Year-end sanctions target Chinese supply chains and AI, quantum computing and biotechnology
Several agencies of the US executive and the US Congress have passed sweeping year-end sanctions, export controls and supply chain restrictions targeting the Chinese national security complex, high-tech entities and companies allowing human rights violations in Xinjiang. Collectively, these measures reflect a growing bipartisan concern about U.S. investment, exports, and trade support for certain Chinese military and industrial activities that have been determined to undermine U.S. national security interests, as well as rights violations. humans from China. The new measures will prompt U.S. and global businesses to further examine the legal, political and reputational risks associated with China-related trade and investment as the United States continues to tighten restrictions targeting sensitive aspects of the bilateral economic relationship. .1
New Capital Markets Sanctions and Auditing Rules Targeting Chinese Issuers
Since December 10, the Treasury’s Office of Foreign Assets Control (OFAC) has added nine Chinese technology companies to its list of non-SDN Chinese Military Industrial Complex (NS-CMIC) entities under Executive Order (EO) 13959, as amended by EO 14032.2 (The nine companies were already on the Department of Commerce’s Entity List, which prevents companies from exporting products and technologies under United States jurisdiction without a license.) As a result of these designations, state persons -Unis can no longer buy or sell products to the public. Traded securities of listed entities, or any derivative of listed securities of, or designed to provide investment exposure to, such securities.
The targeted entities are mainly Chinese companies which would have developed or contributed high-tech to help monitor and suppress Uyghurs and other minority populations in Xinjiang, including companies that have developed artificial intelligence (AI) -based facial recognition software to identify members of ethnic minority groups and alert the authorities in the event of a positive identification; âbig data systemsâ for surveillance applications, such as scanning mobile devices for âcriminalâ content; and surveillance drone technology. This includes SenseTime, which has been added to the NS-CMIC list on December 10, International Human Rights Day. In doing so, the Biden administration specifically highlighted the “serious human rights violations” perpetrated by SenseTime. The designation resulted in a temporary delay in SenseTime’s initial public offering in Hong Kong, which was originally scheduled for December 17 and is currently scheduled for December 30.
In addition, on December 16, the United States Public Company Accounting Oversight Board (PCAOB) issued a report determine that it is incapable of “inspecting or fully investigating” public accounting firms registered with the PCAOB and headquartered in China and Hong Kong. This brings the United States one step closer to banning the trading of mainland Chinese and Hong Kong companies’ securities on U.S. stock exchanges, in accordance with the 2020 Holding Foreign Companies Accountable Act (HFCAA). Under the HFCAA and related rules, trading bans would begin in 2024 in the absence of any changes in Chinese companies’ auditing practices, an important further step towards financial decoupling on the horizon. The U.S. Senate has passed legislation that would speed up the trade ban deadline by one year, though the House of Representatives has yet to pass related legislation.
Export controls against Chinese AI, quantum computing and biotechnology
The Commerce Department’s Bureau of Industry and Security (BIS) has also released a series of new China-related entity listing designations and export control reforms to restrict exports to China in those countries. fields of AI, quantum computing, biotechnology and drones. These actions are consistent with recent US intelligence assessments which focused on the national security dimensions of some critical technologies, including AI, bioeconomy, autonomous systems, quantum computing and semiconductors.
On December 16, the BRI amended as a final rule, the Export Administration Regulations (EAR) to add 37 Chinese and third country entities to the list of entities. The designations primarily focus on the Chinese Academy of Military Medical Sciences and its research institutes in response to their use of “biotechnological processes to support Chinese military end-uses and end-users,” including the development of “weapons of brain control âand Chinese military modernization. The American intelligence community has identified âbioeconomyâ technologies as creating ânational security and economic vulnerabilitiesâ for the United States. The BIS typically imposes a licensing requirement for exports, re-exports and transfers (within the country) on entities on the entity list of all items subject to EARs with a deemed refusal.
These Entity List designations followed other important actions by BIS in recent weeks to increase restrictions on the export of sensitive technology to China and other countries. On November 24, the BIS issued a final rule adding 27 Chinese and third-country entities to the entity list for their role in supporting “China’s quantum computing efforts that support military applications, such as counter-stealth and counter-submarine applications, and the ability to break encryption or develop tamper-proof encryption, âamong other activities. In addition, the BIS has issued a proposed rule on November 6, 2021, to monitor certain life science technologies, as part of an ongoing BIS process to identify and monitor emerging technologies. Specifically, the proposed rule invites public comments on the inclusion of “software” for the operation of nucleic acid assemblers as a new category on the Commercial Checklist (CCL) given its possible use in biological weapons programs. If this rule goes into effect, it could create new export control requirements affecting the life sciences industry, as well as further expanding the authority of the Committee on Foreign Investment in the United States (CFIUS) to review and potentially restrict foreign business acquisitions and investments. develop such software.
In addition, the Biden administration is would have plans to tighten existing restrictions on the export of certain semiconductor technologies to Chinese semiconductor giant Semiconductor Manufacturing International Corp. (SMIC), that BIS added to the entity list in 2020, but under a presumption of refusal only for items “only required” for semiconductor production at high-tech nodes. The amended rules would remove the “only required” caveat and thereby restrict exports of a wider range of production technologies to the minimum wage.
Legislation targeting Chinese forced labor and supply chain vulnerabilities
On December 23, President Biden enacted the law Uyghur Forced Labor Prevention Law, which strengthens the ban on importing goods made with forced labor in China. In particular, the legislation requires United States Customs and Border Protection (CBP) to apply a rebuttable presumption that “all merchandise, merchandise, article and merchandise extracted, produced or manufactured in whole or in part in the Autonomous Region People’s Republic of China’s Xinjiang Uyghur âor produced by an entity on a list of entities operating in the region will be prohibited from entering the United States. The presumption can be overcome when CBP determines that the importer has exercised due diligence and responded to inquiries and that “by clear and convincing evidence” the product was not manufactured with forced labor.
In addition, article 855 of the National Defense Authorization Act, which President Biden signed into law on Dec. 27, creates a new disclosure requirement for companies doing work in China on US Department of Defense contracts over $ 5 million. The move reflects concerns that companies doing work for the US and Chinese governments will disclose sensitive US national security information or labor products to China.
The executive and legislative actions described above reflect an emerging U.S. policy to reduce U.S. technological, commercial, and financial ties with certain sensitive high-tech sectors of the Chinese economy, based on both national security and human rights concerns.
The recent restrictions also indicate that the US government appears inclined, at least for now, to use list-based sanctions and export controls to target Chinese entities of concern, rather than general application technology controls. , such as general restrictions on exports of technologies associated with AI, semiconductors, quantum computing and biotechnology (although there are examples of limited measures in this regard, as noted below). above). Unlike general application restrictions, which would affect broad categories of technology and could have uncertain implications for US domestic investment in that technology and the commercialization of that technology, list-based sanctions could potentially have a more predictable effect and fewer unintended consequences. List-based sanctions are also relatively easy to administer for US businesses. The United States government has made efforts to date to avoid undue control of certain technologies so that the United States continues to facilitate the investment and commercialization of these technologies.
For many companies, the policy measures outlined above highlight the persistent challenges of doing business in today’s geopolitical environment, which require not only compliance with applicable law, but also, in many cases, l anticipation of the likely direction of future changes in US law, because as well as new chinese laws designed to counter the effect of US restrictions.
In recent months, China has also adopted measures to counter the effectiveness of US sanctions. For example, as the company explained in a precedent alert, China’s Anti-Sanctions Law serves as a blocking law designed to deter some parties from implementing restrictive measures against China, creating potentially conflicting demands on those parties.
These entities are Cloudwalk Technology Co., Ltd. ; Dawning Information Industry Co., Ltd .; Leon Technology Company Limited; Megvii Technology Limited; Netposa Technologies Limited; SZ DJI Technology Co., Ltd. ; Xiamen Meiya Pico Information Co., Ltd .; Yitu limited; and SenseTime Group Limited.