The U.S. Treasury Department has issued new guidance regarding the Chinese Military-Industrial Complex (CMIC) sanctions in response to frequently asked questions, just two days before the deadline for U.S. investors to fully divest their holdings of securities of designated Chinese military companies.
The new guidance, published on June 1, states that “U.S. persons are not required to divest their holdings of CMIC securities during the relevant 365-day divestment period and may continue to hold such securities after the divestment period.”
“E.O. 13959, as amended, permits purchases or sales made solely to effect the divestment of CMIC securities, but only during the 365-day divestment period. Accordingly, any such purchase or sale is prohibited after the 365-day divestment period, absent OFAC authorization,” the guidance reads.
This means that the 365-day divestment isn’t mandatory; it’s an authorization to buy or sell covered CMIC securities purely for the purpose of divestment, according to Herbert Smith Freehills LLP.
The London-based law firm said that while the new policy doesn’t impose a divestment obligation, U.S. investors will be prohibited from divesting any CMIC securities holdings that they retained after the divestment period ended.
“As a practical matter, given the lack of certainty over how long the CMIC Sanctions Program or the sanctions against individual CMICs will last, U.S. persons and companies would be well-served to consider divesting by the divestment deadline, since their ability to divest following the deadline will effectively depend upon the Program being suspended (or on the sanctions against individual CMICs being terminated),” the law firm said.
The new policy permits U.S. financial institutions to continue facilitating CMIC securities transactions for and on behalf of non-U.S. clients, although the Office of Foreign Assets Control (OFAC) said that dividend reinvestment would constitute a “purchase” of CMIC securities and is thus prohibited under the order.
President Joe Biden signed an order on June 3, 2021, amending a Trump-era ban on U.S. investment in Chinese firms, designating 59 companies linked to the Chinese defense and surveillance industry.
The order prohibits U.S. investment from supporting the Chinese military-industrial complex; military, intelligence, and security research and development programs; and weapons and related equipment productions.
“In addition, I find that the use of Chinese surveillance technology outside the [People’s Republic of China] and the development or use of Chinese surveillance technology to facilitate repression or serious human rights abuse constitute unusual and extraordinary threats,” Biden said.
Then-President Donald Trump initially issued the executive order (pdf) on Nov. 12, 2020, banning U.S. investments in Chinese companies designated by the Pentagon as having ties to the Chinese military, citing threats to U.S. national security.
The Chinese Communist Party, through its aggressive national strategy, “Military-Civil Fusion,” uses Chinese companies to strengthen the Chinese military, formally known as the People’s Liberation Army, Trump’s executive order states.
The Trump administration extended the investment ban in late December 2020 to apply to any subsidiary of a communist Chinese military company. The Treasury Department said that it planned to publicly list subsidiaries that were “50 percent or more owned” or “determined to be controlled” by Chinese military companies.
Isabel van Brugen contributed to this report.