On January 9, 2021 the People’s Republic of China (“PRC”) passed the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (“Rules”). The new Rules are aimed at counteracting the perceived negative impact on the PRC caused by what it alleges are the “unjustified extra-territorial application” of foreign laws and regulations. The Rules, according to the official English translation are designed to safeguard Chinese national sovereignty, security, and development interests, and apply to situations where the extra-territorial application of foreign legislation, for example U.S. export controls, “unjustifiably” prohibits or restricts the citizens, legal persons or other organizations of China from engaging in trade and related activities.
According to the new Rules when a citizen, legal person or other organization of the PRC is prohibited or restricted by foreign law or legislation from engaging in “normal economic trade and related activities” with a third State or its citizens, legal persons or other organizations, that citizen, person or legal entity must report the matter to the Chinese State Council within 30 days. Upon making such a report the government may then upon review issue a “prohibition order” stating that the conflicting foreign law shall not be observed.
The following elements will be taken into consideration by the State Council in determining whether an application of foreign law or legislation “unjustifiably” prohibits or restricts the citizens, legal persons or other organizations of the PRC from engaging in trade and related activities.
(1) Whether international law or the basic principles of international relations are violated;
(2) Potential impact on China’s national sovereignty, security and development interests;
(3) Potential impact on the legitimate rights and interests of the citizens, legal persons or other organizations of China;
(4) Other factors that shall be taken into account.
While the new Rules do provide a mechanism for a citizen, legal person or other organization of the PRC to apply to the State Council for exemption from compliance with a prohibition order, it is unknown how willing the State Council will be to issue such an exemption. Absent an exemption any citizen, legal person or other organization of China who fails to truthfully report such a matter within 30 days, as required, or fails to comply with a previously issued prohibition order may be reprimanded in one of several ways including the issuance of a warning, an order to rectify the situation within a specified period of time, and/or a fine proportional to the severity of the circumstances.
Companies and individuals who engage in international commerce have been faced with similar contradictory compliance scenarios in the past, with governments at times developing domestic legal protections in response. The creation of blocking statutes aimed at limiting the recognition and/or enforcement of foreign judgements is one tool that has been previously utilized in similar situations, although it is yet to be seen if the PRC will ultimately follow suit.
As things stand, those with transactions subject to U.S. export controls (e.g., EAR, ITAR, OFAC, etc.) with operations or entities in the PRC these new Rules require that in scope transactions be handled with the utmost care. A citizen, legal person or organization of the PRC may now be at times required to simultaneously comply with U.S. (or foreign) law(s) as well as conflicting Chinese law(s). If you have any questions about the new “Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures” please contact an attorney at Barnes, Richardson & Colburn, LLP.