The anticipated clarifying guidance on the current ban on new U.S. investment in certain Communist Chinese military companies (CCMCs) is now postponed until June 11, 2021. The investment ban, which was originally issued by the Trump administration last fall, has caused considerable confusion because of the lack of clear accompanying guidance and drafting ambiguities in the initial executive order, E.O 13959, which was later amended by E.O. 13974.
The U.S. Department of Defense (DOD) is charged with maintaining and updating the list of CCMCs, while the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC), is responsible for implementing and enforcing the CCMC sanctions program. As part of the postponement, OFAC further extended a General License (GL) that provides some breathing room for parties trying to determine whether a transaction involves a restricted entity. Originally issued on January 8, 2021 GL 1 authorizes U.S. persons to engage in all transactions and activities otherwise prohibited by the executive orders as they relate to publicly traded securities of entities whose name closely resemble, but do not exactly match, the name of a company designated as a CCMC on DOD's list. OFAC subsequently extended the GL, renumbered as GL 1A, on January 26, 2021. On May 18, 2021, OFAC announced that it again extended the GL, renumbered as GL 1B, through June 11, 2021 at 9:30 a.m. EDT. Notwithstanding the GL, OFAC continues to prohibit U.S. persons from public trading of securities of those entities identified on the CCMC list.
Earlier this month, DOD simultaneously agreed to remove the Chinese smartphone maker Xiaomi Corporation (Xiaomi) from the CCMC list. DOD originally placed Xiaomi on the CCMC list in January 2020, thereby prohibiting U.S. investors from transacting in the smartphone corporation's securities. On March 12, 2021, the U.S. District Court for the District of Columbia issued a preliminary injunction that enjoined enforcement of that prohibition against Xiaomi. In enjoining enforcement of the executive orders against Xiaomi, the District Court held that DOD did not meet the "substantial evidence" standard to support its designation of Xiaomi as a CCMC pursuant to the Administrative Procedure Act (APA). The joint status report filed with the District Court by DOD and Xiaomi in mid-May indicates that the parties intend to resolve the matter outside of court and Xiaomi will be removed from the CCMC list.
On May 5, 2021, the court also issued a preliminary injunction enjoining enforcement of the executive orders against the Chinese data processing company which was initially designated as a CCMC by DOD on January 14, 2021. Similarly, the court found that the second designation also exceeded DOD's statutory authority pursuant to the 1999 National Defense Authorization Act (NDAA), and the designation failed to meet the APA's "substantial evidence" standard.
We anticipate further changes to the prohibitions and the list of CCMCs as the Biden administration solidifies its policies and as new guidance is issued. We continue to monitor developments associated with this and other U.S.-China sanctions issues. If you have any questions regarding how these recent developments may affect your business, please reach out to Venable's International Trade Group for guidance.