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Briefing on the PRC Blocking Rules

2021-01-20 62

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Introduction


On January 9, 2021, the Ministry of Commerce of the PRC (“MOFCOM”) promulgated the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the “PRC Blocking Rules”) with immediate implementation effect.


The PRC Blocking Rules aims to block the application in China of foreign laws and measures which unjustifiably prohibit or restrict PRC persons from trading with third countries/regions and their citizens, legal persons or other organizations.


Notably, the PRC subsidiaries of multinationals are qualified as PRC persons and therefore will also be subject to the regime introduced by the PRC Blocking Rules.


Key Points


1. How will the PRC Blocking Rules work?


Reporting Obligation: If a PRC citizen, legal person or an organization of any other type (a “PRC Person”) is prohibited or restricted by a foreign law or measure from conducting normal economic, trade and other relevant activities with any third country/region and its citizens, legal persons or other organizations (a “Third Country Person”), such PRC Personis obliged to report to MOFCOM on such situation within 30 days.


Assessment Mechanism: The PRC State Council will establish a working mechanism (the “Working Mechanism”), which will be formed by MOFCOM, National Development and Reform Commission (NDRC) and other relevant departments, to jointly access and determine whether the extraterritorial application of such foreign law or measure is unjustifiable, by taking into consideration of the following factors comprehensively:


  • whether it violates any international law or basic principle of international relation;

  • whether it will have any potential impact on PRC’s national sovereignty, security and development interests;

  • whether it will have potential impact on the legitimate right and interest of any PRC citizen, legal person or other organization; and

  • other factor that shall be taken into consideration.


Prohibition Order: If as the result of assessment, it is determined that the application in China of a foreign law or measure is unjustifiable, MOFCOM may issue an order prohibiting the recognition of, enforcement of and compliance with the said foreign law or measure (the “Prohibition Order”). Failure to comply with the Prohibition Order will result in penalties and liabilities.


Exemption Application: On a case-by-case basis, a PRC Person may seek exemptions from complying with a Prohibition Order.


2. Who will be subject to the PRC Blocking Rules?


The PRC Blocking Rules apply to only PRC Person, not to any legal person established outside of PRC or any individual with foreign nationality. Notably, the subsidiaries, branches and representative offices of a foreign company registered in PRC are PRC Persons and will therefore be subject to the PRC Blocking Rules.


3. What are the consequences for violating the PRC Blocking Rules?


Failure to report: If a PRC Person fails to perform the reporting obligation, it may be subject to administrative penalties, such as being imposed by a warning, correction order or fine.


Failure to comply with Prohibition Order: If a PRC Person complies with a foreign law or measure which was blocked under a Prohibition Order (the “Blocked Foreign Law”), in addition to the abovementioned administrative penalties, it may also be held liable for compensating the damages caused to other PRC Persons.


Other: If a PRC Person suffers losses as a result of any judgment or decision made on the basis of a Blocked Foreign Law, it may litigate before a PRC court to claim damages from the entities who have benefited from such judgment or decision.


Outlook


So far, the PRC Blocking Rules only set up an initial frame of the new regime, no specific Prohibition Order has been issued yet. It remains to be seen how the new regime will be implemented in practice.


In any event, it is clear that the new regime imposed by the PRC Blocking Rules will be highly challenging to multinationals. It will be recommendable for multinationals to immediately to carry out an assessment of its PRC business operations and formulate their own compliance plans. 



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