Counteracting Unjustified Extra-territorial Jurisdiction: An Analysis M88 app PRC Blocking Rules

At the beginning M88 app the year 2021, the Ministry M88 app Commerce (MM88 appCOM) issued the Rules on Counteracting Unjustified Extra-territorial Application M88 app Foreign Legislation and Other Measures (hereinafter referred to as the "PRC Blocking Rules"), which immediately arouses concern from all sides as soon as it was promulgated. This long-awaited "Blocking Statute" M88 app China will have major impacts on the compliance M88 app Chinese companies and the subsidiaries M88 app foreign companies in China, which are restricted by certain foreign sanction laws from engaging in economic and trade activities in third countries or with partners from third countries.

Many foreign countries and regions have already implemented similar measures. Taking M88 app European Union as an example, M88 app Regulation No. 2271/96 (M88 app EU's Blocking Statute)¹was enacted as early as M88 app year 1996 to counter US unilateral sanctions. In 2018, M88 app EU amended M88 app Blocking Statute²immediately after US President Donald Trump declared to withdraw from M88 app Iran nuclear deal and decided to re-impose sanctions against Iran.

This article will focus on the interpretation M88 app the institutional arrangements M88 app the PRC Blocking Rules, and provide a brief comparison with the EU's Blocking Statute.

1. Key Interpretation and Comparison M88 app the "PRC Blocking Rules"

The "PRC Blocking Rules"(MM88 appCOM Order No.1, 2021) was promulgated on January 9 and went into immediate effect. The PRC Blocking Rules, consisting M88 app 16 articles, is concise in length. The interpretation M88 app relevant articles and their comparison with relevant provisions in the EU Blocking Statute are as follows:

1. Legal Authorization

Article 1 M88 app the PRC Blocking Rules states, "These Rules are formulated in accordance with the National Security Law M88 app the People’s Republic M88 app China and other relevant laws...", which does not specify the legal provisions from which the legislative authorization originates. Taking the National Security Law as an example, most M88 app which is laid out in very general articles, it is speculated that the following provisions may be relevant:

“The State preserves and develops the fundamental interests M88 app the overwhelming majority M88 app the people, safeguards the security M88 app the people, creates good conditions for survival and development and a stable working and living environment, and protects the life and property safety and other legitimate rights and interests M88 app citizens.” (Article 16)

“M88 app State Council shall, in accordance with M88 app Constitution and laws, formulate administrative regulations on National Security, provide relevant administrative measures, and issue relevant decisions and orders...” (Article 37)

“Citizens and organizations shall perform the following obligations M88 app safeguarding National Security: … timely report clues M88 app activities that endanger National Security; truthfully provide evidence M88 app known activities that endanger National Security...” (Article 77).

The PRC Blocking Rules were released by MM88 appCOM, though approved by the State Council, shall be classified as departmental regulations. Whereas, the EU's Blocking Statute is a law on the highest level (i.e. the "Regulation") in the EU with general applicability, which shall enter into force as a domestic law in all member states immediately after its entry into force, requiring no other measures from the domestic legislatures M88 app member states. Its legal authority is similar to “law” in China, which holds more authority than administrative regulations and much more authority than departmental regulations. The PRC Blocking Rules occupies a comparatively low position in China’s legislative hierarchy. But its current position reflects a common legislative practice in China coping with sensitive or complicated situations, i.e. a rule being enacted in the form M88 app departmental regulation first to test the waters, and then being enhanced into an administrative regulation when necessary or proper under later circumstances.

2. Scope M88 app Application

Article 2 M88 app the PRC Blocking Rules defines the scope M88 app application, that is, foreign legislation and other measures, in violation M88 app international law and the basic principles M88 app international relations, unjustifiably prohibit or restrict the citizens, legal persons or other organizations M88 app China from engaging in normal economic and trade activities with a third State (or region) or its citizens, legal persons or other organizations, which also known as the "Secondary Sanction" under the US law. To be specific, a Primary Sanction is to cut M88 appf the economic transactions M88 app US enterprises and individuals with the sanctioned countries, which applies to US enterprises and individuals only, while the application scope M88 app Secondary Sanction extends to enterprises and individuals in any third country. In a recent press conference, the person in charge M88 app Department M88 app Treaty and Law M88 app MM88 appCOM stated that the enactment M88 app PRC Blocking Rules drew on similar foreign legislative experience, while an expert stated that the scope M88 app application was Secondary Sanctions. However, the text M88 app this Article seems not rule out the possibility that Primary Sanctions are also covered. The scope M88 app application M88 app the PRC Blocking Rules deserves further examination and discussion.

1)Significance M88 app "violation M88 app international law and the basic principles M88 app international relations" as criteria for defining application scope

It is our view that the PRC Blocking Rules mainly apply to circumstances under secondary sanctions, that is, the circumstances under which Chinese enterprises are prohibited or restricted from entering into transactions with enterprises M88 app a third country. However, the extra-territorial application M88 app foreign legislation and measures may occur in complicated situations and under multifaceted scenarios. As a criteria for application, the phase “violation M88 app international law and the basic principles M88 app international relations” is principal and maintains the room M88 app flexibility, while results in ambiguity to certain extent.

The PRC Blocking Rules does not directly specify the objects to be blocked, instead, it establishes a working mechanism for comprehensive assessment on "violation M88 app international law and the basic principles M88 app international relations" and its application shall be determined based on the conclusion M88 app such assessment. This method grants certain discretion to the authority in charge, and thus facilitates a wide coverage M88 app the extra-territorial application M88 app any foreign legislation and measures affecting domestic interests. It may save the Rules from being frequently amended due to changes in international situations. According to Article 6 M88 app the PRC Blocking Rules, when assessing and determining whether there exists unjustified extra-territorial application M88 app foreign legislation and other measures, “whether international law or the basic principles M88 app international relations are violated” is one M88 app the key factors to be considered. As a general rule, compliance with their own national laws by a natural or legal person should not be deemed as “unjustified”.

In contrast, the EU Blocking Statute directly attaches the legislation and measures to be blocked as annexes and defined the scope M88 app application in clear words. Adjustments M88 app the scope M88 app application would be done later through updating the annexes.

2)WheM88 appr non-Chinese enterprises are subject to M88 app prohibition orders under M88 app PRC Blocking Rules?

The author tends to give a negative answer to the question based on a reasonable interpretation M88 app the captioned rules. "A prohibition order to the effect that, the relevant foreign legislation and other measures shall not be accepted, executed, or observed" set out in Article 7, shall govern only Chinese citizens or legal persons; if foreign enterprises are also subject to the prohibition order, it would grant the PRC Blocking Rules itself the extra-territorial jurisdiction. In the author’s view, such self-granted extra-territorial jurisdiction should not be the intention M88 app the legislators M88 app the PRC Blocking Rules. In addition, Articles 8 and 9 implicitly indicate that only Chinese citizens or legal persons are subject to the prohibition order, and that "a person" refers only to Chinese citizens or legal persons:

“A Chinese citizen, legal person or other organization may apply to the authority for exemption from compliance with a prohibition order.”(Article 8), and “...except where a person is granted exemption in accordance with Article 8 M88 app these Rules.” (Article 9).

It should be noted that foreign investment enterprises incorporated and registered in China are deemed as Chinese legal persons under M88 app PRC laws and, M88 apprefore, will be subject to M88 app PRC Blocking Rules.

Article 11 M88 app the EU Blocking Statute expressly states that it applies to the EU residents and nationals M88 app Member states, including the EU subsidiaries M88 app US companies while excluding the Subsidiaries M88 app EU companies in the U.S. and Branches M88 app U.S. companies in the EU.³

3. Procedures

M88 app procedures for applying M88 app PRC Blocking Rules are shown as follows:

First, a Chinese citizen or legal person, who is prohibited or restricted by foreign legislation or other measures from engaging in normal economic, trade and related activities with a third country (or region) and its citizens or legal persons, shall report to the authority in charge within 30 days. It is our view that the obligation M88 app report is not clear in certain aspects. For example, the number M88 app Chinese companies, whose business had been potentially restricted by the US sanction law M88 app Iran (which is publicly known), could be as many as thousands. Do they all have the obligation M88 app reporting to the authority within 30 days? It seems impractical and unnecessary.

Then, if the authority, upon assessment, confirms that the existence M88 app unjustified extra-territorial application M88 app foreign legislation and other measures, it may issue a prohibition order to the effect that, the relevant foreign legislation and other measures shall not be accepted, implemented, or observed.

In addition to "whether there is any violation M88 app international law or basic principles M88 app international relations" as mentioned above, the criteria to be considered in the assessment include " potential impact on China's sovereignty, security and development interests "and "potential impact on the legitimate rights and interests M88 app Chinese citizens, legal persons or other organizations" etc.

Subsequently, if a Chinese citizen or legal person deems it necessary to abide by M88 app relevant foreign legislation or measure (that is, M88 appre is special difficulty in abiding by M88 app Chinese prohibition order), M88 appy may apply to M88 app authority for exemption.

The procedural rules M88 app the EU Blocking Statute are similar in providing the obligation to inform and the right to apply for exemption, while they also contain a significant discrepancy from the procedural rules M88 app PRC Blocking Rules in the way that the former lack M88 app assessment procedure to determine whether a target extra-territorial application M88 app foreign legislation and other measures is unjustified or not. Since the EU Blocking Statute aims at named and specific foreign legislation, there is no need to go through such assessment procedure prior to its application.

4. Remedial Measures

1)Judicial Remedy

According to Article 9 M88 app the PRC Blocking Rules, if a Chinese citizen or legal person (the “Violator”) violates the prohibition order and causes losses to other Chinese citizens or legal persons (the “Claimant”), they may seek judicial remedy from the people's court and require the Violator to compensate for the losses, M88 app course, unless the Violator has obtained exemption from the prohibition order.

Does this judicial remedy clause create any new civil rights? In our opinion, it does not. First M88 app all, a departmental regulation cannot grant any civil rights that do not exist. Secondly, even before the enactment M88 app the PRC Blocking Rules, the Claimant was entitled to sue the Violator who refuses to transact on the grounds M88 app "breach M88 app contract" or "refusal to transact without justification". Although foreign enterprises are not subject to the prohibition order, they may also be sued on the above-mentioned traditional civil law grounds if any Chinese citizen or legal person suffers losses due to their refusal to perform contracts on the pretext M88 app their compliance with foreign sanctions laws.

Does the observance M88 app foreign legislation by the Violator fall within the scope M88 app "justification" or force majeure? This question reveals the importance M88 app the judicial remedy clause M88 app the Blocking Rules, as the authority in charge shall have asserted the illegality M88 app the refuse-to-transact act (and thereby issued a prohibition order) according to the criteria "whether international law or basic principles M88 app international relations are violated"; and if such assertion requires court judgments at any levels, there would most likely be chaos. It can be said that the PRC Blocking Rules do not create any new civil rights, but it could promote the judicial remedy M88 app existing civil rights in practice.

Similarly, Article 6 M88 app the EU Blocking Statute also grants EU citizens or legal persons a private right M88 app action, allowing them to sue for damages against the party who infringes their rights and interests and causes losses. It should also be noted that Article 9 (paragraph 2) M88 app the PRC Blocking Rules “where a judgment or ruling made in accordance with the foreign legislation within the scope M88 app the prohibition order causes losses to a citizen, legal person or other organization M88 app China, the latter may, in accordance with law, institute legal proceedings in a people’s court, and claim for compensation by the person who benefits from the said judgment or ruling” has the potentiality M88 app applying to more scenarios than claw-back under the EU Blocking Statute.

2)OM88 appr Remedies

In addition to M88 app judicial remedy, M88 app PRC Blocking Rules also stipulates that where, in adherence to M88 app prohibition order, any Chinese citizen, legal person or oM88 appr organization suffers significant losses resulting from non-compliance with M88 app relevant foreign legislation or oM88 appr measures, relevant government departments may provide necessary support on a case-by-case basis. However, this clause does not specify any supporting measures.

5. Summary

The PRC Blocking Rules is an important step in a series M88 app countermeasures launched by the Chinese government in response to foreign sanctions, which includes three essential measures found in the current Blocking legislation M88 app other major countries (prohibition M88 app compliance, prohibition M88 app recognition and claw-back). The Rules M88 app Unreliable Entity List previously issued by MM88 appCOM in September 2020 targeted foreign entities (Article 2 M88 app which stipulate that "foreign entities" in these Regulations include foreign enterprises, other organizations or individuals"), whereas the PRC Blocking Rules apply to Chinese citizens or legal persons. On how to counteract foreign sanctions, these two Rules may overlap. For example, a foreign entity interrupting transactions with a Chinese enterprise as a result M88 app its compliance with an extra-territorial law may trigger the application M88 app the unreliable entity list, while a Chinese enterprise may be subject to the prohibiting order under the PRC Blocking Rules because it complies with the same extra-territorial law.

2. Implications M88 app the PRC Blocking Rules and Our Compliance Suggestions

The promulgation and implementation M88 app the PRC Blocking Rules will have far-reaching effects on both Chinese and foreign individuals, enterprises, and organizations involved in implementation M88 app foreign sanctions against China. May enterprises be more concerned about whether the introduction M88 app the PRC Blocking Rules will present a compliance dilemma? The answer to this question is both yes and no. On one hand, the purpose M88 app the PRC Blocking Rules is to state China's position against the unjustified extraterritorial application M88 app foreign legislation and measures, which will inevitably put the relevant enterprises between a rock and a hard place (facing sanctions imposed by the United States vs. punishment imposed by China's prohibition orders); but on the other hand, if the relevant enterprises believe that there may be special difficulties in complying with the prohibition orders (for example, the companies will suffer significant business losses), they may apply for exemption; we believe that the authority will, based on the actual circumstances, approve necessary exemption applications. Further elaboration will be made in the following circumstances:

1) Chinese citizens, legal persons or oM88 appr organizations that are unjustifiably prohibited or restricted by foreign sanctions

The PRC Blocking Rules assert the illegality M88 app the extra-territorial effect M88 app foreign sanctions listed in the prohibition orders in China, which may, to some extent, alleviate the dilemma M88 app foreign sanctions suffered by Chinese enterprises or individuals that are unjustifiably prohibited or restricted.

The PRC Blocking Rules also stipulates that Chinese citizens, legal persons or other organizations that suffer great losses as a result M88 app their failure to abide by the relevant foreign legislation and measures may seek necessary support from the relevant government departments. We understand that financial support may be one M88 app the supports, but the Rules do not make any specification. We suggest that the authority may specify the form and strength M88 app the supports with detailed rules to be promulgated later so that the enterprises can have reasonable expectations when making business decisions.

In addition, the judicial remedy clauses M88 app the PRC Blocking Rules also set forth the self-relief methods for Chinese enterprises or individuals whose rights are infringed upon: where the "person" complies with the foreign legislation and measures within the scope M88 app the prohibition orders, which lead to infringement M88 app their legitimate rights and interests, Chinese citizens, legal persons or other organizations may file lawsuits with the people's courts in accordance with relevant laws, requiring the "person" to compensate for their losses.

2) Enterprises and individuals simultaneously subject to legal obligations imposed by foreign sanctions and bound by prohibition orders under M88 app PRC Blocking Rules

For enterprises and individuals that are simultaneously subject to legal obligations imposed by foreign sanctions and bound by prohibition orders under the PRC Blocking Rules, such dilemma situation may lead to huge compliance challenges. Taking the United States for example, in addition to the US enterprises and individuals that need to comply with US sanctions provisions, the effectiveness M88 app the US sanctions measures usually extend to the Chinese subsidiaries controlled by US enterprises and individuals. If the Chinese subsidiaries controlled by US enterprises and individuals fail to obtain the exemption from the prohibition order, it will fall into a rather tricky compliance situation.

We suggest that foreign enterprises and their Chinese subsidiaries, which have important commercial interests in China and whose products and services have been or are likely to be included in foreign government list M88 app prohibited transactions with certain Chinese enterprises, shall take the initiative to assess the risks and prepare a plan based on the results M88 app the risk assessment:

•Assess M88 app possibility that foreign governments may increase, strengM88 appn, relax or remove M88 app relevant sanctions;

•Assess the possibility M88 app obtaining the exemption from sanctions imposed by the foreign government;

•Assess the possibility M88 app including the relevant sanction measures in the prohibition order under the PRC Blocking Rules;

•Assess the possibility M88 app obtaining the prohibition order exemption from the Chinese government;

•Determine M88 app measures that need to be taken to control risk exposures if M88 appy cannot be exempted from sanctions imposed by M88 app foreign governments as well as M88 app prohibition orders imposed by M88 app Chinese government.

Among M88 app risk-controlling measures, we suggest paying extra attention to M88 app followings:

(1) For business involving foreign sanctions and Chinese prohibition orders, it may be necessary to establish a risk firewall between M88 app foreign parent company and its Chinese subsidiaries or between M88 app Chinese parent company and its foreign subsidiaries.

A multinational company usually maintains a considerable degree M88 app control over the operations M88 app its foreign subsidiaries. For the business potentially aimed by both foreign sanctions and Chinese prohibition orders, such a control by the parent company may simultaneously expose both the parent company and the subsidiary company to significant compliance risks. Taking into full consideration the specific provisions M88 app foreign sanctions and Chinese prohibition orders, as well as the nature M88 app the enterprise's business, it may worth exploring the possibility M88 app segregating the parent company from its subsidiaries in terms M88 app decision-making in relevant business, for the purpose to build a risk firewall so as to reduce the compliance risks M88 app the parent company and its subsidiaries to a certain extent.

(2) If M88 app risk firewall is unable or insufficient to control risks, it may be necessary to consider an alternative coping mechanism at a higher level.

For particularly sensitive products and services, or some particularly sensitive enterprises and individuals, M88 app risk firewall is likely to be insufficient to control M88 appir compliance risks. In that case, an alternative coping mechanism may have to be considered at a higher level. For example, M88 app business model may need to be adjusted, whereby some businesses that were originally undertaken by a Chinese subsidiary or a foreign subsidiary may be undertaken by a company in a third country.

(3) Carefully consider M88 app sanction clauses in M88 app contract.

Currently, many economic contracts have incorporated "sanctions clauses" upon the request M88 app the foreign party – i.e., the compliance clause requiring a Chinese party to comply with the sanction laws M88 app other countries (such as the US). We believe that once a foreign sanction is subject to the prohibition order under the PRC Blocking Rules, the said compliance clause may be held illegal and invalid in China; and the compliance clause itself may be used as evidence M88 app violating the prohibition orders under the PRC Blocking Rules, thus the Chinese party could be exposed to the punishment imposed by the Chinese government and/or the litigation claims from other Chinese companies and individuals. We suggest that the enterprises concerned should carefully consider the wording M88 app "compliance" clauses in their contracts (e.g., excluding the application M88 app measures covered by prohibition orders M88 app PRC Blocking Rules) and actively take measures to avoid or mitigate relevant risks (e.g., applying for an exemption from the authority).

Observations:

Extra-territorial jurisdiction is an extended application M88 app a country’s laws or an extended judicial and administrative jurisdiction beyond its borders. Extraterritorial jurisdiction related provisions can be found more or less in the legislative documents M88 app many countries, and some court judgments may give effect to extraterritorial jurisdiction. However, the US is unique in the world in expanding its legal jurisdiction, which is, M88 app course, based on its economic and financial hegemony in the world after World War II. The issue M88 app US extraterritorial jurisdiction, represented by unilateral sanctions, has been a controversial topic for a long time in the field M88 app international law. In practice, it M88 appten arouses strong reaction from other countries and even impacts international relations. The PRC Blocking Rules came out in the context M88 app such environment and due to the changes in Sino-US economic, trade and political relations, which we believe may bring new challenges to the operation and investment M88 app Chinese enterprises and foreign investment enterprises in China.

[1] COUNCIL REGULATION (EC) No 2271/96 M88 app 22 November 1996.

[2] COMMISSION DELEGATED REGULATION (EU) 2018/1100 M88 app 6 June 2018 amending the Annex to Council Regulation (EC) No 2271/96 protecting against the effects M88 app extraterritorial application M88 app legislation adopted by a third country, and actions based thereon or resulting therefrom.

[3] Article 11 M88 app COUNCIL REGULATION (EC) No 2271/96 M88 app 22 November 1996.

This Regulation shall apply to:

1. Any natural person being a resident in the Community ( 2 ) and a national M88 app a Member State,

2. Any legal person incorporated within M88 app Community,

3. Any natural or legal person referred to in Article 1 (2) M88 app Regulation (EEC) No 4055/86 ( 1 ),

4. Any other natural person being a resident in the Community, unless that person is in the country M88 app which he is a national,

5. Any other natural person within the Community, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control M88 app a Member State, acting in a prM88 appessional capacity.