3 Key Takeaways

1. China is expanding laws that can reach companies and individuals outside its borders, particularly when foreign sanctions or business decisions affect Chinese interests.
2. New rules covering supply chains, foreign sanctions and overseas investment are creating potential conflicts for multinational companies attempting to comply with U.S. and Chinese law at the same time.
3. Recent enforcement signals that Beijing is moving beyond legislation and increasingly using courts and regulators to put its counter-sanctions framework into practice.

By Samuel López | USA Herald

China is rapidly expanding the reach of its legal system beyond its borders, creating a new layer of risk for multinational corporations already navigating U.S. sanctions, export controls and supply-chain regulations.

The growing framework is designed in large part to counter what Beijing views as the improper use of foreign sanctions and “long-arm jurisdiction” against Chinese companies and individuals. But for international businesses, the practical consequence may be much more complicated: complying with one country's laws could increasingly expose a company to penalties under another country's legal system.

One of the most significant developments is State Council Order No. 834, China's new industrial and supply-chain security regulation.

The measure gives Chinese authorities power to investigate foreign organizations or individuals accused of interrupting normal transactions, discriminating against Chinese counterparties or otherwise threatening China's supply-chain security. It also subjects supply-chain investigations and information gathering conducted inside China to existing Chinese laws governing data, national security and regulatory compliance.

That distinction matters.

Order 834 does not categorically prohibit multinational companies from conducting legitimate supplier audits or due diligence. Instead, the legal danger arises when those investigations violate Chinese law or when a company's resulting decisions are viewed by Beijing as discriminatory or damaging to Chinese supply chains.

For corporations conducting forced-labor screening, sanctions compliance, export-control reviews or supplier investigations, that can create a difficult conflict-of-laws problem.

China followed with State Council Order No. 835, which directly addresses what Beijing describes as improper foreign extraterritorial jurisdiction.

The regulation authorizes countermeasures, establishes a “malicious entity” mechanism targeting organizations and individuals involved in implementing foreign measures, and prohibits organizations or individuals from assisting in enforcement of foreign jurisdiction that China deems unlawful. Chinese citizens and companies harmed by those measures may also bring lawsuits against parties accused of enforcing them.

China's legal reach also extends to overseas investment.

Order No. 837, effective July 1, gives Beijing greater authority over Chinese outbound investment while permitting countermeasures when foreign governments or organizations impose what China considers discriminatory restrictions against Chinese investors.

Those measures can include restrictions on imports and exports, investment, transactions with Chinese entities and the ability of certain individuals to enter, work or remain in China.

Another law that took effect July 1 illustrates how far Beijing is willing to extend this concept beyond traditional economic sanctions.

China's Ethnic Unity and Progress Promotion Law provides that organizations and individuals outside China may face legal responsibility for conduct Beijing determines undermines ethnic unity or promotes separatism.

Chinese officials have openly defended the extraterritorial provision. Vice Minister of Justice Hu Weilie said Beijing considers it a legitimate exercise of sovereign legislative authority rather than improper “long-arm jurisdiction.”

The central concern for multinational companies is no longer theoretical.

The Financial Times reported that a Shanghai maritime court ordered the operator of the Dortmund Express to compensate Chinese surveillance company Hikvision after the carrier declined to deliver containers containing Hikvision electronics because the company was subject to U.S. restrictions. China's Supreme People's Court subsequently praised the ruling as a model for similar disputes.

Cases like that reveal the emerging legal collision.

A global company may determine that U.S. sanctions, export controls or compliance obligations require it to stop doing business with a Chinese entity. China may increasingly view that same decision as discriminatory conduct requiring investigation, countermeasures or civil liability.

This does not mean Chinese law automatically overrides U.S. sanctions outside China. It does mean companies with employees, assets, subsidiaries, suppliers or executives exposed to Chinese jurisdiction may have considerably more to lose when the two systems conflict.

For corporate legal and compliance departments, China risk is therefore becoming more than a sanctions question.

It is becoming a question of which country's law a company can obey without violating another's.

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