State and Commerce Departments Take New Action on 24 Chinese Companies

August 28, 2020

Tom Best, Shaun Wu, Quinn Dang, Talya Hutchison, and Holly Flynn

On August 26 2020, the United States Government announced visa restrictions on Chinese individuals and imposed sanctions on 24 Chinese companies for their alleged activities related to the PRC’s territorial claims in the South China Sea. The Department of Commerce added those companies to the Entity List, a list maintained by the Bureau of Industry and Security (BIS) that identifies persons believed to be involved in, or pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States. Separately, the Department of State issued visa restrictions on executives (and their family members) believed to be involved in the conduct at issue.

A list of the designated companies can be found here. According to the Department of Commerce, the entities were added “for their role in helping the Chinese military construct and militarize the internationally condemned artificial islands in the South China Sea.” The use of the Entity List here is the first known instance of use of this sanctions authority power in connection with territorial disputes in the South China Sea.

Department of Commerce Entity List Designations

An Entity List designation does not prohibit all dealings with the listed entity. The effect of the Department of Commerce’s action is that any person – whether a U.S. person or a foreign person – cannot export, reexport, or transfer (in-country) any item subject to the Export Administration Regulations (EAR) to the designated entity without first obtaining a BIS license. Moreover, applications for the required specific authorization are “usually subject to a policy of denial” according to Department of Commerce guidance. License applications for transfer of items to all of the companies designated pursuant to the August 26 action for their roles involving the South China Sea also will be subject to a presumption of denial. Items that are subject to the EAR include those that are: (i) located in the United States; (ii) of U.S. origin; (iii) foreign-made items that incorporate U.S.-origin goods, software, or technology (often above a specified threshold); and (iv) certain other items that are “direct products” of U.S.-origin technology or software.

A leading Chinese microchip manufacturer was placed on the Entity List in October 2018 reportedly in connection with alleged theft of U.S. trade secrets. Huawei and many of its affiliates were later added to the Entity List in May 2019 (as well as additional affiliates in the past two years) for reasons that the Department of Commerce identified was related to its violations of the International Emergency Economic Powers Act (IEEPA) and OFAC sanctions. The Department of Commerce is increasingly using the restrictions of the Entity List to implement U.S. national security policy, primarily – but not exclusively – relating to China.[1]

State Department Visa Restrictions

In addition to the Department of Commerce’s actions, the Department of State announced visa restrictions on certain executives of those companies and their families. The State Department has announced that it will not publish the names of individuals, who will now be inadmissible into the United States (and their immediate family members may be inadmissible as well). The action follows similar restrictions placed on Chinese officials in response to PRC government actions in Hong Kong earlier this summer. Such visa restrictions may also be imposed on executives of additional Chinese companies in the weeks and months to come, and so China-based companies should be prepared and plan for business contingencies ahead of time.

[1] The addition of these 24 companies was made concurrent with the designation of 36 other companies who were also determined to be “acting contrary to the national security or foreign policy interests of the United States.” The full Federal Register notice can be found here: https://www.federalregister.gov/d/2020-18909.