Since the US sanctioning of ZTE, everyone has become aware of, and gradually become familiar with, the US sanctions legal regime, but Chinese enterprises need to be clear that this regime is not limited to the federal level.
At the state level, there are also a large number of state sanctions programmes and regulations, and a significant number of states have published sanctions lists based on sanctions laws. In this column, the authors propose, in light of their recent practical experience in handling a US state-level sanctioning of a Chinese enterprise, to share with readers counter strategies and recommendations for when a Chinese enterprise faces US state-level sanctions.
Based on our preliminary searches of the 50 US states, more than 20 have issued state Iran Divestment Act/Projects, with such projects formulated chiefly on the basis of section 202 of the Comprehensive Iran Sanction, Accountability, and Divestment Act of 2010 (CISADA) adopted by the Obama government in 2010.
The main sanction measures can be divided into two types: (1) a government contract and procurement ban, namely, governments and their relevant agencies are prohibited from executing public procurement and government procurement contracts with enterprises that have been placed on the list of those participating in prohibited activities in Iran, or executing renewals to such contracts with such enterprises; and (2) a fund investment restriction, namely, assets of any pension fund or annuity fund belonging to, or under the jurisdiction of, the state government may not be invested in an enterprise on the sanctions list.
The authors have found that 19 states have published lists of sanctioned enterprises based on sanctions projects, and that such lists including a number of familiar Chinese enterprises, e.g., China Precision Machinery Import-Export Corporation, China National Petroleum Corporation, PetroChina Company, China National Offshore Oil Corporation, Zhuhai Zhenrong Company, SINOHYDRO Corporation, etc. These Chinese enterprises have been placed on the sanctions list of a number of states, including New York state, New Jersey, Tennessee, etc.
The authors understand that the decision by a state government to place an enterprise on its sanctions list is usually based on the investigation carried out, and the report provided, by an independent third-party institution. ISS (Institutional Shareholder Services) is one of the companies that provides this type of service. It is a private third-party research service institution that provides relevant information and services to government agencies and private companies.
Government agencies can subscribe to ISS’s research and reporting services, thereby obtaining information on the business activities of relevant companies in Iran. Of course, enterprises can also communicate with, and provide relevant information to, a government to correct a decision adverse to the enterprise rendered by a government authority.
First, a great deal of importance needs to be attached to being placed on the sanctions list. The authors argue that serious importance needs to be attached to being placed on the sanctions list, taking an active counter strategy to resolve the same, and not just letting it happen. This is because, if an active response is not mounted when first placed on a sanctions list, there is a risk of being placed on the sanctions list of more states.
Before deciding to place an enterprise on its sanctions list, certain state governments have a mechanism to communicate with the enterprise, according it a certain amount of time to provide evidence and comments. For the enterprise, this is an excellent opportunity to clear itself, and it must grab this opportunity to resolve the risk at its outset.
Second, the entire group in the same boat principle. A group may have hundreds or even thousands of subsidiaries, with the names of each company having a part in common, or similar. Sometimes, what a state government finds may not be the right entity, and the enterprise, after receiving a relevant letter and subjectively determining that it is not engaging in the relevant business activities in Iran, may ignore it, but this may have an adverse effect on the enterprise, other companies belonging to the group, or even the whole group, resulting in the group ultimately being placed on the sanctions list.
Accordingly, we recommend that such an event should be considered from the perspective of the overall interests of the group and all of its members, and be dealt with centrally under the leadership of the group.
Finally, the principle of prudent information disclosure. When communicating with a state government, it is important to be extremely prudent with the information disclosed, on the one hand fulfilling the objective of eliminating any apprehensions that the state government may have, while on the other hand also being careful to have dedicated personnel control and filtering the relevant information so as to avoid giving rise to any unnecessary nuisances.
As the sanctions list of each state government is posted on the relevant state government’s website, such information could be further used by the sanctions filtering software of the media, independent third-party investigation firms, etc., and information providers, resulting in an enterprise being placed on the sanctions list of even more states. Accordingly, it would be best for an enterprise to actively respond to, and seek to resolve, the issue with the assistance of a professional firm.