On 28 December 2020, the Office of Foreign Assets Control (OFAC) at the United States Department of the Treasury published a series of Frequently Asked Questions (FAQs)1 clarifying a number of significant uncertainties related to the 12 November 2020 Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies (the Investment EO, or the EO).2 OFAC also published an updated list of Communist Chinese Military Companies subject to these prohibitions, including their official names, akas, and equity tickers. OFAC issued three additional sets of FAQs, one on 4 January and two on 6 January 2021.3

As discussed in our recent policy alert,4 the Investment EO is part of a broader U.S.-led pushback on China’s efforts to use its private companies to augment its military capabilities, a Chinese strategy referred to as Military-Civil Fusion. Following the announcement of the EO, which prohibits transactions in publicly traded securities of identified Communist Chinese Military Companies, the scope of these prohibitions, including whether they applied to subsidiaries of these companies, was reportedly a topic of significant debate within the U.S. government.5

  • OFAC will use a variant of its 50 percent rule for the purposes of the Investment EO. Like other sanctions programs, the EO prohibitions will apply to any entity owned 50 percent or more by an identified Communist Chinese Military Company, but in a distinction from the 50 percent rule, only after OFAC publicly lists such subsidiaries, unless a subsidiary has an exact or “closely matching” name, in which case the prohibitions would apply regardless of their listing by OFAC. OFAC indicated that it will also consider listing entities it identifies as being controlled (though not owned 50 percent or more) by an identified Communist Chinese Military Company.
  • The Investment EO prohibitions apply not only to entities with a name that exactly matches the name of an entity identified under the EO, but also to entities “with a name that . . . closely matches” such a name. Determining what constitutes a close match may add confusion and create risk, as OFAC does not provide additional information as to what it believes constitute a close match. On January 6, OFAC reconfirmed that an entity, including a subsidiary, with a closely matching name is subject to the EO prohibitions, regardless of whether it is listed by OFAC or not. While OFAC included equity tickers for all 35 companies currently on the list, investors should be mindful that similarly named companies may also be covered but not named.
  • The EO’s prohibitions apply to a broad set of financial products, including investment funds. The EO prohibits transactions in publicly traded securities of listed entities, to include derivatives of these securities as well as securities designed to provide investment exposure to these entities. In the new FAQs, OFAC makes clear that this includes a broad range of financial products. Further, for investment funds, no de minimis exception exists for the percentage of prohibited securities or their derivatives within a given fund and all transactions in such funds with even a single share of a prohibited security are prohibited. 
  • OFAC did not clarify all areas of uncertainty. For example, OFAC did not provide guidance on an unusually broad definition of “security” in the EO or why the EO defines “transaction” narrowly to include only “purchases for value,” and whether the EO thus does not apply to any activity that is not a purchase.6

Understanding the Guidance

The OFAC FAQs (FAQs 857-865) aim to clarify a number of uncertainties surrounding the issuance of the November 12 Executive Order.

  • OFAC clarified that it will apply a variant of the so-called “50 percent rule” to entities owned or controlled by identified Communist Chinese Military Companies. As a general rule, entities owned 50% or more by Specially Designated Nationals (SDNs) or persons listed on the Sectoral Sanctions Identifications (SSI) List are subject to the same prohibitions as their parent entities, regardless of whether they are specifically listed or identified by the Treasury Department. When the EO was issued, it was unclear whether the 50 percent rule would likewise apply to these new prohibitions. OFAC has now clarified its position, noting that it will consider owned or controlled entities to be subject to the same restrictions as parent entities but that the EO prohibitions on investment in such entities will apply only after OFAC publicly identifies them unless such an entity has an exact or a “closely matching” name.
  • OFAC provided additional guidance on the entities subject to the EO prohibitions, which now includes companies with “closely matching” names to listed entities. When the administration published the EO in November 2020, many industry participants noted that the list of Communist Chinese Military Companies included shorthand English names for certain companies instead of their official names (e.g., Hikvision and Huawei). Together with the new guidance, OFAC has published the list of entities falling under the EO prohibitions, which is now called the Non-SDN Communist Chinese Military Companies List (NS-CCMC List). The NS-CCMC List, now comprised of 35 companies, includes not only official names of the companies, but also their equity tickers (on Chinese, and in some instances, Hong Kong, exchanges), AKAs, and the corresponding equity issuer’s name. OFAC did not include official company names in Mandarin. 

    However, OFAC stated in FAQs 858 and 864 that the prohibitions in the EO apply with respect to securities and their derivatives of companies not only with a name that exactly matches the name of a company on OFAC’s NS-CCMC List, but also companies with “closely matching” names, without, however, clarifying criteria that could help determine a close match. In FAQ 864 OFAC cited the following examples of “closely matching” names: 

    Among other names, OFAC’s current list includes (1) China Telecommunications Corp. / China Telecommunications; (2) China Mobile Communications Group / China Mobile Communications / China Mobile Communications Group Co Ltd; and (3) China United Network Communications Group Co Ltd / China United Network Communications Ltd. These names closely match the names of China Telecom Corporation Limited (NYSE: CHA), China Mobile Limited (NYSE: CHL), and China Unicom (Hong Kong) Limited (NYSE: CHU).

    It will thus be up to the industry to conduct due diligence on any companies with closely matching names. Considering a general lack of publicly available information about corporate structures of Chinese companies, as well as the use of common words within corporate names, identifying companies that fall within the EO prohibitions may prove difficult and result in overenforcement. 

    OFAC also noted that it included additional identifying information on the NS-CCMC List “where possible,” suggesting that the list of issuers or equity tickers may be incomplete. In any case, OFAC did not identify each and every prohibited security or its derivative that could be traded on an exchange in any jurisdiction. 
  • OFAC’s broad definitions of many terms within the EO confirmed that the EO will have significant implications for the investment industry. The guidance is clear that the EO prohibitions apply 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. For transactions in ETFs, index, and mutual funds, OFAC will not apply any de minimis exception, meaning that even if a prohibited security or its derivative constitutes a negligible share of the underlying fund, transactions in such funds by or involving a U.S. person are prohibited. This creates a substantial compliance burden on U.S. persons to ensure that no securities or derivatives they may be transacting in contain any share of prohibited securities. OFAC also noted that prohibitions are not limited to securities or their derivatives traded on any particular exchanges. Instead, “publicly traded securities” mean securities denominated in any currency that trade on any securities exchange or even over the counter, in any jurisdiction.
  • OFAC clarified that the EO does not prohibit certain transactions necessary to effect divestiture during the wind-down periods.  One key question that arose following the announcement of the EO was whether market intermediaries, including U.S. persons, could purchase the restricted securities after the prohibitions came into effect as part of a transaction or series of transactions meant to facilitate the divestiture of these securities within the relevant wind-down period. In FAQ 865, OFAC made clear that such intermediaries may engage in “ancillary or intermediary activities” necessary to effect divestiture during the wind-down periods. This likely covers the purchase of such securities if part of a transaction or series or transactions is designed to ultimately effect divestiture. 
  • OFAC has clarified certain terminology within the EO, but a number of uncertainties remain. The EO imposes prohibitions on any “transactions” in publicly traded securities of, securities that are derivative of, or securities designed to provide investment exposure to an identified Communist Chinese Military Company. The term “transaction” is defined as a “purchase for value.” Thus, it remains unclear whether a U.S. person investor or a U.S.-based fund may continue to passively hold a security of an identified company or even sell such security after the end of the wind-down period (i.e., 11 November 2021 for the companies identified in the EO, or 365 days after a subsequent identification of a company as prohibited either by DoD or OFAC). In FAQ 862, published on 4 January 2021, OFAC stated only that U.S. persons do not have to divest of restricted securities or their derivatives by 11 January 2021, but did not address whether passive holdings or divestment are permissible after the wind down period. In FAQ 863, OFAC also stated that “support services” such as clearing, execution, settlement, custody, transfer agency, and back-end services by or involving a U.S. person are permissible, to the extent they are not provided to U.S. persons in connection with prohibited transactions. 

    The EO also contains an unusually broad definition of “security” to include “currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding 9 months.” Thus, it remains uncertain whether the EO prohibits transactions in certain banking products, such as, for example, bills of lading, though it is not clear if these are generally “purchased” or “publicly traded.”

Implications for the Private Sector

Following OFAC’s guidance it is clear that the Investment EO will present challenges for investors, investment advisers, and fund managers that are active in both domestic and international securities markets.

  • The EO imposes a significant burden on market participants to evaluate their holdings to determine exposure not only to listed companies, but also to companies that may have similar names, for which the guidance appears to suggest they should conduct in-depth due diligence.
  • Because there is no de minimis exception for transactions in funds that may include a prohibited security or its derivative among its underlying investments and there is no jurisdictional limit on the exchanges where prohibited securities or funds may be traded, U.S. persons must conduct sufficient due diligence to ensure they do not have exposure. While the EO provided for a 365-day wind-down period to allow U.S. persons to divest of prohibited securities and their derivatives, beginning on 11 January 2021, any involvement of a U.S. person in a purchase of a prohibited security or its derivative will be in violation of the Investment EO.
  • Investors, investment advisers, and fund managers should closely monitor changes to the list of entities identified as Communist Chinese Military Companies. The Department of Defense and the Treasury Department share the authority to identify and list any new Communist Chinese Military Companies pursuant to Section 1237 of the National Defense Authorization Act for the Fiscal Year 1999. Companies operating in the investment industry, therefore, must monitor both OFAC and DoD announcements for additions to the list, as per Section 4 of the EO, the EO prohibitions will apply automatically to such companies after 60 days since their inclusion, regardless of whether OFAC simultaneously adjusts its NS-CCMC List. We expect additional companies or their subsidiaries to be identified in the coming weeks.


1 https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20201228. 
2 “Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies” (November 12, 2020), available at https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-securities-investments-finance-communist-chinese-military-companies/
3 https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20210104_44, https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20210106, and https://home.treasury.gov/policy-issues/financial-sanctions/faqs/865.
4 K2 Integrity Policy Alert, “United States Prohibits Investment in Chinese Companies with Military Ties” (Nov. 19, 2020), available at https://www.k2integrity.com/en/knowledge/policy-alerts/united-states-prohibits-investment-in-chinese-companies-with-military-ties.
5 https://www.reuters.com/article/uk-usa-china-investment/draft-guidance-on-china-investment-ban-spurs-tensions-in-trump-administration-sources-idUKKBN28R3ER
6 Typically, Executive Orders impose blocking prohibitions and define prohibited activities as “making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any [sanctioned] person” or receipt of the same from such a sanctioned person, prohibiting virtually all activities with blocked persons absent an OFAC authorization. Various OFAC regulations, while referring to “transactions,” do not define the term, but instead describe exactly the types of transactions that are prohibited or permissible (e.g., see 31 CFR 560.407 “Transactions related to Iranian-origin goods.”) In contrast, the Investment EO prohibits “transactions” in securities of identified Communist Chinese Military Companies, defining the term “transaction” only as “purchase for value,” arguably suggesting that other types of activities are permissible.