Chinese Military Companies Sanctions

The prohibitions in E.O. 13959, as amended, apply to a subsidiary of a Chinese Military-Industrial Complex Company (CMIC) listed on the NS-CMIC List only if such subsidiary itself is publicly listed on the NS-CMIC List by Treasury pursuant to E.O. 13959, as amended, or identified in the Annex of E.O. 13959, as amended.  OFAC’s 50 percent rule does not apply to entities listed solely pursuant to E.O. 13959, as amended.  Accordingly, the prohibitions on any subsidiaries listed on the NS-CMIC List would go into effect beginning 12:01 a.m. eastern time on the date that is 60 days after such subsidiary is added to the NS-CMIC List.  

For purposes of E.O. 13959, as amended, the term “publicly traded securities” includes any “security,” as defined in section 3(a)(10) of the Securities Exchange Act of 1934, Public Law 73–291 (as codified as amended at 15 U.S.C. 78c(a)(10)), denominated in any currency that trades on a securities exchange or through the method of trading that is commonly referred to as “over-the-counter,” in any jurisdiction.

Examples of financial instruments covered by this provision include, but are not limited to, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds, to the extent such instruments also meet the definition of "publicly traded security" as defined in section 3(c) of E.O. 13959, as amended.

Yes.  Under E.O. 13959, as amended, any purchase or sale of publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of any CMIC listed on the NS-CMIC List is prohibited, regardless of such securities' share of the underlying index fund, ETF, or derivative thereof.

For purposes of E.O. 13959, as amended, activity by U.S. persons related to the following services are considered permissible, to the extent that such support services are not provided to U.S. persons in connection with prohibited purchases or sales: clearing, execution, settlement, custody, transfer agency, back-end services, as well as other such support services. 

Yes.  Market intermediaries, including market makers, and other participants may engage in ancillary or intermediary activities that are necessary to effect divestiture during the relevant wind-down periods or that are not otherwise prohibited under E.O. 13959, as amended.  Purchases or sales by U.S. persons (including investors and intermediaries) involving investment funds that are seeking to divest during the relevant wind-down periods are permitted.  See FAQ 901 with respect to the due diligence expectations associated with determining whether a particular purchase or sale is permissible. 

Consistent with FAQ 865, which clarifies that market intermediaries and other participants may engage in ancillary or intermediary activities that are necessary to effect divestiture during the relevant wind-down periods or that are not otherwise prohibited under E.O. 13959, as amended, transactions and activities by securities exchanges operated by U.S. persons involving the purchase or sale of publicly traded securities (or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities) of any entity listed on the Non-SDN Chinese Military-Industrial Complex Companies List (the “NS-CMIC List”) are not prohibited. 

E.O. of June 3, 2021 amends E.O. 13959 by replacing Sections 1 through 5 of E.O. 13959, as amended, and revokes E.O. 13974.  In particular, E.O. of June 3, 2021 amends E.O. 13959 to prohibit the purchase or sale by U.S. persons of any publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of any person listed in the Annex to E.O. 13959, as amended by E.O. of June 3, 2021, or of any person determined by the Secretary of the Treasury, in consultation with the Secretary of State, and, as appropriate, the Secretary of Defense:

• (i) to operate or have operated in the defense and related materiel sector or the surveillance technology sector of the economy of the People’s Republic of China; or
• (ii) to own or control, or to be owned or controlled by, directly or indirectly, a person who operates or has operated in any sector described in clause (i) above, or a person who is listed in the Annex to E.O. 13959, as amended by E.O. of June 3, 2021, or who has otherwise been determined to be subject to the prohibitions in Section 1(a) of E.O. 13959, as amended by E.O. of June 3, 2021.

To implement E.O. of June 3, 2021, OFAC has published a list on its website containing the names of entities identified in or pursuant to E.O. 13959, as amended by E.O. of June 3, 2021, titled the Non-SDN Chinese Military-Industrial Complex Companies List (the “NS-CMIC List”).  In addition, OFAC is removing and replacing all previously issued Frequently Asked Questions (FAQs) related to E.O. 13959, as amended.  OFAC will refer to E.O. 13959 as amended by E.O. of June 3, 2021 as “E.O. 13959, as amended.”
 

OFAC has published a list on its website containing the names of entities that are subject to the prohibitions of E.O. 13959, as amended, as the Non-SDN Chinese Military-Industrial Complex Companies List (the “NS-CMIC List”), along with additional identifying information where possible.  Effective June 3, 2021, the NS-CMIC List replaced and superseded in its entirety the Non-SDN Communist Chinese Military Companies List (NS-CCMC List), which has been deleted from OFAC’s website.  Only entities whose names exactly match the names of the entities on the NS-CMIC List are subject to the prohibitions in E.O. 13959, as amended.  OFAC will refer to entities listed on the NS-CMIC List as “Chinese Military-Industrial Complex Companies” or “CMICs.”

For any entity listed in the Annex to E.O. 13959, as amended, the prohibitions go into effect beginning at 12:01 a.m. eastern time on August 2, 2021.  For any entity not listed in the Annex to E.O. 13959, as amended, the prohibitions go into effect beginning at 12:01 a.m. eastern time on the date that is 60 days after the date the entity is listed on the NS-CMIC List.

Purchases or sales of publicly traded securities of CMICs listed in or pursuant to E.O. 13959, as amended, made solely to divest, in whole or in part, such securities by a U.S. person are permitted until 12:01 a.m. eastern time on the date that is 365 days after the date the entity is listed in the Annex to E.O. 13959, as amended, or added to the NS-CMIC List.
 

Pursuant to E.O. 13959, as amended, OFAC expects to use its discretion to target, in particular, persons whose operations include or support, or have included or supported, (1) surveillance of persons by Chinese technology companies that occurs outside of the PRC; or (2) the development, marketing, sale, or export of Chinese surveillance technology that is, was, or can be used for surveillance of religious or ethnic minorities or to otherwise facilitate repression or serious human rights abuse.

For purposes of assessing whether certain purchases or sales are permissible under E.O. 13959, as amended, U.S. persons — including financial institutions, registered broker-dealers in securities, securities exchanges, and other market intermediaries and participants — may rely upon the information available to them in the ordinary course of business. 

U.S. persons are not prohibited from providing investment advisory, investment management, or similar services to a non-U.S. person, including a foreign entity or foreign fund, in connection with the non-U.S. person’s purchase or sale of a covered security, provided that the underlying purchase or sale would not otherwise violate E.O. 13959, as amended.  For example, a U.S. individual acting as the fund manager for a non-U.S. investment fund, or a U.S. entity that is the investment adviser or investment manager for a non-U.S. investment fund, is not prohibited from advising on, authorizing, directing, or approving purchases or sales of covered securities by the non-U.S. investment fund, provided that the underlying purchase or sale would not otherwise violate E.O. 13959, as amended (e.g., neither the purchase nor sale of the covered security is for the ultimate benefit of a U.S. person, the purchase or sale is not a willful attempt to evade the prohibitions of E.O. 13959, as amended, etc.).  See FAQ 901 with respect to the due diligence expectations associated with determining whether a particular purchase or sale is permissible.  

For purposes of E.O. 13959, as amended, U.S. persons employed by non-U.S. entities are not prohibited from being involved in, or otherwise facilitating, purchases or sales related to a covered security on behalf of their non-U.S. employer, provided that such activity is in the ordinary course of their employment and the underlying purchase or sale would not otherwise violate E.O. 13959, as amended, (e.g., neither the purchase nor sale of the covered security is for the ultimate benefit of a U.S. person; neither the purchase or sale is a willful attempt to evade the prohibitions of E.O. 13959, as amended, etc.).  

Yes.  U.S. market makers, and non-U.S. market makers who employ U.S. persons, are permitted to engage in activities that are necessary to effect divestiture during the during the 365-day periods in which divestment transactions are permitted or that are not otherwise prohibited under E.O. 13959, as amended, including the conversion of American depositary receipts (ADRs) of a CMIC into underlying securities of the CMIC on the foreign exchange where the underlying securities are listed.  See FAQ 865 with respect to the permissibility of market intermediaries and other participants engaging in ancillary or intermediary activities that are necessary to effect divestiture of covered securities.

No.  The prohibitions of E.O. 13959, as amended, apply only with respect to certain purchases or sales of publicly traded securities of entities listed on the NS-CMIC List.  E.O. 13959, as amended, does not prohibit activity with entities listed on the NS-CMIC List that is unrelated to such securities, such as the purchase or sale of goods or services.  E.O. 13959, as amended, also does not prohibit the purchase or sale of goods or services with respect to subsidiaries of such entities.

U.S. persons are not required to divest their holdings of CMIC securities during the relevant 365-day divestment period and may continue to hold such securities after the divestment period.  E.O. 13959, as amended, permits purchases or sales made solely to effect the divestment of CMIC securities, but only during the 365-day divestment period.  Accordingly, any such purchase or sale is prohibited after the 365-day divestment period, absent OFAC authorization.

U.S. persons who hold securities of CMICs identified pursuant to E.O. 13959, as amended, may continue to receive cash dividends and stock splits related to such covered securities, and U.S. financial institutions may continue to process such transactions.  However, purchases of CMIC securities effected through dividend reinvestments constitute purchases that are prohibited pursuant to E.O. 13959, as amended.  U.S. persons may, however, continue to facilitate the distribution of dividend reinvestments for non-U.S. persons after the relevant divestment period.

No.  E.O. 13959, as amended, does not require U.S. financial institutions to block transactions.  However, transactions that would be prohibited under E.O. 13959, as amended (including an attempted sale of covered securities by a U.S. person made to effect the divestment of CMIC securities after the 365-day divestment period), must be rejected and reported to OFAC within 10 business days.  Consistent with FAQ 863, U.S. financial institutions may continue to intermediate purchases or sales by or from non-U.S. persons to or for non-U.S. persons.