On July 22, 2019, Secretary of State Mike Pompeo announced that the U.S. Government would impose sanctions on Chinese state-owned oil trading company Zhuhai Zhenrong Company Limited and its chief executive Youmin Li for knowingly purchasing or acquiring oil from Iran. Zhuhai Zhenrong was previously sanctioned in 2012 due to alleged dealings with Iran, but those sanctions were far less extensive, and were removed in 2016 pursuant to the Iran nuclear deal. This action announced by Secretary Pompeo involves the addition of these parties to the Specially Designated Nationals (“SDN”) list, as a result of which any transactions or dealings involving U.S. persons with these parties or their “interests in property” are prohibited, and U.S. persons are required to freeze any such property pursuant to specific rules promulgated by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). In addition, Youmin Li is subject to a U.S. visa ban.

According to the Department of State, these sanctions resulted from Zhuhai Zhenrong’s purchase or acquisition of crude oil from Iran after the expiration of China’s Significant Reduction Exception (“SRE”), which we have previously discussed and which allowed China to continue buying oil from Iran until May 2, 2019 without the risk of sanctions for companies and financial institutions involved in that trade. These sanctions were imposed under Executive Order (“EO”) 13846. Section 3(a)(ii) of EO 13846 authorizes the imposition of different types of sanctions, ranging from less severe measures to the most severe measure of designation on the SDN list, for persons determined to have, “on or after November 5, 2018, knowingly engaged in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran.” Section 3 also authorizes sanctions on a person determined to be a “successor entity to,” or, if there is some knowledge or participation in the relevant activity, a person that “owns or controls” or “is owned or controlled by or under common ownership or control with,” a person designated under Section 3 of EO 13846.

These are the first sanctions imposed on a Chinese entity for engaging in oil trade with Iran since the May 2 expiration of the SRE waivers for China and certain other countries. But this is not the first U.S. Government action putting pressure on Chinese entities engaged in alleged sanctionable activity in Iran. For example, OFAC just last week sanctioned several Chinese companies, among others, for helping Iran procure metals and other materials for its nuclear program.

The move to sanction a state-owned Chinese company sends a message to other companies and financial institutions worldwide that may still be engaged in sanctionable dealings with Iran, and is likely to raise tensions as the U.S. and China continue their trade negotiations. Last month, the U.S. State Department’s Special Representative for Iran, Brian Hook, signaled the Trump Administration’s particular focus on China, stating that the Administration “will sanction any imports of Iranian crude oil,” and warning that it would take a look at reports of Iranian crude oil going to China specifically. Secretary Pompeo stated, during a speech in Florida announcing this move, “We’ve said that we will sanction any sanctionable behavior, and we mean it.”

It is possible that Zhuhai Zhenrong was selected as a sanctions target due to a perception that sanctions on this particular entity may not have as severe consequences as sanctions on other major Chinese companies involved in the oil trade may have, in light of reports that Zhuhai Zhenrong is largely disconnected from the Chinese financial system. If this was meant primarily as a “shot across the bow” for any companies and financial institutions still engaged in oil trade with Iran, it should get the global industry’s attention.