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  • SEC: Offshore issuers must disclose relationships to China-based operating companies

    Securities

    On July 30, SEC Chair Gary Gensler issued a statement instructing staff to seek certain disclosures from China-based operating companies and offshore issuers associated with such companies before their registration statements can be declared effective. Gensler explained that the Chinese government recently provided “new guidance to and placed restrictions on China-based companies raising capital offshore, including through associated offshore shell companies.” This is relevant to U.S. investors, Gensler stated, because a number of Chinese sectors restrict companies from having foreign ownership and prohibit them from listing on exchanges outside of China.

    In order to bypass these restrictions, many China-based operating companies are structured as Variable Interest Entities (VIEs), where they establish an offshore shell company in another jurisdiction, such as the Cayman Islands, to issue stock to public shareholders, Gensler said. He expressed concerns that the average U.S. investor “may not realize that they hold stock in a shell company rather than a China-based operating company,” where the investors’ “exposure” to the Chinese company is derived only through a series of contracts between the shell and the operating company, with neither the investor nor the shell company holding any equity in the Chinese company itself.

    In light of the overall risks associated with the China-based VIE structure, Gensler asked staff to ensure that offshore issuers associated with China-based operating companies prominently and clearly disclose (i) that investors are buying shares of a shell company issuer; (ii) that “investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements”; and (iii) the financial relationship between the VIE and the issuer. In addition, for all China-based operating companies seeking to register securities with the SEC (either directly or through a shell company), Gensler asked staff to ensure these companies disclose, among other things, whether the company and the issuer received permission from Chinese authorities to be listed on U.S. exchanges, as well as the risk that an approval could be denied or rescinded. Gensler further noted that China-based operating companies may be delisted in the future if the Public Company Accounting Oversight Board is unable to inspect an issuer’s public accounting firm within three years, as required by the Holding Foreign Companies Accountable Act.

    Securities SEC Disclosures China Shell Companies

  • OFAC issues advisory for China and Hong Kong

    Financial Crimes

    On July 16, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), along with the Departments of State, Treasury, Commerce, and Homeland Security, issued an advisory on the risks associated with actions carried out by the Government of the People’s Republic of China and the Government (PRC) of the Hong Kong Special Administrative Region (SAR) that may impact U.S. companies operating in the Hong Kong SAR of the People’s Republic of China. The advisory divides risks into four categories: (i) risks for businesses following the imposition of the NSL; (ii) data privacy risks; (iii) risks regarding transparency and access to critical business information; and (iv) risks for businesses with exposure to sanctioned Hong Kong or PRC entities or individuals. As previously covered by InfoBytes, OFAC issued regulations implementing Executive Order (E.O.) 13936 issued last July. E.O. 13936, among other things, targets and authorizes the imposition of sanctions on persons who materially assist, sponsor, or provide financial, material, or technological support to activities contributing to the undermining of Hong Kong’s democracy and autonomy (covered by InfoBytes here). In addition to the advisory, OFAC added several individuals and entities to its Specially Designated Nationals List.

    Financial Crimes Of Interest to Non-US Persons Anti-Money Laundering China Department of Treasury OFAC Hong Kong Sanctions OFAC Designations

  • OFAC issues advisory for China’s Xinjiang region

    Financial Crimes

    On July 13, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), along with the Departments of State, Commerce, Homeland Security, and Labor, as well as the Office of the U.S. Trade Representative, issued an updated advisory on the risks for businesses with possible exposure in their supply chain to entities involved in human rights abuses in the Xinjiang Region. The recent advisory updates the original version released in July 2020 (covered by InfoBytes here), which was issued after OFAC announced sanctions pursuant to Executive Order 13818 against a Chinese government entity and four current or former government officials for alleged corruption violations of the Global Magnitsky Human Rights Accountability Act. The updated advisory outlines risks to be considered when “assessing business partnerships with, investing in, sourcing from, or providing other support to companies operating in Xinjiang, linked to Xinjiang, or with laborers from Xinjiang.”

    Financial Crimes OFAC Department of Treasury Of Interest to Non-US Persons Department of Homeland Security Department of Labor China OFAC Sanctions

  • President Biden issues executive order prohibiting securities investments in Chinese military companies

    Financial Crimes

    On June 3, President Biden issued Executive Order (E.O.) 14032, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” The E.O. takes additional steps pursuant to the national emergency declared pursuant to E.O. 13959 (covered by Infobytes here), including the threat posed by the military-industrial complex of the People’s Republic of China (PRC) and “its involvement in military, intelligence, and security research and development programs, and weapons and related equipment production under the PRC’s Military-Civil Fusion strategy.” The E.O. generally prohibits U.S. persons from “the purchase or sale of any publicly traded securities, or any securities that are derivative of such securities, or are designed to provide investment exposure to such securities, of” any listed Chinese military company. The E.O. also establishes the deadlines for divestment of investments in companies currently listed as Chinese military companies as well as companies that later may be added to the list of Chinese military.

    Among other things, the prohibitions apply “except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and not withstanding any contract entered into or any license or permit granted before the date of the order.” The E.O. also prohibits any transactions by U.S. persons or within the U.S. that evade or avoid, have the purpose of evading or avoiding, cause a violation of, or attempt to violate the provisions set forth in the order, as well as any conspiracy to violate any of these prohibitions. Additionally, the Treasury Secretary—after consulting with heads of other executive departments as deemed appropriate—is authorized to take actions, including promulgating rules and regulations, to carry out the purposes of the E.O.

    OFAC also published eight new FAQs and seven updated FAQs regarding the new E.O. In addition, several names and entities have been added to OFAC’s Non-SDN Chinese Military-Industrial Complex Companies List.

     

    Financial Crimes OFAC OFAC Designations Sanctions Biden Department of Treasury China Of Interest to Non-US Persons SDN List

  • OFAC amends security investment-related general license

    Financial Crimes

    On May 18, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued General License (GL) 1B, “Authorizing Transactions Involving Securities of Certain Communist Chinese Military Companies.” GL 1B authorizes through June 11 (9:30 a.m. eastern daylight time) certain transactions and activities that involve “publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of an entity whose name closely matches, but does not exactly match, the name of a Communist Chinese military company as defined by section 4(a) of E.O. 13959.” However, GL 1B does not authorize “[a]ny transactions or activities involving publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities of entities identified in the Office of Foreign Assets Control’s Non-SDN Communist Chinese Military Companies List (NS-CCMC List) pursuant to section 4(a)(iii) of E.O. 13959, as amended, as a subsidiary of a person determined to be a Communist Chinese military company, including entities added to the NS-CCMC List on January 8, 2021.” GL 1B immediately replaces and supersedes GL 1A, dated January 26.

    Financial Crimes OFAC Sanctions Of Interest to Non-US Persons Department of Treasury China

  • OFAC says prohibitions no longer apply to previously sanctioned Chinese military company

    Financial Crimes

    On May 6, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published FAQ 893 clarifying that prohibitions under Executive Order (E.O.) 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies,” do not apply to a previously listed company. Specifically, OFAC explained that following a May 5 court order preliminarily enjoining the implementation of E.O. 13959 against the company, the E.O.’s prohibitions will not apply pending further order of the court.

    Financial Crimes Department of Treasury OFAC Of Interest to Non-US Persons Sanctions OFAC Designations China

  • FINRA fines firm for failing to follow its own AML policies

    Financial Crimes

    On April 16, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver, and Consent (AWC), which resulted in a $250,000 fine against a New York-based trading firm for allegedly failing to establish an anti-money laundering (AML) compliance program and a tailored Customer Identification Program (CIP) over a four-year period, which permitted potentially suspicious trading out of accounts based in China and other foreign countries. As a result, the firm allegedly failed to detect red flags concerning potentially suspicious activity and failed to investigate or report the activity in a timely manner. According to FINRA, the firm’s failure to set up a “reasonable” AML program and a tailored CIP between September 2016 and September 2020 resulted in the failure to “detect, investigate, and respond” to red flags in four related accounts, including suspicious activity related to: (i) possible trading of low-priced securities and other activity connected to the foreign accounts; (ii) transactions that lacked business sense or apparent investment strategy; (iii) a customer account that had “unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity”; and (iv) a customer account, which showed an unexplained high level of account activity with very low levels of securities transactions. FINRA stated that although the “firm’s written procedures required the use and review of exception reports to assist with the identification of red flags for suspicious trading and suspicious money movements, they did not identify any exception reports that the firm would use and did not describe how supervisors should use them.” The firm neither admitted nor denied the findings set forth in the AWC letter.

    Financial Crimes FINRA Settlement Anti-Money Laundering Compliance Of Interest to Non-US Persons China

  • OFAC sanctions Chinese government officials for human rights violations

    Financial Crimes

    On March 22, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13818 against two current Chinese government officials for alleged corruption violations of the Global Magnitsky Human Rights Accountability Act. According to OFAC, the sanctioned persons are connected to serious human rights abuse against ethnic minorities, including Uyghurs, in the Xinjiang region. The sanctions follow previous OFAC designations taken against several other Chinese government entities and current or former government officials for similar corruption violations (covered by InfoBytes here and here). As a result of the sanctions, all property and interests in property belonging to the sanctioned persons, and “any entities that are owned, directly or indirectly, 50 percent or more” by them, subject to U.S. jurisdiction are blocked and must be reported to OFAC. OFAC notes that its regulations generally prohibit U.S. persons from participating in transactions with these persons, which includes “the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods or services from any such person.”

    Financial Crimes OFAC OFAC Designations Department of Treasury Sanctions SDN List China Of Interest to Non-US Persons

  • OFAC announces Hong Kong-related designations

    Financial Crimes

    On March 17, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) added several Chinese citizens and Hong Kong nationals to the Specially Designated Nationals List. The individuals were designated under Executive Order (E.O.) 13936, which, among other things, authorizes the imposition of sanctions on persons who are determined to be responsible for or complicit in actions or policies that threaten the peace, security, stability, or autonomy of Hong Kong. Under E.O. 13936, “[a]ll property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, . . .are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in” with any foreign person identified to have engaged in the aforementioned activities.

    Financial Crimes Department of Treasury OFAC Sanctions OFAC Designations China Hong Kong SDN List

  • OFAC issues FAQs on sanctioned Chinese military companies

    Financial Crimes

    On March 14, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published FAQs related to two Chinese military companies sanctioned pursuant to Executive Order (E.O.) 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” FAQ 880 states that, following a court order preliminarily enjoining the implementation of E.O. 13959 against a previously sanctioned company, the prohibitions are no longer applicable pending further order of the court. FAQ 881 clarifies when prohibitions in E.O. 13959 will take effect with respect to a company that was initially erroneously named, then delisted, and then correctly named.

    Financial Crimes Department of Treasury OFAC Sanctions OFAC Designations China

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