Regulatory intelligence for US exporters

China's Unreliable Entity List Could Complicate Export Control, Sanctions Compliance, Law Firms Say

China’s so-called unreliable entity list could present compliance challenges for multinational companies and may be used to retaliate against U.S. export controls and sanctions, trade lawyers said. As a result, companies trying to comply with both U.S. and Chinese regulations may have to choose one over the other, risking sanctions from at least one country, law firms said.

The release Sept. 19 of the list’s regulations (see 2009210017) is “further complicating the management of regulatory, reputational and political risks for companies operating in Asia,” DLA Piper said Sept. 22. The threat of being added to the list, which could mean trade and travel restrictions, might “deter owners and managers from actions that might attract sanctions.”

While the criteria for adding companies to the list remain somewhat unclear, Hong Kong-based King & Wood Mallesons said Beijing may first seek to designate companies complying with U.S. export controls and sanctions against China. “Foreign companies who comply with U.S. sanctions and suspend transactions with Chinese companies may be an immediate target,” the law firm said Sept. 21.

DLA Piper agreed, saying companies that recently stopped doing business with China due to U.S. restrictions may be prime candidates. The list “may be intended to neutralize foreign governments' sanctions and export control measures against Chinese companies,” the firm said. “Multinational companies active in Asia may face clashing directives from the sanctions regimes of China, the U.S., and other jurisdictions.”

In addition, the list’s regulations indicate a “potentially broad” scope of sanctionable conduct, DLA Piper said. While countries across the world typically impose sanctions against people and companies for threatening their national security, China’s unreliable entity list will also target entities that threaten the country’s “development interests,” the firm said. Such threats may be construed to “encompass a wide range of competitive practices clashing with industrial policy or trade policy goals.”

China may also target foreign third-party suppliers for cutting off supplies to Chinese customers and may even target businesses for the conduct of their parent companies. “While the [list’s] provisions do not explicitly provide that foreign-invested enterprises in China may be sanctioned for the offshore conduct of foreign parent companies or affiliates,” DLA Piper said, “the regulatory context suggests that such measures would be permitted.”

But Baker McKenzie said much of how the regulations will be implemented “remains unclear,” including how China will apply them to “the existing Chinese subsidiaries of the foreign persons.” The law firm also said that China’s desire to increase investment may take priority over the list. “Since the Chinese government has been making great effort in promoting foreign investment … we believe most of the existing foreign-invested companies should not be adversely affected by the” regulations, Baker McKenzie said in a Sept. 22 blog post.

Instead, the list may be used as a retaliatory tool against specific U.S. actions, King & Wood Mallesons suggested. The timing of the regulations, released as the U.S. imposed restrictions on TikTok and WeChat (see 2009210008), may not be coincidental, the firm added, and “fuels speculation” that China may use the list for “tit-for-tat retaliation.”