News & Insights

The US, China, and the Need for Enhanced Sanctions Screening

Navigating the US-China Relationship: How Enhanced Sanctions Screening Benefits International Businesses

Despite all the issues currently dominating global headlines: war, flooding, earthquakes, drought, and wildfires, one topic outside of these remains constantly front and center in the minds of governments, businesses, and regulators worldwide – the growing impasse between the world’s two economic and military superpowers: the USA and the People’s Republic of China.

From growing tensions in the South China Seas, and with new maps showing China’s  asserted territorial rights, to increasing sanctions from both US, European, and Chinese regulators on the movement of goods, technology, and intellectual property, there is an increasing divide that is causing business leaders to rethink their investment strategies and geographic areas of focus. The almost weekly changes in policy mean that business leaders and their compliance professionals must maintain constant vigilance over the ever-changing global sanctions regime. 

The increasingly fraught geopolitical relationship between the US and China has resulted in a sanctions environment that is both dynamic and unpredictable. Actions taken by one government often prompt countermeasures by the other, making it hard for businesses to anticipate future policy shifts. In its latest move against the US, echoing similar US-imposed sanctions against TikTok, China announced plans to ban the use of Apple’s iPhone by Chinese government employees. The action resulted in a 6% drop in Apple stock.

Despite the slowing of the Chinese market and decoupling in some areas, the sheer size of China’s economy and its need for foreign direct investment across all sectors is still a huge draw for foreign investors from across the globe, not just the US and Europe. However, foreign direct investment (FDI) has slowed as companies become more conservative in their investment strategies and wary of being ensnared in the increasingly complex regulatory environment.

A Crisis Unfolding

Since the Trump administration’s Executive Order 13817, where the US sought to strengthen its economy by placing tariffs on goods from China to ensure domestic supply for strategically essential materials, the number of tariffs and sanctions has grown exponentially. Europe has followed suit with both trade blocks declaring Huawei a security risk, thereby impacting its global competitiveness due to its inability to access advanced chipmaking technology, enhanced with the passage of the US CHIPS Act in 2023. 

While Chinese imports of Boeing aircraft, Iowa corn, and other products remain restricted, it is technology that has understandably drawn the lion’s share of attention. In 2022, the Biden administration announced a new export control policy on artificial intelligence (AI) and semiconductor technologies to China.

This new policy, which comes on the heels of the CHIPS Act’s passage, suggests the US  remains focused on retaining control — particularly in the areas of AI, chip designs, electronic design automation software, semiconductor manufacturing equipment, and equipment components — critical areas in which the US is keen to maintain its global dominance. 

Visits to China this summer by senior government officials from numerous Western nations, including the US, Australia, UK, and EU, have done little to thaw relations. Yet, there is a sense among some business leaders that there is an emerging appetite to re-engage in some areas. With new proposals to increase the restrictions on companies’ ability to invest in China, the Executive Order on the new Outbound Investment Program came on the heels of visits by Treasury Secretary Janet Yellen and Commerce Secretary Gina Raimondo. Signals remain mixed, which poses a significant challenge to compliance professionals as they work with their investment teams to navigate these difficult waters.

Gauging the Extent of Sanctions Exposure

Tesla, Apple, and Nike are among the best-known companies doing business in China. Still, thousands of others, including those in the manufacturing and healthcare sectors, also have close ties in the region and will be concerned about their sanctions exposure for current investments and any future investments or M&A activity. Discussions with firms in the US, Europe, and Asia show a strong desire to invest in Chinese entities or gain a market position. However, caution is needed to ensure that firms do not fall foul of the regulatory framework or engage with either sanctioned parties or those with significant reputational risks. 

Therefore, carrying out an accurate, effective sanctions-risk assessment remains critical. Such an assessment requires the following key elements:

  • Stay Informed: Stay up-to-date on international sanctions policies and regulations. Regularly check government websites, subscribe to relevant newsletters, and consult with legal and compliance experts who specialize in sanctions adherence.
  • Know Your Business Partners: Conduct thorough due diligence on potential partners, customers, and suppliers in China. Scrutinize their ownership structures, affiliations, and potential connections to entities or individuals on sanctions lists.
  • Sanctions Screening Tools: Use sanctions screening software and databases to help identify individuals and entities subject to sanctions. Invest in enhanced due diligence and sanctions screening for complex environments like China to uncover connections and risks that database scans alone will miss.
  • Regular Audits and Reviews: Conduct regular audits and reviews of your business operations in China to ensure ongoing compliance with sanctions laws. Periodically reassess your risk exposure as business environments and regulations evolve.
  • Supply Chain Assessment: Assess your supply chain thoroughly to identify potential exposure to sanctioned entities or regions. Evaluate alternative suppliers or partners to mitigate risks.
  • Engage Local Experts: If operating in China, consider engaging local legal and compliance experts who are well-versed in Chinese regulations and can provide insights into local compliance requirements.

The Need for Enhanced China Sanctions Screening

While standard sanctions screening is crucial for any international business transaction, the complexities of doing business in China necessitate a more thorough approach. China’s dynamic regulatory environment, evolving sanctions policies, and close ties between state-owned enterprises and the government make it imperative for companies to conduct enhanced due diligence.

Monitoring potential risks related to export controls, sanctions, and emerging trade restrictions takes human eyes to identify false positives, provide context, and make crucial connections that a basic database scan cannot uncover. Conventional sanctions screening that relies mainly on off-the-shelf tools to gather information from widely available databases misses out on crucial, up-to-the-minute information and historical context. Deep country knowledge, language skills, and human insight and intuition are critical in the sanctions screening process in a dynamic environment.

At IntegrityRisk, we apply longstanding, deep experience in enhanced sanctions screening to support businesses and financial institutions navigating the complexities of international transactions.

  • Our sanctions screening goes beyond cursory database and watchlist checks to provide critical analysis and context;
  • Our enhanced due diligence (EDD) utilizes Chinese language research as part of our open-source research and link analysis; and
  • We can provide support with local source inquiries and investigations to determine the status, connections, and reputation of Chinese-based individuals and corporations.

Reach out today with any questions or to inquire about our enhanced China sanctions screening, EDD, and open-source intelligence-gathering capabilities.