New Restrictions on Chinese Military Companies | ECTI

In early June, President Biden signed Executive Order 14032, “Addressing the Threat from Securities Investments That Finance Certain Companies of the People’s Republic of China.” This Executive Order (E.O.) recasts the Trump Administration Executive Order 13959 and places direction of the related sanctions program under the Treasury Department’s Office of Foreign Assets Control (OFAC).

The new E.O. addresses securities investments that finance the named Chinese military companies, including “…the threat posed by the military-industrial complex of the People’s Republic of China (PRC) and its involvement in military, intelligence, and security research and development, and weapons and related equipment production under PRC’s Military-Civil Fusion strategy.” The E.O. also notes that “the use of Chinese surveillance technology outside of China and the development or use of Chinese surveillance technology to facilitate repression or serious human rights abuse constitute unusual and extraordinary threats…to the national security, foreign policy, and economy of the United States…”

E.O. 14032 replaces OFAC’s Non-Specially Designated National Communist China Military Companies (Non-SDN CCMC) List with a new Non-SDN Chinese Military Industrial Complex Companies (Non-SDN CMIC) List. Although this might appear to be a simple case of relabeling, it actually indicates new criteria. The two lists are not identical.

E.O. 14032 does not prohibit exports to listed Chinese military companies. However, in separate actions, the Commerce Department’s Bureau of Industry and Security (BIS) has added a number of Chinese companies to either its Entity List or the Military End-User (MEU) List. The MEU List was instituted by BIS in December 2020 and imposes special Export Administration Regulations (EAR) licensing requirements for exports, reexports, and transfers to military end users in China (along with Burma, Russia, and Venezuela). It covers a wide range of products, from low-level electronics, mass market encryption software and hardware, to commercial aircraft parts and components. The full list of Export Control Classification Numbers (ECCNs) affected by the MEU List and the broader MEU rule is available in Supplement No.2 to Part 744 of the Export Administration Regulations (EAR).

What Exporters Need to Know About E.O. 14032

Many export professionals have been confused by the new E.O. and what it means for dealing with designated Chinese military companies. Here’s what you need to know:

• U.S. persons or companies are prohibited from engaging in the purchase or sale of publicly traded securities, as well as securities derived from or designed to provide investment in such securities. The scope of sanctions on companies designated under the Chinese Military Companies Sanctions Program is limited in comparison to those individuals, groups, and entities on the much larger and more restrictive OFAC Specially Designated National (SDN) List.
• The new Executive Order draws attention to the U.S. government’s concerns with the use of Chinese surveillance technology to facilitate repression or human rights abuses. It extends designation criteria to companies that operate or have operated in the Chinese defense sector and related material sector, or the Chinese surveillance technology sector, as well as entities owned or controlled by parties operating in these sectors.
• The U.S. Department of Treasury administers this sanctions program, rather than the U.S. Department of Defense which was the case during the prior administration. This structure is more in keeping with past sanctions programs.
• Exports, including manufactured goods, materials, software, or technology exports, are not restricted by this E.O. – its focus is on publicly-traded securities investments that finance the identified Chinese military companies.
• Exports to China of items subject to the EAR are subject to an increasingly complex array of restrictions. Among the export compliance issues to consider are:
  • The many items that require a license based simply on ECCN.
  • License requirements for military and military-intelligence end-uses and end-users.
  • The need for due diligence against all U.S. Government restricted parties lists.
  • Heightened controls on Hong Kong following the effective end of the territory’s autonomy.
• The new Executive Order is effective as of August 2, 2021.

Export and sanctions regulations are complex and change frequently. Staying current on export regulations can seem like a never-ending process. That’s why our team at ECTI strives to make it easier for you be up-to-date and knowledgeable about the critical export regulation changes that can impact your business. Check out our latest tools & resources here.

Do you have questions about how best to keep track of changes to export regulations that affect your company’s export activities? ECTI can help you easily stay current with changes to export regulations. Visit www.learnexportcompliance.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP^®) certification program. To find upcoming e-seminars, live seminars and live webinars and browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You can also call the Export Compliance Training Institute at 540-433-3977 for more information.