US makes changes to sanctions on Chinese military companies

In November 2020, the Trump administration issued Executive Order 13959 ("EO 13959"), which imposed an investment ban on so-called "Communist Chinese Military Companies" ("CCMCs"). The new order ("EO 13959, as amended"), replaces and supersedes large parts of EO 13959, redefining and expanding the target of sanctions.

Adjustment and expansion of scope

The original EO 13959 imposed sanctions on companies listed as CCMCs by the Department of Defense ("DoD") pursuant to Section 1237, as amended, of the 1999 National Defense Authorization Act ("NDAA"). (See our previous Sanctions Alert here.) The new EO 13959, as amended, removes the reference to CCMCs, and instead aims sanctions at companies found by the US to "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")]". The Secretary of the Treasury (in consultation with the Secretary of State, and as appropriate the Secretary of Defense) is tasked with maintaining a list of such companies, the "Non-SDN Chinese Military-Industrial Complex Companies List" ("the NS-CMIC List" and "CMICs"). In tandem with the release of the order, 59 companies were added to the list.

Thus, the target and focus of these sanctions have been adjusted, with a significant expansion of scope with the inclusion of the Chinese surveillance technology sector. According to a White House Fact Sheet, this inclusion solidifies and strengthens the sanctions regime, and allows the US to "address the threat of Chinese surveillance technology firms that contribute — both inside and outside China — to the surveillance of religious or ethnic minorities or otherwise facilitate repression and serious human rights abuses."

Sanctions also extend to any person identified "to own or control, or to be owned or controlled by, directly or indirectly, a person who operates or has operated in [the defense and related materiel sector or the surveillance technology sector of the economy of the PRC], or a person who is listed [as a CMIC] or who has otherwise been determined to be subject to the prohibitions [of EO 13959, as amended]." As was the case for CCMCs in the original EO 13959, OFAC's 50% rule does not apply to CMICs.

Starting 2 August 2021, US persons are prohibited from purchasing or selling 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 CMIC. For future CMIC-designations, sanctions kick in after a 60 day period. Furthermore, a wind-down period of 365 days from designation is provided to divest from prohibited securities.

As CMICs replaces CCMCs, DoD lists CMCs

OFAC's new FAQ #899 makes clear that "only entities whose names exactly match the names of the entities on the NS-CMIC List are subject to the prohibitions in E.O. 13959, as amended." In other words, CCMCs are no longer sanctioned under the regime. Although there is a great deal of overlap between the old and new list, several of the previously targeted CCMCs have not been listed as CMICs.

At least for now, it appears the DoD's CCMC-listings under Section 1237, as amended, of the 1999 NDAA are still active. The DoD may also continue to make designations under this legal basis. However, with the changes to EO 13959-regime, a CCMC-listing under Section 1237, as amended, no longer entails automatic sanctions.

Notably, the DoD simultaneously released its own list of 47 "Chinese Military Companies" (CMCs) pursuant to Section 1260H of the 2021 NDAA (see our previous Sanctions Alert on this this provision here). Section 1260H does not in itself provide basis for imposing sanctions, but rather has an apparent intended effect of "naming and shaming" listed companies, as well as issuing an implied threat of measures to be imposed in the future. As a case in point, 39 of the listed CMCs also appear on the new NS-CMIC list, and the last eight companies are subsidiaries of Semiconductor Manufacturing International Corporation (SMIC), itself a CMIC.

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WR Sanctions Alerts provide you with updates on material developments in the country-specific sanctions programmes implemented by the US, the UN, the UK, the EU and Norway. We will not provide updates on mere prolongations, without material changes, of existing sanctions programmes, nor on any listings or de-listings of individuals/entities placed on implemented sanctions lists . Please note that the WR Sanctions Alerts are provided as general information and do not constitute legal advice.