AML/FCPA Alert: Major SOEs Sanctioned & Risks in Civil-Military Fusion Programs

Posted by Wang, Yi on August 27, 2020

Thorough and life cycle regulatory counseling is critical for international businesses, in light of the ongoing sanctions under the reformed export control regime and beyond election outcomes. The latest enforcement priorities and focuses are no surprise but consistent with the statutory purpose as actions “necessary to effectively counteract” national security and foreign policy threats, under the Export Control Reform Act, as part of the bi-partisan John McCain National Defense Authorization Act for Fiscal Year 2019 (“NDAA”).

On August 26, Commerce Department (DOC) identifies 24 Chinese companies to the Entity List based on US’s foreign policy positions concerning issues relating to South China Sea. Commerce finds the newly sanctioned entities “played a significant role in China’s provocative construction of these artificial islands and must be held accountable.” The following companies are newly identified by DOC:

China Communications Construction Company Dredging Group Co., Ltd.
China Communications Construction Company Tianjin Waterway Bureau
China Communications Construction Company Shanghai Waterway Bureau
China Communications Construction Company Guangzhou Waterway Bureau
China Communications Construction Company Second Navigation Engineering Bureau
Beijing Huanjia Telecommunication Co., Ltd.
Changzhou Guoguang Data Communications Co., Ltd.
China Electronics Technology Group Corporation, 7th Research Institute (CETC-7)
Guangzhou Hongyu Technology Co., Ltd., (a subordinate institute of CETC-7)
Guangzhou Tongguang Communication Technology Co., Ltd. (a subordinate institute of
CETC-7)
China Electronics Technology Group Corporation, 30th Research Institute (CETC-30)
China Shipbuilding Group, 722nd Research Institute
Chongxin Bada Technology Development Co., Ltd.
Guangzhou Guangyou Communications Equipment Co., Ltd.
Guangzhou Haige Communication Group Co., Ltd.
Guilin Changhai Development Co., Ltd.
Hubei Guangxing Communications Technology Co., Ltd.
Shaanxi Changling Electronic Technology Co., Ltd.
Shanghai Cable Offshore Engineering Co., Ltd.
Telixin Electronics Technology Co., Ltd.
Tianjin Broadcasting Equipment Co., Ltd.
Tianjin 764 Avionics Technology Co., Ltd.
Tianjin 764 Communication and Navigation Technology Co., Ltd.
Wuhan Mailite Communication Co., Ltd.

Identification of the above entities means transactions involving controlled items will be subject to the Export Administration Regulations (EAR) administered by the Bureau of Industry Security (BIS) of DOC.  Additional license requirements apply to exports, re-exports, and transfers (in-country) of items subject to the EAR to listed entities. BIS further highlights that “the availability of most license exceptions is limited.”

So far Commerce Department identifies only “$5 million roughly” U.S. exports to these parties. However, going forward the latest sanction measures will “address any proposed exports.”

According to the State Department, “In 2009, CCCC was blacklisted by the World Bank for fraudulent bidding practices on a highway contract in the Philippines.” Moreover, another factor prompting sanction is “CCCC’s role in Beijing’s military-civil fusion program, which encourages Chinese civilian entities to work with the People’s Liberation Army in a common goal of bolstering defense,” according to public sources.

Big or small, AML/FCPA/Export control sanctions are no longer limited to traditional fronts such as Iran, North Korea and anti-terrorism (which remain equally important). Rather, the latest and further sanctions and enforcement actions, as we briefed earlier this year, have gone beyond ICT sector. The latest sanction has identified certain subsidiaries of China Communications Construction Co. (CCCC), a major contractor of the Belt and Road Initiative to develop infrastructure projects, among others.

ECRA requires that “no person may engage in any transaction or take any other action with intent to evade” the export control regime within US jurisdiction. The message from this sanction is very clear: Legal departments of international businesses must not sign off participation in civil-Military fusion programs, without thorough assessment of regulatory risk exposure, economic consequences, civil or criminal liabilities.