I. Background of Refinery SDN List against Chinese Entities

Since 2025, the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") has implemented a series of sanctions targeting small, privately-owned Chinese refineries (commonly known as "teapot refineries"). OFAC, pursuant to Executive Orders 13902 and 13846 under U.S. laws concerning Iran sanctions, has designated five entities, including Hengli Petrochemical (Dalian) Refinery Co., Ltd. ("Hengli"), to the Specially Designated Nationals (SDN) List ("Refinery SDN List"), alleging that these entities procured Iranian petroleum in violation of U.S. secondary sectoral sanctions.

On April 28, 2026, OFAC further issued a Sanctions Risk Alert titled "Sanctions Risk of Dealing with Teapot Oil Refineries", stating that China accounted for approximately 90% of Iran's petroleum exports and highlighting the five sanctioned Chinese entities again. OFAC noted that the sanctioned entities' U.S. assets are frozen, and U.S. persons are prohibited from engaging in transactions with them. OFAC further warned that U.S. and foreign financial institutions facilitating such transactions could face sanctions, instructing heightened due diligence on petroleum transactions involving Chinese (especially Shandong-based) refineries.

II. MOFCOM Blocking Order

On May 2, 2026, the Ministry of Commerce of China ("MOFCOM"), pursuant to the National Security Law, Foreign Relations Law, Anti-Foreign Sanctions Law and its implementing regulations, and the MOFCOM's Rules on Blocking Unjustified Extra-Territorial Application of Foreign Legislation and Measures ("MOFCOM Blocking Rules"), conducted a comprehensive assessment and determined that the U.S. SDN sanctions against Hengli and the other four entities, including designating them to the SDN List, imposing asset freezes, and prohibiting transactions, constituted improper extraterritorial application. Accordingly, a blocking order was issued, requiring that the above-mentioned U.S. SDN sanctions shall not be recognized, enforced, or complied with, effective immediately.

The legal basis and rationale for the blocking order indicate that: First, these U.S. secondary sanctions targeting Iran's petroleum industry harm China's national security and interests and constitute discriminatory, restrictive measures interfering with Chinese internal affairs under the Anti-Foreign Sanctions Law, prompting countermeasures. This represents a significant practical application of the Anti-Foreign Sanctions Law. Second, the blocking order constitutes a countermeasure taken concurrently under both the Anti-Foreign Sanctions Law and the MOFCOM Blocking Rules. Chinese and foreign entities (including individuals) failing to comply with the blocking order may face all adverse legal consequences under both provisions.

On the same day, a MOFCOM spokesperson further pointed out in a press Q&A that the U.S., pursuant to its executive orders sanctioning other countries and under the pretext of the involvement in Iran’s petroleum trade, has taken sanction measures against relevant Chinese entities, including designating them to the SDN List, imposing asset freezes, and prohibiting transactions. These actions improperly prohibit or restrict Chinese entities from conducting normal economic, trade, and related activities with third countries (or regions), their citizens, legal persons, or other organizations, violating international law and basic norms governing international relations. MOFCOM will continue to closely monitor the improper extraterritorial application of foreign laws and measures. If circumstances specified in the MOFCOM Blocking Rules arise, MOFCOM will carry out relevant work in accordance with the laws and rules. Obviously, the foreign laws and measures that the spokesperson referred to also include EU and UK sanctions on Chinese entities related to transactions with Russia military or defense sectors.

Regarding the current blocking order, Articles 2, 4, 6, and 7 of the MOFCOM Blocking Rules provide the legal foundation: Article 2 defines the scope - foreign laws or measures improperly applied extraterritorially in violation of international law or international relations principles, which unjustifiably prohibit or restrict Chinese citizens, legal persons, or organizations from conducting normal commercial or related activities with third countries (or regions), their citizens, legal persons, or other organizations. Article 6 specifies factors for assessing improper extraterritorial application, including: (1) Whether international law or the basic principles of international relations are violated. The U.S. sanctions on Chinese teapot refineries dealing with Iran constitute long-arm jurisdiction and violate international law. (2) Potential impact on China's national sovereignty, security and development interests. At present, the U.S.'s military strikes against Iran, in violation of international law, and the resulting turmoil in the Persian Gulf have already severely affected the security of China's petroleum import channels. The current SDN sanctions against refineries in China further exacerbate the situation, already impacting China's supply chain security. (3) Potential impact on the legitimate rights and interests of Chinese citizens, legal persons, or organizations. This impact is obvious and self-evident. (4) Other factors that shall be taken into account. This falls within the scope of the discretion of the Chinese government.

III. Impacts on Chinese and Foreign Companies

According to MOFCOM Blocking Rules, this blocking order requires that any company or person shall not recognize, enforce, or comply with the above-mentioned sanctions related to the Refinery SDN List. In accordance with the MOFCOM Blocking Rules and the Anti-Foreign Sanctions Law, the consequences of violating the blocking order are as follows:

1. Foreign Companies

Foreign companies that refuse normal trade with the five entities due to compliance with U.S. SDN sanctions may violate the provision under the Anti-Foreign Sanctions Law that "any organization and person shall not implement or assist in the implementation of the discriminatory restrictive measures taken by any foreign country against any Chinese citizen or organization" and the five entities have the right to initiate legal claims for compensation.

For those who fail to implement the countermeasures, the relevant departments of the State Council shall have the authority to prohibit or restrict them from engaging in government procurement, bidding, the import and export of goods and technologies, international service trade, and other activities; to prohibit or restrict them from receiving data or personal information from overseas; and to prohibit or restrict them from staying and residing in China.

2. Chinese Companies

First, Chinese companies must strictly comply with the blocking order and must not refuse normal trade with the five entities due to U.S. SDN sanctions. For those who suspend or refuse transactions citing U.S. SDN sanctions, they may face legal consequences including warnings, orders to make corrections within a prescribed time limit, or fines, and may be prohibited or restricted from engaging in government procurement, bidding, the import and export of goods and technologies, international service trade, and other activities, as well as from providing data or personal information to overseas recipients, for failure to implement the countermeasures. Moreover, compared with foreign companies, Chinese companies will face a greater risk of legal claims for compensation by these five entities.

Second, if genuine difficulties exist, an application for exemption may be submitted. If compliance with U.S. SDN sanctions is objectively unavoidable, Chinese companies may submit a written exemption request to the MOFCOM, including the reasons and scope. MOFCOM will decide on whether to grant approval within 30 days after accepting the application.

It should be noted that, for transactions that as a matter of fact cannot be fulfilled in practice due to designations on the Refinery SDN List, transactional parties taking corresponding measures such as contractual termination or similar remedies per se normally do not violate this blocking order. However, any entities or individuals in the industrial, banking, insurance, shipping or trade business shall be cautious not to be over-obedient to such Refinery SDN List, and not to refuse transactions or services that could have been executed or performed. To avoid such over-obedience by Chinese and foreign parties which is detrimental to the interests of entities and individuals in China is the warning that this blocking order signaled.