Prohibited Celebration 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 below U.S. export management and sanctions legal guidelines. America has strict laws prohibiting U.S. corporations from partaking with sure international people and entities. These embody 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 essential when coping with Chinese language corporations, as many Chinese language people and entities have just lately been added to those lists.

The Complexity of Screening for Prohibited Events

Prohibited get together screening entails extra than simply checking names on just a few lists. For example, below the Workplace of Overseas Belongings 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 also be thought of blocked, even when it’s not explicitly on the SDN List.  Exporters often try to establish 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, international corporations usually 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 further 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 liable 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 below paragraph (a) of this part.”

Nevertheless, there are hidden  complexities in these necessities. For instance, the EAR’s Army Finish Person regulation prohibits exporting sure merchandise to “Army Finish Customers” in China. On this part, the time period “navy finish person” is broadly outlined as “[T]he nationwide armed companies (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 capabilities 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 “Army Finish Person” in EAR §744.21(g), together with events whose actions or capabilities are supposed to assist “navy finish makes use of” in China.

An identical requirement exists below 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 may be difficult, posing vital compliance dangers for U.S. exporters.

Prohibited get together screening just isn’t restricted to exporters; it is usually essential 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  below the EAR and OFAC sanctions can lead to fines as much as $1 million and imprisonment for as much as 20 per violation.  Underneath the UFLPA, non-compliance can lead to an entire ban on imports of the product into the US.

Due Diligence Screening Methodology

There are a number of steps that corporations can take to try to cut back these dangers. Along with screening for restricted events, corporations often request their international counterparties to signal export and import compliance certifications. They will additionally embody import and export compliance clauses of their buy and sale contracts. These certifications can require the international 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 in opposition to the SDN Checklist and different related lists.

Equally, for EAR compliance, corporations can require that their international counterparties affirm, amongst different issues, that they don’t fall below the definition of “navy finish person” or “military-intelligence finish person”. 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 international counterparties confirming that no drive labor was concerned of their provide chain. This documentation might embody  manufacturing unit go to reviews, audit reviews, and provide chain maps, amongst different issues.

Since it’s not unusual for Chinese language and different international corporations to misconceive the complicated U.S. import and export necessities, U.S. corporations often additionally conduct their very own impartial due diligence evaluations of the events concerned within the transactions.  Such evaluations sometimes would study the international firm and its house owners to realize perception into their operations and to establish any potential points or considerations. The gadgets to be reviewed will depend upon the small print of the transaction concerned, however can embody researching the Chinese language firm’s shareholders, the character of its enterprise actions (together with any connections with Chinese language navy companies or XUAR) and whether or not there are any reviews of fraudulent, legal or compliance violations. These impartial third-party evaluations 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 cut back the danger of violating laws and probably cut back penalties. These evaluations additionally present beneficial details about the Chinese language firm that can be utilized for enterprise or negotiation functions.


China poses distinctive challenges relating to conducting due diligence evaluations, primarily resulting from Chinese language authorities  restrictions on data obtainable to international corporations and governments.

Regardless of these challenges, Harris Bricken has intensive expertise conducting due diligence evaluations of Chinese language corporations, leveraging vital sources to beat these limitations.

When mixed with different compliance practices reminiscent of restricted get together screening and export/import compliance packages, due diligence evaluations can function a beneficial instrument in safeguarding U.S. corporations concerned in Chinese language enterprise transactions.


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

Tom McVey  is a global company legal professional 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 US (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 legal professional at Harris Bricken the place he additionally heads up the agency’s Africa Follow. You’ll find out extra about Ngosong right here.