Call to action

In an increasingly complex global market where sanctions are becoming more norm than exception, Chinese companies should take note of all available options to fight back. Judith Xu, chief compliance officer and legal director at Junzheng Logistics, and Vicky Wang, a Shanghai-based partner at Wintell & Co, plot the battle lines

ECONOMIC SANCTIONS have become a common tool used by countries to pursue their foreign policies and national security goals. The Russia-Ukraine conflict is a prime example of this trend, as major Western powers including the EU, US and UK have imposed a broad scope of sanction measures against Russia.

These sanctions primarily apply to their own entities, companies, nationals, ships and aircraft, as well as commercial activities conducted within the nexus involving the above. The specific measures of sanctions differ between countries and regions, but can be generally categorised as follows:

• Listing specific individuals, entities, vessels and aircraft in the sanction list. For example, Vladimir Putin, Russian oligarchs and Russian banks have been included into the US specially designated nationals and blocked persons list (SDN List);
• Prohibiting or restricting the import and export of goods in key sectors and industries, such as energy and/or military-related industries, as well as for products from the contested LNR region;
• Restrictions on financing and access of capital market, such as the SWIFT ban, and the prohibition of investments, close correspondents or payable-through accounts (PTAs); and
• Other restrictions such as border control, and ban on provision of accounting and consulting services.

According to Castellum.ai, a database tracking global sanctions, Russia became the most sanctioned country in the world in March 2022, surpassing Iran and North Korea. Not only have the sanctions had a significant impact on Russia’s economy, particularly in the oil and gas sector, they have also caused widespread tensions in the global market.

As it happens, Chinese companies often have strong economic and trade ties with the primary targets of US sanctions, such as Russia and Iran.

According to the latest data released by the General Administration of Customs of China on 13 January 2023, the trade volume between China and Russia in 2022 increased by 34.3% to a record high of RMB1.28 trillion (USD190.3 billion). In 2022, China exported goods worth USD76.1 billion to Russia, an increase of 12.8% compared to 2021; while the value of goods exported from Russia to China increased by 43.4% to USD114.1 billion.

In recent years, the US has intensified sanctions and penalties against non-US companies for business transactions and activities with entities subject to US sanctions, giving full play to the long-arm effects of those measures. On the other hand, the integration of the global economy makes it inevitable for Chinese companies to be tied to US interests. This has resulted in Chinese companies being easily identified as violating US economic restrictions, laws and regulations, thereby falling prey to its network of sanctions.

THE OFAC AND SDN LIST

Sun Tzu wrote in The Art of War: “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” In this sense, it is crucial for Chinese companies to grasp the mechanism and implications of these major sanction measures before they can take necessary measures to mitigate the risks and avoid potential violations.

The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policies and national security goals. The OFAC also plays a critical role in administering licensing programmes that allow certain transactions to proceed in spite of sanctions. One of the most important and widely known sanction lists managed by the OFAC is the SDN list, which includes individuals, companies and organisations deemed to be a threat to US national security or foreign policy.

When making a designation to the SDN list, the OFAC relies on information from various sources such as US government agencies, foreign governments, UN expert panels, and open-source reporting. Thorough investigations are usually conducted that include a review of all available information, the findings and conclusions of which are documented in a formal evidentiary memorandum outlining the evidence supporting the determination that a person meets one or more criteria specified by the sanctions authority. Before the OFAC makes a final determination, proposed listing actions are reviewed by the Departments of the Treasury, Justice, State and other US agencies as necessary.