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When a Chinese enterprise is placed on a foreign sanctions list, counterparties increasingly invoke “compliance” to freeze payments, suspend supply, or refuse performance. Many enterprises assume the situation is hopeless. In fact, since the Anti-Foreign Sanctions Law (AFSL) took effect in 2021, and following the 2025 Implementing Provisions, China has built up an operable legal architecture for counter-sanctions response.

In 2024 a Chinese offshore-engineering company on the U.S. OFAC SDN List used this framework to recover more than CNY 86 million in unpaid construction balances within 39 days — case (2024) Su 72 Min Chu No. 2157, expressly mentioned in the Supreme People’s Court’s 2025 Work Report and the first judicial application of Article 12 of the AFSL nationally. Building on this case, we outline six legal weapons available to sanctioned Chinese enterprises.

I. Tort Action: Bypassing Arbitration Clauses and Suing in China

Article 12 of the AFSL provides:

No organisation or individual shall enforce or assist in enforcing discriminatory restrictive measures adopted by a foreign State against PRC citizens or organisations. Where an organisation or individual breaches the preceding paragraph and harms the lawful rights of PRC citizens or organisations, the affected party may bring an action in a people’s court seeking cessation of the infringement and compensation.

The practical significance is that Article 12 grants the sanctioned enterprise a statutory right of action independent of the underlying contract. Many cross-border contracts specify London arbitration or English law. Where the counterparty cites sanctions to refuse payment, contract-based recourse forces the Chinese party offshore — expensive, slow, and unlikely to find a foreign tribunal willing to apply Chinese counter-sanctions law.

Article 12 opens a different route: the counterparty’s act of enforcing a foreign sanction by refusing payment constitutes a tort. The harm occurs in China; Chinese courts have jurisdiction. The tort and the contract claim are independent legal relationships; the contract’s arbitration clause does not bind the tort claim.

In the Nanjing case, although the original contract designated London arbitration and English law, the Chinese party pleaded in tort, and the Nanjing Maritime Court accepted jurisdiction and ultimately facilitated settlement.

A further legal effect is often overlooked: a foreign unilateral sanction (i.e. one not imposed by the UN Security Council) is generally not recognised under Chinese law as a lawful excuse for non-performance. The counterparty’s defence that it must “comply with U.S. sanctions” is not, in Chinese eyes, force majeure, nor a valid exemption — U.S. sanctions are not “unforeseeable” since the risk was apparent at contract signing. Chinese courts are inclined to characterise refusal as a tort, not a justified defence.

This is, for now, the only direct judicial application of Article 12, and it concluded by settlement. The contours of “discriminatory restrictive measures”, the methodology of damages, and the scope of compensation await further case law. But the route is open, and Article 20 of the 2025 Implementing Provisions (State Council Order No. 803) expressly encourages law firms to provide legal services for such actions — a clear policy signal.

II. Pre-Action Asset Preservation and the Court Account as Payment Channel

Winning a judgment is meaningless if collection fails. In counter-sanctions cases, pre-action preservation may matter more than the action itself — it both creates negotiating leverage and addresses the hardest practical question: how to route payment in a sanctions environment.

A Chinese enterprise may apply pre-action for the seizure, attachment or freezing of the counterparty’s assets in China. For vessels, the maritime courts offer “live arrest” under Article 27 of the Special Maritime Procedure Law: transfer and mortgage of the vessel are restricted, but on-site construction or operations may continue. The FPSO vessel in the Nanjing case was placed under “live arrest”, preserving the legal effect of arrest while avoiding the tens of thousands of dollars per day in lost time inherent in traditional immobilising arrest.

Pre-action preservation also produces a strategic by-product, often more valuable than the preservation itself: to release the arrest, the counterparty must usually post counter-security with the court. Once paid into the court’s account, that fund constitutes a compliant, neutral pool of capital.

In the Nanjing case, the Swiss company applied for, and obtained, an OFAC specific licence; it then paid approximately USD 14 million in counter-security into the Nanjing Maritime Court’s account. The payee was the Chinese court — not the SDN-listed Chinese enterprise. Within U.S. sanctions analysis, the payment was characterised as judicial counter-security, not as a commercial payment to a sanctioned party. After settlement, the court disbursed more than CNY 86 million to the Chinese enterprise from the counter-security; the balance was transferred back offshore with court-provided documentation. The sanctions-induced payment barrier was lawfully circumvented.

Replicability turns on several conditions: the respondent has Chinese-domiciled assets (vessels, equipment, inventory, receivables); the underlying transaction has a lawful commercial basis; and OFAC continues to accept the compliance logic of payment to a court rather than to a sanctioned party. Comparable practice has emerged in other jurisdictions: the English Court of Appeal in the 2023 Mints case confirmed that courts may lawfully render judgments favourable to sanctioned parties; the Cologne Higher Regional Court in 2024 held that payment into a frozen account did not breach sanctions.

Practical points: pre-action preservation has a 30-day statutory window within which substantive proceedings must be commenced; “live arrest” applies generally only to Chinese-flag or China-registered vessels; the applicant must usually post security.

III. Leveraging the Counterparty’s “Dual Compliance Bind”

This weapon is not in any statute, but may be the most effective negotiating tool a sanctioned Chinese enterprise has.

The “dual compliance bind” describes the position of a foreign counterparty (such as the Swiss company in the Nanjing case) caught between two legal regimes: U.S. sanctions law requires it to cease all dealings with the sanctioned party; AFSL Article 12 prohibits it from enforcing the foreign discriminatory measure. Complying with one breaches the other. Operations in the EU add a third layer through the EU’s Blocking Regulation. Academic commentary has called this an “irreconcilable compliance bind”.

For the Chinese enterprise, the bind creates negotiating space. Once jurisdiction is established through a tort action and assets are locked through pre-action preservation, the counterparty must confront a reality: continuing to refuse payment exposes it to tort liability in China, and now also to the administrative sanctions added in the 2025 Implementing Provisions — meetings, fines, exclusion from government procurement, import/export restrictions, and possible inclusion on the Unreliable Entity List. For a multinational with sustained Chinese operations, these consequences far outweigh a single sanctions-compliance review.

OFAC itself is not monolithic. It administers a licensing regime — general licences applying automatically when published, and specific licences case by case. OFAC FAQ 808 makes clear that initiating or continuing legal proceedings against a sanctioned party does not itself require a licence, but signing a settlement, or judicial enforcement that causes the transfer of blocked property, requires a specific licence. In other words, the architecture leaves a door open: where the transaction’s purpose is cooperation with a foreign judicial process, and the payee is the court rather than the SDN entity, OFAC has authority to license.

The Chinese enterprise can communicate that route to the counterparty: there is a lawful exit — apply to OFAC for a specific licence, pay into the Chinese court’s account. The counterparty thereby satisfies both regimes. The Swiss company in the Nanjing case took precisely this path — and resolved the matter in 39 days.

OFAC specific licences typically take 4–6 months; complex transactions may take longer. The Chinese enterprise can speed this up by proactively providing the court’s account details, an OFAC licence-application roadmap, and a Chinese-law analysis of the counterparty’s exposure.

IV. MOFCOM Reporting and the Blocking Procedure

Administrative responses are equally important and serve as the procedural foundation for judicial action.

Reporting. Under the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (MOFCOM Order [2021] No. 1), a Chinese subject affected by improper extra-territorial application of foreign law must report to MOFCOM within 30 days. This is not optional. Following the report, MOFCOM may evaluate whether to issue a blocking order (requiring Chinese subjects not to recognise, enforce or comply with the foreign measure), and the affected party may sue third parties whose compliance with the foreign measure has caused harm.

As of end-2025, MOFCOM had not issued a blocking order; the framework operated primarily as a deterrent. But timely reporting is the entry point to all further counter-measures.

Unreliable Entity List. Where a counterparty’s enforcement of foreign sanctions has harmed Chinese interests, the enterprise can petition MOFCOM to add the counterparty to the Unreliable Entity List. Designated entities face import/export restrictions, investment restrictions, personnel-entry restrictions and fines.

Use of this tool has accelerated. The 2020 framework saw essentially no activity until February 2023; usage rose sharply in 2025, with 72 entities listed (all U.S.) by October — close to monthly additions. The shift from latent to routine use has imposed real compliance pressure on foreign counterparties.

V. Counter-Sanctions Jurisdiction Pre-Empted in Contract Drafting

This weapon must be prepared before sanctions hit.

A neglected detail of the Nanjing settlement was an agreement to submit future disputes to the Nanjing Maritime Court under Chinese law. This effectively extended AFSL protection to the entire ongoing relationship.

For not-yet-sanctioned enterprises the logic is the same. Insert a clause along the lines of: “Disputes arising from a party’s enforcement of foreign government sanctions shall be subject to the jurisdiction of the Chinese courts, governed by Chinese law.” If sanctions later strike and the counterparty breaches, Article 12 can be invoked in tort without a jurisdictional fight.

Other clauses to consider: avoid making “compliance with U.S. sanctions” a termination trigger (which may itself violate Article 12); use neutral commercial language such as “material adverse change”; provide multi-currency and alternative-banking payment options; build in court-account or third-party-escrow channels as fallback payment mechanisms.

VI. Court Disclosure as Pressure: Winning Without a Judgment

This weapon is not in the statute but in the procedure.

After accepting an anti-sanctions case, the court can, within the answering period, explain to the foreign party the position under Chinese law: assisting in enforcing foreign unilateral sanctions may attract civil liability and the new administrative penalties under the 2025 Implementing Provisions — interview summons, rectification orders, fines, exclusion from government procurement, import/export and exit restrictions. This is not a judgment, but its deterrent effect is often outsized — the foreign party must re-evaluate the cost of continued non-payment under Chinese jurisdiction.

In the Nanjing case, court disclosure prompted the parties to apply jointly for mediation. The Swiss company, having understood the Chinese law risks, voluntarily waived its arbitration clause, accepted court jurisdiction, and applied for an OFAC specific licence. From filing to mediation order: 39 days — far quicker than the years typical of international arbitration.

This weapon’s effectiveness depends on the others: without pre-action preservation locking assets, and without tort jurisdiction established, the explanation lacks teeth. The six weapons must operate together to form a coherent counter-sanctions litigation strategy.

The six weapons are not isolated. They sit on top of a coherent system:

  • Anti-Foreign Sanctions Law (2021) — offensive instrument, supplying both private rights of action and administrative counter-measures.
  • Blocking Rules (2021) — defensive instrument, blocking extraterritorial application of foreign law.
  • Unreliable Entity List Provisions (2020) — precision-strike instrument, targeting specific foreign entities.

In addition, Article 48 of the Export Control Law contains a reciprocity provision; Article 36 of the Data Security Law blocks foreign data demands in sanctions enforcement; Article 33 of the Foreign Relations Law furnishes superordinate authority.

The Nanjing case is significant not only because it confirms that Article 12 can be applied directly as a cause of action, but because it demonstrates a workable “dual compliance” route — OFAC specific licence plus court-account routing — that allows the foreign party to comply with U.S. law while performing its obligations to the Chinese party.

For Chinese enterprises four steps are immediate: (i) report to MOFCOM within 30 days of being sanctioned; (ii) map the counterparty’s Chinese-domiciled assets eligible for preservation; (iii) prepare a tort claim in parallel; (iv) proactively present the counterparty with an OFAC-licence-plus-court-account roadmap. Acting only after the counterparty has moved its funds or the vessel has sailed renders the best tools useless.

Authorities

  • Anti-Foreign Sanctions Law of the PRC, Articles 3 and 12.
  • Provisions Implementing the Anti-Foreign Sanctions Law (State Council Order No. 803), Article 20.
  • Special Maritime Procedure Law of the PRC, Article 27.
  • Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (MOFCOM Order [2021] No. 1), Article 5.
  • Foreign Relations Law of the PRC, Article 33.