The Biden Administration Ends the Year with Several National Security-Driven Measures Targeting China

As President Biden approaches one year in office, his Administration rounded out a year of national security-driven efforts towards China with several additional foreign investment, sanctions, and export control-related actions. These actions underline the Biden Administration’s focus on protecting sensitive U.S. technologies, countering the growing influence of China’s military, and responding to concerns about China’s record on democracy and human rights. They also demonstrate the variety of legal tools that the Administration is using to pursue its foreign policy objectives, including existing regulatory authorities and new laws passed by Congress.

In December 2021, the Biden Administration took the following China-focused actions:

• On December 9, 2021, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”) implemented new export controls and an arms embargo, respectively, on Cambodia to counter “expanded Chinese military influence” in Cambodia.

• On December 10, 2021, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) added three individuals and three entities from China to its list of Specially Designated Nationals and Blocked Persons (“SDN List”) for actions “undermining U.S. national security or foreign policy interests.” At the same time, OFAC designated Chinese firm SenseTime as a Non-SDN Chinese Military-Industrial Complex (“NS-CMIC”) company for its use of facial recognition surveillance programs to target the Muslim Uyghur minority in Xinjiang. On December 16, OFAC designated eight additional Chinese firms as NS-CMIC companies for their similar use of biometric surveillance technologies to track ethnic and religious minorities in China.

• On December 13, 2021, Chinese private equity firm Wise Road Capital and U.S.-incorporated and publicly traded Magnachip Semiconductor announced the termination of their $1.4 billion deal after failing to receive clearance from the Committee on Foreign Investment in the United States (“CFIUS”).

• On December 17, 2021, BIS restricted the export of U.S. goods and technology to 34 Chinese entities by adding them to the so-called “Entity List” for actions deemed contrary to U.S. national security or foreign policy interests.

The Biden Administration’s executive actions are in parallel with strong bipartisan efforts in Congress to further address national security and human rights concerns about Chinese government policies. On December 23, 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act, a Congressional package designed to ensure that goods made with forced labor in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China do not enter the United States market. The China-focused U.S. Innovation and Competition Act, which has passed in the Senate and is pending before the House, is expected to become law in the new year. In combination, these actions indicate a growing concern among U.S. officials from across the political spectrum regarding China, and we expect to see a continuation in 2022.

Implications

The Biden Administration’s China strategy will have a significant impact on i) investors who hold individual securities and funds invested in the securities of the companies newly listed on OFAC’s Non-SDN CMIC List, ii) entities engaged in the export of certain national security-controlled articles and technologies, including biotechnologies, and iii) U.S. companies pursuing deals with Chinese counterparties related to highly sensitive technologies, including semiconductors.

China has vowed to respond to these and other recent U.S. actions. As noted in our previous Client Alert, the June 2021 passage of China’s “Counter-Foreign Sanctions Law” built upon China’s existing Blocking Measures and expanded the scope of sanctions available to Chinese authorities, including restrictions on travel entry, freezing property, and restricting certain transactions with listed entities. Indeed, on December 21, 2021, China took action to bar entry, freeze assets, and forbid dealing with four people from the U.S. Commission on International Religious Freedom, a federal government entity that evaluates and suggests policies for countries where religious freedom is deemed to be endangered.

It remains to be seen whether China will take further action pursuant to the Counter-Foreign Sanctions Law. Nevertheless, as the global sanctions and export controls landscape grows increasingly complex due to the broad, extraterritorial scope of Chinese and U.S. authorities, multinational corporations must carefully consider how the implementation of these laws could implicate their business.

Additional Detail on Recent Measures

BIS and DDTC Actions

Restrictions Targeting China-Cambodia Military Ties

On December 9, 2021, the Department of Commerce’s BIS amended the Export Administration Regulations (“EAR”) to expand restrictions on exports to Cambodia. At the same time, the State Department’s DDTC amended Section 126.1 of the International Traffic in Arms Regulations (“ITAR”) to add Cambodia to the list of countries for which it is the policy of the U.S. to deny licenses and other approvals for exports and imports of defense articles and services. These actions came in response to China’s expanding influence in Cambodia, including the construction of military facilities at the Ream Naval Base in Cambodia. U.S. officials have warned that China’s expanding military influence in Cambodia could “undermine Cambodian sovereignty, threaten regional security, and negatively impact U.S.-Cambodia relations.”

As a result of the rule changes, exports to Cambodia subject to U.S. jurisdiction are now subject to licensing requirements for National Security-controlled items (15 C.F.R. § 742.4(b)(7)), certain items destined for “military end use” or “military end users” (15 C.F.R. § 744.21), and certain items intended for military-intelligence end use or users (15 C.F.R. § 744.22). BIS’s policy for reviewing applications for such licenses will be a presumption of denial.

Entity List Designations

BIS added 34 Chinese entities¹ to the Entity List to address “ongoing threats to U.S. national security and foreign policy presented by [China]’s efforts to develop and deploy biotechnology and other technologies for military applications and human rights abuses.” As a result, exports of items subject to the EAR now require a license, subject to a policy of presumptive denial.

In its final rule published December 17, 2021, the Department of Commerce explained that China’s Academy of Military Medical Sciences (“AMMS”) and its 11 research institutes “use biotechnology processes to support Chinese military end uses and end users, to include purported brain-control weaponry.” The Department of Commerce further explained that it targeted other Chinese companies for “acquiring and attempting to acquire U.S.-origin items in support of military modernization for the People’s Liberation Army,” for providing “material support to Iran’s advanced conventional weapons and missile programs to entities [on the SDN list],” and for being “part of a network used to supply or attempt to supply Iran with U.S.-origin items that would ultimately provide material support to Iran’s defense industries.”

OFAC: Addition of Chinese Individuals and Entities to SDN and NS-CMIC Lists

Pursuant to Executive Order (“EO”) 14032, OFAC recently listed nine Chinese companies to its SDN List for their surveillance and tracking of religious and ethnic minorities. These companies are: Cloudwalk Technology, Dawning Information Industry, Leon Technology Company, Megvii Technology, Netpose Technology, SenseTime Group, SZ DJI Technology, Xiamen Meiya Pico Information Company, and Yitu Limited. As a result, U.S. individuals are prohibited from engaging in certain securities transactions with these companies.²

As noted in our previous Client Alert, the U.S. government has taken action pursuant to EO 13959, as amended by EO 14032, to target the surveillance technology sector in China over concerns that this sector operates in close coordination with the Chinese government and military and facilitates corruption and serious human rights abuses. Specifically, the U.S. is concerned that China’s defense and surveillance technology sectors have been working in cooperation with the Chinese government in an effort to repress members of the predominantly Muslim Uyghur minority in Xinjiang. According to U.S. officials, the deployment of surveillance technologies in this region has facilitated the Chinese government’s use of forced labor practices against the Uyghur minority during the production of certain goods, including most prominently the production of cotton and other agricultural products.

Alongside this authority, EO 13818 also equips the U.S. government with the ability to target entities and individuals it identifies as having “engaged in, or whose members have engaged in serious human rights abuse.”

Pursuant to EO 13818, OFAC recently listed three individuals—Hezheng Lu, Erken Tuniyaz, and Shohrat Zakir—and three entities—Moxing Cartoon, Nings Cartoon Studio, and Shanghai Hongman Cartoon and Animation Design Studio—as having engaged in serious human rights abuses related to the repression of the Uyghur minority. As a result, U.S. persons are generally prohibited from engaging in transactions or other dealings with such persons.

CFIUS: Termination of Magnachip-Wise Road Capital Deal

Following months of negotiation with CFIUS regarding the proposed merger of Magnachip Semiconductor Corporation and an affiliate of China-based Wise Road Capital, Magnachip announced on December 13, 2021 the mutual termination of the proposed merger. The parties failed to receive CFIUS clearance for the deal. The parties did not publicize the national security concerns articulated by CFIUS that led to the termination of the transaction, but it is believed the concerns related to the acquisition of a semiconductor manufacturing company by a Chinese entity.

The termination of this deal is significant, not only because of the U.S. Government’s concerns about Chinese acquisitions of semiconductor technology but also CFIUS’s seemingly broad exercise of jurisdiction. Magnachip and Wise Road Capital did not initially make a filing with CFIUS regarding their proposed deal seemingly based on the position that CFIUS did not have jurisdiction because Magnachip’s business is outside the United States (with the exception of its parent company, which is publicly-traded in the U.S.). Nevertheless, CFIUS still exercised its jurisdiction to investigate the transaction, and its opposition ultimately led to its termination.

Enactment of Uyghur Forced Labor Prevention Act

On December 23, 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act (“Act”), which is significant in that it presumptively denies imports into the United States of all goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang region of China. Import prohibitions covering an entire geography are rare, so the Act signals the United States’ active posture towards addressing concerns over the government of China’s use of forced labor schemes against persecuted groups.

While the Act presumptively denies any import coming from Xinjiang, there remains a narrow exemption whereby U.S. Customs and Border Protection could approve certain imports from Xinjiang. To obtain this exemption, however, importers must prove by “clear and convincing evidence” that their articles are not products of any forced labor scheme.

To ensure the import ban is implemented effectively, the Act requires the Forced Labor Task Force established under section 741 of the United States-Mexico-Canada Agreement Implementation Act to develop a strategy to ensure that goods mined, produced, or manufactured in Xinjiang are not imported into the United States. Following public comment and hearing, the strategy must:

• Identify threats that could lead to the importation of goods produced using forced labor and identify ways to reduce those threats;

• Describe the entities and products that are a part of forced labor schemes in China, including:
  • Entities that mine, produce, or manufacture goods with forced labor;
  • Entities that work with the government to recruit, transport, harbor, and receive forced labor;
  • Products that are mined, produced, or manufactured with forced labor; and
  • Facilities and entities that source material from any government labor scheme that uses forced labor.
• Identify sectors of high enforcement priority;

• Recommend efforts, initiatives, and technologies to trace goods suspected of being produced by forced labor;

• Describe how U.S. Customs and Border Protection could i) use its existing legal authority to prevent entry of banned goods and ii) benefit from additional resources;

• Provide guidance to importers on supply chain due diligence and evidentiary standards for proper compliance; and

• Create a plan for collaborating with nongovernmental and private sector entities.

Following the creation of this strategy within 180 days of the enactment of this Act, the Task Force will submit annual updates to Congress regarding the ongoing implementation of the strategy. In addition, the Act requires the Secretary of State to submit to Congress a report regarding the United States’ diplomatic efforts to enhance international awareness and cooperation around ending forced labor in China.

Finally, the Act tees up additional mandatory sanctions against any foreign person, including any official of the government of China, that the President determines is responsible for serious human rights abuses in connection with forced labor in China.

The Act will remain in effect until the President determines that the government of China has ended mass internment, forced labor, and other gross violations of human rights in Xinjiang or after eight years if the President has not yet made that determination.

O’Melveny recognizes law clerk Dillon Roseen for his valuable contribution in researching and drafting this article.

¹ The full list of companies is: Academy of Military Medical Sciences; Academy of Military Medical Sciences, Field Blood Transfusion Institution; Academy of Military Medical Sciences, Institute of Basic Medicine; Academy of Military Medical Sciences, Institute of Bioengineering; Academy of Military Medical Sciences, Institute of Disease Control and Prevention; Academy of Military Medical Sciences, Institute of Health Service and Medical Information; Academy of Military Medical Sciences, Institute of Hygiene and Environmental Medicine; Academy of Military Medical Sciences, Institute of Medical Equipment; Academy of Military Medical Sciences, Institute of Microbiology and Epidemiology; Academy of Military Medical Sciences, Institute of Radiation and Radiation Medicine; Academy of Military Medical Sciences, Institute of Toxicology and Pharmacology; Academy of Military Medical Sciences, Military Veterinary Research Institute; Aerosun Corporation; Changsha Jingjia Microelectronics Co., Ltd.; China Electronics Technology Group Corporation 52nd Research Institute; Comtel Technology Limited; Fujian Torch Electron Technology Co., Ltd.; Hangzhou Hikmicro Sensing Technology Co., Ltd.; HMN International Co., Ltd.; Hong Kong Cheung Wah Electronics Technology Company Limited; HSJ Electronics; Hyper Systems Union Limited; Inner Mongolia First Machinery Group Co., Ltd.; Integrated Scientific Microwave Technology; Jiangsu Hengtong Marine Cable Systems Co., Ltd.; Jiangsu Hengtong Optic-Electric Co., Ltd.; ROV Solutions; Shaanxi Reactor Microelectronics Co., Ltd.; Shanghai Aisinochip Electronics Technology Co., Ltd.; Shanghai Aoshi Control Technology Co., Ltd.; Shenzhen Rion Technology; Thundsea Electric Limited; Wavelet Electronics; and Zhongtian Technology Submarine Cable Co.

² EO 14032 amended EO 13959 issued by President Trump, see generally our previous OMM Alert “President Trump Issues Executive Order Prohibiting US Investments in Companies with Ties to the Chinese Military,” but the baseline restriction prohibiting U.S. persons from certain investments in listed entities is the same.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, and Dillon Roseen, an O’Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2021 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.