In response to the extraterritorial reach of the U.S. sanctions laws, China’s Ministry of Commerce promulgated the "Regulations on the List of Unreliable Entities" in September last year, and the "Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures" in January this year. Subsequently, in June 2021, the Standing Committee of the National People’s Congress, China’s highest legislature, passed the “Anti-Foreign Sanctions Law” to further strengthen the legal framework for Chinese government to respond to foreign sanctions.
Interpretation of the above-mentioned counter-sanctions measures have been widely discussed by the legal community. However, it is unclear how China will enforce its counter-sanctions measures in practice. In this article, we will discuss the enforcement of similar existing blocking statutes and counter-sanctions measures in other jurisdictions, such as the European Union, Canada and Russia. The experience from other countries may shed some light on how China’s counter-sanctions measures may be enforced, and underscore the risks that local and foreign companies should be aware of.
How other countries have dealt with the U.S. sanctions?
The extraterritorial reach of U.S. economic sanctions has a long history. In the mid-1990s, the President of the United States signed the Helms-Burton Act, which allows sanctions on third-country companies and individuals that trade with Cuba. The promulgation of this act faced resistance from the international community. Various countries have issued counter-sanctions laws, such as the EU Blocking Statute and Canada's revised "Foreign Extraterritorial Measures Act".
The EU Blocking Statute is only applied to specific foreign sanctions. Upon its first announcement in 1996, it contained only two U.S. sanctions acts against Cuba and one against Iran and Libya. In 2018, after U.S.’s withdrawal from the Iran nuclear deal (i.e. the Joint Comprehensive Plan of Action), the EU updated the Blocking Statute and extended the coverage to other relevant U.S. sanctions against Iran. In 2021, the British government also implemented its own version of blocking statute, deriving directly from the EU version.
From 2009 to October 2021, OFAC has announced 61 settlements with non-U.S. companies, of which 38 are EU, UK and Canadian companies. Thus far, there are limited cases where companies invoke the blocking statutes in response to the U.S. sanctions. This is partly because the EU and Canada’s blocking statutes have limited scope of application. Multinational companies generally choose to comply with U.S. sanctions to avoid potential monetary penalties, criminal charges and/or to be included in the U.S. sanctions list.
The United States have also been cautious in its response to challenges brought by European allies. One famous example is the "BAWAG case" in 2007. The Austrian BAWAG bank was acquired by a U.S. company, and following the acquisition, the bank closed the accounts of 100 Cuban nationals in adherence to the U.S. sanctions against Cuba. The Austrian government charged BAWAG bank for potential violation of EU Blocking Statute. The case was finally resolved after the U.S. government granted a special exemption to the BAWAG bank.
With the expansion of the EU Blocking Statute since 2018, we notice several new lawsuits challenging companies’ sanctions compliance controls. For example, a group of Iranian customers sued British Metro Bank for closing their bank accounts. Deutsche Telekom was sued for discontinuing provision of telecommunication services to Iran’s Melli Bank. These two cases are still ongoing. If the judgment is in favor of the plaintiffs, more similar lawsuits may be encouraged to contest against European companies’ general practice in following the U.S. sanctions.
Yet, the blocking statutes do not necessarily shield companies from the U.S. sanctions in a U.S. court. In 2010’s Brodie case, the Pennsylvania district judge essentially refused to accept the EU Blocking Statute as a justification for violating U.S. sanctions, on the basis that “[b]locking statutes did not require the defendants to sell product to Cuba … Nor does there appear to be a realistic possibility of prosecution under these laws.”
Russia, as a country directly sanctioned by the U.S., has taken a different approach compared to the European Union. Since the Crimea incident in 2014, the United States expanded its sanctions against Russia. Initially, Russia retaliated the U.S. with entry restrictions on several U.S. officials. The counter-measures then expanded as Russia issued a presidential decree prohibiting import of food from countries that sanctioned Russia, including the European Union and the United States. In 2018, Putin signed the "Law on Measures (Countermeasures) in Response to Unfriendly Actions of the United States and Other Foreign States", which authorizes the administration to implement a series of countermeasures, including restrictions on imports and exports, restrictions on investment, and other measures decided by the president. Following this new law, Russia restricted imports from Ukraine and imposed special economic restrictions on Ukraine, freezing the Russian assets of designated Ukrainian individuals and companies.
On the other side, a recent ruling by a Russian court denied the extraterritorial reach of foreign sanctions. In 2020, Google blocked the Tsargrad TV ’s youtube account as the owner was on the U.S. SDN list. Tsargrad challenged Google’s decision in court. In April 2021, the Moscow Arbitration Court ruled in favour of Tsargard. Google will be fined if the situation is not rectified, and the fine is set to increase exponentially over time. Google has appealed the ruling since then and the case is currently still ongoing. This case directly threatens Google’s existence in Russia and underscores the potential worst-case scenario due to conflict of laws.
What can we expect in China?
- China’s anti-sanctions laws and regulations are not only a political signal. It provides a legal basis for countermeasures.
- The anti-sanctions laws and blocking statues do not necessarily shield companies from the extraterritorial reach of U.S. sanctions.
- While direct sanctions imposed on China remain limited, Chinese government has been restrained in its choice of countermeasures. As of October 2021, the List of Unreliable Entities is still empty. Yet, if foreign economic sanctions further expand, the Chinese government is likely to enforce countermeasures.
- Companies should assess their exposure to both sanctions and counter-sanctions risks relating to their customers, business partners and supply chain, and establish an effective escalation process to ensure both risks are properly evaluated and discussed. Senior management can also engage external compliance professionals to conduct an independent review to ensure the company has a holistic sanctions compliance program taking care both sides of the coin.