Biden Executive Order Amends, Clarifies China Blacklist

The revised EO is clearer, addresses many of the problem areas in the old EO, and is more enforceable, says Nick Turner at Steptoe & Johnson.

US President Joe Biden has amended Executive Order 13959 to modify, expand upon and clarify the Trump era investment ban on certain securities linked to Chinese companies.

EO 13959, enacted by former president Trump in November 2020, banned US persons from investing in companies linked to China’s military. The financial sanctions and selection of targeted companies were tied to a congressionally mandated US Department of Defense report.

The policy has confused investors about the extent of its reach to subsidiary firms, and how companies with similar names to the designated companies were affected. Some of the Chinese companies including Xiaomi challenged the investment ban in court and won.

Last month, the US Treasury announced a two-week delay of the investment ban against so-called ‘Chinese Military Companies’, which was due to take effect on 27 May. The extension was said to be needed for the Biden administration to craft a stronger policy.

The amended order, amended by EO 14032, shifts the responsibility to create a list of prohibited companies from the Department of Defense to the Treasury Department.

EO 14032 also changes the criteria for entities to capture those that operate in the defence or surveillance technology sectors. The previous order targeted companies owned, controlled or otherwise affiliated with the Chinese military.

The annex to the new EO lists 59 companies the Treasury has identified for their connection to China’s defence and surveillance technology sectors, including Huawei, SMIC, Hikvision, and CNOOC, as well as telecoms operators China Mobile, China Telecom and China Unicom.

US persons are prohibited from investing in these companies through their publicly-traded debt and equity securities, funds that contain the securities in their portfolios, and any related publicly-traded derivatives – effective from 2 August.

However, the order provides a one-year divestment period and clarifies that purchases and sales “made solely to effect the divestment, in whole or in part” of the covered securities are permitted.

Only entities whose names exactly match the names of the entities on the list are subject to the prohibitions.

A set of FAQs also clarify that US persons are not prohibited from providing investment advisory, investment management, or similar services to a non-US person, including a foreign entity or foreign fund, in connection with the non-US person’s purchase or sale of the covered securities.

In addition, US persons employed by non-US entities are not prohibited from being involved in or facilitating purchases or sales related to a covered security on behalf of their non-US employer in the ordinary course of their employment.

This should offer clarity in relation to State Street’s role in managing Hong Kong’s Tracker Fund. The Hong Kong government has reportedly been considering dismissing State Street as the manager of the tracker fund, due to concerns about how the US investment ban would impact investment in Chinese companies that form part of the fund.

The new EO also does not prohibit activities with entities on the list that are unrelated to the covered securities, such as selling and buying goods and services.

“While maintaining the thrust of the Trump-era policy under EO 13959, and expanding it somewhat, the revised EO is clearer and addresses many of the problem areas in the old EO,” says Nick Turner, a sanctions lawyer with Steptoe & Johnson. “With fewer gaps, it also appears to be more enforceable.”

“The new FAQs reflect a fairly sensible interpretation of the EO and also appear to incorporate feedback from industry participants on several important points. Overall, the FAQs appear to reflect where the market was in interpreting and applying the old EO, particularly around involvement of US persons in business of non-US companies.”

“The elimination of ‘close name matches’ is a huge relief.”

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