China Establishes New Mechanism to Counteract "Unjustified" Extraterritorial Application of Foreign Measures

On January 9, 2021, China's Ministry of Commerce (MOFCOM) issued Order No. 1/2021 on the Rules on Counteracting Unjustified Extraterritorial Applications of Foreign Legislation and Other Measures (the "Rules").¹ The Rules, which took immediate effect, complement the Export Control Law (ECL) effective December 1, 2020 and the Provisions on the List of Unreliable Entities (UEL) effective from September 19, 2020. The Rules provide the government with a legal framework to counter laws and regulations from other countries deemed to affect the interests of China. MOFCOM is expected to release further guidance on the Rules but announced no timeframe.

The head of MOFCOM's Department of Treaty and Law commented in a January 12 press briefing that the Ministry drafters drew on international precedent, including "a series of resolutions calling for the repeal of unilateral laws and measures with extraterritorial effects imposed on enterprises and individuals of other countries" adopted by the United Nations since the 1990s.² MOFCOM also likely drew on experience from the European Union's 2018 Blocking Statute³ and similar legislation in Canada⁴ and Mexico⁵. 

Legal basis, regulatory intent and oversight

The Rules specify the 2015 National Security Law of the People's Republic of China⁶ and "other relevant laws" as the underlying legal authority, which provides a very broad definition of "national security."⁷ 

The stated purpose of the Rules is "counteracting the impact on China caused by unjustified extraterritorial application of foreign legislation and other measures, safeguarding national sovereignty, security and development interests, and protecting the legitimate rights and interests of citizens, legal persons and other organizations of China."⁸  The broad scope and purpose leave the authorities with wide discretion in determining what may constitute a potential threat to national security, at least pending further implementing guidance.

Administration

Establishment of the Working Mechanism

The Rules call for the establishment of a "Working Mechanism" composed of relevant central departments to "[counteract] unjustified extraterritorial application of foreign legislation and other measures."⁹  MOFCOM will chair the Working Mechanism, oversee implementation, and handle specific cases along with the National Development and Reform Commission (NDRC) and other relevant departments of the State Council. This type of interagency Working Mechanism is common in China, particularly when broad economic and trade policies are concerned. A similarly structured Working Mechanism was established for the implementation of the UEL. 

Scope of application

The Rules define "unjustified extraterritorial application of foreign legislation and other measures" as "in violation of international law and the basic principles of international relations, unjustifiably prohibit or restrict the citizen, legal person or other organization of China from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations" (Emphasis added) (the "unjustified application").¹⁰  The term "third State" suggests that the Rules apply to transactions between a Chinese entity and an entity in a third country, rather than an entity in the State where the legislation and other measures are promulgated. 

The Rules do not specify the foreign legislation and other measures targeted, which allows discretion to cover any foreign legislation and measures that have extraterritorial effect (other than treaties or international agreements to which China is a party).¹¹

Reporting requirement

Under the Rules, Chinese citizens, legal persons or other organizations (the "Chinese entity")¹² are required to "truthfully report such matters" to MOFCOM within 30 days, where the Chinese entity "is prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations."¹³

The Rules do not make the reporting obligation contingent upon the Working Mechanism's affirmative finding that the extraterritorial application at issue is "unjustified." Indeed, as MOFCOM paraphrased in the press briefing, the task of the Working Mechanism is to "assess and confirm" whether there exists unjustified extraterritorial application. This implies that the Chinese entity should proactively report the extraterritorial application within the timeframe specified or face penalties, as discussed below. However, the Rules do not define key terms such as "normal," "extraterritorial application," or application to actions prior to the effective date, and the format for filing and receiving such reporting. Therefore, in the near term, it would be prudent for Chinese entities, including foreign-owned affiliates in China, to monitor closely any relevant developments on implementation or application of the Rules. 

Prohibition by the Working Mechanism

The Working Mechanism is charged with reviewing the foreign law or measures at issue and determines (or "confirms," as MOFCOM indicated in the press briefing) whether there exists an "unjustified extraterritorial application," taking into account the various factors including international law and practice, impact on national sovereignty and development, and the rights of the Chinese entity.¹⁴

If the Working Mechanism confirms an "unjustified extraterritorial application," MOFCOM may issue a "prohibition order" to block the Chinese entity from complying with such extraterritorial application. The Working Mechanism can also suspend or withdraw a prohibition order,"¹⁵ and a Chinese entity may apply to MOFCOM for an exemption to the prohibition order.¹⁶  The Rules contain few details on procedure and specify no means of appeal.

Encouragement of compliance

The Working Mechanism can provide "guidance and service" and support for the Chinese entity adversely affected by the "unjustified application." It also may take countermeasures in response to an "unjustified application."¹⁷  Relevant terms are not further elaborated. 

Consequences of non-compliance

Private right of action

The Rules permit Chinese entities to bring suit in Chinese courts against a "person" for compensation in two situations: (i) when a "person" fails to comply with the prohibition order and therefore "infringes upon the legitimate rights and interests of" the Chinese entity; and (ii) when "a judgment or ruling made in accordance with the foreign legislation within the scope of the prohibition order" benefits a "person" but causes losses to the Chinese entity.¹⁸  In both situations, the Chinese entity may "institute legal proceedings in a people's court, and claim for compensation" from the person, subject to such "person" receiving an exemption from MOFCOM.¹⁹  If the person refuses to execute the judgment or ruling, the Chinese entity may seek enforcement from the court, and injunctive relief also may be possible.

Notably, the Rules do not define "person." As a domestic order, "person" presumably covers Chinese individuals and entities (including Chinese subsidiaries or branches of foreign entities). However, it is not clear whether an entity incorporated in a third country is also covered. MOFCOM is reportedly making efforts to clarify this and other terms and definitions under the Rules. Only a Chinese entity is eligible for an exemption to a prohibition order,²⁰ and only a Chinese entity is allowed to institute legal proceedings in a people's court, i.e., in China.

As a result, an entity (such as a foreign-owned affiliate in China) may find itself caught in a dilemma in which compliance with an "unjustified application" of one country will lead to a violation of the Rules in China. It is uncertain to what extent such a dilemma will become a real concern from a business perspective, absent further information on implementation and actual application. 

Penalty by the Working Mechanism for non-compliance

The Rules authorize the Working Mechanism to impose monetary and other penalties on (i) a Chinese entity that does not meet its reporting obligation or fails to comply with a prohibition order, and (ii) staff members of the Working Mechanism who fail to keep confidential the identity of the reporting Chinese entity.²¹ MOFCOM has broad discretion on whether or not to impose penalties. 

Outlook

As mentioned, there is no timeline for issuance of implementing rules or guidance, which may clarify points of uncertainty. Foreign entities potentially subject to compliance with extraterritorial US sanctions involving Chinese entities, especially ones with subsidiaries or branches operating in China, would be prudent to stay abreast of further announcements and developments under the Rules. 

_{1 MOFCOM published the Rules in both (here in Chinese) and (here in English).
2 MOFCOM's press release.
3 The EU Blocking Statute aims to protect against and counteract the effects of certain extraterritorial sanctions. It prohibits EU individuals and companies from taking action to comply with specified foreign sanctions (unless authorization is granted by the European Commission on the basis that non-compliance would seriously damage EU or party interests). See Commission Delegated Regulation 2018/1100 effective August 8, 2018.
4 Foreign Extraterritorial Measures Act, R.S.C., 1985, c. F-29.
5 Law to Protect Trade and Investment from Foreign Laws that Contravene International Law dated October 23, 1996 and amended April 8, 2012 (in Spanish).
6 The Rules, Art. 1.
7 National Security Law of the People's Republic of China, Art. 2. (in Chinese).
8 The Rules, Art. 2.
9 The Rules, Art. 4.
10 The Rules, Art. 2.
11 The Rules, Art. 15.
12 Pursuant to Arts. 57-58 of the Civil Code of China (in English), a legal person is "an organization that has capacity for civil rights and capacity for civil conduct and independently enjoys civil rights and assume civil obligations in accordance with the Law" and that "is established in accordance with the laws." Arts. 102-103 define a "non-legal-person organization" as an "organization that is not a legal person, but has the capacity for civil conduct in its own name" such as "one-person enterprise, partnerships, professional service firms etc." Furthermore, a "non-legal-person organization" should be registered in accordance with the law.
Therefore, it appears that wholly owned companies and/or joint ventures established by foreign companies in China would be considered a Chinese entity in the context of the Rules as they would be Chinese legal persons. Similarly, organizations such as representative offices would also be considered as a Chinese entity in the context of the Rules as they would be non-legal-person organizations.
13 The Rules, Art. 5.
14 The Rules, Art. 6.
15 The Rules, Art. 7.
16 The Rules, Art. 8.
17 The Rules, Art. 12.
18 The Rules, Arts. 9-11.
19 The Rules, Art. 8.
20 The Rules, Art. 8.
21 The Rules, Arts. 13-14.}

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