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OFAC Adds Chinese Entity to SDN List in Connection with Human Rights Abuses

James.Treanor@cwt.com's picture
Commentary by James Treanor

OFAC designated the Xinjiang Production and Construction Corps ("XPCC") and two individuals to the Specially Designated Nationals and Blocked Persons List ("SDN List"). The designations were linked to human rights abuse in the Xinjiang Uyghur Autonomous Region ("XUAR"). In a general license, OFAC authorized certain "wind down and divestment" transactions and activities related to blocked subsidiaries of the XPCC through 12:01 a.m. EDT on September 30, 2020, which otherwise would be prohibited as a result of the sanctions imposed on the XPCC.

OFAC's designation of the XPCC was pursuant to Executive Order 13818, "Blocking the Property of Persons Involved in Serious Human Rights Abuse or Corruption," which implemented the Global Magnitsky Human Rights Accountability Act. As described in the U.S. Treasury Department's press release, the XPCC is a "paramilitary organization in the XUAR that is subordinate to the Chinese Communist Party (CCP)." The entity is also a large business conglomerate, and it is the XPCC's commercial operations that are likely to be most impacted by U.S. sanctions. As a result of OFAC's action, all entities that are owned 50 percent or greater by the XPCC are also automatically "blocked" (the "Blocked XPCC Subsidiaries"), and U.S. persons generally are prohibited from engaging in transactions with them.

OFAC's General License 2 allows for the orderly wind down of business with - and divestment to non-U.S. persons of debt, equity or other holdings in - the Blocked XPCC Subsidiaries. In a related FAQ, OFAC clarified that the general license does not authorize any transactions with XPCC itself, but only transactions with Blocked XPCC Subsidiaries. In addition, OFAC noted that the general license does not allow U.S. persons to purchase or invest in holdings in any Blocked XPCC Subsidiaries, except to the extent such transactions are ordinarily incident and necessary to effectuate authorized divestment transactions (e.g., to facilitate the transfer of Blocked XPCC Subsidiary holdings to a non-U.S. person). OFAC also highlighted that the general license does not authorize any debit to the account of a Blocked XPCC Subsidiary on the books of a U.S. financial institution.

Commentary

The region of Xinjiang, meaning "new frontier" in Chinese, received its name nearly 300 years ago following an extended military campaign during the Qing dynasty's heyday. The region was remote from Beijing, however, and for two centuries the "new frontier" proved a challenge to settle. Enter the XPCC in 1954, created by the central government under Mao Zedong soon after the CCP established control over Xinjiang. According to an official history of the organization released in 2014 to mark its 60th anniversary, the XPCC was entrusted with responsibility to "cultivate and guard the border areas." This work started primarily with agricultural development, but the XPCC has since expanded into food processing, textiles, coal, iron and steel production, machinery and other industries.

Notwithstanding the XPCC's anodyne moniker and its origins in China's Central Asian hinterland, it is a an economic heavyweight. According to official statistics, on the eve of its 60th birthday the XPCC's trade volume surpassed $11 billion, and it produced nearly a quarter of China's cotton output. Over 10% of Xinjiang's population - nearly 3 million people - live and work under the XPCC. By almost any measure, then, the designation of the XPCC represents the most significant application of blocking measures against any Chinese entity in recent decades. Companies and financial institutions will need to work quickly to determine whether they have direct or indirect dealings with the XPCC or any Blocked XPCC Subsidiaries and, if necessary, utilize General License 2 to wind down affected dealings or investments. And it is not just U.S. firms that must concern themselves with XPCC's designation: under Executive Order 13818, non-U.S. businesses, banks and others may themselves be subject to designation by OFAC if they are found to have "provided financial, material or technological support for, or goods or services to" blocked persons like the XPCC.

Notably, the XPCC was not sanctioned based on allegations of its own involvement in human rights abuses in Xinjiang. Instead, it was designated for being controlled by, or having acted on behalf of, Chen Quanguo. In addition to being the First Political Commissar of the XPCC, Chen is also the current Communist Party Secretary of the XUAR - the de facto leader of the region. In that role, he was sanctioned by OFAC in July 2020 for "his connection to serious human rights abuse." Were Chen to relinquish his position at the XPCC and otherwise divorce himself from the entity's affairs, the reason for the XPCC's designation would be removed, and it is possible - though far from certain - that sanctions on the XPCC would be lifted.

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