CMIC Divestment Period Ends – What You Need to Know

Date: 07/01/2022

CMIC Sanctions Foundations

Amid political and trade tensions between the United States and the People’s Republic of China (“China”), President Trump issued Executive Order (“EO”) 13959 on November 12, 2020, to address the national emergency posed by the exploitation of United States capital to resource and enable the development and modernization of China’s military, intelligence, and other security organizations. EO 13959 prohibited any transaction in publicly traded securities, derivatives, and other investment instruments1 of a “Communist Chinese military company,” only permitting divestment sales. EO 13974 of January 13, 2021, expanded EO 13959 to prohibit even the possession of securities of such companies.

On June 3, 2021, President Biden issued EO 14032, which replaced and superseded EOs 13959 and 13974. EO 14032 reverted the ban to only prohibiting the purchase or sale of publicly traded securities, and recategorized the restricted entities from “Communist Chinese military companies” to persons determined by the Secretary of the Treasury (i.e., listed in the Annex to the EO or specifically identified by Treasury at a later date) “to operate or have operated in the defense and related materiel sector or the surveillance technology sector of the economy” of China, or own or control, or be owned or controlled by a person who operates in the defense and related materiel or surveillance technology sectors. 2 In addition, EO 14032 created a period during which persons could purchase or sell CMIC securities for the purpose of divestment, ending June 3, 2022, or 365 days from the date of the addition of a company not initially listed in the Annex to EO 14032.

The Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) maintains the Non-Specially Designated Nationals and Blocked Persons Chinese Military-Industrial Complex List (“NS-CMIC List,” which replaced the Trump-created Non-SDN Communist Chinese Military Companies List), of parties subject to EOs 13959 and 14032. On February 15, 2022, OFAC codified the prohibitions in the CMIC EOs as the Chinese Military-Industrial Complex Sanctions Regulations, located at 31 C.F.R. Part 586. Notably, the announcement of the codification of CMIC sanctions stated that “OFAC intends to supplement these regulations with a more comprehensive set of regulations, which may include additional interpretive guidance and definitions, general licenses, and other regulatory provisions,” and the current prohibitions could change in the future.3

Concurrent with the issuance of EO 14032, the Department of Defense (“DOD”) released a list of “Entities Identified as Chinese Military Companies Operating in the United States.” This list, which has been published and updated since the 1999 National Defense Authorization Act,4 merely identifies such companies, however, and is not identical to the NS-CMIC List. For example, several subsidiaries of Semiconductor Manufacturing International Corporation (“SMIC”),5 China’s largest computer chip company, appear on the DOD list, but are not specifically named on the NS-CMIC List, and thus are not subject to CMIC restrictions.

The CMIC List Today

On June 3, 2022, the one-year divestment period for CMIC company securities came to an end, meaning that after such time, U.S. persons can no longer buy or sell the securities6 of these CMIC companies (but they are permitted to hold such securities). What does this mean for U.S. persons, and what can financial institutions and other at-risk entities and individuals do to protect themselves from risk?

However, some ambiguity remained after EO 14032 as it banned transactions in CMIC company securities but did not proscribe or even address the mere possession of such securities. To clarify the issue, on June 1, 2022, OFAC released three Frequently Asked Questions (“FAQs”) explaining what EO 14032 does and does not require or prohibit. Specifically, FAQ 1046 specified that U.S. persons are not required to divest their holdings of CMIC securities during the divestment period, and may continue to hold such securities, but may not buy or sell such securities after the divestment period without authorization from OFAC. FAQ 1047 stated that U.S. persons can continue to receive cash dividends and stock splits related to covered securities, but may not reinvest dividends in such securities, as that would constitute the purchase of a CMIC security. Lastly, FAQ 1048 provided guidance for U.S. financial institutions, namely, that they are not required to block transactions prohibited under EO 13959 or 14032; rather, they must reject such transactions (including divestment transactions after the divestment period) and report them to OFAC within 10 days.7 Notably, consistent with earlier FAQ 863, U.S. financial institutions may continue to intermediate purchases or sales of CMIC securities by or from non-U.S. persons to or for non-U.S. persons.8

Additional FAQs address uncertainties regarding CMIC companies. For example, FAQ 857 states that OFAC’s 50 Percent Rule9 does not apply to entities on the NS-CMIC List. This means that U.S. persons can transact in the securities of subsidiaries of CMIC companies, as long as those subsidiaries are themselves not named on the NS-CMIC List.

As of the time this writing – after the initial June 3 divestment period has terminated – U.S. persons can no longer transact in the majority of CMIC securities, but they can possess them and receive dividends from them. The NS-CMIC List currently includes 68 entities. Notable entries on the list include telecommunications technology giant Huawei Technologies Co. Ltd. (“Huawei”), China’s big three telecom operators (China Mobile, China Telecom, and China Unicom), Hikvision, the video surveillance company, and SMIC.

OFAC has updated the NS-CMIC List periodically, with the last eight additions to the list coming on December 16, 2021, including AI and facial recognition firm Megvii Technology Ltd. The divestment period for these companies will end on December 16, 2022, 365 days from the date of their addition to the NS-CMIC List. This lull – between the last updates to the list and ending of the initial divestment period set out by EO 14032 – could be for several reasons. For one, the Biden administration may be focused on Russia-related sanctions and, as a result, less severe China-related sanctions have been put on the backburner. Alternatively, the White House could be contemplating other options for penalizing and sanctioning Chinese companies. One such method is adding them to the Department of Commerce Bureau of Industry and Security (“BIS”) Entity List, which restricts U.S. exports to such listed parties. Additionally, BIS could subject CMIC entities to a Foreign-Direct Product (“FDP”) Rule, which restricts the transfer of foreign-made items made using U.S.-origin software or technology. Such is the case with Huawei and several its subsidiaries (one of which is also on the CMIC as well as subject to BIS’s FDP Rule). Lastly, OFAC could add such companies to the SDN List – as is the case of China National Electronic Import-Export Company (“CEIEC”), which OFAC sanctioned in November 2020 for facilitating undemocratic activity in Venezuela.10

Enforcement and Compliance

To date, no enforcement actions have been made public with respect to transacting in the securities of CMIC companies. Now that the initial divestment period has terminated, OFAC may take action against U.S. persons who trade in CMIC securities and investment instruments. A robust sanctions compliance program, particularly involving restricted party screening, is the best way of ensuring adherence to OFAC regulations. U.S. persons generally will need to ensure that the securities in an investment transaction are not related to CMIC entities, so restricted party screening will be critical. As noted above, normal transactions – such as the buying and selling of goods and services – with CMIC companies is generally permitted, barring other restrictions (e.g., the FDP Rule restrictions placed on Huawei).

U.S. financial institutions will need to assess their product offerings and ensure that they do not intermediate the purchase or sale of CMIC securities for any U.S. persons. (As noted above, according to FAQ 863, U.S. financial institutions may provide non-U.S. persons with clearing, execution, settlement, custody, transfer agency, and back-end services.) Additionally, sanctions compliance programs should be regularly reviewed and audited to ensure adherence to the specific requirements and prohibitions of the CMIC Sanctions Regulations as entities are added to or removed from the NS-CMIC List.

Compliance with the CMIC Sanctions Regulations is crucial as penalties for violations can be severe. The maximum criminal penalties include fines up to $250,000 for individuals and up to $500,000 for organizations,11 and civil penalties can reach up to $330,947 for individuals or organizations.12

The complexities of OFAC sanctions lists and BIS export restrictions are a difficult, legally risky, and everchanging maze for financial institutions and companies to navigate. The attorneys at Torres Trade Law can help. If you have any questions about sanctions on China or in general, please do not hesitate to reach out.

1 See OFAC FAQ 860: such other financial instruments include but are not limited to futures, swaps, options, warrants, American depositary receipts, global depositary receipts, exchange-traded funds, index funds, and mutual funds.

2 OFAC FAQ 905 clarifies that the EO does not prohibit other activities with CMIC entities, such as the purchase or sale of goods or services.

3 87 Fed. Register 8735.

4 See Pub. Law 105-261, Sec. 1237(b) (Oct. 17, 1998).

5 Department of Defense, “DOD Releases List of Chinese Military Companies in Accordance With Section 1260H of the National Defense Authorization Act for Fiscal Year 2021” (Jun. 3, 2021) (available at

6 As defined in section 3(a)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(10)).

7 For the distinction between blocking and rejecting, see OFAC FAQs 32 and 36: Blocked funds must be held by the financial institution in an interest-bearing account, whereas rejected funds are not processed and returned to the originator.

8 See OFAC FAQ 863: U.S. persons may provide, to non-U.S. persons, services including clearing, execution, settlement, custody, transfer agency, and back-end services. See also, OFAC FAQ 902, which states that U.S. persons are not prohibited from providing investment advisory, investment management, or similar services to non-U.S. persons in connection with CMIC securities.

9 Under the 50 Percent Rule, persons, including companies and governmental entities, sanctioned under Executive Orders or OFAC regulations are considered to have an interest in all property and interests in property of an entity in which such blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest. Consequently, any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person under OFAC blocking (i.e., SDN) sanctions.

10 See Department of Treasury, “Treasury Sanctions CEIEC for Supporting the Illegitimate Maduro Regime’s Efforts to Undermine Venezuelan Democracy” (Nov. 30, 2020) (available at

11 See 18 U.S.C. § 3571(b)-(c).

12 31 C.F.R. § 586.701; 87 Fed. Register 7369.

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