Chinese measures highlight global supply chain due diligence complexity

The Chinese countermeasures will have immediate practical implications for many global businesses and highlight the growing complexity entailed in conducting effective global supply chain due diligence.

The Chinese countermeasures

On 5 August, China’s Ministry of Commerce (MOFCOM), acting under the Anti-Foreign Sanctions Law, placed six entities on its countermeasure list and prohibited organisations and individuals within China from engaging in transactions, cooperation or other related activities with them. The six entities are:

• Applied DNA Sciences, Inc. 
• Stratum Reservoir, LLC. 
• Altana Technologies, Inc. 
• Responsible Business Alliance (RBA) 
• Verité Group, Inc. 
• Human Rights in China (HRIC) 

The listed entities include supply chain traceability technology providers, data analytics platforms, international responsible supply chain organisations, social audit and labour rights investigation institutions, and related organisations.

According to the decision, MOFCOM considered that the entities had “assisted and supported the United States’ illegal Xinjiang-related sanctions” and that their conduct was of a serious nature, severely infringing upon China’s national sovereignty, security and development interests.

What is the legal effect of the measures? 

The countermeasures impact entities within China and those based overseas.

For companies, branches and individuals registered or located within China, the prohibition is directly binding. Any transactions or cooperation with the listed entities should be immediately discontinued or avoided. 

Common affected scenarios include engaging the relevant institutions to conduct supply chain audits, procuring their data or traceability services, relying on their certification or assessment programs, and similar cooperation arrangements. If any of the above activities involve the listed entities, they should be terminated or adjusted. 

For overseas entities, there is an indirect impact.

For multinational groups registered outside China but with subsidiaries or operating entities in China, although the prohibition does not directly apply to their overseas headquarters, their entities within China remain subject to the restrictions. Therefore, multinational enterprises need to review, from a group management perspective, whether their global supply chain compliance programs include audit arrangements, data service procurement, on-site interview support or other forms of cooperation involving the listed institutions and implemented with the participation of China-based entities and assess whether the project structure or implementing entities need to be adjusted accordingly. 

For organisations and individuals within China involved in either of the above scenarios, Article 13 of the Provisions on the Implementation of the Anti-Foreign Sanctions Law provides that, where they fail to implement countermeasures in accordance with law, the relevant departments of the State Council may order them to make corrections and may, depending on the circumstances, prohibit or restrict them from participating in government procurement, bidding and tendering, import and export of relevant goods and technologies, and international trade in services, prohibit or restrict their cross-border receipt or provision of data and personal information, or prohibit or restrict the exit, stay or residence of relevant personnel in China.

Accordingly, failure to discontinue transactions or cooperation with listed entities may not only constitute non-compliance with the countermeasures but have practical implications for government project participation, import and export arrangements, cross-border data flows and personnel mobility. 

The broader implications for supply chain compliance teams

From a practical perspective, several of the listed institutions have long been active in the field of global supply chain due diligence. 

For example, RBA is an industry initiative with activities relating to responsible supply chain management in the electronics sector; Verité has been widely involved in labour rights and supply chain risk assessments; Altana provides supply chain risk and trade data analytics services; and Applied DNA Sciences provides product origin verification and traceability technologies. 

In recent years, with the development of regimes such as the US Uyghur Forced Labor Prevention Act (UFLPA) and the EU Forced Labour Regulation (EUFLR), multinational enterprises have begun to rely on third-party institutions to support supply chain mapping, raw material traceability, labour rights risk assessments, and third-party social compliance audits. 

These new MOFCOM measures do not mean that China prohibits companies from conducting supply chain due diligence, nor do they mean that third-party audit activities are prohibited as such. MOFCOM’s decision is directed at the relevant entities’ alleged assistance and support for US Xinjiang-related sanctions, rather than supply chain audits or ESG management activities in general. 

However, viewed from the perspective of regulatory trends, this development reflects a reality that multinational enterprises should pay close attention to: certain supply chain due diligence activities, including traceability and certification, may touch upon compliance red lines under China’s legal framework if they are closely linked to foreign unilateral sanctions or restrictive measures. 

Specific challenges facing multinational companies 

Existing audit programs may need to be reassessed 

If a multinational company has embedded RBA standards, Verité investigation mechanisms or relevant traceability tools into its global supply chain management system, it should note that, under the current countermeasures, entities within China may no longer continue cooperation with the listed entities. Companies should assess whether relevant standards, tools or services have been embedded in their global compliance framework and supplier management processes, and consider how to complete separation, replacement and transition arrangements within a short period of time. 

Supply chain information collection and verification mechanisms may need to be adjusted 

In recent years, regulators in Europe and the US have increasingly emphasised proof of raw material origin, visibility into upstream suppliers, transparency of production processes and verification of labour rights risks. Companies therefore typically need to rely on third-party databases, digital traceability platforms, on-site audit programs and independent investigation institutions. If existing tools or cooperation partners are restricted, companies may need to redesign their evidence collection and verification mechanisms. 

The “dual compliance” challenge continues to intensify 

For multinational companies, the deeper issue is that regulatory requirements across different jurisdictions may continue to conflict.

On the one hand, the EU, US, and certain other jurisdictions continue to expand their regulatory frameworks relating to social responsibility due diligence, including labour rights, and supply chain transparency.

On the other hand, China has gradually established a counter-sanctions and blocking regime centered on the Anti-Foreign Sanctions Law and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, a data cross-border transfer and privacy protection regime based on the Data Security Law and the Personal Information Protection Law, an export control regime centered on the Export Control Law, and a broader supply chain security management framework. 

Companies may therefore face situations where a particular action constitutes a compliance obligation in one jurisdiction but may give rise to regulatory risk in another. This issue of conflicting compliance obligations is gradually becoming an important challenge in global supply chain management. 

How should companies respond? 

For multinational companies, the more important task at this stage is not to immediately overhaul the entire supply chain management system, but to conduct targeted risk assessments and project reviews. 

Companies are advised to focus on identifying affected cooperation projects, reviewing relevant contractual structures, establishing alternative verification mechanisms, and setting up a cross-jurisdictional legal assessment mechanism.  

For companies subject to regulation in China, the EU and the US, major supply chain investigation projects should be subject to comprehensive legal assessment before launch, rather than being carried out solely based on the requirements of a single jurisdiction. 

Looking ahead, the core challenge for companies may no longer be whether to conduct due diligence, but how to build a supply chain compliance system that is both globally applicable and locally executable while meeting regulatory expectations in Europe, the United States and other jurisdictions and, at the same time, taking into account compliance requirements under China’s legal framework. This case shows that China-related supply chain compliance requirements have increasingly become an important issue that multinational companies cannot afford to overlook.