Prohibited Social gathering Screening and the Hidden Risks in China Enterprise Transactions

By Tom McVey & Ngosong Fonkem*

 If your organization is doing enterprise with a Chinese language firm, it’s important to pay attention to the dangers related to prohibited events beneath U.S. export management and sanctions legal guidelines. America has strict laws prohibiting U.S. corporations from participating with sure overseas people and entities. These embrace events listed on the Treasury Division’s List of Specially Designated Nationals and Blocked Persons (the “SDN Checklist”), in addition to the Commerce Division’s Entity Checklist, Denied Persons List, and Military End-User List (for sure merchandise), amongst others.  There are additionally sure restrictions on importing merchandise from China’s Xinjiang Uyghur Autonomous Area (“XUAR”) or from events listed on the Uyghur Compelled Labor Prevention Act Checklist (“UFLPA”).  It’s essential to display screen your transactions to make sure that you’re not doing enterprise with restricted events. That is significantly vital when coping with Chinese language corporations, as many Chinese language people and entities have lately been added to those lists.

The Complexity of Screening for Prohibited Events

Prohibited get together screening includes extra than simply checking names on just a few lists. As an example, beneath the Workplace of Overseas Property Management’s (OFAC’s) “fifty % rule,” if a celebration or events listed on the SDN Checklist personal 50% or extra of an organization, that firm can be thought-about blocked, even when it’s not explicitly on the SDN List.  Exporters often try and determine who the shareholders or members are in any firm with which they’re conducting a transaction to substantiate that no get together or events on the SDN Checklist personal 50% or extra of that firm. Sadly, overseas corporations typically hesitate to offer correct shareholder data, which exposes U.S. corporations to compliance dangers.

Equally, the Commerce Division’s Export Administration Rules (“EAR”) comprise numerous restricted get together lists. These lists prohibit the export or switch of sure merchandise to listed events or require extra authorizations for transactions. It’s the duty of U.S. corporations to find out if the events concerned of their transactions are on these lists. See for instance EAR §744.21(b)(1) which offers: “Exporters, re-exporters, and transferors are accountable for figuring out whether or not transactions with entities not listed on complement no. 7 or 4 to this half are topic to a license requirement beneath paragraph (a) of this part.”

Nevertheless, there are hidden  complexities in these necessities. For instance, the EAR’s Navy Finish Person regulation prohibits exporting sure merchandise to “Navy Finish Customers” in China. On this part, the time period “navy finish consumer” is broadly outlined as “[T]he nationwide armed providers (military, navy, marine, air drive, or coast guard), in addition to the nationwide guard and nationwide police, authorities intelligence or reconnaissance organizations (excluding these described in § 744.22(f)(2)), or any individual or entity whose actions or features are supposed to assist ‘navy finish makes use of’ . . . . ”  This time period contains not solely events listed on the Military End-User List, but additionally another get together that meets the definition of “Navy Finish Person” in EAR §744.21(g), together with events whose actions or features are supposed to assist “navy finish makes use of” in China.

An identical requirement exists beneath EAR § 744.22, which prohibits exporting all EAR-regulated merchandise to “military-intelligence finish customers” or “military-intelligence finish makes use of” in China and sure different nations.  Figuring out these connections could be difficult, posing important compliance dangers for U.S. exporters.

Prohibited get together screening shouldn’t be restricted to exporters; additionally it is vital for U.S. importers. With the implementation of the Uyghur Compelled Labor Prevention Act, U.S. importers should excercise due diligence measures to adjust to laws that prohibit importing items from entities linked to China’s XUAR area, or these listed on the UFLPA Entity List. Given the complexity of provide chains, it may be troublesome to find out whether or not imported merchandise contain prohibited types of labor or are related to listed entities, creating challenges for U.S. importers.

Penalties for non-compliance

Non-compliance with prohibited get together restrictions can result in extreme penalties. Violations  beneath the EAR and OFAC sanctions may end up in fines as much as $1 million and imprisonment for as much as 20 per violation.  Below the UFLPA, non-compliance can lead to a whole ban on imports of the product into the USA.

Due Diligence Screening Methodology

There are a number of steps that corporations can take to try to scale back these dangers. Along with screening for restricted events, corporations often request their overseas counterparties to signal export and import compliance certifications. They’ll additionally embrace import and export compliance clauses of their buy and sale contracts. These certifications can require the overseas events to characterize that they are going to function in compliance with U.S. export and import legal guidelines, disclose the names of their shareholders, and make sure that none of their shareholders are listed on any related watchlists. Primarily based on this data, corporations can  then display screen the shareholder names towards the SDN Checklist and different related lists.

Equally, for EAR compliance, corporations can require that their overseas counterparties affirm, amongst different issues, that they don’t fall beneath the definition of “navy finish consumer” or “military-intelligence finish consumer”. They need to additionally try to substantiate that the exported product is not going to be utilized in any “navy finish use” or “military-intelligence finish use” as outlined within the EAR. Within the case of UFLPA compliance, corporations can request certifications and documentation from their overseas counterparties confirming that no drive labor was concerned of their provide chain. This documentation could embrace  manufacturing facility go to studies, audit studies, and provide chain maps, amongst different issues.

Since it’s not unusual for Chinese language and different overseas corporations to misconceive the complicated U.S. import and export necessities, U.S. corporations often additionally conduct their very own unbiased due diligence critiques of the events concerned within the transactions.  Such critiques usually would study the overseas firm and its house owners to achieve perception into their operations and to determine any potential points or issues. The objects to be reviewed will rely upon the main points of the transaction concerned, however can embrace researching the Chinese language firm’s shareholders, the character of its enterprise actions (together with any connections with Chinese language navy businesses or XUAR) and whether or not there are any studies of fraudulent, prison or compliance violations. These unbiased third-party critiques assist the U.S. corporations fulfill their compliance obligations and assist show their good religion efforts to adjust to the legal guidelines. By conducting this due diligence, corporations can scale back the danger of violating laws and probably scale back penalties. These critiques additionally present invaluable details about the Chinese language firm that can be utilized for enterprise or negotiation functions.


China poses distinctive challenges relating to conducting due diligence critiques, primarily because of Chinese language authorities  restrictions on data out there to overseas corporations and governments.

Regardless of these challenges, Harris Bricken has intensive expertise conducting due diligence critiques of Chinese language corporations, leveraging important assets to beat these limitations.

When mixed with different compliance practices resembling restricted get together screening and export/import compliance packages, due diligence critiques can function a invaluable device in safeguarding U.S. corporations concerned in Chinese language enterprise transactions.


* The above put up was written by Tom McVey and Ngosong Fonkem.

Tom McVey  is a global company lawyer and enterprise advisor in Washington, Dc. Mr. McVey advises shoppers on the Export Administration Rules, the OFAC sanctions packages, ITAR, the Overseas Corrupt Practices Act, the anti-boycott legal guidelines and the Committee on Overseas Funding in the USA (CFIUS). He additionally advises on cross-border enterprise transactions together with worldwide gross sales and distribution, joint ventures, mergers and acquisitions, non-public fairness, worldwide enterprise planning and company compliance.

Ngosong Fonkem is a global commerce lawyer at Harris Bricken the place he additionally heads up the agency’s Africa Observe. You’ll find out extra about Ngosong right here.