China’s New Sanctions Blocking Regime: Should Canadian Businesses in Hong Kong Be Worried?

China’s New Sanctions Blocking Regime: Should Canadian Businesses in Hong Kong Be Worried?

On June 10, 2021, the Standing Committee of the Chinese National People’s Congress (“NPC”) passed the Chinese Anti-Foreign Sanctions Law (“ASL”).[1] The ASL prohibits organizations and individuals from assisting foreign nations in implementing sanctions against the People’s Republic of China (“China”). Instead organizations and individuals must assist the government in implementing countermeasures against foreign nations. The NPC, China’s top legislative body, was initially expected to also pass the ASL into Hong Kong Law, raising concerns for Canadian businesses with locations in Hong Kong. However implementation is delayed for the time being after an NPC meeting last week ended with no mention of introducing the ASL into Hong Kong Law.

The ASL is the newest addition to China’s sanctions regime, which also includes the Blocking Rules and the Unreliable Entities List. These measures are the Government of China’s counter to economic sanctions, import restrictions and export control measures imposed by a number of countries against China for alleged human rights violations against the Uyghurs and other Muslim ethnic minorities in the Xinjiang Uyghur Autonomous Region (“XUAR”).[2]

China’s Sanctions Regime

As noted above, China has recently implemented a host of measures in an effort to protect its economic interests including:

Anti-Foreign Sanctions Law

The ASL grants the Government of China the power to impose retaliatory sanctions in response to “discriminatory restrictive measures” that target Chinese citizens or which interfere with China’s “internal affairs”. Additionally, organizations and individuals subject to the ASL are prohibited from complying with any “discriminatory restrictive measure” against China by a foreign country. Legal liability may result for any violation of the ASL.[3]

Blocking Rules

In January 2021, China’s Ministry of Commerce also issued the Blocking Rules which aim to implement a reporting framework by which the Chinese government identifies foreign sanctions laws with an extraterritorial effect that restrict Chinese businesses from engaging in “normal economic, trade and related activities with a third State”.[4]

Unreliable Entities List

In September 2020, China’s Ministry of Commerce released the Unreliable Entity List (“UEL”) under which entities that suspend “normal transactions with” or that apply “discriminatory measures” that violate “normal market transaction principles” and cause “serious damage to the legitimate rights or interests” of a Chinese party are listed. If designated under the UEL, foreign entities may be subject to an array of economic sanctions.[5] So far, China has targeted Canada by imposing sanctions against Canadian Federal MP Michael Chong and the Subcommittee on International Human Rights of the Standing Committee on Foreign Affairs and International Development of the House of Commons of Canada.

These measures were implemented in response to a growing number of sanctions against China by the US, Canada, UK and the European Union. The Canadian measures are discussed below.

Canadian Measures Against China

On March 23, 2021, the Government of Canada imposed economic sanctions against China under the Special Economic Measures Act (“SEMA”) in response to the “gross and systematic human rights violations” in the XUAR. The sanctions prohibit “any person in Canada” and, importantly, “any Canadian outside of Canada” from dealing with the listed entities and individuals.[6] This means that any Canadian citizen working in Hong Kong and every Canadian company operating out of Hong Kong is prohibited from dealing with those listed. For instance, the sole listed entity is Xinjiang Production and Construction Corps, an alleged paramilitary organization implementing the Chinese government’s policy in the XUAR.[7] Dealing with this entity violates SEMA and risks a fine of up to $25, 000 or 5 years imprisonment.

Canada also has import and export control measures that, while not specifically targeted against China, may be used to restrict trade with China. For example, Canada has import prohibitions on goods mined, manufactured or produced wholly or in part by forced labour under Customs Tariff which could be used to ban imports of goods from the XUAR.[8] Canada also has export control measures in place under the Export and Import Permits Act such that the exportation of controlled goods and technologies from Canada may be prohibited if there is a substantial risk that they could be used to commit or facilitate serious violations of international humanitarian or human rights law.[9] Exportation of controlled goods may be prevented if it is believed the goods are destined for the XUAR.

Finally, the Government of Canada also requires Canadian companies that seek to do business in the XUAR to sign the “Xinjiang Integrity Declaration” (the “Declaration”). The Declaration requires companies to affirm that they are not knowingly sourcing products or services from a supplier implicated in forced labour or other human rights violations. Not signing this declaration and not collaborating in good faith can result in the withdrawal of trade advocacy support by the Canadian government and the refusal of future financial support by Canada’s export credit agency, Export Development Canada. While these are not economic sanctions, this requirement may be viewed as a “discriminatory restrictive measure” by the Chinese government.

A Potential Headache for Canadian Businesses in Hong Kong

If the ASL is incorporated into Hong Kong Law, the Canadian business community in Hong Kong could find itself in the untenable situation of “damned if you do, damned if you don’t.” To illustrate, should a Canadian business find itself in the improbable situation of transacting with Xinjiang Production and Construction Corps it may choose to continue its transactions with this entity and risk violating Canadian economic sanctions under SEMA. Alternatively, the Canadian company could choose to halt transactions with the entity and risk prosecution by Hong Kong authorities for complying with a “discriminatory restrictive measure” in violation of the ASL.

Currently, the few individuals and entities listed under Canadian sanctions are not likely to cause an issue for Canadian businesses. However, this may change if tensions between Canada and China, like those arising from the arrest of Huawei CFO Meng Wanzhou in Vancouver and the subsequent detention of Michael Spavor and Michael Kovrig in Beijing, are not resolved. Should Chinese conglomerates be listed in the future, such as Huawei or ZTE, a headache could certainly materialize.

Canada’s Experience with Blocking Statutes: the Foreign Extraterritorial Measures Act

Canada has implemented measures similar to China’s Blocking Rules under the Foreign Extraterritorial Measures Act (“FEMA”).[10] In the mid-1990s, in the context of trade tensions between the US and Cuba, Canada released the Foreign Extraterritorial Measures (United States) Order, 1992 which required Canadian companies to notify the Canadian government when they received communications, usually from US parent companies, related to trade or commerce between Canada and Cuba.[11] For more detailed information on the FEMA Order, see our May 2019 bulletin. These companies were faced with the conundrum of being prohibited from complying with the US sanctions against Cuba and being mandated to comply with US sanctions by the US parent company. The Canadian experience indicates that violations of these laws are not always aggressively prosecuted and so companies may need to weigh the risk of enforcement and penalties when choosing to comply with one law over the other.

Conclusion

While it is presently unclear whether or when the ASL will be incorporated into Hong Kong Law, the potential for incorporation presents elevated legal compliance risk for Canadian businesses in Hong Kong. Although these challenges can complicate business operations in Hong Kong, particularly if the Canadian government adds to the sanctions list, they are not insurmountable hurdles as the Canadian experience with the FEMA Blocking Order has shown. With the assistance of qualified legal counsel from both jurisdictions, Canadian businesses in Hong Kong can reduce the risk of sanctions breaches in either jurisdiction.

[1] China’s Anti-Foreign Sanctions Law (unofficial English translation).
[2] For more information on US sanctions imposed against China, see our July 2021 bulletin.
[3] China’s Anti-Foreign Sanctions Law (unofficial English translation), Articles 11 and 12.
[4] MOFCOM Order No. 1 of 2021 on Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, Article 2.
[5] MOFCOM Order No. 4 of 2020 on Provisions on the Unreliable Entity List, Article 2.
[6] Special Economic Measures (People’s Republic of China) Regulations: SOR/2021-49, Section 3.
[7] Special Economic Measures (People’s Republic of China) Regulations: SOR/2021-49, Schedule Part I and II.
[8] Customs Tariff, SC 1997 c 36, Section 132(1)(m)(i.1).
[9] Export and Import Permits Act, RSC 1985, c E-19, Section 7.3(1)(b).
[10] Foreign Extraterritorial Measures Act, RSC 1985, c F-29.
[11] Foreign Extraterritorial Measures (United States) Order, 1992, SOR/92-584.

by Stephen Wortley and Chris Scheitterlein (assisted by Tayler Farrell, Articling Student)

McMillan is the only National Canadian law firm with an office in Hong Kong and routinely assists clients with investments into Mainland China and into Canada, in both cases using Hong Kong as the jumping off point.

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2021