The latest data released by the Ministry of Commerce of China on foreign investment in China[1][2]shows that despite the constantly changing international economic environment, foreign investment in China continues to grow, and this growth trend is expected to persist.

In light of our research and the recent projects we have handled over the past three years, we would like to remind both Chinese and foreign enterprises that, in addition to conducting routine due diligence on transaction counterparties and target companies, trade compliance legal risks—particularly hidden risks related to US export controls and economic sanctions—should be a top priority in due diligence efforts. These risks are insidious, characterized by extended investigation and prosecution timelines, coupled with severe legal liabilities. Identifying and addressing these issues are sometimes made even more challenging by the fact that M&A lawyers may not always have experience in this domain. Therefore, it is essential to pay special attention to trade compliance risks, regardless of the form of investment.

I.Past Cases: Penalties for Violations of US Export Control or Economic Sanctions Laws in Corporate M&A

1、Successor Liability: Sigma-Aldrich’s USD 1.76 Million Settlement with BIS (Bureau of Industry and Security of the US Department of Commerce) for Violations of US Export Control Laws

In April 1997, three entities of Sigma-Aldrich (formerly the world’s largest chemical reagent producer and now a brand under the pharmaceutical and chemical giant Merck Group) acquired specific assets and partnership interests of Research Biochemicals Limited Partnership (RBLP).

BIS determined that RBLP had been exporting controlled biological toxins without the required licenses since 1995, prior to its acquisition by Sigma-Aldrich. Moreover, these violations continued for more than a year after the acquisition. This indicated that Sigma-Aldrich failed to uncover RBLP’s prior export violations during pre-acquisition due diligence and did not rectify these violations post-acquisition. As a result, BIS held Sigma-Aldrich accountable, not only as the successor to the pre-acquisition violations, but also as the perpetrator of post-acquisition violations. Sigma-Aldrich ultimately agreed to settle the case by paying USD 1.76 million.[3]

This case set a precedent for BIS to pursue successor liability. Under certain conditions, acquiring companies may be held responsible for the pre-acquisition violations of their target entities.

2、Post-Acquisition Penalty: US company Stanley Black & Decker’s USD 1.8 Million Settlement with OFAC (Office of Foreign Assets Control of the US Department of the Treasury) for Violations of US Sanctions Laws by its Chinese Subsidiary

In May 2013, Stanley Black & Decker acquired a 60% stake in Jiangsu Guoqiang and established a joint venture with the latter. Although Stanley Black & Decker provided compliance training to Jiangsu Guoqiang’s employees, it failed to implement procedural monitoring or audit Jiangsu Guoqiang’s operations, which would have ensured cessation of sales to Iran post-acquisition.

From 2013 to 2014, it was discovered that Jiangsu Guoqiang had directly or indirectly exported 23 shipments of goods worth over USD 3.2 million to Iran, violating US sanctions prohibiting transactions involving US persons (which included Jiangsu Guoqiang, as a foreign subsidiary of a US company) with Iran. The statutory civil penalty for such violations could reach over USD 6.9 million. Ultimately, Stanley Black & Decker voluntarily disclosed the violations to OFAC and cooperated with the investigation. The company reached a settlement and agreed to pay over USD 1.8 million.[4]

These two cases demonstrate that acquiring companies may face severe legal liabilities, including substantial fines, if they fail to conduct thorough trade compliance due diligence before the acquisition, or fail to discover issues of the acquired companies, or fail to implement proper compliance measures post-acquisition.

II.Recent Cases: Notable Trade Compliance Due Diligence Mandates We Have Handled in Corporate M&A

1、Trade Compliance Considerations in Corporate Acquisitions

We assisted a well-known German manufacturing enterprise in assessing trade compliance risks for its proposed acquisition of a Chinese company. Through due diligence, we discovered that the target company might have been engaging in transactions with entities in US-sanctioned countries via a Hong Kong shell company over the past few years. These transactions violated US sanctions laws, exposing the target company to risks such as significant fines and inclusion on sanctions or control lists.

Based on the successor liability principle, if the German enterprise meets the criteria for substantial succession in this acquisition deal, it could assume full legal liability for the target company’s prior violations. We recommended mitigation measures to the German enterprise, including additional requirements for the target company and buyback clauses in the acquisition agreement (specific details are confidential). After a comprehensive and cautious evaluation, the German enterprise ultimately decided to abandon the acquisition.

This case underscores the potential risks inherent in transactions involving sanctioned entities, which are often obscured, especially considering how those transactions tend to be carried out through intermediary companies. Without rigorous due diligence, identifying the ultimate users and destinations of the target companies’ goods or services could be extremely difficult.

2、Trade Compliance Considerations in Investor Acquisitions

We supported an investor from a renowned US-based fund in assessing trade compliance risks for the proposed acquisition of a subsidiary of a globally recognized telecommunications company. Our due diligence revealed that while the parent of the target company had a relatively robust compliance program for US export controls and sanctions, the target company lacked a full understanding of, and therefore failed to comply with, those regulations—a common issue in corporate execution. Following a thorough risk evaluation, the investor prudently chose not to proceed with the acquisition.

3、Trade Compliance Considerations in Joint Ventures

While assisting the China-based joint venture of a renowned German automobile manufacturer in improving its trade compliance management system, we observed a gap in the client’s understanding of the applicability of US export control and sanctions laws to a Chinese entity owned by a European parent company. The client struggled to comprehend the extraterritorial (“long-arm”) jurisdiction of US export control and sanctions laws. Consequently, there were no procedural controls in place to address its dealing of items subject to US export controls.

During the on-site review, we also noted instances of collaboration with US-controlled entities for testing purposes. Although it was not immediately clear whether these activities constituted violations, such instances warranted significant attention from the parent company. Miscommunications and gaps in compliance awareness among joint venture management could cause the parent company to receive inaccurate and incomplete reports, which prevents it from promptly discerning and addressing incompliances.

III.Conclusion

In recent years, we have conducted trade compliance due diligence and risk assessments in support of a great number of projects involving investment, merger, equity transfer, and ownership sale. These efforts have not only been crucial for foreign investment projects in China but have also gained increasing importance for Chinese enterprises pursuing overseas expansion. Identifying risks during pre-investment assessments does not necessarily preclude transactions. Instead, effective risk controls or mitigation measures tailored to the specific circumstances can help maximize the achievement of commercial objectives.

[注] 

[1] China Foreign Investment Statistical Bulletin (2024): https://wzs.mofcom.gov.cn/cms_files/filemanager/195082220/attach/20249/1534906939894198bbb5b6b86a752466.pdf?fileName=%E4%B8%AD%E5%9B%BD%E5%A4%96%E8%B5%84%E7%BB%9F%E8%AE%A1%E5%85%AC%E6%8A%A52024.pdf

[2] Foreign investment data in China from January to August 2024: https://www.gov.cn/lianbo/bumen/202409/content_6974975.htm

[3] Handbook of Export Controls & Economic Sanctions, edited by Kay C. Georgi and Paul M. Lalonde

[4]https://ofac.treasury.gov/media/9321/download?inline