How should Chinese companies face increased US enforcement risk from their global business operations?
The recent escalation of tensions between the US and Russia, North Korea and Iran has triggered the Trump administration to unveil new sanctions, implement additional export controls, and impose novel anti-money laundering measures directed at these countries – as well as companies and financial institutions that do business with or otherwise support those jurisdictions.
While the US’ stated policy goals for these measures have not included imposing economic pain on China, these actions have had important indirect consequences for many Chinese companies and financial institutions. During the past year, the US has targeted Chinese entities with severe sanctions, slapped massive fines on Chinese firms, and wholly cut off certain Chinese banks from the US financial system.
Newly enacted sanctions suggest the US will take similar action against Chinese firms that carry out certain types of business with North Korea, Russia and Iran. These developments in international risk enforcement underscore why it is important for Chinese firms to understand US law, as well as the severe and negative consequences that can flow to Chinese companies that fail to do so.
ENFORCEMENT DIRECTED AT CHINESE COMPANIES
The Trump administration has utilized a variety of policy tools to punish Chinese firms that violate US law, or that support foreign governments that have strained relations with the US.
1. Economic sanctions. In June 2017, the US Department of Treasury’s Office of Foreign Assets Control (OFAC) added two Chinese citizens to its Specially Designated Nationals and Blocked Persons List (SDN List) because OFAC determined these individuals were operating front companies for sanctioned North Korean entities. Contemporaneously, OFAC also designated Dalian Global Unity Shipping, purportedly for smuggling luxury goods into North Korea in violation of a UN ban on such trade.
In November 2017, immediately after the Trump administration classified North Korea as a state sponsor of terrorism, OFAC designated four Chinese companies and a Chinese individual with longstanding commercial ties to North Korea for engaging in significant importation and exportation activities to and from North Korea, including computers, machinery and raw materials associated with the construction of nuclear reactors.
2. Anti-money laundering special measures. In June 2017, the Financial Crimes Enforcement Network (FinCEN), another office within the Treasury Department, proposed to designate the Chinese Bank of Dandong as a “primary money laundering concern”. FinCEN asserted that the Bank of Dandong served as a “conduit” for North Korea to access the US and international financial systems, by processing more than US$2.5 billion in transactions through its US correspondent accounts between May 2012 and May 2015.
Some of these funds were used to facilitate millions of dollars of transactions on behalf of companies involved in North Korea’s weapons of mass destruction and ballistic missile programmes. When FinCEN issued a final rule last November implementing these special measures, the Bank of Dandong was effectively cut off from the US financial system.
3. Damming warrants. The US government has also utilized so-called “damming warrants” to seize funds of Chinese firms acting on behalf of North Korea. When a damming warrant is placed on an account, the US government prevents all funds from exiting the account and seizes any funds that flow into the account during the pendency of the warrant.
In early 2017, a federal district court in the District of Columbia granted the Department of Justice’s (DOJ) application to attach damming warrants for correspondent accounts at eight US financial institutions that allegedly were used by Chinese firms to process tens of millions of dollars on behalf of North Korea. The DOJ ultimately seized more than US$4 million in funds routed through the correspondent accounts while the damming warrants were in place.
4. Multi-agency enforcement actions. The US government has targeted Chinese companies for violating sanctions and export control laws. In one notable recent enforcement action, the China-based telecommunications company Zhongxing Telecommunications Equipment Corporation (ZTE) pled guilty to violating the International Emergency Economic Powers Act and simultaneously entered into settlement agreements with the OFAC, the Department of Justice, and the Bureau of Industry and Security (BIS) related to allegations that it had wilfully evaded US sanctions and export control laws by building, operating and servicing telecommunications in Iran using US-origin equipment and software. ZTE agreed to pay a total of US$892 million to resolve its potential liability, with the OFAC collecting more than US$100 million. This penalty is the largest civil penalty that the OFAC has ever imposed on a non-financial institution.
In addition, various media reports indicate the US government has opened a similarly wide-ranging investigation to assess telecommunications equipment and service company Huawei Technologies’ compliance with US sanctions and export controls. Both the OFAC and BIS reportedly have issued subpoenas to Huawei demanding that it turn over information regarding its historical exports to Cuba, Iran, North Korea, Sudan and Syria. Such subpoenas would suggest that Huawei, like ZTE, also may have shipped products or technology to those countries in contravention of US law.
5. Criminal prosecutions. Chinese firms that violate US sanctions and anti-money laundering laws can face criminal charges. In fact, the DOJ and OFAC frequently collaborate on building criminal cases against foreign nationals who attempt to evade US sanctions.
In August 2016, the DOJ charged a Chinese trading company, Dandong Hongxiang Industrial Development, along with four company executives, with violating US federal law by using front companies established in offshore jurisdictions to assist a sanctioned North Korean company in evading US sanctions.
The DOJ also initiated a civil forfeiture action against the Dandong Hongxiang’s funds in 25 Chinese banks on the basis that those funds were implicated in a money laundering scheme. In parallel with the DOJ actions, the OFAC added Dandong Hongxiang Industrial Development and its executives to the SDN List for their conduct.
Michael Casey is a London-based partner, Cori Lable is a Hong Kong-based partner, and Tiana Zhang is a Shanghai-based partner at the international law firm Kirkland & Ellis. Ning Ning, Kirkland & Ellis’ associate in Hong Kong, also contributed to this article.
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