Over the past week, there have been considerable developments regarding the U.S.’s Chinese Military Company Sanctions program. Specifically, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has issued additional formal guidance and General License 2, the President has issued a new Executive Order amending E.O. 13959, and the Department of Defense (DoD) has added 9 additional companies to the Section 1237 List (which are subject to the restrictions of E.O. 13959 and the new amended E.O.) as of January 14, 2021.
Amended Executive Order
The new Executive Order of January 13, 2021 amends E.O. 13959 by clarifying the definition of “transaction” and terms of divestment, among other changes.
With respect to divestment, the E.O. of January 13, 2021 provides that transactions for the purposes of divestment (for covered securities subject to the implementation date of January 11, 2021) are permissible through 11:59 p.m. EST on November 11, 2021. However, U.S. persons are not permitted to possess those securities after November 11, 2021. Thus, U.S. persons are required to divest and are not permitted to hold such securities after the divestment period concludes on November 11, 2021 for certain securities subject to E.O. 13959, as amended by the E.O. of January 13, 2021.
For companies that are subsequently sanctioned pursuant to E.O. 13959, as amended by the E.O. of January 13, 2021, U.S. persons are permitted to divest for 365 days following the date that the company is added to the OFAC or DoD lists. Similarly, U.S. persons cannot possess those securities after the 365 day period ends and must divest.
The new E.O. of January 13, 2021 also clarifies the definition of “transaction” as “the purchase for value, or sale, of any publicly traded security.”
Department of Defense Additions
The DoD added 9 new companies to the Section 1237 List on January 14, 2021. Those companies are subject to the restrictions contained in E.O. 13959, as amended by the E.O. of January 13, 2021. As such, U.S. persons will be prohibited from transacting in the publicly traded securities of those companies 60 days after January 14, 2021, and U.S. persons must divest their holdings in the publicly traded securities of those companies within 365 days after January 14, 2021.
General License 2
General License 2 permits all “transactions and activities” by securities exchanges operated by U.S. persons that would otherwise be prohibited by E.O. 13959 Section 1(a)(ii), as amended by the E.O. of January 13, 2021, involving publicly traded securities or any securities that are derivative of (or designed to provide investment exposure to) such securities of any entity that is listed on OFAC’s Non-SDN Communist Chinese Military Companies List (NS-CCMC List) after 12:01 a.m. on January 14, 2021. These transactions and activities are authorized for 365 days after the date on which the entity is added to the NS-CCMC List.
OFAC provided additional guidance via Frequently Asked Questions (FAQs) late on January 14. Notably, OFAC issued FAQs 871, 872, 873, and 874:
- FAQ 871 addresses the compliance obligations of securities exchanges operated by U.S. persons, and in particular, the obligations under General License 2.
- FAQ 872 addresses the divestment question, stating that U.S. persons are required to divest their holdings of publicly traded securities, or securities that are derivative of (or designed to provide investment exposure to) such securities of Communist Chinese Military Companies (CCMC). Notably, the FAQ makes clear that possession of these securities after the divestment deadline is prohibited.
- FAQ 873 clarifies the definition of “transaction” as “the purchase for value, or sale, of any publicly traded security.” Note that this definition of “transaction” had already been clarified in the E.O. of January 13, 2021, which amended E.O. 13959.
- FAQ 874 addresses the types of activities that are permissible to effectuate divestment.