On June 1, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) released three Frequently Asked Questions (“FAQs”) providing additional guidance on the sanctions of Chinese Military-Industrial Complex Companies (“CMIC”).
Executive Order 13959 (which was amended and superseded on June 3, 2021 by Executive Order 14032) prohibits US persons from purchasing or selling publicly traded securities of identified CMIC companies. These companies are identified on the Non-SDN CMIC List. US persons have 365 days to divest after an entity is added to the CMIC List.
OFAC’s FAQs clarified that US financial institutions are not required to block the attempted purchase or sale of CMIC securities covered by Executive Order 13959 after the relevant 365-day divestment period. The FAQs caution that “transactions that would be prohibited under E.O. 13959 (including an attempted sale of covered securities by a US 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.” However, US financial institutions may continue to act as a financial intermediary for purchases or sales by or from non-US persons to or for non-US persons.
The FAQs also clarify that US persons who hold securities of sanctioned CMICs may receive cash dividends and stock splits related to such covered securities, and that US financial institutions may process such transactions. However, under Executive Order 13959, “purchases of CMIC securities effected through dividend reinvestments” are prohibited, although US persons may “continue to facilitate the distribution of dividend reinvestments for non-US persons after the relevant divestment period.”
Finally, the FAQs explain that “US 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.” It adds that the Executive Order “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.”
Following the issuance of this guidance, Senator Marco Rubio (R-FL) sent a letter to U.S. Treasury Secretary Janet Yellen concerning the above clarifications, arguing that this guidance “risk[s] diminishing its [the executive order’s] effectiveness in curbing the influence and power of” CMIC sanctions, and undoes “the intent of the original order as it was first enacted.”1 Secretary Yellen has not yet issued a public response.
OFAC’s recently released FAQs should not be taken as a message that CMIC sanctions will have no teeth. Among other things, the FAQs made clear that purchases or sales of publicly traded securities of CMIC companies by US persons post the 365-day period are prohibited, even if the transaction is made for the sole purpose of effecting the divestment of CMIC securities, and such transaction must be rejected and reported to OFAC by US financial institutions. In addition, even though the transaction ban on CMIC securities applies to US persons, non-US persons should be aware that they could be held liable for causing, conspiring with, and aiding and abetting US persons to violate the transaction ban and/or under similar legal theories. Thus, all persons dealing with CMIC securities in their businesses should take their US sanction compliance obligations seriously.
1 Press Release, Rubio Urges Treasury Not to Weaken Divestment Requirements for Chinese Military Companies, Office of Senator Marco Rubio (June 21, 2022), https://www.rubio.senate.gov/public/index.cfm/2022/6/rubio-urges-treasury-not-to-weaken-divestment-requirements-for-chinese-military-companies.