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NOV 27 2023

Targeting China’s Defense Industries: US House Committee Takes Aim at the Chinese Military Industrial Complex

President Xi’s recent visit to the United States has triggered additional attention on pending legislation that would target with sanctions companies that engage in operations in the defense or surveillance technology sectors of the economy of the People’s Republic of China and prohibit U.S. companies from doing business with the same. This fall the U.S. House of Representatives’ Committee on Financial Services unanimously advanced H.R. 760, titled the Chinese Military and Surveillance Company Sanctions Act of 2023 (CMSC Sanctions Act), which aims to undercut the military industrial complex of the People’s Republic of China by sanctioning entities crucial to its defense and surveillance technology sectors.1 The CMSC Sanctions Act’s author, Congressman Andy Barr (KY-06), said of the Act, “In the face of [China’s] ambitions to reshape the global order, the [CMSC Sanctions Act] stands as a crucial tool to cut off financing to PRC firms threatening U.S. national security.”

The CMSC Sanctions Act, if passed into law, would impose sanctions on any foreign person2, as determined by the Secretary of the Treasury in consultation with the Secretary of State (and possibly the Secretary of Defense), who is determined “to knowingly engage in significant operations in the defense and related material sector or the surveillance technology sector of the economy of the People’s Republic of China.”3

In determining who shall be subject to its prohibitions, the CMSC Sanctions Act requires the Secretary of the Treasury, not less frequently than annually, to evaluate and make a determination with respect to foreign persons listed in Executive Order 140324, titled Addressing the Threat From Securities Investments That Finance Certain Companies of the People’s Republic of China, and to assess whether further sanctions should be imposed.5

In addition, the Secretary of the Treasury, in consultation with the Secretary of State, the Secretary of Commerce, and the Secretary of Defense shall assess whether, under existing authorities, sanctions should be imposed with respect to foreign persons located in the People’s Republic of China listed on the Military End User List (Supplement No. 7 to part 744 of the Export Administration Regulations) and listed by the Department of Commerce on the Denied Persons List or the Entity List (Supplement No. 4 to part 744 of the Export Administration Regulations) as well as foreign persons listed pursuant to section 1260H of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (10 U.S.C. § 113 note).6

In this regard, the Act directs the Secretary of the Treasury to focus particular attention on foreign persons engaged in any of the following sectors7:

  • Artificial intelligence, machine learning, autonomy, and related advances;
  • High-performance computing, semiconductors, and advanced computer hardware and software;
  • Quantum information science and technology;
  • Robotics, automation, and advanced manufacturing;
  • Advanced communications technology and immersive technology;
  • Biotechnology, medical technology, genomics, and synthetic biology;
  • Data storage, data management, and cyber-security, including biometrics; and,
  • Advanced materials science, including composites and 2D materials.

The CMSC Sanctions Act is a bipartisan attempt to build upon two previous Executive Orders: Executive Order 13959, which was issued by President Trump on November 12, 2020, and Executive Order 14032, which was issued by President Biden on June 3, 2021. Both Executive Orders focused on banning public securities investments by U.S. persons in certain Chinese companies, finding that additional steps were necessary to address “the threat posed by the military-industrial complex of the People’s Republic of China (PRC) and its involvement in military, intelligence, and security research and development programs, and weapons and related equipment production under the PRC’s Military-Civil Fusion strategy.”8 

While broad in its application, the Act provides for certain exceptions to its prohibitions, including any activity subject to the reporting requirements of Title V of the National Security Act of 1947, any authorized intelligence or law enforcement activities of the United States, U.S. governmental activities, and some humanitarian purposes.9 

Civil penalties for violations of the Act include a fine not to exceed the greater of $250,000 or an amount twice the value of the transaction that is the basis of the violation.10 For those who willfully violate its provisions, the Act provides criminal penalties, including imprisonment for not more than twenty (20) years and/or a fine of not more than $1 million.11

On Wednesday, September 20, 2023, the Financial Services Committee advanced the proposed legislation, which is now being considered by the Foreign Affairs Committee. A vote by the House has not yet been set. For anyone interested in U.S. trade policy towards China, the CMSC Sanctions Act, although in its early stages of consideration, should be monitored. 

Buchanan has a coordinated team with deep national security experience who are here to assist.

  1. H.R. 760 was introduced in the U.S. House of Representatives in February 2023 and was referred to the Committee on Financial Services and the Committee on Foreign Affairs.  On September 20, 2023, the Committee on Financial Services advanced the original version of the legislation as well as an Amendment in the Nature of a Substitute to H.R. 760 that was offered by Congressman Andy Barr (KY-06).  The discussion of the legislation herein focuses on the provisions of the Amendment in the Nature of a Substitute.
  2. For purposes of the CMSC Sanctions Act, a foreign person means an individual or entity that is not a U.S. person, and a U.S. person is (1) “a United States citizen or alien lawfully admitted for permanent residence to the United States” or (2) “an entity organized under the laws of the United States or of any jurisdiction within the United States, including a foreign branch of such entity,” or (3) “a person in the United States.” H.R. 760 § 2(l)(2)-(3), 118th Cong. (2023) (this draft refers to Section 2, as indicated in the Amendment in the Nature of a Substitute as “Sec. 2. Sanctions with Respect to Communist Chinese Military and Surveillance Companies”).  
  3. H.R. 760 § 2(a), 118th Cong. (2023).  
  4. Exec. Order No. 14032, 86 Fed. Reg. 30,145 (June 3, 2021).  
  5. H.R. 760 § 2(b)(1), 118th Cong. (2023).  
  6. H.R. 760 § 2(c)(1), 118th Cong. (2023).  
  7. H.R. 760 § 2(d)(1)-(8), 118th Cong. (2023).  
  8. Exec. Order No. 14032, 86 Fed. Reg. 30,145 (June 3, 2021).  
  9. H.R. 760 § 2(i)(1)-(3), 118th Cong. (2023).  
  10. See 50 U.S.C. § 1705(b).  
  11. See 50 U.S.C. § 1705(c).
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