On 10 June 2021, the Anti-Foreign Sanctions Law of the PRC (AFS Law) was adopted by the Standing Committee of the National People’s Congress of China and came into effect.
Compared with the Provisions on the List of Unreliable Entities (Entities List) and the Measures for Blocking Improper Extraterritorial Application of Foreign Laws and Measures (Blocking Measures) promulgated by the Ministry of Commerce earlier, the AFS Law has a higher legislative level. The Entities List and the Blocking Measures are mainly based on the PRC National Security Law and the PRC Foreign Trade Law. The AFS Law addresses the issues not covered by these two laws and provides legal basis for the relevant authorities of the State Council of China to further stipulate other countermeasures in the future.
Pursuant to Article 12 of the AFS Law, no organization or individual shall implement or assist in implementation of discriminatory restrictive measures adopted by a foreign country against Chinese individuals or organizations. For multinational corporations (MNCs) in China that pursue a “global compliance” strategy, the AFS Law, apart from giving them the corresponding legal basis for not implementing the discriminatory sanction measures of their home countries, may also bring the realistic dilemma that they have to take a pick on the side to stand.
Specifically, if a foreign country imposes sanctions on a Chinese company, the MNCs will have to face the dilemma where it is required to comply with both their home country’s sanction requirements and China’s AFS Law. The following paragraphs summarize several key issues the MNCs will face under the AFS Law in the form of Q&A and try to put forward our preliminary insights based on our experience.
1. Would the compliance with foreign export control violate the AFS Law?
To achieve their global strategy and compliance, MNCs are often subject to export control of their home countries or countries in which they have a commercial presence. In accordance with Article 3 of the AFS Law, it is aimed at the acts of foreign countries that violate international law and the basic norms governing international relations, contain or suppress China with various excuses or pursuant to their own laws, take discriminatory restrictive measures against Chinese individuals or organizations, and interfere in China’s internal affairs. What kind of export control of foreign countries against Chinese enterprises and individuals that may fall within the scope of “discriminatory restrictive measures” is not explicitly provided in the AFS Law.
In practice, foreign governments’ export control measures may be adopted as one of the approaches for their sanctions against China. For example, the so-called Hong Kong Autonomy Act, signed by then-US President Donald Trump on 14 July 2020, authorizes the White House to designate and impose sanctions, including a ban on property transactions, on certain Chinese individuals and financial institutions. Prohibited property transactions under the Hong Kong Autonomy Act include “the export of any property subject to US jurisdiction.” Thus, to some extent, export control measures imposed by a foreign country specifically on Chinese enterprises and individuals may be considered as “sanction measures”. If the Chinese authorities deem that the export control measures taken by foreign countries against Chinese enterprises and individuals constitute discriminatory restrictive measures, and decide to take countermeasures, MNCs’ compliance with the corresponding export control measures of the relevant foreign countries may be recognized as the act of “implementing the discriminatory restrictive measures adopted by foreign countries against Chinese individuals and organizations” as specified in Article 12 of the AFS Law.
It is noteworthy that Article 48 of the PRC Export Control Law implemented since 1 December 2020 stipulates that the Chinese government may adopt reciprocal measures based on the actual circumstances against any country or region which abuses its export control and harms China’s national security and interests. We believe that the restrictive export control measures of foreign countries fall within the scope of the Export Control Law, rather than the AFS Law. However, how the Chinese law enforcement authorities interpret the “discriminatory restrictive measures” under the AFS Law remains to be seen.
We suggest that MNCs should pay continuous attention to the latest legislative development of the relevant implementing rules of the AFS Law and the typical cases that the administrative and judicial authorities may release from time to time, and timely assess whether there is any risk of violating the AFS Law by complying with the foreign export control so as to take further actions.
2. Are commitment letters of sanction compliance or sanction compliance and liability exemption clauses still valid?
In practice, in order to minimize the risk of the implementation of foreign sanctions laws or export control measures, MNCs tend to include sanction compliance and liability exemption clauses in the commercial contracts and transaction documents signed with Chinese enterprises or individuals or require the Chinese enterprises or individuals to issue a commitment letter of sanction compliance. For example, a Chinese enterprise or individual is required to guarantee that the transaction does not violate the sanctions and export control adopted by a particular foreign country or agree that the MNC is entitled to terminate the contract without any liability in the event of a possible violation of foreign sanctions or export control. The effectiveness of these arrangements may now be challenged by the AFS Law.
Article 12 of the AFS Law stipulates that no organization or individual shall implement or assist in the implementation of discriminatory restrictive measures imposed by foreign countries against Chinese individuals or organizations. The term “any organization or individual” as used in this Article does not exclude the MNCs or their business entities in China. Where an MNC requires a Chinese enterprise or individual to guarantee that the transaction does not violate the foreign sanctions or grant it a right to unilaterally terminate the contract or the transaction under the circumstance that the foreign sanctions may be violated, it may be deemed as “implementing or assisting in implementing” discriminatory restrictive measures, which constitutes a violation of the AFS Law.
According to Article 153 of the PRC Civil Code, a civil juristic act in violation of the mandatory provisions of laws and regulations shall be void, unless otherwise provided by such mandatory provisions. Without doubt, Article 12 of the AFS Law is one of the mandatory provisions of the laws, but is it the kind of mandatory provision that will nullify a civil juristic act in violation thereof?
According to the mainstream view of China’s judicial practice, the mandatory provisions of laws and regulations will nullify a civil juristic act in violation thereof if it is the only way to realize the legislative purpose of such provisions.1 As for the AFS Law, its legislative purpose may not be achieved if the validity of implementation or assistance in the implementation of discriminatory restrictive measures imposed by foreign countries against Chinese individuals or organizations is not denied. Therefore, in judicial practice, Article 12 of the AFS Law is likely to be deemed as a mandatory provision, a violation of which will nullify a civil juristic act. In this regard, the validity of the commitment letter on sanction compliance issued by a Chinese enterprise or individual as required by an MNC or the sanction compliance and liability exemption clauses agreed in the transaction documents may be challenged and nullified, and thus the MNC cannot claim exemption of liabilities or termination of the contract.
We suggest that MNCs…