The Office of Foreign Assets Control (OFAC), of the US Department of the Treasury, recently published its replies to eight frequently asked questions on how to implement Executive Order No. 13959. The order made its basically clear that the US sanctions against “Communist Chinese Military Companies” (CCMCs) mainly focus on prohibiting Americans from trading in: (1) publicly traded securities of a CCMC; (2) securities that are a derivative of publicly traded securities of a CCMC; and (3) securities that are designed to provide investment exposure for publicly traded securities of a CCMC.
However, the details, such as the scope of affected companies, types of securities, currencies, trading methods and regions, and whether sanctions extend to support services, are not very clear, and this needs further explanation from the OFAC. The recent published OFAC reply addressed part of the above-mentioned questions, and focuses on the following aspects.
Do the sanctions extend to subsidiaries of a CCMC?
As of 7 January 2021, the list of CCMCs under Executive Order No. 13959 includes 35 Chinese companies. The authors note that the OFAC specifically listed the name of securities issuers and securities identification codes corresponding to each CCMC in its CCMC list, updated on 22 December 2020. Trading on securities of these 35 companies has been banned since 11 January 2021.
As to whether the subsidiaries of these companies are also included in the scope of sanctions, according to the OFAC reply, it intends to include all the subsidiaries that meet the following conditions in the list to be published: (1) those that have issued publicly traded securities; and (2) entities of which 50% or more interests are directly or indirectly held by a CCMC under Executive Order No. 13959, or that are controlled by these companies.
Trading on securities of these subsidiaries will also be prohibited as of the 60th day after the subsidiaries are included in the OFAC’s list to be published. In addition, it is worth noting that the OFAC reply also pointed out that subsidiaries with names exactly or closely matching the names in the CCMC list published at present were also the targets of sanctions under the current CCMC list, and clearly pointed out that the current targets of sanctions included China Mobile, China Unicom and China Telecom, which are traded on the New York Stock Exchange.
According to the OFAC reply, it is the authors’ understanding that, considering that the companies on the CCMC list at present are mostly group companies of central state-owned enterprises or local state-owned enterprises in China, the sanctions under Executive Order No. 13959 in the future may extend to all members with publicly traded securities affiliated with these group companies.
Moreover, the expression “closely match” in the OFAC reply are vague, which may directly include the current listed entities under the central state-owned enterprises or local state-owned enterprise groups. Considering the complexity of securities trading, it is suggested that the group companies on the CCMC list sort out in advance their members that may be affected, and evaluate the proportion and importance of US capital in related securities. For securities with a high proportion of US capital, it is necessary to prepare countermeasures in advance to avoid the risk of market fluctuation caused by centralised withdrawals of US capital at that time.
Which securities are sanctioned and involved?
First of all, the OFAC reply explained the important term, “publicly traded securities”, under Executive Order No. 13959; that is, it covers any pricing currency (US dollars or other currencies), any jurisdiction (the US, or outside the US), and any trading method (floor trading or over-the-counter trading) related to a CCMC.
With regard to over-the-counter trading, the OFAC reply does not give a clear definition, but uses the vague expression, “through the method of trading that is commonly referred to as ‘over-the-counter’”. Thus, the authors believe that the scope of “publicly traded securities” under Executive Order No. 13959 is still uncertain.
In addition, the OFAC reply makes it clear that the securities prohibited from trading include, but are not limited to, futures, options, swaps, warrants, American depositary receipts, global depositary receipts, ETF, index funds, mutual funds, etc. Moreover, it is forbidden to invest in all kinds of funds holding the securities of a CCMC, regardless of the proportion of shares held.
It should be noted that a “United States person” referred to in Executive Order No. 13959, in line with the previous executive orders for TikTok and WeChat, means American citizens, any permanent resident alien, any entity registered under the federal or state laws of the US (including foreign branches), or any person in the US. It can be seen that American subsidiaries of Chinese companies are also subject to the sanctions under Executive Order No. 13959.
Sanctions do not extend to ancillary services
The OFAC reply indicates that as long as the intermediary’s support services do not involve prohibited transactions, providing support services such as clearing, trading, custody, transfer agency and back-end services is allowed.
To sum up, the OFAC during former president Donald Trump’s term of office intends to extend sanctions to the subsidiaries of a CCMC, and will generally identify the scope of “securities” involved in sanctions on broader standards. However, as of the last update of this article, Incoming US President Joe Biden, and the key members of the future Biden administration, have not yet expressed their attitude towards Executive Order No. 13959. Therefore, there are still variables in its future implementation.
In this changing period, the authors note that the market reaction to this executive order has been constantly changing, such as the decision of New York Stock Exchange on whether to delist China’s three major telecom operators. As a new sanction programme, there are still many specific operational problems to be answered concerning Executive Order No. 13959, and the authors will continue to pay attention to relevant legal documents and relevant interpretations, and assist Chinese companies to respond in a timely manner.
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