After two and a half years since the issuance of the Regulations on the Unreliable Entities List (“UEL Regulations“), the Unreliable Entities List Working Mechanism (“Mechanism“) headed by China’s Ministry of Commerce has for the first time designated two US aerospace and defense companies as “Unreliable Entities”.

The notice issued by the Mechanism on February 16, 2023 announced the below measures against these Unreliable Entities:

  • prohibition on import and export activities involving China;
  • prohibition on new investment in China;
  • denial of entry into China of the senior executives of these entities;
  • denial or revocation of Chinese work permits, or right to stay or reside in China granted to the senior executives of these entities; and
  • financial penalty on each of these entities equivalent to two times the value of arms sales made to Taiwan since the date of issuance of the UEL Regulations (i.e., September 19, 2020), payable within 15 days of the announcement, failing which additional penalty may be imposed.

This comes in addition to the announcement made by spokesperson for the Ministry of Foreign Affairs on February 21, 2022 at one of its press conferences, that these US companies (though involving different entities under the same groups) were sanctioned under the China Anti-foreign Sanctions Law (“AFSL“) (a separate retaliatory sanction regime) without specifying in detail the applicable sanctions measures.

What does this mean to multinational companies doing business in and with China

Since the escalation of the trade and political tension between China and the United States, China has developed a robust sanctions and retaliatory regime through the introduction of the AFSL, the UEL Regulations, the Blocking Rules, the Export Control Law and other relevant measures. However, to date, there has only been a handful of designations (both individuals and entities) under these measures collectively, primarily with respect to matters concerning China’s national security, sovereignty as well as other core interests (including issues relating to Taiwan, Hong Kong, Xinjiang, etc.)

In terms of designations of private entities engaged in commercial activities, the designations are further limited to companies that have supplied arms to Taiwan and a few Taiwanese companies that are alleged to be involved in the Taiwanese independence separatism activities. Indeed, the two US companies added to the UEL are designated for supplying arms to Taiwan even after they were already sanctioned under the AFSL. So far, no sanctions measures have been taken with respect to private companies for suspending supply to or trade with Chinese counterparties in compliance with foreign trade measures, as previously alluded to be the primary purpose of UEL designations.  Given the circumstances, the repeated sanctions measures taken with respect to these two US companies is a strong signal from the Chinese government that national security concern remains the top focus area for China in its utilization of its sanctions toolkit, and the limited sanctions measures against private companies suggest that China is currently taking a highly measured approach in selecting its sanctions targets given the potential ramifications on business environment.

Practical considerations for businesses

We set out below the implications and practical considerations of the UEL designations for businesses:

Designated entities

  • Companies that are themselves designated under the UEL would face significant challenges in conducting business in and with China, resulting from the prohibition from engaging in import and export activities involving China, prohibition on investment in China, prohibition on the entry of relevant personnel into China, etc.
  • While the UEL designations do not per se apply to their subsidiaries or affiliates, if the designated entities are doing business through related entities either within or outside China, this development can potentially result in other practical challenges which should be handled with care (for e.g., with respect to the movement of foreign employees in and out of China, transfer of funds, etc.).
  • The RUEL provides mechanism for removing an unreliable entity from the UEL after the entity rectified its behavior and eliminated the consequences of its offending actions. Though technically possible, given the typical political undertone and symbolic nature of sanctions designation by China, it may be challenging for a request for such removal to yield positive results.

Other multinational companies supplying military, defense and other strategic goods and services

  • Given the current focus of the Chinese sanctions measures on national security considerations, companies supplying military, defense and other strategic goods and services to Taiwan and potentially other jurisdictions that are in military rivalry with China (which could be seen as threat to China’s national security) are likely to be at highest risk of China’s trade restrictive measures. In this respect, apart from the UEL and retaliatory sanctions, the Export Control Law of China, effective from December 1, 2020, also has in place mechanisms to restrict export activities for the purpose of preserving China’s national security interests, including “blacklisting” foreign end-users and imposing export licensing requirements on exports from China that are considered to involve “national security threats”.    
  • Companies falling within this category should seek to understand the various trade restrictive measures available to the Chinese government that can be imposed for national security reasons, and consider: (i) the typical triggering points for such measures to be imposed; (ii) how such sanctions risks can be mitigated or reduced; and (iii) what contingency plans can be put in place to soften the adverse implications arising from such measures, based on a holistic assessment of the companies’ supply chain in China and beyond.

Companies operating in China

  • For other companies, especially those doing business in China, it would be important to conduct a review to determine whether any of its transactions are subject to restriction as a result of the UEL designations, to ensure continued compliance with the Chinese rules and regulations.
  • Companies operating in China should also ensure that China sanctions and export control considerations are specifically accounted for, in the companies’ overall trade compliance programs.

Concluding Remarks

As the Chinese sanctions framework and application continue evolving in response to various geo-political and national security considerations, companies doing business in and with China should actively monitor and assess how potential sanctions measures may impact its business operations, in order to proactively take steps to build resilience for their supply chains.

Frank Pan is a partner of FenXun Partners who is a premier Chinese law firm. FenXun established a Joint Operation Office with Baker McKenzie in China as Baker McKenzie FenXun which was approved by the Shanghai Justice Bureau in 2015.