Several enquiries lately raise the same question: a long-standing foreign counterparty is suddenly placed on a U.S. sanctions list. The goods have shipped, the works are done, but the balance cannot be paid. Sometimes the foreign company itself is sanctioned; sometimes an upstream supplier has been listed and the entire chain has broken. Can the contract still be performed? Can the money still be recovered?
Yes — but you need to understand and use the rules of the sanctions system itself.
In 2024, the Nanjing Maritime Court resolved China’s first case applying the Anti-Foreign Sanctions Law — (2024) Su 72 Min Chu No. 2157. A Chinese offshore-engineering company on the OFAC SDN List recovered, by suit and mediation, more than CNY 86 million in construction balance in 39 days. The Swiss payer made payment, after obtaining an OFAC specific licence, into the court’s account. It violated neither U.S. sanctions law nor the PRC AFSL.
The case proves a point: sanctions are not the end of the transaction. A compliant exit exists. But to navigate it, you have to understand how the architecture operates.
Definitions
OFAC. The Office of Foreign Assets Control, U.S. Department of the Treasury, which administers U.S. economic sanctions.
SDN List. The Specially Designated Nationals and Blocked Persons List. Listing freezes the entity’s U.S.-jurisdiction assets and prohibits all U.S. persons (citizens, lawful permanent residents, entities organised in the U.S., and parties using the U.S. dollar clearing system) from any dealings. The List’s reach is broad because most cross-border trade clears through USD; even non-U.S. transactions that touch USD clearing fall within OFAC’s analytical perimeter.
Extraterritorial / long-arm jurisdiction. Claiming jurisdiction over persons and conduct outside one’s territory. U.S. sanctions law’s extraterritorial reach is wide — covering not only U.S.-resident actors but also USD-denominated cross-border transactions, products using U.S. technology or equipment, and foreign entities with U.S. business links. This is why a sanctioned Chinese enterprise sees counterparties withdraw — they fear secondary sanctions exposure.
Specific licence. OFAC’s mechanism allowing exceptional transactions. General licences apply automatically when published (e.g. for humanitarian goods). Specific licences are case-by-case applications setting out the transaction’s background and fund flow, decided by OFAC in 4–6 months. The system inherently allows for compliant exceptions.
Blocking law. Legislation by which one state counteracts another’s extraterritorial sanctions. China’s Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (2021) and the EU’s Blocking Regulation are examples. The logic: your sanctions law does not reach me, so my citizens and enterprises should not be required to comply with your unilateral measures. Under Chinese law, a foreign enterprise that enforces foreign sanctions within Chinese territory may itself breach Chinese law.
Counter-security. The litigation-preservation concept whereby an arrested party deposits security with the court to release the arrest. In counter-sanctions cases, the key is that the funds flow into the court’s account — not the sanctioned enterprise’s account. Within U.S. sanctions analysis, this may be characterised as a payment within a judicial process, not a commercial payment to a sanctioned party, creating a compliant payment channel.
OFAC Is Not a Solid Wall
Many assume SDN listing means total cessation of dealings. Not so. OFAC operates a full licensing regime. FAQ 808 makes clear: commencing or continuing legal proceedings against a sanctioned party does not require a licence in itself, but executing a settlement or transferring blocked property under judicial enforcement requires a specific licence.
The Swiss company in the Nanjing case relied on exactly this principle. After being sued in Nanjing Maritime Court, it applied for an OFAC specific licence on the basis of cooperation with Chinese judicial process. OFAC granted the licence, and the Swiss company paid approximately USD 14 million in counter-security into the Nanjing Maritime Court’s account. Within the U.S. sanctions analysis, the payee was a Chinese court — not the SDN-listed Chinese enterprise — and the payment characterisation was judicial counter-security, not a commercial payment to a sanctioned party. After mediation, the court disbursed more than CNY 86 million from the counter-security to the Chinese enterprise.
OFAC also operates “wind-down” authorisations — typically 30 to 365 days following a new designation — allowing affected parties to orderly terminate existing dealings. When the Xinjiang Production and Construction Corps was sanctioned in 2020, the initial 60-day window was later extended to 120 days because of Nike, Amazon and other supply-chain implications. If your counterparty has just been sanctioned, the first step is to check whether a corresponding general licence accompanied the designation — the lowest-friction compliance window.
The Court-Account Routing: How Nanjing Worked
The Nanjing route was not accidental. It was an engineered compliance solution.
Step 1. The Chinese enterprise sued in tort, not in contract. The contract specified London arbitration and English law; a contract claim would have lacked Chinese jurisdiction. But Article 12 of the AFSL prohibits any organisation or individual from enforcing or assisting in enforcing foreign discriminatory restrictive measures against Chinese citizens or organisations. The Swiss company’s refusal to pay in compliance with OFAC sanctions constituted an independent tort, with the harm occurring in China. The Nanjing Maritime Court therefore had jurisdiction.
Step 2. “Live arrest” of the FPSO (Floating Production, Storage and Offloading unit — the contractual subject matter): a restriction on transfer and departure, with on-site construction allowed. This preserved the legal effect of arrest while avoiding the daily losses of a traditional immobilising arrest. To release the arrest, the Swiss company had to post counter-security.
Step 3. The court explained the Chinese law consequences to the Swiss party: continuing to enforce U.S. sanctions by refusing payment could attract tort liability under Chinese law, and the new administrative sanctions added in the 2025 Implementing Provisions. With both regimes’ risks now in view, the Swiss company chose a path that satisfied both — applying to OFAC for a specific licence to remit counter-security to the court’s account.
Step 4. After mediation, the court paid the Chinese enterprise from the counter-security; the balance was returned to the Swiss company’s offshore account, with the court providing cross-border payment documentation. Funds flowed entirely through the court’s account; no direct fund flow between the sanctioned enterprise and the payer.
From filing to mediation order: 39 days.
Is This Replicable?
Nanjing is, for now, the only direct precedent, and it resolved through mediation rather than judgment. But international practice supports the “court account as neutral payment channel” approach.
The English Court of Appeal held in 2023 in Mints that a court may lawfully render judgment in favour of a sanctioned party — this is not “providing funds to” the sanctioned party. In 2024, in O v C, the English High Court went further: where U.S. sanctions risk was raised, the court considered the risk “imagined” rather than “real” and permitted disputed sale proceeds to be deposited with the court. The Cologne Higher Regional Court (2024) held that payment of arbitral-award proceeds into a frozen account did not breach financial sanctions because the funds did not flow into accounts the sanctioned party could freely use.
The trend is clear: international courts are converging on the view that sanctions should not block legitimate judicial process. “Court account routing” is becoming a widely accepted compliance channel.
Replicability turns on one variable: OFAC’s continued acceptance of “payment to a court rather than to the sanctioned party” as compliant. Against the backdrop of intensified U.S.–China tensions and elevated OFAC enforcement activity (432 China-related SDN designations under the Biden administration; 216 in Trump’s first term), how long the window remains open warrants close monitoring.
What to Do
If your counterparty has been sanctioned, or you are sanctioned and need to recover receivables, work through the following:
(i) Report to MOFCOM within 30 days. Required by the Blocking Rules; the gateway to all further counter-measures.
(ii) Map the counterparty’s Chinese assets. Vessels, equipment, inventory, receivables, bank deposits — all are potential pre-action preservation targets. Preservation does more than lock execution; it creates the moment when counter-security can flow into a court account.
(iii) Plead in tort to secure jurisdiction. Where the contract names an offshore arbitration seat, do not litigate in contract. Plead AFSL Article 12 in tort, with the harm occurring in China. Chinese courts have jurisdiction, free of the arbitration clause.
(iv) Offer the counterparty an exit plan. Don’t wait. Proactively supply court account details, an OFAC specific-licence roadmap, and a Chinese-law exposure analysis. The goal is to show the counterparty that the OFAC-licence + court-account route is the lowest-cost path.
(v) Build sanctions exit pathways into contracts. For enterprises not yet sanctioned: insert language giving Chinese courts jurisdiction over disputes arising from a party’s enforcement of foreign sanctions; designate a court account or third-party escrow as a fallback payment channel; avoid “compliance with U.S. sanctions” as a termination trigger (which may itself violate AFSL Article 12) — prefer neutral commercial wording such as “material adverse change”.
Sanctioned Does Not Mean Isolated
The deepest harm sanctions cause is often psychological — the sanctioned enterprise convinces itself that “business is over”; counterparties believe the asset has become untouchable. The sanctions architecture is not in fact a sealed wall. OFAC licensing, court-account routing, and the protections offered by China’s counter-sanctions regime combine to produce compliant transactional channels across two — even three — legal systems.
The lesson of the Nanjing case is not confrontation but precision use of the rules of both regimes to find a path acceptable to both. For Chinese enterprises, the case is not an outlier but a replicable methodology — provided you act early and understand the architecture.
Authorities
- Anti-Foreign Sanctions Law of the PRC, Article 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.