This article was written by Meg Utterback and Willis Sautter.
On September 20, 2018, the US Department of the Treasury, Office of Foreign Assets Control (“OFAC”) placed Li Shangfu and the Equipment Development Department of China, referenced as the 装备发展部, on the list of Specially Designated Nationals (“SDN List”) pursuant to the Countering America’s Adversaries through Sanctions Act of 2017, known at CAATSA. The basis for sanction was the purchase of military aircraft from Russia. This extraordinary measure reflects the broad use of sanctions by the current US Administration.
Because the US Administration is using sanctions so frequently as a sword, there has been increasing dialogue about how far the sanctions reach and what they mean. Almost daily, the US Government is announcing new restrictions on business with North Korea, Iran, and Russia. Chinese companies need to pay attention to these developments. US sanctions can impact individuals and companies worldwide – including Chinese companies.
Most US sanctions – so-called “primary sanctions” – generally require compliance by US persons only (United States citizens and lawful permanent residents, entities organized under United States law, and others physically located in the United States). For example, OFAC maintains the SDN list of entities (including individuals, organizations, and vessels) that have been sanctioned by the US Government. US persons are prohibited from having dealings of any kind with these entities and with any entity owned 50 percent or more by these entities.
But some US sanctions – so-called “secondary sanctions” – require compliance by non-US persons (including Chinese individuals and companies) and applies to activity that has no connection to the United States (including activity that takes place in China). These sanctions do not regulate non-US persons directly. The sanctions impose prohibitions on US persons that deal with non-US persons, who engage in sanctioned activities. In so doing, they block the non-US person’s access to the US market. As an example of this kind of sanction, the US Treasury has the power to block access to the US financial system for non-US financial institutions found to have engaged in significant financial transactions with certain parties on the SDN List. This is accomplished by prohibiting a US financial institution from opening or maintaining a correspondent account in the United States for the non-US financial institution that is subject to sanction.
In recent years, the US Government has used US secondary sanctions to target Chinese companies, particularly those companies that do business with Iran and North Korea. In some cases, the sanctioned entities have been cut off from the US financial market. For example:
In July 2012, the US Treasury sanctioned a Chinese bank, the Bank of Kunlun, for providing financial services to more than six Iranian banks that were involved with Iran's WMD programs or international terrorism; and
In November 2017, the US Treasury sanctioned a Chinese bank, the Bank of Dandong, for having provided banking services to companies involved in financing North Korea’s ballistic and nuclear weapons program.
In other cases, the US Government has placed the sanctioned entities on the SDN List. This means that the entities are generally blocked from doing business with US persons (via the means of freezing any property of the entities that is in the possession or control of US persons or within the United States). For example:
In June 2017, the US Treasury sanctioned two Chinese citizens and a Chinese shipping company, Dalian Global Unity Shipping, for their financial ties to North Korea’s nuclear and missile programs.
In August 2017, the US Treasury sanctioned three Chinese coal companies: Dandong Zhicheng Metallic Materials Co., Ltd., JinHou International Holding Co., Ltd., and Dandong Tianfu Trade Co. These companies imported over $500 million of coal from North Korea between 2013 and 2016.
In August 2017, the US Treasury sanctioned Dandong Rich Earth Trading, a Chinese firm charged with importing rare metals from North Korea.
In August 2017, the US Treasury sanctioned Mingzheng International Trading, a China and Hong Kong-based bank that allegedly provided financial services for a North Korean foreign exchange bank.
Navigating US secondary sanctions will not become easier in the future. This is especially true if Chinese companies do business with Iran, Russia, or North Korea.
With respect to Iran, the US Government recently announced a number of secondary sanctions. For example, individuals and companies of any nationality (including Chinese) will be subject to US sanctions if they:
knowingly engage in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector;
knowingly provide significant support to a person determined to be part of Iran’s energy, shipping, or shipbuilding sectors, a port operator in Iran, or certain Iranian persons included on the SDN List;and
as of November 5, 2018, knowingly engage in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran.
With respect to Russia, the US Congress recently authorized the imposition of penalties on non-US persons for knowingly engaging in a variety of activities involving Russia or Russia-related projects. For example, the US Government is now required to impose sanctions on non-US persons who facilitate a significant transaction with persons placed on the SDN List in connection with Russia-related sanctions. The US Government may also impose sanctions on non-US financial institutions that engage in certain defense and energy-related transactions on behalf of certain persons on the SDN List.
With respect to North Korea, the US Government recently imposed sanctions on any person (which includes Chinese persons) to have engaged in at least one significant importation from or exportation to North Korea of any goods, services, or technology.The US Government also recently imposed sanctions on any non-US financial institution found to have, after September 21, 2017, knowingly conducted or facilitated any significant transaction in connection with trade with North Korea.
Not every transaction with SDN entities results in an absolute bar to transacting with them. Many of these transactions of course do have a secondary sanctions risk, but not all. It is important to understand how and when the sanctions are applied. To ensure compliance with US secondary sanctions, we recommend that Chinese companies perform due diligence on all prospective business partners to make sure they have not been placed on the SDN List, especially if the transaction in question is related to Iran, North Korea, or Russia. In addition, we recommend that Chinese companies address US sanctions contractually. For example, companies can require that a counterparty represent that neither it nor its directors, officers, and employees are currently a designated target or otherwise a subject of US sanctions.
KWM is experienced in advising Chinese companies on the risks presented by US sanctions that apply to non-US persons. We are happy to review past or prospective transactions to determine their compliance with US sanctions law. We can also advise on how to mitigate the risks associated with US sanctions.
The SDN List targets persons involved with, among other things, terrorism, weapons proliferation, narcotics trafficking, human rights abuses, genocide, and organized crime. Chinese companies must ensure that their conduct does not cause the US Government to place them on the SDN List. Entities on the SDN List are effectively cut off from business in the United States and with US persons wherever located. As discussed in this article, entities on the SDN List are also effectively cut off from business with certain non-US persons as well.
The referenced sanction is the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, better known as CISADA, and the parties in question are those found to be connected with Iran’s proliferation of weapons of mass destruction (“WMD”).
Executive Order 13846, subsection 3(a)(i).
Executive Order 13846, subsection 1(a)(iv)(C).
Executive Order 13846, subsection 3(a)(ii).
The referenced legislation is the “Countering America’s Adversaries Through Sanctions Act” (“CAATSA”), signed into law on August 2, 2017.
Executive Order 13810, subsection 1(a)(iii).
Executive Order 13810, subsection 4(a)(ii).