China Promulgates New Extraterritorial Jurisdiction Measures

On January 9, 2021, the Ministry of Commerce (“MOFCOM”) released the Measures for Blocking Improper Extraterritorial Application of Foreign Laws and Measures (“Measures”), with immediate effect.

The Measures state that Chinese citizens, legal entities, and organizations (hereafter collectively referred to as “PRC persons”) must report to the competent authority in China, any inappropriate application of foreign measures or laws that are designed to bar economic, trade, and related activities between China and other countries.

The competent authority has the power to issue an injunction allowing the reporter not to recognize, implement, or comply with the said foreign norms, as well as to file a lawsuit in China claiming for losses’ compensation.

What is the reason behind the adoption of the Measures?

As further explained below, the Measures provide a retaliation clause remarking that China is ready to take the necessary countermeasures against any improper extraterritorial application of foreign laws and measures. In this way, China is sending a message to the entire world, warning foreign countries to stop unjustly prohibiting or restricting Chinese people or companies from doing business.

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With the decision to promulgate such type of measures, China reasserts that, if Chinese businesses are not treated equally and allowed to carry out their business in a lawful and regular manner, then the Chinese government is ready to intervene.

It is worth noting that while the Measures do not mention any specific foreign country, they will likely serve as countermeasures to the US restrictions and bans – for instance, the ban against Tik Tok and WeChat, the measures adopted against Huawei’s chips, or the exclusion of China Unicom, China Telecom, and China Mobile from the stock exchange – that heavily impact doing business with Chinese companies and individuals.

Considering the recent change in US administration, China’s move might be interpreted as an attempt to change the direction of US-China relations, in the hope that such Measures will deter President Joe Biden’s administration from maintaining (or exacerbating) the regulations implemented during Trump’s administration. Hence, how China will relate itself with the US – and consequently how global companies will be impacted by the Measures – really depends on the Biden administration’s approach. (In a recent interview, Biden said that his administration would be ready for “extreme competition” with China but based within the scope of international rules.)

The same type of logic shall apply to any other foreign country, in other words, if it wants to maintain a good and smooth relationship with China – it will have to evaluate whether to modify (or remove) the policies and regulations that prevent or restrict PRC persons from performing economic, trade, and related activities.

Summary of the Measures

Purpose of the Measures

MOFCOM explains that the aim of these Measures is to safeguard China’s sovereignty, security, development interests, and to protect the legitimate rights and interests of PRC persons. It does also specify that the Measures are enacted in accordance with China’s National Security Law and other relevant laws.

Scope of application

The Measures apply when a foreign law or measure – in violation of international laws or other norms regulating international relations – prohibits or restricts PRC persons from conducting economic, trade, and related activities with any third country (region) or with its citizen, legal person, or any other organization.

In these cases, the foreign law or measure will be deemed to be improperly applied by the foreign authorities and the Chinese competent authority will issue an injunction targeting the said foreign norms.

However, the Measures clarify that, if the extra-territorial application of a certain law or measure is provided by an international agreement or treaty to which China is a party, it is excluded from the Measures’ scope of application.

Competent authority

The Measures provide that the relevant departments of the State organs directly under the Central Government (a joint committee referred to as “Working Mechanism”) shall be responsible for responding to the improper extraterritorial application of foreign laws and measures. The Working Mechanism shall be led by the competent commerce department of the State Council, that, together with the development and reform department and other relevant departments, shall deal with specific matters.

Requirements and notification

The Measures state that PRC persons must report the relevant information to the competent commerce department of the State Council, indicating any foreign law and measure that prohibit or restricts them from conducting economic, trade, and related activities with any third country (region) or its citizens, legal persons, or other organizations.

The said obligation shall be fulfilled within 30 days from when the Chinese citizen, legal person, or other organization experiences circumstances in which a foreign law or measure prevent them from carrying out the said activities. The failure to report such situations will lead to the application of relevant penalties, as further explained here below.

Evaluation criteria and injunction’s issuance

The Working Mechanism, in its evaluation concerning the extraterritorial application of the foreign law or measure, will consider the following factors:

• Whether or not there is a violation of international laws and basic norms of international relations;
• Possible impact on the sovereignty, security, and development interests of China;
• Possible impact on the legitimate rights and interests of Chinese citizens, legal persons, or other organizations; and
• Any other factor that shall be taken into consideration.

In the event the Working Mechanism deems that there is an improper application of the foreign law or measure, it may decide that the competent commerce department of the State Council shall issue an injunction against recognition, enforcement, or compliance with the relevant foreign laws and measures. Any violation of the injunction will be punished according to the Measures.

The injunction can be suspended or cancelled later, upon a new evaluation of the actual circumstances.

Exemption from complying with the Injunction

The Measures provide that PRC persons may apply to the competent commerce department of the State Council for an exemption from complying with the injunction.

To apply for exemption, the applicant shall submit a written application to the competent commerce department of the State Council, explaining the reason of the request and the scope of the exemption. The competent commerce department of the State Council, within 30 days upon acceptance of the application, shall decide on whether, or not, to approve the application and shall, in case of emergency, approve or reject it in a timely manner.

Compensation for losses and governmental support for incompliance

The Measures provide that PRC persons shall file a lawsuit claiming for compensation of losses in the following cases:

• When their rights and interests have been harmed by a party who complies with a foreign law or measure targeted by an injunction (unless an exemption from complying with the injunction has been granted); and
• When a judgement or ruling made in accordance with a foreign law that falls within the scope of the injunction, affects their rights and interests thus causing losses. In this case, the lawsuit can be filed against the party that benefitted from the said judgement or ruling.

Once the right for compensation is ascertained by the Chinese court, if the party concerned refuses to pay the amount due as compensation, the Chinese citizen, legal person, or other organization who suffered losses, shall apply to the Chinese competent court for enforcement.

Furthermore, where a PRC person disobeys a foreign law or measure (declared as inappropriately applied by an injunction) and because of the said infringement, such PRC person suffers losses, the relevant Chinese government department may decide to provide the support that it deems necessary based on the circumstances.

Retaliation

Interestingly, the Measures clearly provide that the Chinese government may, considering the actual conditions and needs, take necessary countermeasures against any improper extraterritorial application of foreign laws and measures.

Penalties

As mentioned above, the act of reporting the improper application of foreign laws or measures that restrict or prevent a PRC person from conducting economic, trade, and related activities with any third country (region) or its citizen, legal person, or other organization, is considered as an obligation and its violation leads to penalties’ application.

According to the Measures, if any Chinese citizen, legal person, or other organization fails to truthfully report the relevant situations in accordance with the relevant provisions, or fails to comply with an injunction, the competent commerce department of the State Council may give them a warning, order them to make corrections within a specified time limit, and may impose a fine against them depending on the seriousness of the circumstances.

Confidentiality

The Measures state that who reports an inappropriate application of a foreign law or measure to the Chinese competent authorities, has the right to ask for confidentiality, therefore the competent commerce department of the State Council and its staff members shall keep all the information collected as confidential.

Where a functionary of the competent commerce department of the State Council violates the said confidentiality obligations, they will be punished according to the law, and, in the event their behavior constitutes a crime, they will be held criminally liable as well.

Interpretation related issues

MOFCOM, by issuing the Measures, intends to strengthen the protection of Chinese sovereignty, security, development interests, as well as the rights and interests of PRC persons. This approach is in line with other previous regulations that China has recently adopted, such as the Export Control Law, that is aimed at assuring Chinese national security and interests.

However, the Measures are not clear in many aspects, starting from the concept of foreign laws and measures that might be subject to an injunction. In fact, it is not clear whether the word “measures” shall refer to policies, regulations, directives, or other sources of law. This vagueness brings a lot of uncertainties in the practical implementation of these new Measures.

Other doubts concern the fact that the Measures do not provide for a clear definition of the activities that fall into the scope of the Measures. Indeed, they simply mention economic, trade and “related activities”, thus increasing the scope for unpredictability in the way the Measures will apply.

In addition, with reference to the penalties, it shall be noted that it is not specified the amount to be paid as fine in case of serious violations, nor the situations that are considered sufficiently serious to justify a fine imposition.

In light of the above, further regulations are expected to be promulgated to clarify the Measures and fill gaps such as those mentioned above.

Who is the affected by the Measures?

Despite the interpretation problem and, consequently, the application issues that derive from the Measures’ lack of clarity, it is certain that Chinese citizens, legal persons, and other organizations will be impacted by the new rules and will have to pay extra attention from now on.

In fact, firstly, PRC persons – considering the penalties that will be imposed if they do not comply with the said reporting obligation – must be careful as they will have to understand whether and to what extent they are obliged to perform their reporting duties.

In addition, once an injunction has been issued, PRC persons will be exposed to a double risk: they ignore the foreign rules targeted by the injunction, thus risk being sanctioned in the foreign country, or they decide to comply with the foreign norms – thus violating the injunction – and run into the risk of facing penalties in China.

However, foreign companies should also be careful. Indeed, as provided under the Measures, a PRC person is entitled to file a lawsuit before the competent Chinese court claiming for losses against who has harmed its interests and rights, as well as against the party that benefitted from a judgment or ruling made in accordance with a foreign law or measure that is the subject of an injunction.

In conclusion, considering the Measures’ gaps and vagueness, we recommend both Chinese and foreign companies seek professional advice on the matter to find the best way to protect their interests, while remaining compliant with the new norms.

We will monitor and report any further development on this topic.

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