In August I wrote about the impact of the political environment on international trade, and I’ve been banging on about this weaponizing of sanctions to forward national policy objectives ever since.
There are two significant regions in the world with emerging compliance regimes that should have your attention, the compliance of which will ultimately conflict with U.S. regulators.
My August blog also advised you not to choose sides, rather stay attuned to the face-paced geopolitical issues that may not only aggravate the U.S. administration, but any foreign administration and to plan for both outcomes.
If you’ve dabbled in exporting from the U.S., you are no doubt aware that there are regulations and laws surrounding your every activity and of course… fines and penalties should you run afoul of the same.
Flexing their muscle in June 2021, China passed the Anti-foreign Sanctions Law targeting any action under U.S. secondary sanctions that “unjustifiably prohibits or restricts the citizens, legal persons or other organizations of China from engaging in normal economic, trade and related activities with a third country (or region) or its citizens, legal persons or other organizations.”
Importantly, when an organization or individual continues to implement a blocked foreign discriminatory restrictive measure, the Anti-Sanctions Law allows Chinese persons to “institute a lawsuit with the people’s court, in accordance with the law, requesting the said organization or individual to cease the infringement and compensate for the losses.” Lovely…
The onus has always been on the U.S. company not to do business with entities on any U.S. sanctions list, and to operate under the laws and regulations of the U.S.
Consequences for violating the new Chinese law may include the Chinese placing restrictions on your immigration (travel), they could seize your assets or restrict transactions through sanctions of their own and other measures.
Not to be outdone… the EU Blocking rule prohibits compliance by EU persons with certain U.S. sanctions against Cuba and Iran. It particularly affects EU business since it was updated in 2018 when the U.S. left the ‘nuclear deal’ with Iran and enhanced its sanctions. In December 2021, the Court of Justice of the European Union (CJEU) delivered a judgment clarifying the impact of the Regulation on the termination of contracts by EU persons who intend to comply with the U.S. sanctions.
The Regulation was drafted with a view to neutralizing the extraterritorial effect of U.S. sanctions to protect EU persons from U.S. laws. Sounds like the EU and China must have gotten together on this one…
The main takeaways from the EU court’s judgment are the following:
- EU persons can be found in breach of the regulation even if they voluntarily comply with U.S. sanctions and are not subject to any direct orders or enforcement proceedings by U.S. authorities.
- EU persons terminating contracts with U.S. sanctioned parties are not obliged to disclose the reasons for termination if national law does not compel them to do so. However, if civil proceedings arise from the termination, the terminating party will be viewed as having terminated contractual relations in order to comply with U.S. sanctions and must prove that the termination was based on other reasons which do not violate Article 5 of the EU Regulation.
- EU member state courts must weigh how the invalidation of a contract termination serves the Regulation’s objectives against the EU person’s exposure to secondary sanctions and the EU person’s ensuing economic losses if they would not be permitted to terminate the contract.
How this affects your business
The judgment does not materially alter the position for EU businesses with a U.S. nexus, which are still potentially caught by regulatory crossfire. If a challenge of a termination is to be expected, obtaining an authorization from the EU Commission can be considered as a tool to mitigate risk
As we’ve seen, the new Chinese law is all about forwarding Chinese ascendancy in the marketplace, same for the EU. The Chinese law is not specific to forced labor, it is a response to U.S. sanctions surrounding forced labor. Last year U.S. sanctions were all about the Chinese military and tech companies like Huawei.
What has me alarmed is the fact that Chinese government officials have begun making inquiries of Chinese companies, including whether they are doing business with certain entities and if they have been requested to avoid using materials identified on U.S Customs lists.
U.S. companies should take this into consideration when implementing due diligence procedures, particularly with regard to Chinese supply chain partners and employees.
Herein lays the problem. Don’t comply with U.S. laws, you may run afoul of the U.S. government. Don’t comply with Chinese laws… OK, you get the point.
Let me throw a wrench into the mix. The U.S. and California are not the only governments who have anti-forced labor laws. Australia, specifically New South Wales, Canada and the United Kingdom have their own strict regulations on the topic which seem to mirror the U.S. regulations and provide for an extraterritorial reach, meaning you could be sued in a New South Wales court for violating their anti-forced labor laws.
Corporate responsibility flows upstream and downstream in the supply chain. If you are a U.S. entity, you are compelled to follow U.S. laws and regulations. If you are doing business in the UK, Canada, Australia, or the European Union then you should have this topic in mind.
I would strongly suggest discussing your engagement and future business in China with your stakeholders. Ultimately it all boils down to your appetite for risk.
Passage of the Anti-Sanctions Law follows closely on the heels of a series of U.S. measures that, variously, refined and potentially expanded investment sanctions targeting Chinese defense and surveillance technology companies. If trade tensions continue, companies may increasingly find themselves subject to competing compliance obligations, demanding a careful review of applicable compliance policies, procedures and practices.
- Chinese authorities are authorized to identify individuals or organizations involved in making, deciding, and implementing foreign “discriminatory restrictive measures” and include them on the new Countermeasure List established by the Anti-Sanctions Law, which in turn may result in a series of sanctions measures against you.
- The new law also allows the authorities to extend the coverage of sanctions to individuals and organizations related to those already designated on the Countermeasure List.
- Broad compliance obligations have been imposed upon organizations and individuals. Companies may find themselves subject to competing legal requirements. Ultimately, for U.S. companies, you are compelled to abide by U.S. laws and regulations, it may come to a point when you’ll need to decide to participate in the Chinese market or leave it altogether.
- The EU regulation has left open too many questions and admittedly does not change the position of the EU company with U.S. nexus.