Taking Stock of China, Inc.: Examining Risks to Investors and the U.S. Posed by Foreign Issuers in U.S. Markets

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Introduction[1]

Chairman Sherman, Ranking Member Huizenga, Representative McHenry, and distinguished members of the committee, I am honored to appear before you today to discuss the risks to investors and the United States posed by Chinese issuers in U.S. markets.

I come before this committee as a sanctions and compliance professional, having worked at the U.S. Department of the Treasury and advised financial institutions, corporations, humanitarian organizations, and individuals on ensuring they operate in compliance with U.S., EU, and UN sanctions obligations. As part of my work in both the public and private sectors, I have seen firsthand the power of U.S. economic sanctions in furthering U.S. foreign-policy objectives. While sanctions are not a panacea, they can be used in narrow and targeted ways to great effect.

One area where the United States has increasingly used this tool is in the global competition with China. As Congress and the Biden administration consider ways to protect U.S. markets from abuse and push back against certain Chinese activities that threaten U.S. national security, sanctions remain one of the top policy levers to consider pulling.

Safeguarding transparency in the global financial system and in U.S. markets is critical to protecting U.S. national security and the strength of the U.S. financial system. A core part of providing this transparency is ensuring U.S. investors have access to relevant, material information about foreign companies in order to make informed decisions. Over the last few years, the United States has taken important steps to ensure that Chinese companies attempting to access U.S. markets must play by the same rules as U.S. companies and do not introduce significant, material risk into U.S. investors’ portfolios due to those Chinese companies’ lack of transparency.

At the same time, we must balance those considerations against the risk of creating an onerous set of disclosure requirements that deter companies from seeking to access U.S. markets or that make it overly burdensome to do business here in the United States. Such burdens can deter legitimate companies from seeking financing on U.S. capital markets. This is a delicate balance to strike.

Likewise, we must make sure that any additional disclosure requirements would be impactful. Implementing broad-based disclosure requirements on Chinese issuers seeking access to U.S. capital markets may not have the intended effect if those issuers are already refusing to comply with relevant rules and regulations. And if those disclosure requirements are overbroad, they may impact non-Chinese issuers that we want to attract to U.S. capital markets.

As Congress and the administration weigh whether to create new reporting and disclosure requirements and determine how to best protect U.S. investors, they should likewise consider the use of narrowly targeted sanctions, which offer a well-established tool to ensure U.S. companies — and U.S. national security — are protected from certain threats.

The United States has a range of sanctions tools to target specific Chinese companies whose activity it believes poses national security risks. In particular, over the last few years, the United States has deployed limited but powerful prohibitions on trading in public securities of certain Chinese companies associated with the People’s Liberation Army or otherwise alleged to be involved in China’s “military-civil fusion” program.

Likewise, for companies or individuals who are alleged to engage in particularly egregious actions, such as sanctions evasion, crackdowns on human rights in Hong Kong, or mistreatment of the Uyghur population in Xinjiang, the United States maintains powerful sanctions authorities to block such persons. This targeted approach may be a narrow and effective way to limit these companies’ access to U.S. markets and to U.S. capital.

In addition to sanctions designations, the U.S. Department of the Treasury also has effectively promulgated advisories and guidance warning the private sector of doing business with certain companies or in certain sectors, including in Chinese industries. For example, the Treasury Department, along with its interagency partners, issued a supply chain advisory designed to warn the private sector about the risks of human rights abuses and forced labor in Xinjiang.[1]

Furthermore, the Treasury Department and the Financial Crimes Enforcement Network routinely issue detailed guidance highlighting financial-crime risks in certain foreign jurisdictions and industries.[2] Providing such targeted information to U.S. persons operating in the capital markets space, including in conjunction with relevant regulatory agencies, such as the Securities and Exchange Commission (SEC), could be an effective way to warn U.S. investors of specific risks posed by particular Chinese persons.[3]

These tools could provide a narrow, targeted way both to warn U.S. companies and investors of the risks of doing business with certain Chinese companies or in certain Chinese industries, as well as to limit those Chinese companies’ ability to secure capital on U.S. markets while threatening U.S. national security.

Nevertheless, sanctions are not a silver bullet for protecting U.S. investors from Chinese companies that are subject to lax regulatory controls in their home jurisdiction. For example, sanctions may not be a good policy tool for targeting Chinese companies that do not adhere to international standards of good governance and financial stewardship and do not provide that information to U.S. investors. Rather, sanctions are an appropriate tool for targeting specific Chinese companies that threaten U.S. national security.

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[1] U.S. Department of State, Department of the Treasury, Department of Commerce, Department of Homeland Security, Department of Labor, and the Office of the Trade Representative, “Updated Xinjiang Supply Chain Business Advisory,” July 13, 2021. (https://home.treasury.gov/system/files/126/20210713_xinjiang_advisory_0.pdf)

[2] See, for example: U.S. Department of the Treasury, Financial Crimes Enforcement Network, Advisory, “Updated Advisory on Widespread Public Corruption in Venezuela,” May 3, 2019. (https://www.fincen.gov/sites/default/files/advisory/2019-05-03/Venezuela%20Advisory%20FINAL%20508.pdf).

[3] For a recent example of how the SEC has raised these considerations for investors, see: U.S. Securities and Exchange Commission, CF Disclosure Guidance: Topic No.10, “Disclosure Considerations for China-Based Issuers,” November 23, 2020. (https://www.sec.gov/corpfin/disclosure-considerations-china-based-issuers)