On June 1, 2022, the Office of Foreign Assets Control of the US Department of the Treasury (“OFAC”) issued three new FAQs regarding OFAC’s Chinese Military-Industrial Complex Companies (“CMICs”) Sanctions program. The new FAQs were issued to coincide with the deadline by which US persons were authorized to divest from the securities of designated CMIC entities (“CMIC Securities”).
The previous US administration introduced the CMIC Sanctions Program in November 2020 with the issuance of Executive Order (“EO”) 13959 (“Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies”), which was later amended by EO 14032 (“Addressing the Threat From Securities Investments That Finance Certain Companies of the People’s Republic of China”) in June 2021 (collectively, “EO 13959”).
See 31 C.F.R. Part 586.
The new FAQs reinforce two key points regarding the CMIC Sanctions Program:
- First, US financial institutions may continue to facilitate transactions in CMIC Securities for and on behalf of non-US clients.
- Second, the 365-day divestment window is permissive, not mandatory, meaning that US persons may continue to hold CMIC Securities after the relevant divestment deadline, e.g., June 3, 2022 for entities named in the annex to EO 14032. However, although US persons may continue to hold CMIC Securities outside the divestment window, doing so comes with the practical risk that it will not be possible to sell the position going forward, as long as the CMIC Sanctions Program remains in effect.
We summarize the new FAQs below:
- FAQ 1048
FAQ 1048 asks whether, after the end of the relevant 365-day divestment period authorized pursuant to EO 13959, US financial institutions are required to block the attempted purchase or sale of CMIC Securities.
OFAC advises that blocking is not required under EO 13959. On the other hand, transactions that are prohibited by EO 13959 must be rejected and reported to OFAC within 10 business days. OFAC clarifies that attempts to sell CMIC Securities solely for the purpose of divestment, if such attempts occur outside the 365-day window for divestment, must also be rejected.
On the other hand, OFAC notes that US financial institutions “may continue to intermediate purchases or sales by or from non-U.S. persons to or for non-U.S. persons.” See FAQ 863. OFAC’s express acknowledgement that US persons may facilitate the purchase and sale of CMIC Securities by non-US persons remains one of the distinguishing features of the CMIC Sanctions Program.
- FAQ 1047
FAQ 1047 asks whether persons holding CMIC Securities may receive stock splits, cash dividends, or dividend reinvestments related to the CMIC Securities, and whether US financial institutions are allowed to process transactions related to such activity.
OFAC advises that US persons may continue to receive passive benefits from holding CMIC Securities such as cash dividends and stock splits, and that US financial institutions may continue to process such transactions.
However, OFAC warns that dividend reinvestment would constitute a “purchase” of CMIC Securities and is therefore prohibited under EO 13959.
Notwithstanding this restriction, OFAC reiterates that US persons may continue to facilitate the distribution of dividend reinvestments for non-US persons after the relevant divestment period.
- FAQ 1046
FAQ 1046 asks whether US persons are required to divest their holdings of CMIC Securities before the end of the relevant 365-day divestment period pursuant to section 1(c) of EO 13959.
OFAC advises that divestment is not required; the 365-day divestment window is an authorization to purchase or sell covered CMIC Securities solely for the purpose of divestment, but does not impose a divestment obligation. On the other hand, US persons would be prohibited from divesting from any holdings of CMIC Securities that they continued to hold after the end of the divestment period.
As a practical matter, given the lack of certainty over how long the CMIC Sanctions Program or the sanctions against individual CMICs will last, US 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 divestment deadline varies depending upon when an entity was designated as a CMIC. For those entities named in the annex to EO 14032, the deadline to divest was 12:01 am (EST) on June 3, 2022. For entities designated after that date, it is 12:01 am on the date that is 365 days from the date of designation.
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