Caught Between OFAC and Beijing: The Practical Implications of China’s Blocking Framework
Introduction
Part 1 of this series – A Compliance Practitioner’s Guide – The Legal Architecture – set out the legal architecture underpinning China’s blocking regime — the triggers that prompted Beijing to legislate, the two regulatory bodies responsible for the framework, and the four instruments enacted between September 2020 and June 2021. This second part examines what that framework means in practice.
For four years following the Blocking Rules’ enactment in January 2021, the compliance conflict they created remained largely theoretical. Beijing had built the legal architecture. It had not yet used it. That changed on 2 May 2026, when MOFCOM issued its first formal Prohibition Order — blocking OFAC designations of five Chinese petrochemical companies and placing international banks, insurers, traders, and their counterparties in an immediate and irresolvable conflict of law. The dilemma this series has been building to is no longer a stress test. It is live.
The First Prohibition Order — A Live Case Study
Since March 2025, OFAC designated five Chinese independent ‘teapot’ refineries for their alleged involvement in importing and refining Iranian crude oil. On 24 April 2026, OFAC designated Hengli Petrochemical (Dalian) — China’s second-largest independent refinery and a major buyer of Iranian crude — marking a significant escalation given its size and importance in the market. At the same time, OFAC issued a limited General Licence authorising a wind-down period for certain Hengli-related transactions until 24 May 2026, subject to strict conditions including that any payments to Hengli be made into a blocked, interest-bearing account in the US.
On 2 May 2026, MOFCOM issued a prohibition order under the Blocking Rules, stating that the US sanctions measures against Hengli Petrochemical (Dalian) and four other Chinese companies — including their inclusion on the SDN List, asset freezes, and transaction prohibitions — shall not be recognised, enforced, or observed. This is the first time China has used the Blocking Rules since they were introduced five years earlier.
The consequences for counterparties were immediate. International banks, insurers, traders, shipping and logistics providers caught between these two regimes on the one hand needed to comply with US sanctions to avoid penalties, while on the other hand, Chinese law restricted them from following those same sanctions. Simultaneously, the US hardened its position: US Secretary of State Marco Rubio confirmed at a press conference that any entity complying with the Blocking Order — foreign financial institutions expressly included — would face secondary sanctions exposure and potential loss of access to the US financial system.
In a single week, what had been a compliance architecture built for deterrence became a live enforcement conflict. The dilemma practitioners had been stress-testing in policy papers and internal risk assessments was no longer hypothetical.
The Structure of the Conflict
The Hengli case illustrates a conflict that is structural, not situational. It arises from the fundamental design of both regimes — and it applies to a far broader range of entities and transactions than the energy sector alone. The conflict has three distinct dimensions.
Primary exposure — Chinese-incorporated entities. Any entity incorporated under Chinese law — including Chinese subsidiaries of foreign multinationals — is directly subject to both regimes. Under OFAC’s framework, a US-owned Chinese subsidiary is a US person for sanctions purposes and must comply with OFAC restrictions. Under the Blocking Rules, that same entity, as a Chinese legal person, is required to report the extraterritorial measure to MOFCOM within 30 days and is thereafter bound by any resulting Prohibition Order. There is no structural resolution at the subsidiary level. The parent company must choose which regime to prioritise, accept the consequences of non-compliance with the other, or seek exemptions from both regulators — a process with no guaranteed timeline or outcome.
Secondary exposure — third-country financial institutions. The reach of the framework extends well beyond entities with direct Chinese incorporation. Financial institutions blocking transactions between China and third countries in compliance with US sanctions may face the risk of litigation in China and impairment of their assets and reputation there. Under Article 9 of the Blocking Rules and Article 12 of the Anti-Foreign Sanctions Law (AFSL), a non-Chinese bank that terminates a correspondent relationship or rejects a payment instruction in order to comply with OFAC obligations — entirely standard sanctions compliance practice — creates potential civil liability exposure in Chinese courts if that action harms a Chinese party covered by a Prohibition Order.
In 2024, a Chinese company brought proceedings in a Chinese court against a European counterparty that had suspended payment following a US sanctions designation. The case progressed and was ultimately resolved only after the European company obtained a licence from OFAC and proceeded with payment. This is not a theoretical risk. It is a documented enforcement pattern.
Contractual exposure — sanctions clause adequacy. Traditional sanctions clauses requiring compliance with ‘all applicable sanctions laws’ may no longer be adequate in contracts involving Chinese counterparties, since compliance with one set of applicable sanctions laws may constitute a breach of another applicable legal regime within the same jurisdiction. Standard boilerplate is now a source of legal risk rather than a safe harbour.
The Banking and Financial Services Angle
The conflict lands particularly hard on international banks, for reasons that go to the core of how financial institutions manage sanctions risk.
Banks operating in correspondent networks depend on the ability to reject or block transactions involving OFAC-designated parties without legal liability in other jurisdictions. The Blocking Rules and AFSL undermine this assumption directly. A bank with a Chinese subsidiary or significant Chinese counterparty exposure cannot simply apply a global SDN blocking policy and consider the matter closed. That policy, applied to a Chinese entity covered by a MOFCOM Prohibition Order, now carries litigation risk in China under Article 9 of the Blocking Rules and Article 12 of the AFSL.
For trade finance specifically — an area of significant China exposure for international banks — the risks are acute. Letters of credit, guarantees, and payment obligations governed by contracts with Chinese counterparties may be directly affected by Prohibition Orders that prohibit the suspending or blocking of transactions that OFAC simultaneously requires to be suspended or blocked. Banks must now consider both regimes at the point of transaction execution, not merely at onboarding.
Where a company is genuinely placed in a dilemma — where compliance with the Blocking Order would violate OFAC sanctions, or vice versa — the company may consider applying for an exemption from MOFCOM under Article 8 of the Blocking Rules or applying to OFAC for a specific licence. In practice, this dual-track exemption process is untested at scale, with no established timeline, no guaranteed outcome, and significant operational uncertainty for transactions requiring prompt execution.
It is also worth noting the currency dimension. Some market participants are exploring whether transactions can be structured to avoid US dollar settlement — thereby removing the US jurisdictional nexus that triggers primary OFAC application. China’s Cross-Border Interbank Payment System (CIPS) has emerged as an increasingly utilised alternative infrastructure for this purpose. However, USD dominance in trade finance and commodity markets makes this a complex and partial solution at best, and one that introduces its own set of regulatory and counterparty considerations.
Navigating the Conflict — What Firms Are Doing
There is no single solution to a structural conflict of this nature. What practitioner guidance and emerging market practice suggest is a range of risk management approaches rather than a clean compliance path.
Legal entity architecture. Multinationals are reviewing whether their Chinese subsidiary structures can be ring-fenced from parent-level sanctions compliance obligations — segregating the Chinese legal person from group-wide OFAC exposure. This approach has limits: US persons within a Chinese subsidiary remain subject to OFAC obligations regardless of the entity’s incorporation, and the approach does not address the reporting obligation triggered under Article 5 of the Blocking Rules.
Contractual redesign. Contracts involving Chinese counterparties should make clear that no party is compelled to act in breach of applicable laws in any relevant jurisdiction, including anti-sanctions or blocking rules, and should include practical mechanisms to deal with conflict of laws situations — including requirements to consult in good faith, explore alternative arrangements, or seek relevant licences or exemptions from OFAC or MOFCOM. Dispute resolution clauses and indemnity provisions should also be reviewed in light of the competing litigation risks each regime creates.
Dual-track regulatory engagement. Where a Prohibition Order is issued or anticipated, firms should consider simultaneously seeking an OFAC specific licence and a MOFCOM exemption under Article 8 of the Blocking Rules. Neither process is fast, and neither guarantees relief — but dual engagement demonstrates compliance intent to both regulators and creates the clearest available record if the matter is subsequently scrutinised.
What remains true in all scenarios is the core compliance reality: there is no universally safe harbour. A compliance officer managing China exposure cannot fully satisfy both OFAC and MOFCOM simultaneously in a conflict scenario. The task is to understand the exposure clearly, document the decision-making process rigorously, and escalate to senior management and legal counsel before positions are taken — not after.
Practitioner Takeaways
The China blocking framework is no longer a future risk to be monitored. The issuance of MOFCOM’s first Prohibition Order in May 2026 confirms that the instruments are operational and that Beijing is willing to use them. The following considerations are relevant to any compliance practitioner with exposure to China-connected transactions, counterparties, or entities.
Understanding the jurisdictional footprint before a conflict arises. Firms should map which entities in their group are incorporated under Chinese law. Chinese subsidiaries of foreign multinationals are subject to the Blocking Rules’ reporting obligation and any resulting Prohibition Orders as a matter of Chinese law — regardless of what the parent company’s OFAC compliance programme requires. This is not a gap that can be closed by policy alone; it requires legal structure decisions made at the governance level.
The 30-day reporting clock is real and starts immediately. Under Article 5 of the Blocking Rules, Chinese parties are required to report to MOFCOM within 30 days of becoming subject to an extraterritorial measure that restricts their normal economic activities. This obligation exists regardless of whether a Prohibition Order is subsequently issued. Failure to report carries administrative penalties. Firms with Chinese-incorporated entities need a clear internal escalation process that identifies triggering events and ensures reporting decisions reach the right people within the window.
Audit sanctions clause language in China-connected contracts. Standard boilerplate requiring compliance with ‘all applicable sanctions laws’ creates a structural contradiction when two sets of applicable laws directly conflict. Contracts with Chinese counterparties should explicitly address conflict of laws scenarios, provide mechanisms for good-faith consultation, and include practical paths — licence applications, exemption requests, payment deferral — for situations where simultaneous compliance is impossible.
Dual-track regulatory engagement is the least-bad option in a conflict scenario. Where a Prohibition Order covers a transaction that OFAC obligations require to be blocked, firms should consider simultaneously seeking a specific OFAC licence and a MOFCOM Article 8 exemption. Neither route is guaranteed or fast — but dual engagement demonstrates compliance intent to both regulators and creates the clearest available evidentiary record if the matter is subsequently scrutinised.
Civil litigation risk is not limited to entities with Chinese operations. Article 9 of the Blocking Rules and Article 12 of the AFSL create a cause of action in Chinese courts for any party — including non-Chinese entities with no Chinese presence — whose compliance with foreign sanctions causes loss to a Chinese party covered by a Prohibition Order. The 2024 Nanjing Maritime Court case involving a European company illustrates that this risk is being actively litigated. Entities with assets or reputational exposure in China should factor this into their sanctions termination decisions.
The framework continues to evolve — monitoring is not optional. The March 2025 AFSL Implementation Regulations expanded asset seizure powers and broadened the scope of covered conduct. The April 2026 Regulations on Countering Improper Extraterritorial Jurisdiction extended the framework further still. This is not a static legal landscape. Practitioners should maintain active monitoring of MOFCOM announcements, NPC-SC legislative activity, and major law firm client alerts from practices with China-specific expertise.
Do not over-block. One of the clearest signals from the May 2026 Blocking Order is that blanket global SDN blocking policies — applying US designations without analysis of whether specific transactions actually fall within OFAC’s jurisdictional reach — carry real exposure under Chinese law. Many multinational companies simply block all transactions with SDN-listed entities worldwide, even where OFAC rules do not require such broad restrictions. This approach, applied uncritically to Chinese entities covered by a Prohibition Order, may now constitute a violation of Chinese law. Calibrated, jurisdiction-specific screening is preferable to indiscriminate global blocking.
This article is for informational purposes only and does not constitute legal or compliance advice. Always consult a qualified professional.
The views expressed in this article are the author’s own and do not reflect the views of his employer or any organisation with which he is affiliated.
References
Where official primary source texts are available in English, these are cited directly. Law firm client alerts are cited as analytical commentary on primary sources.
May 2026 Blocking Order — Primary Sources
1. MOFCOM, Announcement No. 21 of 2026: Blocking Order Regarding United States’ Sanctions on Five Chinese Companies Involving Iranian Oil Transactions, 2 May 2026. mofcom.gov.cn
2. US Department of the Treasury, OFAC, Designation of Hengli Petrochemical (Dalian) Refinery Co., Ltd. and Related Entities, 24 April 2026. home.treasury.gov
3. US Department of the Treasury, OFAC, General License V: Authorizing the Wind Down of Transactions Involving Hengli Petrochemical (Dalian) Refinery Co., Ltd., 24 April 2026. ofac.treasury.gov
4. US Department of the Treasury, OFAC, Alert: Sanctions Risk of Dealing with Teapot Oil Refineries, 28 April 2026. ofac.treasury.gov
May 2026 Blocking Order — Analytical Commentary
5. Stephenson Harwood, China’s First Use of Blocking Rules Against US Sanctions on Chinese Refineries, May 2026. stephensonharwood.com
6. Squire Patton Boggs, China Issues Its First Blocking Order, May 2026. squirepattonboggs.com
7. King & Wood Mallesons, China Issues Its First Blocking Order Against US Sanctions, May 2026. kingandwood.com
8. Mayer Brown, China Expands Its Playbook: New Regulations Create Direct Compliance Conflicts for Multinationals, April 2026. mayerbrown.com
Blocking Rules and AFSL — Compliance Analysis
9. Morrison Foerster, New Blocking Rules by China’s MOFCOM Create New Risks for Chinese and Foreign Companies, January 2021. mofo.com
10. WilmerHale, China Issues Blocking Rules to Counter Foreign Sanctions and Other Measures, 21 January 2021. wilmerhale.com
11. Morrison Foerster, China’s New Anti-Foreign Sanctions Law: Understanding Its Scope and Potential Liabilities, 30 June 2021. mofo.com
12. Herbert Smith Freehills, China Enacts Anti-Foreign Sanctions Law, June 2021. hsfkramer.com
13. Hughes Hubbard & Reed, China’s Anti-Foreign Sanctions Law Gets Teeth: Understanding the 2025 Implementation Regulations, April 2025. hugheshubbard.com
2024 Litigation Precedent
14. Nanjing Maritime Court, Trial Report on Foreign and Hong Kong, Macao, Taiwan-Related Cases (2020-2025), 29 September 2025 — first civil tort case under the Anti-Foreign Sanctions Law, referenced in Squire Patton Boggs (ref. 6 above)
