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2023: A review of foreign sanctions and export control developments involving China

In June 2023, the Five Eyes partners agreed to deepen cooperation on export control enforcement, underscoring the sustained commitment of the U.S. and its allies to prioritize actions related to sanctions and export control regulations. Ringfencing has emerged as a critical strategy for multinational companies navigating escalating tensions between the world's two largest economies. Heightened risks are particularly noticeable within the high-tech supply chain and finance sectors.

Throughout 2023, updates to sanctions and export control regulations related to China concentrated on sensitive technologies, along with designations pertaining to Russia and Iran. The Chinese government has implemented ongoing countermeasures in response to these developments.

FIGURE 1: CHINA LOOKBACK TIMELINE 20231)

The following are some key takeaways:

  • Financial firms took proactive steps to mitigate risks relating to investment restrictions. While there have been no alterations to the Chinese Military-Industrial Complex Companies (CMIC) List, the White House issued a new executive order in August 2023 to enhance restrictions on U.S. investments in China in sensitive technologies, including semiconductors and microelectronics, quantum computing, and artificial intelligence. Simultaneously, reports from the media have emerged regarding U.S. investment companies undergoing regulatory investigations, prompting a proactive approach to mitigate associated risks. Some have chosen to separate their China operations, while others are bolstering their sanctions control programs and implementing new policies to ensure continued compliance.
  • Export control rules on chips tightened, and more Chinese companies were included on the Entity List. The Bureau of Industry and Security (BIS) updated export control rules on advanced computing chips in October 2023. The new rules broadened the technical parameters for chips and chip-making equipment, extended license requirements for additional countries, and enforced end-use controls for companies headquartered or owned by a parent located in China. The Netherlands and Japan have also imposed export controls on chipmaking equipment in 2023. By the end of 2023, more than 700 Chinese individuals and entities were included on the Entity List. There was an addition of over 150 individuals and entities in 2023, the highest increment in the past decade. 
  • Chinese companies were increasingly affected by Russian sanctions.  In 2023, we observed 40 SDN designations of Chinese individuals and organizations associated with OFAC’s Russian sanctions programs, along with 62 additions to the Entity List being accused of supporting Russia’s military and defense industrial base. This marks a substantial surge from the figures in 2022. Unsurprisingly, an increasing number of Chinese companies were affected, given that most Russian sanctions were introduced in 2022 and Chinese companies had substantial pre-existing business connections with Russia. For many companies with business interests in or with Russia, both maintaining operations and considering exit strategies pose significant difficulties. 
  • The Chinese government was broadening its sanctions and counter-sanctions strategies, escalating conflict between local and foreign regulatory requirements. In 2023, the Ministry of Foreign Affairs (MOFOM) consistently imposed sanctions on individuals and entities involved in arms sales to Taiwan, as well as in response to U.S. officials meeting Taiwanese politicians. A milestone occurred in early 2023 with the first-time implementation of China's Unreliable Entity List, regarded as the Chinese counterpart to the Entity List. In addition, export restrictions on Unmanned Aerial Vehicle (UAV), certain semiconductor materials (i.e., Ge and Ga), and graphite were announced as retaliatory measures in response to export controls imposed on China. Furthermore, Chinese laws and regulations, such as the anti-foreign sanctions law, blocking rules, anti-espionage law, and data security and protection laws, present increasing challenges in navigating both local and foreign regulatory requirements for multinational companies operating in China.

FIGURE 2: DEVELOPMENT OF U.S. OFAC AND BIS DESIGNATIONS INVOLVING CHINESE INDIVIDUALS, ENTITIES AND VESSELS

In light of these developments, we recommend that multinational companies consider the following measures to stay prepared for increasing regulatory challenges:

  • Broaden the monitoring perspective for updates to regulations and enforcement to encompass areas such as data protection and national security that indirectly impact a company’s ability to fulfil sanctions compliance and export control requirements imposed by diverse regulators.
  • Update their sanctions and trade compliance policy for China to incorporate local legal and regulatory changes. Multinational companies need to recognize that a direct application of the company’s global compliance standards may encounter substantial challenges and local policy adaption is needed, while ensuring proper management of those deviations.
  • Adapt internal controls to address specific sanctions risks pertinent to China wherever needed. For instance, in the finance sector, compliance with U.S. investment restrictions may necessitate the inclusion of China-specific controls tailored to the company’s risks in customer profiles and products. 
  • Ensure the availability of expertise and a robust compliance culture in the company’s China entities. As more multinational companies choose to ringfence their operations in China, there is an increasing need for local compliance officers to make critical decisions. These officers should possess a comprehensive understanding of the intricate global regulatory landscape for sanctions and export control and align their risk appetite with their headquarters.
  • Anticipate and address enquiries related to sanctions compliance when Chinese companies expand internationally. As Chinese companies increasingly go overseas, it is crucial for these companies to understand and adhere to a myriad of overseas regulations, including sanctions compliance. This commitment not only ensures a smooth expansion process but also enhances the reputation of Chinese companies in the global market.   

AlixPartners has deep expertise in assisting financial institutions and corporates in developing sanctions compliance programs, reacting to regulatory enquiries and overcoming operational challenges. We regularly monitor and adjust our service offerings to best support our clients in sanctions and export control-related matters. Please reach out if you have any enquiries relating to this article or our services.

We will add more than 25 new prosecutors who will investigate and prosecute sanctions evasion, export control violations and similar economic crimes. – Deputy U.S. Attorney General Lisa Monaco

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