New Executive Order Carries Forward, Expands Chinese Military Company Sanctions

June 08, 2021

The new executive order continues the policy of prohibiting US persons’ transactions in the publicly traded securities of select Chinese companies, but expands the scope to include both Chinese companies that operate or have operated in the defense and related materiel sector and those in the surveillance technology sector of the economy of the People's Republic of China.

On June 3, 2021, President Joseph Biden issued Executive Order 14032 (EO 14032), which amends Executive Order 13959, continuing the prohibition against US person investments in securities of companies identified as having ties to China’s military sector, and adding companies that are determined to be involved with China’s “surveillance technology sector.” The new order, titled “Addressing the Threat from Securities Investments that Finance Certain Companies of the People’s Republic of China,” maintains most of the companies identified under EO 13959, those described as “Communist Chinese Military Companies” (CCMCs), and adds a number of new companies to the prohibition. EO 14032 replaces the bulk of EO 13959, but maintains the prohibitions on “transactions” by “U.S. persons” in “publicly traded securities” of the designated companies.[1]

Key Changes Resulting from New EO[2]

Similar to EO 13959, EO 14032 continues to prohibit, starting 60 days after a company is identified, US persons from purchasing: (a) publicly traded securities, (b) publicly traded securities that are derivative of such securities, or (c) securities that are designed to provide investment exposure to those securities, of the named entity. Unlike EO 13959, however, the new order does not rely directly on a separately generated list to identify those companies. Instead, the prohibited companies are those identified in the annex to the new EO or those that will be designated in future amendments to the annex by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC). Financial instruments covered by the prohibition continue the scope provided in EO 13959, and include, but are not limited to, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds.

The new EO includes an important, human rights-based expansion of the national emergency declared by former-President Donald Trump in EO 13959. While EO 13959 focused the emergency declaration on China’s military-industrial fusion strategy, EO 14032 further designates companies the administration identifies as those involved in the Chinese “surveillance technology sector” (though it does not define what is included in that sector). This broader scope is consistent with the current administration’s early focus on using sanctions in areas outside the foreign policy and defense sectors. Accordingly, EO 14032 seeks to adversely impact companies responsible for the use of Chinese “surveillance technology” outside the PRC or “to facilitate repression or serious human rights abuse[s, which it asserts] constitute unusual and extraordinary threats.” This new EO replaces the former list of CCMCs with a list of 59 Chinese companies that have been identified under the expanded scope. These companies have been designated as “Chinese Military-Industrial Complex Companies” (CMICs). At the same time, EO 14032 revoked all of the definitions in EO 13959, and thereby removed the cross-reference to section 1237 of the 1999 NDAA that had been relied on to challenge prior designations.

The new list includes most entities on the previous list, excludes some formerly listed companies (notably, those that sued protesting their previous inclusion), and adds a number of new Chinese companies. In its announcement accompanying the issuance of EO 14032, OFAC stated that it intends to target both entities involved in China’s civil-military fusion effort, and entities whose operations include or support: (1) surveillance of persons by Chinese technology companies that occurs outside of China; or (2) the development, marketing, sale, or export of Chinese surveillance technology that is, was, or can be used for surveillance of religious or ethnic minorities or to otherwise facilitate repression or serious human rights abuse. The accompanying press releases indicate that this could include companies the United States believes support China’s activities in Hong Kong and in Xianjing.

Likely due to the differences between the former and current lists of entities now subject to these sanctions, the new EO restarts the timeline for implementation of the sanctions. In effect, the prohibitions under EO 13959 have been terminated and replaced by a similar 60-day lead-in period before the CMIC prohibitions become effective. This mirrors the implementation timeline used in EO 13959. Thus, US persons have until August 2, 2021, before the prohibitions against purchasing securities of those entities listed in the Annex to EO 14032 are effective. US persons will have 60 days after the date of any future CMIC designation by OFAC before the prohibition becomes effective with respect to newly added CMIC securities. Additionally, as in EO 13959, there is a 365-day wind down period, starting from the date an entity’s listing is announced, during which US persons may engage in transactions “solely” to divest securities in CMICs. This 2+10 mechanism (the 365-day divestiture period runs concurrently with the 60-day initial grace period) is the same as that employed in EO 13959, and thus should be familiar to investors.

OFAC Guidance

In coordination with the issuance of the new EO, OFAC released a number of Frequently Asked Questions (FAQs) providing guidance about how it will interpret, implement, and enforce the new order. Some of these FAQs are consistent with those promulgated in conjunction with EO 13959, while others provide important new clarifications.

In the FAQs relating to EO 14032, OFAC confirmed that it would continue to apply a number of interpretations it had used under EO 13959, including, for example, that:

  • the amended prohibitions apply to a subsidiary of a CMIC only if such subsidiary itself is publicly listed by OFAC;
  • OFAC’s 50% rule, whereby subsidiaries that are owned 50% or more by a designated entity are also deemed designated, does not apply to subsidiaries of listed CMICs;
  • subsidiaries or affiliated entities will only be subject to the order if they are listed.

In a departure from the implementation of EO 13959, OFAC announced that only entities whose names exactly match the names of the entities on the CMIC List are subject to the prohibitions of the amended EO. This does away with a policy that had caused uncertainty under EO 13959, when OFAC announced that securities of an entity whose name “closely matches, but does not exactly match,” the name of a listed CCMC would also be considered covered by that order.

OFAC also clarified the activities that US persons may undertake under the order when those actions might otherwise constitute prohibited facilitation. Continuing the departure from general OFAC policy announced under EO 13959, OFAC stated that actions by US persons that support or otherwise facilitate transactions in covered securities are permissible if the underlying transaction is not prohibited. Thus, US persons may provide services for transactions in covered CMIC securities, including clearing, execution, settlement, custody, transfer agency, and back-end services, so long as those services do not result in or support a prohibited transaction involving a US person. Additionally, OFAC explained that market intermediaries, including market makers, and other participants, may engage in ancillary or intermediary activities to facilitate divestment from CMICs during the wind-down period or if otherwise not prohibited under EO 14032. Transactions and activities by securities exchanges operated by US persons involving the purchase or sale of CMIC securities from investment funds seeking to divest during the relevant wind-down periods are also authorized. These clarifications carry over the guidance provided for EO 13959, and thereby provide the continued certainty with respect to these transactions. Critically, OFAC did not change its prior, informal guidance to the effect that a pooled investment vehicle may continue to allow new investment by US persons, so long as the fund is “otherwise” in compliance with the EO.

Additional guidance from OFAC clarifies that, when assessing whether a particular purchase or sale is permitted under the amended EO, US persons may rely upon the information available to them in the ordinary course of business (though it does define what constitutes the ordinary course of business). This provides some comfort to investors, funds, and other market participants regarding the diligence standards that OFAC might apply when determining whether the fund is otherwise in compliance. However, it does not authorize activities where a party’s normal diligence is inherently lacking, or would be deemed not to rise to reasonable industry standards.

Providing further important guidance, OFAC’s FAQs declare that US persons employed by non-US companies are not prohibited from being involved in, or otherwise facilitating, purchases or sales related to a CMIC security on behalf of their non-US employer, provided that such activity is in the ordinary course of their employment and the underlying purchase or sale would not otherwise violate EO 14032 (e.g., be for the ultimate benefit of a US person).


Given the important new changes to the prior Chinese sanctions regime, US and non-US investors and managers will want to carefully review the new restrictions to understand how and when they may be impacted.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Kenneth J. Nunnenkamp
Giovanna M. Cinelli
Steven W. Stone
Katelyn M. Hilferty

Philadelphia, PA
Timothy W. Levin

Miami, FL
Ethan W. Johnson
Joy Crutcher Harrison

[1] EO 14032 also revokes EO 13974, which amended EO 13959 to prohibit “possession” by US persons of CCMC securities.

[2] We previously published a description of the sanctions implemented by EO 13959 (Implications of the New Executive Order Prohibiting Transactions in Publicly Traded Securities of Chinese Military Companies, and Update on EO 13959 Prohibiting Transactions in Securities of Chinese Military Companies), and therefore do not restate that discussion.