Client Alert

Trump Administration Gives Teeth to Pentagon List and Restricts U.S. Investment in Publicly Traded Securities of Chinese Military Companies Operating in the United States

16 Nov 2020

Over the past summer, prompted by a bipartisan Congressional letter identifying a two‑decade‑old statute as an unused tool in confronting China’s strategy of “Military-Civilian Fusion,” the U.S. Department of Defense (“DOD”) developed and published two letters listing names of Chinese military-owned companies operating in the United States. This so-called “Pentagon List” itself was accompanied by no specific prohibitions, although the underlying statute authorized the President to exercise his authority under the International Emergency Economic Powers Act (“IEEPA”) with respect to the identified companies, leading observers to question whether and when the Trump Administration might take action under IEEPA. The Administration ended that uncertainty late last week, putting bite to its bark and restricting future U.S. investment in such companies.

On November 12, 2020, a lame duck President Trump issued an Executive Order (“EO”) that prohibits any transaction by U.S. persons in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of the 31 companies on the Pentagon List as well as any additional companies that may be added in the future. The ban goes into effect on January 11, 2021 – nine days before President-Elect Biden is to be inaugurated – allowing a two-month grace period for such investments. The EO also clarifies that “purchases for value or sales” made within a year of the date of the EO – by November 11, 2021 – are permitted “solely to divest, in whole or in part,” from securities held by U.S. persons as of January 11, 2021.

Key Takeaways

1. The EO prohibits investment by U.S. persons – as of January 11, 2021 – in any publicly traded securities of the 31 named companies and any other entities named by DOD or Treasury in the future as a Chinese military company operating directly or indirectly in the United States. But it gives U.S. persons an entire year to divest themselves of such securities.

2. The investment ban outlined in the EO is a much narrower sanction than the typical type implemented by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). OFAC sanctions generally require U.S. persons to “block” (i.e., freeze) the assets of listed parties and prevent virtually all further transactions with those parties, essentially cutting them off from the U.S. economy. These new sanctions allow U.S. and other persons to deal with entities on the Pentagon List and, for example, engage in ordinary banking activities; the prohibition is only on new investment by U.S. persons in such entities after January 11, 2021, and any continuing investment after November 11, 2021.

3. Typical OFAC sanctions freezing the property of listed parties generally encompass any subsidiaries of which they own 50% or more, but these sanctions do not appear to be as broad, meaning that the investment ban appears only to cover the listed companies and not their subsidiaries. Although Treasury is given the authority to list subsidiaries of these companies, such subsidiaries appear not to be covered until they are publicly listed, meaning that the impact of these sanctions may be relatively limited as of now, since a significant number of the names on the list appear not to be publicly traded.

People’s Republic of China (“PRC”) companies impacted by the EO include dozens of well‑known “ostensibly private and civilian” companies that the EO asserts “directly support the PRC’s military, intelligence, and security apparatuses and aid in their development and modernization.” These companies all previously had been listed by DOD in accordance with Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 as “Communist Chinese Military Companies” for operating directly in the PRC’s Military-Civil fusion development strategy. DOD issued an initial list to Congress in June 2020, which it supplemented in August 2020. As of now, the following companies – several of which are also targeted by U.S. Department of Commerce authorities – are listed and impacted by the new EO:

  • Aero Engine Corporation of China
  • Aviation Industry Corporation of China (AVIC)
  • China Academy of Launch Vehicle Technology (CALT)
  • China Aerospace Science and Industry Corporation (CASIC)
  • China Aerospace Science and Technology Corporation (CASC)
  • China Communications Construction Company (CCCC)
  • China Electronics Corporation (CEC)
  • China Electronics Technology Group Corporation (CETC)
  • China General Nuclear Power Corp.
  • China Mobile Communications Group
  • China National Chemical Corporation (ChemChina)
  • China National Chemical Engineering Group Co., Ltd. (CNCEC)
  • China National Nuclear Corp.
  • China North Industries Group Corporation (Norinco Group)
  • China Nuclear Engineering & Construction Corporation (CNECC)
  • China Railway Construction Corporation (CRCC)
  • China Shipbuilding Industry Corporation (CSIC)
  • China South Industries Group Corporation (CSGC)
  • China Spacesat
  • China State Construction Group Co., Ltd.
  • China State Shipbuilding Corporation (CSSC)
  • China Telecommunications Corp.
  • China Three Gorges Corporation Limited
  • China United Network Communications Group Co Ltd
  • CRRC Corp.
  • Dawning Information Industry Co (Sugon)
  • Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
  • Huawei
  • Inspur Group
  • Panda Electronics Group
  • Sinochem Group Co Ltd

The EO provides that additional names may be added in the future by the Secretary of Defense or of the Treasury upon a determination under Section 1237 that they are Communist Chinese Military Companies operating directly or indirectly in the United States or any of its territories or possessions. The Secretary of the Treasury also may add subsidiaries of any listed companies. 

Interestingly, the EO removes the usual immediate scramble to comply that exists when OFAC adds names to its sanctions lists, because the EO provides that the restrictions will only go into effect 60 days after DOD or Treasury adds names in the future. Similarly, the EO provides the same one-year grace period allowing “purchases for value or sales” made within a year of an entity’s addition to the list, “solely to divest, in whole or in part,” from securities held by U.S. persons as of the date 60 days after the addition of a name to the list. DOD has the authority to remove names it has added to the list, and Treasury has the same authority with respect to names it has added to the list.

The EO grants Treasury, as usual, the authority to issue implementing rules and regulations, including licenses to authorize transactions that otherwise would be prohibited. In an unusual twist, and one destined to slow the pace of any licenses, Treasury is required to first consult with DOD, State, and the Director of National Intelligence before issuing any such licenses.

Certain definitions within the EO contain some usual and unusual features that companies that engage in such securities trading should heed: 

  • “U.S. persons” are defined to include foreign branches, which means that foreign subsidiaries of U.S. parent companies are not bound by the EO;
  • The term “transaction” – a prohibition that OFAC generally would construe broadly – is defined solely as “the purchase for value of any publicly traded security”; and
  • The relevant “security” and “securities” that are encompassed within the EO “include the definition of ‘security’ in section 3(a)(10) of the Securities Exchange Act of 1934, Public Law 73-291, as codified as amended at 15 U.S.C. 78c(a)(10), except that currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding 9 months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited, shall be a security for purposes of” the EO.

Given that the EO is implemented under Treasury’s usual sanctions authority, IEEPA, any violations of these sanctions could be penalized by a fine of up to approximately $300,000, or twice the value of the transaction, whichever is greater, per transaction. Criminal penalties also are available for willful violations. 

Apart from the EO, these companies’ identification as “Communist Chinese Military Companies” intersects other existing U.S. government authorities. Each of these companies would likely be considered a “military end user” under the Commerce Department’s expanded licensing requirements for exports, reexports, and transfers of items intended for military end use or military end users in China, if a company was not already so considered. The Defense Federal Acquisition Supplement has a longstanding prohibition on certain acquisitions from Chinese Communist Military Companies.

In the EO, the President determined that China has been “increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses, which continues to allow the PRC to directly threaten the United States homeland and United States forces overseas . . . .” The President asserted that Chinese military-owned companies “raised capital by selling securities to United States investors that trade on public exchanges both here and abroad, lobbying United States index providers and funds to include these securities in market offerings, and engaging in other acts to ensure access to U.S. capital. In that way, the PRC exploits United States investors to finance the development and modernization of its military.”

The exact scope of the EO prohibitions remain unclear – the text leaves numerous open questions and hypotheticals. The President delegated implementation of the EO to Treasury, and OFAC already has added a new sanctions program, “Chinese Military Companies Sanctions,” to its sanctions page. If OFAC’s novel sectoral sanctions on Russia and Venezuela are any indication, it might take some time for industry to gain clarity on the precise scope of permissible and prohibited transactions, particularly as the issuing Trump Administration departs and the Biden Administration takes office. In the meantime, expect global financial institutions to pump the brakes on many transactions involving securities of the named companies. MoFo’s National Security practice will continue to monitor this situation and keep you apprised of any significant developments or clarity received from OFAC.


Reema Shocair Ali, a National Security Analyst, and Raymond Rif, a Legislative and Policy Specialist, both in the Morrison & Foerster LLP National Security practice, contributed to this alert.

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