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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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On November 12, President Donald Trump signed <a href="https://www.federalregister.gov/documents/2020/11/17/2020-25459/addressing-the-threat-from-securities-investments-that-finance-communist-chinese-military-companies" target="_blank" rel="noopener">Executive Order (E.O.) 13959</a>, “Addressing the Threat from Securities Investments That Finance Communist Chinese Military Companies,” which prohibits U.S. persons (companies and individuals) from investing in certain Chinese firms found to be enabling the Chinese military. This is the latest effort to pressure China over what the Trump administration describes as abusive business practices in the United States. Specifically, the E.O. bans U.S. persons from transacting in securities of any of the <a href="https://www.defense.gov/Newsroom/Releases/Release/Article/2328894/dod-releases-list-of-additional-companies-in-accordance-with-section-1237-of-fy/" target="_blank" rel="noopener">31 Chinese companies</a> previously listed by the U.S. Department of Defense (DoD) pursuant to Section 1237 of the <a href="https://www.govinfo.gov/content/pkg/PLAW-105publ261/pdf/PLAW-105publ261.pdf" target="_blank" rel="noopener">National Defense Authorization Act for Fiscal Year 1999</a> (NDAA) as enabling China’s “Military-Civil Fusion development strategy” and the modernization goals of the People’s Liberation Army. The DoD and the U.S. Department of the Treasury may add additional Chinese companies, and the Treasury Department may add subsidiaries to the list of banned investments. While the E.O.’s ban becomes effective on January&nbsp;11, 2021. However, the scope of the ban remains to be clarified by the U.S. government.

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IEEPA Sanctions Authorized by Section 1237 of the NDAA

Section 1237(a) of the NDAA authorizes the president to impose sanctions under the International Emergency Economic Powers Act (IEEPA) in the case of any commercial activity in the United States by a person who is on the list published under Section 1237(b). Notably, the NDAA authorizes the president to impose IEEPA sanctions “without regard to” IEEPA’s requirement that the president first declare a national emergency, as is usually the case under the IEEPA. A broad range of sanctions may be applied under IEEPA, including requiring U.S. persons to block all property of a sanctioned person (as is required for all persons on the Specially Designated Nationals (SDN) List). The investment ban directed under E.O. 13959 is not the most severe of available sanctions.

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Section 1237(b) requires that the DoD “make a determination of those persons operating directly or indirectly in the United States or any of its territories and possessions that are Communist Chinese military companies and shall publish a list of those persons in the Federal Register.”

E.O. 13959 expressly targets civilian Chinese companies that are “key to the development of the PRC’s military, intelligence and other security apparatuses” and raise capital by selling public securities to U.S. investors. Pursuant to the order, the following transactions by any U.S. person are prohibited:

The E.O. also prohibits any transaction that “evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the prohibitions” of the order.

Notably, the E.O. defines “Communist Chinese military company” to include not only companies currently on or later added to the DoD list, but also companies that the Secretary of the Treasury publicly lists as meeting the criteria in Section 1237(b)(4)(B) of the NDAA or as a subsidiary of a person already determined to be a Communist Chinese military company. Based on a plain reading of E.O. 13959 and this provision in particular, it appears that E.O. 13959’s prohibitions do not apply to subsidiaries of Communist Chinese military companies unless they are listed publicly by the Treasury Department or DoD. Nevertheless, this is an issue to watch closely as the government implements this order.

The E.O. provides two limited exceptions for the following transactions:

Thus, as to the 31 companies currently designated on the DoD list, U.S. persons will have until November 11, 2021 to engage in otherwise prohibited purchases and sales transactions in the Chinese military company securities for purposes of divestment only. After the initial 60-day period following any future determination, U.S. persons will have 365 days to engage in otherwise prohibited purchases and sales of Chinese military company securities in order to divest.

Open Questions on Scope

Many open questions on its scope and impact on U.S. persons remain to be answered by OFAC and the DoD. For example, the DoD list includes the name “Huawei” but does not clarify what specific legal entities are subject to the prohibitions. Additionally, the types of securities the E.O. refers to, directly or indirectly, are also not defined. Finally, it is not clear whether the prohibition will cover only transactions where a U.S. person is the principal (buyer or seller) or also transactions where a U.S. person processes the transaction in some capacity.

Potential Impact on U.S. and Non-U.S. Persons

As noted, the DoD list identifies Chinese companies in the United States that the U.S. government deems to support Chinese military operations. Based on existing rules addressing the U.S. government supply chain, companies should assess whether the DoD list triggers any existing prohibitions on doing business with companies owned or controlled by the Chinese military or a foreign government. Some of these rules include the Federal Acquisition Regulation and Section 514 of the Consolidated Appropriations Act for FY 2018.

Our International Trade group has extensive experience advising on compliance with sanctions and investment restrictions. For more information, please contact:

David M. Schwartz Partner and Practice Group Leader, International Trade 202.263.4170 <a href="mailto:David.Schwartz@ThompsonHine.com">David.Schwartz@ThompsonHine.com</a>

Samir D. Varma Partner, International Trade 202.263.4136 <a href="mailto:Samir.Varma@ThompsonHine.com">Samir.Varma@ThompsonHine.com</a>

Francesca M.S. Guerrero Partner, International Trade 202.973.2774 <a href="mailto:Francesca.Guerrero@ThompsonHine.com">Francesca.Guerrero@ThompsonHine.com</a>

Brent Connor Senior Counsel, International Trade 202.263.4188 <a href="mailto:Brent.Connor@ThompsonHine.com">Brent.Connor@ThompsonHine.com</a>

Joyce Rodriguez Associate, International Trade 202.973.2724 <a href="mailto:Joyce.Rodriguez@ThompsonHine.com">Joyce.Rodriguez@ThompsonHine.com</a>

Scott E. Diamond* Senior Legislative &amp; Regulatory Policy Advisor, International Trade 202.263.4197 <a href="mailto:Scott.Diamond@ThompsonHine.com">Scott.Diamond@ThompsonHine.com</a> *Not licensed to practice law

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions.

https://admin.thompsonhine.com/wp-content/uploads/2022/04/International_Trade_Update_-_Executive_Order_on_Investments_in_Communist_Chinese_Military_Companies_Amended-1.pdf

Executive Order Prohibits U.S. Investment in “Communist Chinese Military Companies”

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