Companies Doing Business in China Caught in a Double Bind

2 minute read | August.10.2022

Continuing tensions between the U.S. and China are creating concerns for multinational companies doing business in China. Last June, China enacted the Anti-Foreign Sanctions Law, designed to counteract “discriminatory restrictive measures employed by foreign nations” against Chinese citizens or entities, interference with China’s internal affairs, or other “containment or suppression” of China. Critically for U.S. multinationals, the law permits the Chinese government to take action against foreign companies or individuals involved in developing or implementing such “discriminatory restrictive measures.” Countermeasures against those designated on China’s Anti-Sanctions List include prohibitions on conducting business in China, expulsion and/or visa cancellation, and asset seizure. Separately, violators may be subject to liability in Chinese courts.

China has not hesitated to invoke the Anti-Foreign Sanctions Law and related laws, and enforcement seems likely to accelerate. Last year, China sanctioned six U.S. individuals and one entity in response to prior U.S. sanctions on seven Chinese officials in Hong Kong. Earlier this year, China sanctioned two U.S. entities for arms sales to Taiwan. Recently, the Chinese Foreign Ministry announced unspecified sanctions against Speaker Pelosi and her family following her Taiwan visit.

Amid the current backdrop, uncertainty and risk abounds for international asset managers, brokerages, and other companies that have planted a flag in China under recently relaxed foreign investment restrictions. In 2018, for example, China permitted foreign companies to hold a controlling 51% stake in joint ventures engaged in financial services and other industries, and removed the ownership cap altogether in 2021. Businesses can mitigate risks in the following ways:

  • Monitor pronouncements and enforcement actions by Chinese government agencies with respect to its blocking law and Anti-Foreign Sanctions Law, including the expanding scope of individuals designated on the Anti-Sanctions List, to determine if there is any risk of exposure under the Chinese laws
  • Closely scrutinize customer and vendor contracts, and consider including clauses for geopolitical events such as sanctions, embargoes, cybersecurity attacks, and national security events
  • Review and refine compliance policies – including KYC and AML standards – to protect the company from corruption, data privacy, national security, and money laundering risks
  • Train employees on responding to potential actions taken under the law, conduct political risk assessments, and proactively consider emergent geopolitical developments

We are closely monitoring the ongoing situation and encourage businesses to consult on these and related issues with an Orrick attorney with whom you have worked in the past. Additionally, we have created a new category on our InfoBytes blog to track China-related developments.