SenseTime was included in the “List of Military-Industrial Complex Enterprises” by the United States. How to fight back?

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On December 10, local time, the U.S. Department of the Treasury issued a statement to include China SenseTime Technology Co., Ltd. on the so-called “List of Military-Industrial Complex Enterprises” and impose investment restrictions.

Many foreign media said that this is another round of suppression by the United States against China’s cutting-edge technology.

The “Military-Industrial Complex Enterprise List” is a relatively new sanction tool concocted by the United States. At the end of Trump’s term, it was used against Xiaomi, but it was stopped by a US judge.

When SenseTime went to Hong Kong for IPO, the Biden administration regained the “big stick” left by Trump and aimed at this Chinese AI unicorn.

Yang Jie, a senior partner of Huiye Law Firm and a compliance legal expert, told that the sanctions imposed by the US Treasury Department may indeed have an impact on Shangtang Technology’s future financing, valuation and business activities.

“But it mainly depends on whether SenseTime is tough enough.” Yang Jie analyzed that when China’s “blocking law” system has taken shape, the company can use the Ministry of Commerce’s “Measures for Blocking Foreign Laws and Measures Improper Extraterritorial Application” to fight back. .

The official Twitter of the U.S. Treasury Department reposted the “Sanctions Statement” on the official website of the Treasury Department, a screenshot of Twitter

The sanctioned SenseTime is the largest artificial intelligence “unicorn” in China. On December 7th, the company just opened an IPO and plans to list on the Hong Kong stock market on the morning of the 17th.

However, the British “Financial Times” reported on the 9th that a source familiar with the matter broke the news that the U.S. government plans to ban U.S. investment in the company and hinder its public offering plan. According to SenseTime’s IPO prospectus, its investors include American Silver Lake Capital and Qualcomm.

On the 10th, the U.S. Treasury Department really issued a “sanctions” statement.

The Wall Street Journal subsequently analyzed that the prohibition of American capital investor Tang Technology showed that the Biden administration is expanding its crackdown on Chinese technology companies.

The spokesperson of the Chinese Embassy in the United States, Liu Pengyu, condemned the United States on the same day, saying that it seriously interfered in China’s internal affairs, violated the basic norms of international relations, and would seriously damage Sino-US relations. Liu Pengyu urged the US to withdraw its “sanctions” decision as soon as possible.

What is the “List of Military-Industrial Complex Enterprises”?

Yang Jie, a compliance legal expert at Huiye Law Firm, told that the so-called “list of military-industrial complex companies” presented by the US government this time is different from the “list of entities” that everyone is more familiar with in the past.

Yang Jie stated that the “Military-Industrial Complex Enterprise List” is a relatively new sanctions tool. It first appeared at the end of Trump’s term. At that time, he authorized the U.S. Department of Defense to lead external sanctions. The U.S. Department of Defense subsequently announced that in 2021. On January 14th, 9 Chinese companies including Xiaomi Group and COMAC were included in the “list”, which caused great fluctuations in Xiaomi’s stock price.

Later, three Chinese companies, including Xiaomi Group and Luokung Technology, went to the United States to sue, and the US Department of Justice ruled that Xiaomi and other companies were removed from the “list”.

Yang Jie said that the victory of Xiaomi and other companies does not mean that the US government will give up this sanctions “weapon.” The “List of Military Industries” that instructs the Ministry of Defense to operate has many procedural flaws. The Biden administration decided to fill in the loopholes and directly transferred the power to formulate the list to the U.S. Department of the Treasury.

In this way, the U.S. Treasury Department has the power to provide sanctions by a “list of military-industrial complex enterprises” in addition to the traditional primary sanctions and secondary sanctions. The consequences of the sanctions are different from the primary sanctions in that it prohibits Americans from investing in stocks, bonds, etc. publicly issued by the sanctioned company, but does not restrict Americans from all transactions with the company.

In addition, it does not prohibit the export of certain US goods, technologies, and services to the company like the list of the Department of Commerce.

Three Impacts of “List” on SenseTime

Despite this, Shangtang’s inclusion in the “List of Military-Industrial Complex Enterprises” may still face three aspects of impact.

Yang Jie analyzed that, first of all, investors who were included in the “list” by the US Department of the Treasury may “persuade” direct investors.

As early as 2017, Qualcomm of the United States invested tens of millions of dollars in SenseTime’s strategic investment; in April 2018, SenseTime’s Series C financing was led by Alibaba Group, Singapore sovereign funds Temasek, Suning and other investment institutions and strategies Partners followed in the investment and raised a total of US$600 million (approximately RMB 3.821 billion).

The main purpose of these investors must be to obtain investment returns. SenseTime has now been included in the “list” sanctions, and it is certainly not allowed to go public in the United States. Even if it is now IPO in Hong Kong, American investors cannot trade its stocks, which will affect the logic of investing in SenseTime.

Second, although SenseTime is currently only included in the “List of Military-Industrial Complex Enterprises” by the Ministry of the Treasury, it does not rule out subsequent sanctions escalation, and market entities will have to consider the possibility of being included in the “Entity List” of the US Department of Commerce. Once this happens, other companies will not be able to cooperate with SenseTime on some items and technologies involved in the sanctions on the “Entity List” of the US Department of Commerce. At that time, some technical cooperation between Qualcomm and SenseTime may be affected.

Finally, due to the “deterrence” of US sanctions on other market players, some companies may “excessively comply with regulations” out of self-protection, cut off relevant economic and trade transactions with SenseTime, and put them at a disadvantage in the market.

Yang Jie pointed out that this kind of “deterrence” is actually the true power of the United States for playing the big stick of sanctions over the years. In practice, it is not even ruled out that some companies may add some clauses to the cooperation contract, stating that if the United States introduces follow-up sanctions in the future, they can suspend the relevant agreement with SenseTime and not be liable for breach of contract. For SenseTime, this means that it will increase its commercial costs when negotiating or fighting for business opportunities in the future.

In fact, this is not the first time SenseTime has been sanctioned by the United States. As early as 2019, a Beijing subsidiary of SenseTime was listed on the “Entity List” by the US Department of Commerce. Being added to the Entity List means that it will face export controls. Without the permission of the US government, certain products, technologies and Services shall not be provided to the companies on the list. Also added to the list of entities are AI companies such as Dahua Technology, Hikvision, HKUST Xunfei, and Megvii Technology.

At that time, SenseTime issued a document stating that it strongly opposed the inclusion of SenseTime in the US Department of Commerce’s list of entities and called on the US government to re-examine it. SenseTime said: “We strictly abide by the laws and regulations of relevant countries and regions. At the same time, we formulate and implement strict ethical standards for the use of artificial intelligence technology, so that artificial intelligence technology can be correctly applied, and the most responsible Attitudes promote the development of artificial intelligence technology.”

Yang Jie pointed out that at that time, SenseTime’s subsidiaries were included in the “Entity List”, which theoretically did not affect the normal business of the parent company, but it also had an invisible deterrent to other market players. This time, SenseTime was included as a whole. The list of “military-industrial complex enterprises” is a strategy adopted by the other side to increase the number of layers.

How should SenseTime respond?

Faced with the bullying-style “long-arm jurisdiction” of the United States, SenseTime is not without solutions.

In January 2021, the Ministry of Commerce of China officially promulgated and implemented the Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures (hereinafter referred to as the “Blocking Law”), in order to oppose the improper extraterritorial application of foreign laws and measures that damage the legitimate rights and interests of Chinese citizens and enterprises Provide legal basis.

Yang Jie pointed out that if SenseTime really encounters “one size fits all” misconduct by some companies in China in the future, it can invoke the “Blocking Law” to request the Ministry of Commerce to investigate relevant companies and correct their misconduct.

For example, Article 5 of the “Blocking Law” states that Chinese citizens, legal persons, etc., should actively report to the Ministry of Commerce when they encounter foreign laws and measures interference.

Article 7 of the “Blocking Law” states that after evaluation, there is indeed interference in foreign laws and measures, and the Ministry of Commerce may issue injunctions such as non-recognition, and Chinese citizens and legal persons may also file suits in the people’s courts for compensation.

The crux of the problem lies in whether SenseTime itself is “hard-spirited” and whether it has the hard power of technology. Yang Jie pointed out that because American companies do not cooperate with SenseTime, it is not without a price. This in itself is an act that may lose the Chinese market.

Xiong Jie, a senior researcher at the Sichuan Institute of Quality Development and a digital transformation expert, pointed out to that currently in the field of artificial intelligence, the West may still have a certain stock advantage. Five years ago, the United States was relatively advanced in artificial intelligence algorithms. , The importance of algorithms in the field of artificial intelligence is decreasing. China has a large amount of data. Even if the algorithms are not so good, they can still feed good models. The main point of cooperation between Qualcomm and SenseTime is “enriching 5G mobile experience with AI”, which is precisely the scenario advantage brought by the first large-scale application of 5G in the Chinese market.

Since the beginning of this year, the United States has repeatedly used the so-called “entity list” to suppress China’s cutting-edge technology industry. In April, the United States included seven Chinese supercomputer entities on the “list.” The Ministry of Foreign Affairs spokesperson Zhao Lijian responded that in order to maintain its technological monopoly and hegemony and contain China’s development, the U.S. government has repeatedly generalized the concept of national security, abused national power, abused the “entity list”, and unscrupulously suppressed Chinese high-tech enterprises by any means. This is firmly opposed. In response to the relevant US measures, China will take necessary measures to resolutely safeguard the legitimate rights and interests of Chinese enterprises.

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