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Recent Developments on U.S. Ban on American Investment in Chinese Military Companies
Wednesday, February 17, 2021

This alert addresses recent developments relating to former President Trump's executive orders on Chinese Military Companies that affect both investors in covered securities and exporters.

OFAC's Frequent Asked Questions

On November 12, 2020, former President Trump issued an executive order ("EO"), pursuant to the National Defense Authorization Act for Fiscal Year 1999, as amended ("NDAA"), prohibiting U.S. persons from investing in publicly traded securities of any person designated by the Secretary of Defense or the Secretary of the Treasury as a "Communist Chinese military company" ("Chinese Military Company"). See our analysis of the Nov. 12 EO here. Since then, the 2021 National Defense Authorization Act ("2021 NDAA") was enacted into law, the EO was amended, the list of Chinese Military Companies expanded, and frequently asked questions promulgated.

Between December 28, 2020 and January 27, 2021, the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") issued 15 Frequently Asked Questions ("FAQs") (available here), which interpreted the EO and clarified OFAC's enforcement interpretation of certain provisions of the EO. The FAQs are summarized below:


Publication Date


Summary of OFAC's Guidance


Dec. 28, 2020

Publicly traded securities of subsidiaries of Chinese Military Companies.

OFAC intends to publicly list the subsidiaries that (1) issue publicly traded securities, and (2) are 50% or more owned or determined to be controlled by one or more Chinese Military Companies. The EO applies to Chinese Military Companies publicly listed by the Department of Treasury pursuant to EO section (4)(a)(iii).


Dec. 28, 2020

In some cases, names of Chinese Military Companies identified by the U.S. Department of Defense ("DoD") may not match the actual names of issuers.

The EO applies to publicly traded securities (or any publicly traded securities that are derivative of, or are designed to provide investment exposure to, such securities) of an entity with a name that exactly or closely matches the name of an entity identified as a Chinese Military Company.  OFAC published the Chinese Military Companies List on its website, which includes the names of entities identified in or pursuant to the EO and additional identifying information of such entities.


Dec. 28, 2020

Definition of "publicly traded securities."

OFAC clarifies that "publicly traded securities" include securities (as defined in section 4(d) of the EO) denominated in any currency that trade in any jurisdiction on a securities exchange or through the method of trading that is commonly referred to as "over-the-counter."


Dec. 28, 2020

Scope of "financial instruments."

The financial instruments covered by the EO include, but are not limited to, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts ("ADRs"), global depositary receipts ("GDRs"), exchange-traded funds ("ETFs"), index funds, and mutual funds, to the extent such instruments also meet the definition of "security" as defined in section 4(d) of the EO.


Dec. 28, 2020

Prohibition of investments in U.S. or foreign funds holding securities of Chinese Military Companies.

The EO applies to investments by U.S. persons in U.S. and foreign funds, such as ETFs or other mutual funds that hold publicly traded securities of Chinese Military Companies or their derivatives.


Jan. 4, 2021

Whether divestment of holdings in securities of Chinese Military Companies by January 11, 2021 is required.

U.S. persons, including U.S. funds and related market intermediaries and participants, are not required to divest their holdings in publicly traded securities (and derivatives) of the Chinese Military Companies identified in the Annex to the EO by January 11, 2021. According to the EO, U.S. persons will have until 11:59 p.m. EST on November 11, 2021 to divest prohibited securities that were held as of 9:30 a.m. EST on January 11, 2021. If additional business entities are designated as Chinese Military Companies, then divestiture must occur within 365 days of the date of designation.


Jan. 6, 2021

Whether U.S. persons are permitted to serve as a custodian, offer for sale, serve as a transfer agent, and trade in covered securities.

OFAC clarifies that the following services by U.S. persons are permissible (as long as they are not provided to U.S. persons in connection with prohibited transactions): clearing, execution, settlement, custody, transfer agency, back-end services, as well as other such support services.


Jan. 6, 2021

Subsidiaries with names that "exactly or closely match" the names of identified Chinese Military Companies.

The prohibitions under the EO apply to subsidiaries of listed Chinese Military Companies with a name that exactly or closely matches the name of a Chinese Military Company identified in the EO. In this guidance, OFAC specifically identified 7 entities having names that "closely match" the names of covered Chinese Military Companies. On January 8, 2021, OFAC issued General License No. 1 to address the implementation issue relating to the "closely match" requirement. The General License No. 1 has been replaced in its entirety by General License No. 1A in FAQ 878, which is summarized below.


Jan. 6, 2021

Whether market intermediaries and other participants can facilitate divestment of covered securities.

OFAC permits market intermediaries and other participants to engage in ancillary or intermediary activities that are necessary to effect divesture during the relevant wind-down periods or that are otherwise not prohibited under the EO. OFAC also permits transactions by U.S. persons involving investment funds that are seeking to divest during the relevant wind-down periods to ensure compliance with the EO.


Jan. 14, 2021

Compliance obligations of securities exchanges operated by U.S. persons.

General License 2 (available here) permits all transactions and activities by securities exchanges operated by U.S. persons related to securities of the Chinese Military Companies identified by OFAC after 12:01 a.m. eastern standard time, January 14, 2021 through the applicable 365-day divestment period.


Jan. 14, 2021

U.S. person divestment of covered securities.

U.S. person must divest any Chinese Military Company securities that they hold by the end of the 365-day wind down period and after the end of the wind down period, U.S. person will be prohibited from holding or trading in Chinese Military Company securities.


Jan. 14, 2021

Definition of "transaction."

The definition of "transaction" is expanded to include any sale of a covered publicly traded security.


Jan. 14, 2021

Activities permitted to divest holdings of covered securities.

Transactions (including purchases for value and sales) entered into on or before the end of the applicable 365-day divestment period, solely to divest, in whole or in part, from Chinese Military Companies securities, is permitted. OFAC also refers to FAQ 865 regarding the permissibility of market intermediaries and other participants engaging in ancillary or intermediary activities that are necessary to effectuate divesture during relevant wind-down periods.


Jan. 27, 2021

Permitted transactions under new General License 1A

Effective January 27, 2021, General License No. 1, dated January 8, 2021, is replaced and superseded in its entirety by General License No. 1A (GL 1A) (available here).

U.S. persons may, subject to the conditions in the general license, engage in transactions otherwise prohibited by the EO involving covered securities of entities whose names closely match, but do not exactly match, the name of a Chinese Military Company. But GL 1A does not authorize transactions in covered securities identified on OFAC's Non-SDN Communist Chinese Military Companies List or otherwise identified by the DoD pursuant to the EO.


Jan. 27, 2021

Whether GL 1A authorizes transactions with entities identified as subsidiaries of a Chinese Military Company.

GL 1A does not authorize any transactions involving covered securities of entities listed on OFAC's Non-SDN Communist Chinese Military Companies List (NS-CCMC List) as a subsidiary of a business entity already determined to be a Chinese Military Company.


Expansion of the Definition of the "Chinese Military Company"

On January 1, 2021, the 2021 NDAA was enacted into law (available here, the revisions discussed in this alert are in Sec. 1260 H. [pp. 578-79]). The 2021 NDAA significantly expands the definition of "Chinese Military Company" to include Chinese entities that are identified as "military-civil fusion contributors." As revised, the definition of Chinese Military Company includes any entity (natural persons are specifically excluded) that is:

  • "directly or indirectly owned, controlled, or beneficially owned by, or in an official or unofficial capacity acting as an agent of or on behalf of, the People's Liberation Army or any other organization subordinate to the Central Military Commission of the Chinese Communist Party; or identified as a military-civil fusion contributor to the Chinese defense industrial base; and

  • engaged in providing commercial services, manufacturing, producing, or exporting." (emphasis added)

In addition, the 2021 NDAA defines "military-civil fusion contributors" as entities within the following seven broadly defined industry categories:

  • "Entities knowingly receiving assistance from the Government of China or the Chinese Communist Party through science and technology efforts initiated under the Chinese military industrial planning apparatus.

  • Entities affiliated with the Chinese Ministry of Industry and Information Technology, including research partnerships and projects.

  • Entities receiving assistance, operational direction or policy guidance from the State Administration for Science, Technology and Industry for National Defense.

  • Any entities or subsidiaries defined as a ‘defense enterprise' by the State Council of the People's Republic of China.

  • Entities residing in or affiliated with a military-civil fusion enterprise zone or receiving assistance from the Government of China through such enterprise zone.

  • Entities awarded with receipt of military production licenses by the Government of China, such as a Weapons and Equipment Research and Production Unit Classified Qualification Permit, Weapons and Equipment Research and Production Certificate, Weapons and Equipment Quality Management System Certificate, or Equipment Manufacturing Unit Qualification.

  • Entities that advertise on national, provincial, and non-governmental military equipment procurement platforms in the People's Republic of China."

In addition to the above seven categories, "military-civil fusion contributors" also include "[a]ny other entities the Secretary [of Defense] determines is appropriate".

Amendment of the EO

On January 13, 2021, former President Trump issued Executive Order 13974 ("amended EO") (available here), amending certain parts of the original EO. Sections 1(b) and (c) of the original EO provide U.S. persons 365 days from the entity's designation to divest covered securities. The amended EO provides that the divestment obligations with respect to a designated entity depend on the date the entity is designated as a Chinese Military Company, and clarifies that U.S. persons must divest any Chinese Military Company covered securities by November 11, 2021 (if the relevant entity was included in the original 31 entities designated in the EO) or 365 days after the date that the entity is designated as a Chinese Military Company.

The amended EO further clarifies that possession of any covered securities by a U.S. person is prohibited after the end of the applicable divestment period, and also revised the definition of "transactions" to include any "sale" of covered securities to clarify that sales of covered securities after the end of the divestment period would violate the amended EO. FAQ 873 noted in the table above also addresses this change.

The Current List of "Chinese Communist Military Companies"

The EO initially applied to 31 Chinese companies named in the Annex to the EO (available here) that had been previously listed by the Secretary of Defense. On January 8, 2021, OFAC published an updated version of its Non-SDN Communist Chinese Military Companies List ("NS CCMC List") (available here). The updated NS CCMC List includes the initial list of 31 Chinese companies and 4 additional entities (available here) designated by DoD on December 3, 2020 and also includes additional identifying information relating to the listed entities, including A.K.A.s (also known as), issuer names (names that are exactly or closely match the names of identified entities) and equity tickers. On January 14, 2021, DoD designated 9 additional entities in the aviation, technology, and semiconductor industries as Chinese Military Companies (available here). 

As of the date of this alert, 44 Chinese entities have been designated as Chinese Military Companies. In addition, the updated NS CCMC List also contains a list of subsidiaries of the 44 designated Chinese entities with names closely matching those designated entities. So, the total number of Chinese entities subject to the EO is more than 44.

Under the amended EO, the transaction prohibition effective date for the initial 31 entities was January 11, 2021 and the divestment period will end on November 11, 2021. For entities subsequently designated as Chinese Military Companies, the transaction prohibition effective date begins at 9:30 a.m. eastern standard time on the date that is 60 days after the entity is designated and the relevant divestment period extends for 365 days after such designation.

The Impact on Exporters

The Chinese Military Companies list affects both investors of the covered securities and exporters. On December 23, 2020, the U.S. Department of Commerce Bureau of Industry and Security ("BIS") issued a list of designated military end users ("MEU List") under the Export Administration Regulations ("EAR") (see our prior alert available here). As due diligence guidance, BIS noted that exporters should closely scrutinize those Chinese Military Companies designated by DoD that are not currently in the MEU List. For compliance, the DoD-designated Chinese Military Companies raise a red flag requiring additional due diligence as to whether a license is required prior to the export, reexport or transfer of MEU Items to such DoD-designated entities. Therefore, in addition to the investors of the Chinese Military Company securities, exporters should also be mindful of the recent developments in Chinese Military Company designations discussed above.

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