China's sanction to U.S. defense companies and Mike Gallagher
On May 20th and 21st, the Chinese government imposed sanctions on three American defence companies and former Congressman Mike Gallagher. The tools used by the Chinese government were the Unreliable Entity List and the Anti-Foreign Sanctions Law.
General Atomics Aeronautical Systems, General Dynamics Land Systems, and Boeing Defense, Space & Security were added to the Ministry of Commerce's Unreliable Entity List on May 20th.
This marks the second time the Chinese Ministry of Commerce has listed American companies as unreliable entities. On February 16, 2023, the MOFCOM first added Lockheed Martin Corporation and Raytheon Missiles & Defense to the list for their involvement in arms sales to Taiwan.
MOFCOM’s announcement also indicated that evidence showed Caplugs, a U.S. company, circumvented the Unreliable Entity List regulations by transferring goods procured from China to entities on the list. Domestic companies were warned about the compliance risks associated with transactions involving Caplugs. This indicates that the authorities implementing the sanction have robust regulatory measures not only during the implementation phase but also in enforcement, particularly against sanction evasion.
The Unreliable Entity List Regulations were first introduced in May 2019. the then-MOFCOM spokesperson Gao Feng stated that foreign companies, organizations, or individuals that do not comply with market rules and severely damage the legitimate rights and interests of Chinese enterprises would be listed as unreliable entities.
MOFCOM explained that the regulations aim to punish foreign companies that harm China's national security, without targeting any specific country or entity. However, many believe the regulations are a countermeasure against U.S. unilateral trade bullying, a response to the Trump administration, and a means to protect the legitimate interests of Chinese companies.
Trade restrictions and investment bans are the two most common types of sanctions under the Unreliable Entity List Regulations.
In previous cases, MOFCOM imposed both trade and investment restrictions on sanctioned entities. Notably, while the rules authorize the authorities to restrict sanctioned entities' investments in China, past cases only restricted new investments, not existing ones.
Regarding the trade restrictions, foreign entities listed are barred from engaging in import and export activities related to China; if Chinese individuals/entities need to conduct transactions with these listed foreign entities under special circumstances, they must apply for a license to MOFCOM.
Regarding the investment ban, listed foreign individuals/entities are prohibited from investing “in China.”(境内） Whether “in China” includes Hong Kong and Macao is a pending issue as they are traditionally deemed as “outside China”(境外）.
Personnel restrictions include entry bans and the revocation of existing residence and work qualifications. In several announcements, senior management of the sanctioned companies was barred from entering China, and their existing residence, stay, and work permits were cancelled.
Fines are the most direct economic penalty for entities listed as unreliable. In the current cases, except for General Atomics Aeronautical Systems and General Dynamics Land Systems, the remaining three entities were fined amounts equivalent to twice the value of their involved military sales contracts. The authorities also allowed these entities 15 days to handle the fine payment, with potential late fees for overdue payments.
China sanctioned Mike Gallagher under the Ministry of Foreign Affairs' Anti-Foreign Sanctions Law on May 21st. And then, on May 22nd, there is another massive sanction to 12 U.S. companies and their senior executives.
To counter foreign economic sanctions, China aims to establish a legal framework for sanctions and countermeasures as a crucial task in building a legal system with extraterritorial application. Enacted in June 2021, the Anti-Foreign Sanctions Law, along with the MOFCOM's Unreliable Entity List Regulations and the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, forms the basic framework of China's current sanctions and countermeasures legal system. These laws and regulations often require administrative agencies to implement the measures, but their classification within administrative law remains unclear.
Under the Anti-Foreign Sanctions Law, the Ministry of Foreign Affairs can issue orders to include relevant individuals on the countermeasures list and implement a series of sanctions. Sanctions on individuals extend to their spouses and direct relatives, organizations where the individual serves as a senior executive, and organizations controlled or established by the individual. Sanctions on organizations include their senior executives or actual controllers. Measures include visa denials, entry bans, visa cancellations or deportations, asset seizures, detentions, or freezes within China, and prohibitions or restrictions on “transactions and cooperation” with Chinese entities. The "other necessary measures" clause provides the Chinese government with leeway to adopt additional sanctions.
Prohibiting Chinese entities and individuals from transactions and cooperation with sanctioned individuals or organizations can have a particularly impactful effect. The Anti-Foreign Sanctions Law's broad definitions of "transactions and cooperation" allow significant interpretative flexibility, often leading to complete severance of ties within China's entities.
Interestingly, although the name of the law is “anti-foreign sanction”, which seems to mean China only initiate sanctions as a countermeasure to foreign sanctions, all actions involve China proactively imposing sanctions on foreign enterprises and individuals without any prior foreign sanctions in place. However, this does not lack legal basis, as Article 15 of the Anti-Foreign Sanctions Law explicitly authorizes the power to proactively impose such sanctions.
Article 15 of the Anti-Foreign Sanctions Law:
For acts by foreign states, organizations, or individuals that harm China's sovereignty, security, or development interests, or assist or support such acts, necessary countermeasures shall be taken in accordance with the relevant provisions of this law.
第十五条 对于外国国家、组织或者个人实施、协助、支持危害我国主权、安全、发展利益的行为，需要采取必要反制措施的，参照本法有关规定执行。
Historically, China has sanctioned multiple American individuals under the Anti-Foreign Sanctions Law:
1. Mike Pompeo, former Secretary of State.
2. Peter Navarro, former White House Trade Advisor.
3. John Bolton, former National Security Advisor.
4. Steve Bannon, former White House Chief Strategist.
5. Senator Ted Cruz of Texas.
6. Senator Marco Rubio of Florida.
7. Senator Bob Menendez of New Jersey.
8. Senator Tom Cotton of Arkansas.
There were reports on Chinese social media that companies like Koch Industries, DuPont, United Airlines, and ExxonMobil refused to engage with Pompeo due to Chinese sanctions. Though these claims were exaggerated, Chinese policymakers might be encouraged to use this tool more frequently in their tit-for-tat strategy with the U.S.
Announcement of sanction from the Chinese government:
Unreliable Entity List Working Mechanism
Announcement
No. 1 of 2024
1. To safeguard national sovereignty, security, and development interests, in accordance with the relevant laws such as the Foreign Trade Law of the People's Republic of China and the National Security Law of the People's Republic of China, the Unreliable Entity List Working Mechanism, based on Articles 2, 8, and 10 of the Provisions on the Unreliable Entity List, has decided to include General Atomics Aeronautical Systems and General Dynamics Land Systems, both companies involved in arms sales to the Taiwan region, in the Unreliable Entity List and take the following measures:
(1) Prohibit the above-mentioned enterprises from engaging in import and export activities related to China;
(2) Prohibit the above-mentioned enterprises from making new investments within China;
(3) Prohibit senior management personnel of the above-mentioned enterprises from entering China;
(4) Disapprove and cancel the work permits, stay, or residence qualifications of senior management personnel of the above-mentioned enterprises within China.
2. On February 16, 2023, the Unreliable Entity List Working Mechanism included Lockheed Martin Corporation and Raytheon Missiles & Defense in the Unreliable Entity List and took relevant measures (see Announcement No. 1 of 2023 by the Unreliable Entity List Working Mechanism). There is evidence that Caplugs has evaded the Provisions on the Unreliable Entity List and other relevant regulations by transferring goods procured from China to enterprises on the Unreliable Entity List. To highlight the risks of potential transactions with entities on the Unreliable Entity List through Caplugs, the following matters are announced:
(1) Domestic enterprises conducting export business with Caplugs should be aware of the risk of illegal transfers, perform due diligence, enhance their duty of care, strengthen trade flow management, and take appropriate measures to ensure that related goods, technology, services, etc., are not transferred to foreign entities on the Unreliable Entity List.
(2) Caplugs must take prompt measures to ensure that goods, technology, services, etc., procured from China are not transferred to foreign entities on the Unreliable Entity List and submit relevant proof materials to the office of the Unreliable Entity List Working Mechanism. Otherwise, the Unreliable Entity List Working Mechanism will take relevant measures against it in accordance with the law.
Contact Information for the Office of the Unreliable Entity List Working Mechanism:
Address: No. 2 East Chang'an Avenue, Dongcheng District, Beijing
Postal Code: 100731
Email: agjasc@mofcom.gov.cn
Matters not covered in this announcement shall be implemented in accordance with the Provisions on the Unreliable Entity List.
This announcement shall take effect from the date of its publication.
Unreliable Entity List Working Mechanism
(Seal of the Ministry of Commerce)
May 20, 2024
http://www.mofcom.gov.cn/article/zwgk/gkzcfb/202405/20240503510680.shtml
Unreliable Entity List Working Mechanism
Announcement
No. 2 of 2024
To safeguard national sovereignty, security, and development interests, in accordance with relevant laws such as the Foreign Trade Law of the People's Republic of China and the National Security Law of the People's Republic of China, the Unreliable Entity List Working Mechanism, based on Articles 2, 8, and 10 of the Provisions on the Unreliable Entity List, has decided to include Boeing Defense, Space & Security, which is involved in arms sales to the Taiwan region, in the Unreliable Entity List and take the following measures:
1. Prohibit the above-mentioned enterprise from engaging in import and export activities related to China;
2. Prohibit the above-mentioned enterprise from making new investments within China;
3. Prohibit senior management personnel of the above-mentioned enterprise from entering China;
4. Disapprove and cancel the work permits, stay, or residence qualifications of senior management personnel of the above-mentioned enterprise within China;
5. Impose a fine on the above-mentioned enterprise, amounting to twice the contract value of arms sales to Taiwan since the implementation of the Provisions on the Unreliable Entity List. The enterprise must pay the fine within 15 days from the date of this announcement in accordance with relevant laws and regulations. If it fails to comply within the specified period, the Unreliable Entity List Working Mechanism will take additional punitive measures, such as imposing extra fines.
Matters not covered in this announcement shall be implemented in accordance with the Provisions on the Unreliable Entity List.
This announcement shall take effect from the date of its publication.
Unreliable Entity List Working Mechanism
(Seal of the Ministry of Commerce)
May 20, 2024
http://www.mofcom.gov.cn/article/zwgk/gkzcfb/202405/20240503510684.shtml
Ministry of Foreign Affairs of the People's Republic of China Order No. 6 of 2024
(Issued on May 21, 2024, effective from May 21, 2024)
Former U.S. Congressman from Wisconsin, Mike Gallagher, has frequently engaged in actions and statements in recent years that interfere in China's internal affairs, undermine China's sovereignty and territorial integrity, and infringe upon Chinese interests. In accordance with Articles 3, 4, 6, 9, and 15 of the Anti-Foreign Sanctions Law of the People's Republic of China, China has decided to impose the following countermeasures against Gallagher:
1. Freeze movable, immovable, and other types of property within China;
2. Prohibit organizations and individuals within China from conducting transactions, cooperation, and other activities with him;
3. Deny the issuance of visas to him and prohibit his entry into China.
This decision shall take effect from May 21, 2024.
Attachment: Countermeasure List
Ministry of Foreign Affairs
May 21, 2024
Attachment
Countermeasure List
Mike Gallagher, former Chairman of the U.S. House of Representatives "China Task Force" and former Congressman from Wisconsin.
https://mp.weixin.qq.com/s/cUiVeCEWAdvVp5BKGIjyhg
Decision on Countermeasures Against U.S. Defense Companies and Senior Executives
(Ministry of Foreign Affairs of the People's Republic of China Order No. 7, promulgated on May 22, 2024, effective from May 22, 2024)
For some time, the United States has ignored China’s objective and fair stance and constructive role in the Ukraine crisis, imposing illegal unilateral sanctions on multiple Chinese entities under the pretext of involvement with Russia. This unilateral bullying and economic coercion have severely infringed upon the legitimate rights and interests of Chinese enterprises, institutions, and individuals. Additionally, the United States continues to sell weapons to the Taiwan region, severely violating the one-China principle and the three Sino-U.S. joint communiqués, gravely interfering in China’s internal affairs, and significantly harming China’s sovereignty and territorial integrity.
Based on Articles 3, 4, 5, 6, 9, and 15 of the Anti-Foreign Sanctions Law of the People's Republic of China, China has decided to take countermeasures against the following U.S. defence companies and senior executives:
Enterprises: Freeze the movable, immovable, and various other types of properties within China of the following 12 companies listed in the annexed Countermeasure List:
Lockheed Martin Missiles and Fire Control
Lockheed Martin Aeronautics
Raytheon/Lockheed Martin Javelin Joint Venture
Raytheon Missile Systems
General Dynamics Ordnance and Tactical Systems
General Dynamics Information Technology
General Dynamics Mission Systems
Inter-Coastal Electronics
System Studies & Simulation
IronMountain Solutions
Applied Technologies Group
Axient
Senior Executives: The following 10 senior executives listed in the annexed Countermeasure List will be denied visas and entry into China, including Hong Kong and Macau:
Kathy J. Warden, Chairwoman, CEO, and President of Northrop Grumman Corporation
Matthew Bromberg, Vice President of Global Operations, Northrop Grumman Corporation
Benjamin R. Davies, Vice President and General Manager of Strategic Deterrent Systems, Northrop Grumman Corporation
Thomas H. Jones, Vice President and President of Aeronautics Systems, Northrop Grumman Corporation
Stephen O’Bryan, Vice President and Chief Global Business Development Officer, Northrop Grumman Corporation
Roshan Roeder, Vice President and President of Defense Systems, Northrop Grumman Corporation
Firat H. Gezen, Vice President of General Dynamics and President of General Dynamics Ordnance and Tactical Systems
Jason W. Aiken, Executive Vice President responsible for Technology, General Dynamics
Amy Gilliland, Senior Vice President of General Dynamics and President of General Dynamics Information Technology
Christopher J. Brady, Vice President of General Dynamics and President of General Dynamics Mission Systems
This decision takes effect on May 22, 2024.
Ministry of Foreign Affairs
May 22, 2024
Annex
Countermeasure List
Enterprises:
Lockheed Martin Missiles and Fire Control
Lockheed Martin Aeronautics
Raytheon/Lockheed Martin Javelin Joint Venture
Raytheon Missile Systems
General Dynamics Ordnance and Tactical Systems
General Dynamics Information Technology
General Dynamics Mission Systems
Inter-Coastal Electronics
System Studies & Simulation
IronMountain Solutions
Applied Technologies Group
Axient
Senior Executives:
Kathy J. Warden, Female, Chairwoman, CEO, and President of Northrop Grumman Corporation
Matthew Bromberg, Male, Vice President of Global Operations, Northrop Grumman Corporation
Benjamin R. Davies, Male, Vice President and General Manager of Strategic Deterrent Systems, Northrop Grumman Corporation
Thomas H. Jones, Male, Vice President and President of Aeronautics Systems, Northrop Grumman Corporation
Stephen O’Bryan, Male, Vice President and Chief Global Business Development Officer, Northrop Grumman Corporation
Roshan Roeder, Female, Vice President and President of Defense Systems, Northrop Grumman Corporation
Firat H. Gezen, Male, Vice President of General Dynamics and President of General Dynamics Ordnance and Tactical Systems
Jason W. Aiken, Male, Executive Vice President responsible for Technology, General Dynamics
Amy Gilliland, Female, Senior Vice President of General Dynamics and President of General Dynamics Information Technology
Christopher J. Brady, Male, Vice President of General Dynamics and President of General Dynamics Mission Systems
Some Chinese official media reports:
Global Times: China sanctions former US lawmaker
CGTN: China takes countermeasures against former U.S. lawmaker Mike Gallagher
Does this mean that these companies are barred from exporting goods to Taiwan (being part of China)?