Guide: China Military Companies Sanctions

August 2021 - Ian Allen and Michael Ingram

What are the Chinese Military Companies Sanctions?

The Chinese Military Companies Sanctions are administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). This sanctions regime targets entities allegedly involved in China’s defense and surveillance industries under the Military-Civil Fusion (MCF) strategy.

Fifty-nine entities are currently listed under this regime and are officially designated as Non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC). These sanctions came into effect on 2 August 2021, per Executive Order (EO) 14032.

While the national emergency under which these sanctions were created was established in November 2020 by President Trump, Biden’s EO 14032 both expanded the scope of the national emergency and “replaced and superseded in their entirety” Sections 1-5 of Trump’s EO 13959 and its amending order, EO 13974.

What do the sanctions prohibit U.S. persons from doing?

The Chinese Military Companies Sanctions essentially ban investment by U.S. persons in the designated Chinese entities.

U.S. persons will be prohibited from “the purchase or sale of any publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of any person listed” as NS-CMIC per Sec. 1(a) of EO 14032.

This sanction regime’s scope is limited only to securities investments at present. The companies designated as NS-CMIC are not to be considered Specially Designated Nationals (SDNs), nor do these sanctions target designated entities’ subsidiaries or trigger OFAC’s 50% rule per FAQ 857.

However, NS-CMIC designated entities will appear in screens conducted with the OFAC Sanctions List Search under the program code CMIC-EO13959.

Who is the target of the Chinese Military Companies Sanctions?

Legal persons subject to the NS-CMIC sanctions designation “operate or have operated in the defense and related materiel sector or the surveillance technology sector of the economy” of the People’s Republic of China (PRC).

President Biden has expanded the original scope of the sanctions, reflecting the U.S. government’s concerns regarding the Chinese policy that nominally civilian-facing companies in China should contribute to the development of military or surveillance technology.

Rather than solely targeting “Communist Chinese Military Companies”, the sanctions now address entities involved in:

• Military, intelligence, and security research and design;

• Weapons and equipment production related to the Military-Civil Fusion strategy; and

• Surveillance technology for export or use in repression or human rights abuses

It should be noted that the NS-CMIC sanctions list superseded and replaced the previously existing Non-SDN Communist Chinese Military Companies (NS-CCMC) sanctions list that was established by EO 13959 in December 2020.

What happens if additional companies are designated as NS-CMIC?

The Secretary of the Treasury, in consultation with the Secretaries of State and Defense, may deem it appropriate to add additional legal persons to the NS-CMIC sanctions list.

U.S. persons must divest within 365 days when a new company is added to the NS-CMIC sanctions list.

Will the Chinese Military Companies Sanctions expand beyond an investment ban?

Any expansion of the prohibitions on NS-CMIC designated persons would have to be established by additional executive orders.

Section 4 of EO 14032 authorizes the Treasury Secretary, in conjunction with the State Department, to “take such actions, including the promulgation of rules and regulations, and to employ all powers granted to the President by IEEPA, as may be necessary to carry out the purposes of this order.”

IEEPA powers grant the U.S. President much autonomy in expanding or reducing existing sanctions programs. However, EO 14032, as written, does not include any language that would suggest specific additional prohibitions or restrictions that could be anticipated for legal persons designated as NS-CMIC.

What happens if additional companies are designated as NS-CMIC?

Any expansion of the prohibitions on NS-CMIC designated persons would have to be established by additional executive orders.

What is the origin of the Chinese Military Companies Sanctions?

The genesis of the Chinese Military Companies Sanctions and the NS-CMIC sanctions list is over two decades old.

Section 1237 of the National Defense Authorization Act of 1999 called upon the Secretary of Defense to identify “Communist Chinese Military Companies” (CCMC) operating in the United States, but the Secretary of Defense never publicly produced such a list.

It was not until September 2019 that Senators urged the Secretary of Defense to produce a list identifying CCMC. Finally, in June 2020, the Department of Defense released its initial findings, which TradeSecure refers to as the 1237 List. Senator Tom Cotton heralded the arrival of the 1237 List as “one piece of a broader campaign our nation must wage against the Chinese Communist Party and its parasitic technology transfer efforts.” Cotton and other Senators called on President Trump to impose “economic penalties” on these firms. The 1237 List would go on to form the basis of the eventual NS-CMIC sanctions list.

The Non-SDN Chinese Communist Military Companies sanctions list (NS-CCMC) – the predecessor to the NS-CMIC – was established by President Trump several months later in EO 13959. As we’ve discussed above, the NS-CCMC was technically more limited in scope, but several designated companies like Xiaomi and Gowin Semiconductor were able to successfully contest their designations and be removed as NS-CCMCs.

The Biden administration clearly wished to continue the general efforts that the NS-CCMC sanctions list sought to achieve. In June 2021, Biden issued EO 14032 which produced a new list of companies considered by the U.S. to be involved in the Chinese military-industrial complex: the NS-CMIC sanctions list.

The original “1237 List” was published by the Department of Defense in June 2020.

Conclusions

From the Trump to Biden administrations, placing economic pressure on the key drivers of China’s military-industrial complex and surveillance industry has been a priority. Despite the untraditional scope of these sanctions, the U.S. government has no intention of reducing that pressure. The shift in the management of these designations from the Defense Department to the Treasury underlines the fact that the U.S. sees sanctions as key to its strategy of countering China’s MCF efforts.

TradeSecure expects further companies to be added to the NS-CMIC sanctions list in the next year. So far, the Chinese government has only made symbolic responses in the form of travel bans against certain persons and the enactment of an “Anti–Foreign Sanctions Law.” If the scope of the Chinese Military Companies Sanctions is ever expanded beyond an investment ban, we expect additional tit-for-tat sanctions between the U.S. and China that could seriously impact trade and supply lines.

Companies should be aware of any compliance obligations related to their investments. They should also be aware that future executive orders could place additional prohibitions or restrictions on NS-CMIC designees. However, at present, trading is still permitted, as the NS-CMIC designees are not considered Specially Designated Nationals.

DISCLAIMER

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials herein are for general informational purposes only.