By James Min II[1]
What do the December 1, 2018, arrest of Ms. Meng Wanzhou in Canada on behalf of the United States, the U.S. Presidential Executive Order (E.O.) 13943 of August 6, 2020, banning WeChat, E.O. 13942 of August 6, 2020, banning Tiktok, and most recently E.O. 13971 of January 5, 2020, banning Alipay, QQ Wallet among others, all have in common? Aside from the geopolitical friction or economic rivalry between China and the United States in recent years, the fact is that they all raise complex legal issues. Moreover, they highlight the importance of Chinese multinational companies’ need to engage in global business in even a more sophisticated manner when it comes to the conflict of laws and the extraterritoriality of U.S. export control and sanctions laws, while at the same time, on the U.S. side, it also calls for the need for the U.S. Government to address its concerns with Chinese technological rivalry in a more sophisticated and nuanced manner rather than addressing it with blunt instruments. As Chinese companies conduct business around the world and become even more technologically advanced, the trend appears to be that they will continue to be targets of many national policies. Thus, it will be even more important that in-house compliance and legal professionals at Chinese companies or those advising such companies help infuse best practices in not only compliance but in business strategies. Given the size and reach of the U.S. economy, technologies, and its legal system, it will be difficult for Chinese multinational companies to simply ignore or avoid the United States entirely in the near term.
A. Background
During the turbulent times around the world in the 1970s, the U.S. Congress enacted a law – the International Economic Emergency Powers Act (IEEPA) – in 1977 to delegate U.S. Congress’ constitutional authority to regulate trade to the U.S. President in cases of emergencies and to clarify and restrict presidential power during times of declared national emergencies which had previously been utilized under the Trading with the Enemy Act of 1917 (TWEA). Under TWEA, presidents had the power to declare emergencies and to impose restrictive economic measures. In 1976, the U.S. Congress terminated the emergencies declared under the TWEA and replaced them with the National Emergencies Act. It then passed the IEEPA to restore the emergency power in a limited form.
Unlike TWEA, IEEPA was drafted to permit presidential emergency declarations only in response to threats originating outside the United States. IEEPA authorizes the U.S. President to declare the existence of an “unusual and extraordinary threat… to the national security, foreign policy, or economy of the United States” that originates “in whole or substantial part outside the United States.” It further authorizes the president, after such a declaration, to block transactions and freeze assets to deal with the threat. However, in drafting the IEEPA law, the U.S. Congress excepted certain authority that the President can exercise in such emergencies including the authority to restrict personal communication, informational material, and certain humanitarian activities.
The various economic sanctions that the U.S. Government has imposed against, for example, North Korea, Iran, Crimea, etc. were implemented through Executive Orders issued under IEEPA. Similarly, the U.S. Government oversight over foreign investment through the Committee on Foreign Investment in the United States (CFIUS) was also authorized under IEEPA.
For some, many of these national security related economic restrictions may be seen as trade protectionism under the guise of national security. If that is the case, then shouldn’t WTO rules apply? When the GATT, the predecessor to the WTO was originally written, it contained an exception for national security concerns which the WTO adopted. GATT Article XXI provides a carve out for actions which a WTO member considers necessary for the protection of its essential security interests “taken in time of war or other emergency in international relations.” This self-declaratory carve out from WTO disciplines, while respecting the sovereignty of WTO member states, does leave a large subjective hole in the applicability of the multilateral trade legal regime that was intended to harmonize trade rules among nations after World War II.
B. Legal Issues with the Executive Orders and the Arrest of Ms. Meng
On August 6, 2020, President Trump’s E.O. 13942 issued under IEEPA prohibited any transactions by persons subject to U.S. jurisdiction with ByteDance Ltd., the parent company of TikTok. The E.O. justified its action by referencing TikTok’s alleged threats to U.S. national security through data collection, content censorship, and misinformation campaigns. The same day, E.O. 13943 also banned WeChat. On January 5, 2021, President Trump citing IEEPA issued E.O. 13971 which prohibits transactions with certain Chinese apps including Alipay, WeChat Pay, QQ Wallet, etc. within 45 days.
While the recent E.O. pertains to fintech apps, the earlier E.O.’s prohibiting WeChat and Tiktok are problematic in that IEEPA excepts the Presidential authority to restrict personal communication or informational material. While E.O.’s reference that it is in accordance with applicable statutes, it was unclear as how the ban would practically not apply to personal communication or informational material aspects of WeChat and Tiktok. This exact legal issue is mired in litigation at the moment at the U.S. Court of Appeals for the Ninth Circuit brought on by the U.S. WeChat Users Alliance and at the U.S. Court of Appeals for the District of Columbia by Tiktok.
Turning back to the Huawei case, the 2018 arrest of Madam Meng in Canada was based on the U.S. arrest warrant for the indictment against her for allegedly violating the U.S. economic sanctions on Iran issued under IEEPA. Ms. Meng’s case is instructive for Chinese multinational companies in many respects. Part of the U.S. case against Ms. Meng has been reported as being based on information obtained and turned over by Huawei’s bank – HSBC, its external monitor imposed by the U.S. Government for the bank’s settlement on its own alleged sanctions violations, and the 2014 electronic search of Ms. Meng’s devices at the airport upon arriving in the United States. Even though she had visited several countries that had extradition treaties with the United States before the arrest, it was her trip through Canada in late 2018 where the U.S. Government requested Canadian authorities to act. While her extradition case is currently pending in Canadian courts whose outcome is still undetermined, the case is an important reminder for multinational companies and its executives as described below.
C. Best Practices
- Integration of Trade Compliance In The Corporate Center.
The recent enforcement cases related to sanctions and export controls as well as the CFIUS orders highlight the need for corporations to better integrate and align its trade compliance resources and expertise. Traditionally, trade compliance often was a discreet function compartmentalized in logistics or supply chain divisions of companies. However, because of its impact on corporations, multinational companies should view trade compliance as a corporate headquarters function that interfaces with multifunctional areas including corporate security, tax and finance, mergers and acquisitions, human resources, operations, marketing, and corporate communications. It is imperative that trade compliance personnel have visibility into and touch points with these multifunctional areas as well as direct lines into senior leadership of the company. This is because as in Madam Meng’s case, even a PowerPoint presentation given externally to the company’s service provider can be used later as evidence against the company.
Furthermore, companies need to invest in internal trade compliance resources and personnel as well as retain qualified external advisors not only when responding to crises, but as an integral part of the overall business strategy, planning and leadership. Even when looking at business expansion, CFIUS and other national security reviews of foreign direct investments which are more pervasive necessitates that corporate decisions must incorporate technical experts in export controls and regulatory requirements in the mergers and acquisitions planning. Without these measures, global companies are leaving a large area of legal and financial exposure to chance and without such compliance capacity in the corporate center, those risks which may be apparent to experts may not be escalated to the proper senior leadership of the company.
- Executive Security
As seen in many cases beyond sanctions and export controls and beyond just Chinese executives, many foreign executives have been arrested by U.S. authorities based on sealed indictments which is a tool used in the U.S. enforcement process that keeps the subject of an enforcement action in the dark until it is unsealed, for example, for the issuance of an arrest warrant. Companies should also incorporate legal and trade compliance risks in its internal security procedures and policies for its executives and personnel when traveling internationally, again necessitating cross functional coordination at the corporate center to safeguard personnel and corporate information.
- Management of Vendors and Third Parties
As seen in Madam Meng’s case and in many other trade enforcement cases against foreign companies, U.S. authorities do not rely only on their own intelligence gathering capabilities, but they also obtain information from a company’s third party service providers including banks, logistics companies, and IT service providers. This can be achieved through administrative subpoena, National Security Letters, FISA orders, and other surreptitious means to gather information not from the target of the investigation but from third parties who would have relevant information about the target. Even when the service providers are not US headquartered; U.S. authorities can obtain vast information through those multinational companies’ U.S. subsidiaries. In this regard, it is important that companies vet their service providers, know what their service providers’ policies are on sharing information with U.S. government agencies and that contracts with service providers have robust requirements to safeguard customer information or to notify the customer when they are requested to disclose information to non-judicial authorities.
D. Future Prognosis
- Biden Administration
Some may believe that much of the recent aggressive posture of the U.S. Government towards China was due to specific individuals in U.S. political leadership who left on January 20, 2021. However, it is unlikely that the fundamental strategic rivalry or tension between China and the U.S. will substantially change. This is because export controls, sanctions, foreign direct investment reviews are all tools of foreign policy. As China’s technological and economic prowess only continues to strengthen, the underlying geopolitical and geostrategic rivalry and tension between the U.S. and China will not likely dissipate. Some advisors in the new U.S. administration have already said that they expect that the Biden administration will take a stronger position on China than has been the case in the past with Democratic Party administrations. Assuming that the Biden administration will bring more experienced bureaucrats and apparatchiks than his predecessor, the hope is that measures taken on sanctions, export controls, or foreign investment reviews will be more nuanced and better tailored, for example, than in the case of Executive Orders issued to ban WeChat or Tiktok.
The recent trends with CFIUS in the U.S. and the development of similar national security based foreign investment review mechanisms in the EU, UK, China, Japan, Australia and elsewhere show that the GATT Article XXI carve out for national security interests will be utilized more even if it has trade protectionist tones. U.S. economic sanctions and export control are increasingly viewed by many nations as an important tool for the U.S. Government to achieve its trade policy objectives as well. There has been a trend of increasing controlled items and expanding the scope of sanctions in recent years. However, at present, many non-US companies, including Chinese enterprises, often are still unable to fully identify and effectively navigate amidst the risks of U.S. sanctions. Until the U.S. Congress further refines the authorities it delegated to the President under IEEPA or the WTO can further clarify and objectively refine the scope of the GATT Article XXI carve out, Chinese and other multinational companies who must operate their business in the global reality and not in aspirational ideals should adopt appropriate compliance postures and invest in compliance resources to navigate the global trade landscape that is increasingly fettered with national security based obstacles outside the purview of multilateral trade regimes. They also need to closely monitor government regulations and policies, as well as retain the services of qualified professionals.
Author
James Min II | LimNexus LLP
James Min is a Partner with the U.S. law firm of LimNexus LLP in their Washington DC office. Mr. Min’s practice focuses on all critical aspects of international trade law including customs, export controls, economic sanctions, CFIUS, free trade agreements, WTO, anti-bribery, internal corporate compliance, trade related defense, international investigations and other international business matters. Mr. Min has particular expertise and experience with U.S. secondary sanctions and extraterritoriality of U.S. trade laws. Mr. Min was formerly the Vice President and Global Head of International Trade Law for a global German company that operates in over 220 countries and territories including Cuba, Iran, Syria, North Korea, Russia, China, etc. Mr. Min began his legal career in the U.S. Government as a trade lawyer at the U.S. Department of Commerce, U.S. Treasury Department, and the U.S. Department of Homeland Security in Washington, DC. He is licensed to practice law in the District of Columbia, the U.S. Court of International Trade, and the U.S. Supreme Court.
[1] The views expressed in this article are entirely that of the author and do not necessarily reflect the views of LimNexus LLP, or any other organization.
The opinions expressed in this article are those of the authors and do not reflect the opinions of InHouse Community Ltd, or it’s employees.