OFAC Issues Clarifying Guidance on Communist Chinese Military Companies Sanctions
Background on EO 13959
On November 12, 2020, President Trump issued Executive Order 13959 (“EO 13959”), Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies. EO 13959 prohibits U.S. investors from purchasing or investing in securities of companies identified by the U.S. government as Communist Chinese military companies (“CCMCs”), a designation determined by the U.S. Department of Defense and the U.S. Department of the Treasury.
Since former President Trump signed EO 13959, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) has issued clarifying guidance and general licenses on this matter.
On January 13, 2021, President Trump strengthened EO 13959 with a directive. The directive broadened the scope of restrictions on U.S. persons. Notably, the amended EO 13959 makes clear that U.S. persons must divest their holdings in such securities within designated wind-down periods, after which it prohibits the “possession” of covered CCMC securities by U.S. persons after the end of the divestment period. The wind-down period will end on November 11, 2021.
Consequently, on January 14, 2021, the U.S. Department of Defense (“DoD“) designated nine further Chinese companies as CCMCs targeted under EO 13959.
Key Points from OFAC’s FAQs
As of January 14, 2021, OFAC has issued a total of 13 FAQs on EO 13959. Some of the most significant are described below:
- FAQ 858 notes that some names of CCMCs previously identified by the Department of Defense (DoD) do not match the names of issuers of publicly traded securities. The FAQ states that the EO applies to securities of CCMCs “with a name that exactly or closely matches the name of an entity” identified in the Annex to EO 13959 or subsequently identified by the DoD or Treasury Department. The newly issued Non-SDN Communist Chinese Military Companies List provides additional identifying information.
- FAQ 860 provides examples of financial instruments covered by this provision include, but are not limited to, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (“ADRs”), global depositary receipts (“GDRs”), exchange-traded funds (“ETFs”), index funds, and mutual funds, to the extent, such instruments also meet the definition of “security” as defined in section 4(d) of E.O. 13959.
- FAQ 861 clarifies that U.S. persons are prohibited from investing in U.S. or foreign funds, such as exchange-traded funds (ETFs) or other mutual funds, that hold publicly traded securities of a Communist Chinese military company.
- In FAQ 863, OFAC provides guidance on which services are considered permissible under EO 13959. OFAC stated that “support services” such as clearing, execution, settlement, custody, transfer agency, and back-end services, as well as other such support services by or involving a U.S. person, are permissible, to the extent they are not provided to U.S. persons in connection with prohibited transactions.
Export Compliance Obligations
The ultimate responsibility for complying with E.O. 13959 will fall to those U.S. persons transacting or potentially transacting with the listed businesses. U.S. persons may not rely on an exact name match to identify CCMC securities, but rather must exercise due diligence, including identifying similar names, to determine whether securities are subject to the prohibition in E.O. 13959.
It is critical to note that CCMCs are not listed on the Consolidated Screening List. Therefore, U.S. companies must manually screen CCMCs against OFAC’s list or utilize a private screening tool that includes the CCMCs.
If you violate any of the regulations, there are severe penalties
Violations of export and sanctions laws carry hefty civil and criminal penalties. Many U.S. businesses have paid hefty civil penalties for violating U.S. export control laws. L3Harris Technologies, for example, was fined $13 million for illicitly exporting defense technology and software. For more examples of costly civil and criminal penalties, check out BIS’ latest Don’t Let This Happen to You!
Diaz Trade Law has significant experience in export and sanctions compliance matters. Specifically, Diaz Trade Law has successfully assisted clients in submitting voluntary self-disclosures to mitigate penalties, submitting export license applications, requesting authorizations for sales, vetting proposed transactions, and building corrective action systems to help ensure that your business does not make the same violation again.
Diaz Trade Law offers export compliance training, can develop or improve your export compliance program, and vet proposed transactions to ensure they comply with U.S. export control regulations. If you have questions on export compliance matters, contact us today at email@example.com or call us at 305-456-3830.