On January 27, 2021, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury issued General License 1A (GL 1A) in connection with Executive Order (EO) 13959 (“Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies”), dated November 12, 2020. OFAC also issued additional guidance in the form of FAQs 878 and 879. EO 13959 prohibits US persons from engaging in any transaction in the publicly traded securities of a “Communist Chinese military company” (CCMC), or any securities that are derivative of, or are designed to provide investment exposure to such securities (collectively, CCMC securities). We have previously discussed developments related to EO 13959 on November 13, 2020, December 29, 2020, January 7, 2021, and January 15, 2021. The original General License 1 (GL 1), issued on January 8, 2021, was due to expire at 9:30am EST on January 28, 2021. GL 1A has the effect of extending the license through 9:30am EST on May 27, 2021. FAQs 878 and 879 clarify the scope of GL 1A, as described below.
As a practical matter, the primary significance of GL 1A is that subsidiaries of CCMCs will not be subject to EO 13959 through May 27, 2021 unless (i) the name of the subsidiary “exactly” matches the name of a designated CCMC; or (ii) the US Secretary of the Treasury designates the subsidiary by name on the Non-SDN Communist Chinese Military Companies List (NS-CCMC List) pursuant to Section 4(a)(iii) of EO 13959 (or the entity is otherwise designated on the NS-CCMC List).
General License 1A
GL 1A replaces and extends the validity of GL 1. GL 1 authorized all transactions or activities involving CCMC securities of entities “whose name closely matches the name” of a designated CCMC through January 28, 2021 (emphasis added). GL 1 appears to have been issued to address the uncertainty surrounding the procedures that would be used to determine whether a name “closely matches” the name of a CCMC. The uncertainty arose following the issuance of guidance by OFAC in two FAQs in December 2020 and January 2021, respectively.
OFAC issued FAQ 858 on December 28, 2020. FAQ 858 stated that the prohibitions in EO 13959 apply to entities “with a name that exactly or closely matches the name of an entity identified” in the annex to EO 13959 or subsequently identified pursuant to EO 13959. Similarly, on January 8, 2021, OFAC stated in FAQ 864 that “[t]ransactions in the securities of any [CCMC] subsidiary (whether expressly listed or not) are prohibited if the subsidiary’s name exactly or closely matches the name” of a designated CCMC.
These FAQs suggested that entities not formally designated on the NS-CCMC List could nevertheless be subject to the prohibitions of EO 13959. However, to date, OFAC has not issued guidance on what legal standard would be applied to concepts of a “close”or “exact” match with the name of an existing CCMC. As a practical matter, GL 1A effectively postpones the need to assess whether subsidiaries of designated CCMCs have names that “closely match” the name of the designated CCMC parent entity through the end of the license period on May 27, 2021. Names that represent an “exact” match are not covered by GL 1A.
Finally, GL 1A clarifies that subsidiaries that have been formally designated by OFAC, including the entities designated on January 8, 2021, fall outside the scope of the license.
New Guidance from OFAC
In addition, OFAC has issued the following two FAQs:
- FAQ 878
FAQ 878 responds to the following question: “What does General License 1A (GL 1A) authorize?”
OFAC answers that GL 1A authorizes US persons to engage in transactions otherwise prohibited by EO 13959, involving the securities of entities whose names “closely match, but do not exactly match,” the name of a designated CCMC during the period that GL 1A is in effect. Moreover, OFAC clarifies that GL 1A does not authorize transactions in the covered securities of entities formally designated in OFAC’s NS-CCMC List or otherwise designated by the US Department of Defense as a CCMC.
- FAQ 879
FAQ 879 responds to the following question: “Does GL 1A authorize transactions with entities identified as subsidiaries of a Communist Chinese military company (CCMC)?”
OFAC answers that GL 1A does not authorize such transactions. Thus, once an entity (subsidiary or otherwise) is designated on OFAC’s NS-CCMC List pursuant to Section 4(a)(iii) as a subsidiary of a CCMC, that entity is subject to the restrictions of EO 13959. In addition, OFAC notes that the prohibitions of EO 13959 apply to newly designated CCMCs (and designated subsidiaries of CCMCs) 60 days from the date on which the entity is designated.
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We will continue to monitor developments. Please reach out to your usual HSF contacts with any questions.