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China's first use of Blocking Rules against U.S. sanctions on Chinese refineries
On May 2, 2026, China’s Ministry of Commerce (“MOFCOM”) issued a prohibition order under its Blocking Rules (defined below) in response to the U.S. designation of five Chinese refineries. This is the first time China has used the Blocking Rules since they were introduced five years ago. What was once a theoretical tension between different legal regimes has now become a real conflict of law issue.
For international companies, this creates immediate challenges. Counterparties of these refineries—and potentially other sanctioned Chinese companies—such as banks, traders, insurers, logistics providers, suppliers and customers, are now caught in the middle. On the one hand, they need to comply with U.S. sanctions to avoid penalties. On the other hand, Chinese law may restrict them from following those same sanctions.
U.S. SANCTIONS AGAINST CHINESE REFINERIES
Since March 2025, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has designated five Chinese independent “teapot” refineries for their alleged involvement in importing and refining Iranian crude oil. On April 24, 2026, OFAC designated Hengli Petrochemical (Dalian) (“Hengli”), 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 license authorising the wind-down of certain transactions involving Hengli until May 24, 2026, subject to strict conditions, including that any payments to Hengli must be made into a blocked, interest-bearing account in the U.S.
As a result, other than what is authorized by the general license, all property and interests in property of Hengli and the other refineries that are in the U.S. or under the control of U.S. persons are blocked. U.S. persons are also generally prohibited from dealing with them, and any entities owned 50% or more by these refineries are also treated as blocked.
In practical terms, these refineries are effectively cut off from the U.S. financial system. Any assets they hold in the U.S., or that pass through U.S. banks, are frozen and cannot be accessed. U.S. companies, banks and individuals cannot do business with them, directly or indirectly. In addition, transactions involving U.S. dollars are effectively off limits, as they typically involve the U.S. financial system and therefore fall within U.S. jurisdiction.
Beyond these primary sanctions, non-U.S. financial institutions and companies may face U.S. secondary sanctions if they engage in significant transactions with these refineries. In practice, this has a wide impact: international banks, insurers, traders, shipping and logistics providers often cut ties with these sanctioned entities to avoid sanctions risk, including the risk of being cut off from the U.S. financial system.
CONFLICT OF LAW CREATED BY CHINA’S BLOCKING ORDER
On May 2, 2026, MOFCOM issued a prohibition order (“Blocking Order”) under the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (“Blocking Rules”). The Blocking Order provides that the relevant U.S. sanctions on the five designated Chinese refineries shall not be recognised, enforced or complied with. It applies only to these five refineries and does not extend to other parties (such as vessels or ports) designated under the same U.S. executive orders and sanctions programs.
The Blocking Rules are intended to counter the extraterritorial reach of foreign sanctions applied to “third-country” parties (entities in neither the sanctioning country nor China). In this context, the Blocking Order primarily targets U.S. secondary sanctions, often described as the “long-arm” application of U.S. law to non-U.S. persons. By contrast, U.S. primary sanctions—which apply to U.S. persons, U.S.-based activities and transactions with a U.S. nexus—appear not to be affected by the Blocking Order, unless they are applied extraterritorially, i.e., outside the U.S. As a result, U.S. companies and transactions within the U.S. remain off limits for the sanctioned refineries.
In practical terms, the Blocking Order is aimed at preventing non-U.S. international companies from refusing to deal with the designated Chinese refineries solely on the basis of U.S. sanctions. For example, a Singaporean bank declining to honour a letter of credit involving Hengli, or a European insurer refusing to provide coverage, may be viewed as conduct falling within the scope of the Blocking Order.
This creates a difficult position for international companies. If a bank or other counterparty proceeds with a transaction involving a sanctioned refinery, it may face U.S. sanctions risk. If it refuses to transact because of U.S. sanctions, that refusal may fall within the scope of the Blocking Order. Where such refusal causes losses to a Chinese counterparty—arguably including not only the designated refineries, but also their affiliates or contractual partners—the Chinese party may bring a claim in Chinese courts seeking damages. Any resulting judgment may be enforced against the foreign company’s assets in China, and its Chinese subsidiaries, joint ventures or branches may also be affected.
In practice, international banks may have less flexibility than other market participants and may be more likely to comply with U.S. sanctions. This is because many transactions—particularly those denominated in USD or routed through the U.S. financial system—create a U.S. nexus and therefore give rise to primary sanctions exposure. For example, if a Singaporean bank processes a payment to Hengli through a U.S. correspondent bank, in USD or not, it may be considered to have caused a U.S. person to violate sanctions. This exposes the bank to primary sanctions risk, which is typically more strictly enforced and carries more severe consequences.
The Blocking Rules form only one part of China’s broader anti-sanctions framework, and other laws and measures may also be used to counter the impact of U.S. sanctions. For example, under the Anti-Foreign Sanctions Law and its implementing rules, Chinese parties may also bring civil claims against entities that comply with foreign sanctions to their detriment. In addition, Chinese authorities may take further action against foreign companies, including potential designation under the Unreliable Entity List or applying newer and broader measures under the 2026 Regulations on Countering Foreign Improper Extraterritorial Jurisdiction. In more severe cases, these measures could restrict or effectively cut off access to the Chinese market.
These risks are not merely theoretical. In 2024, a Chinese company reportedly brought proceedings in a PRC court against a European counterparty that had suspended payment following a U.S. sanctions designation. The case progressed in China and was ultimately resolved only after the European company obtained a licence from OFAC and proceeded with payment. This illustrates the real pressure that conflicting legal regimes can place on international companies.
The conflict also has significant contractual implications. Traditional sanctions clauses requiring compliance with “all applicable sanctions laws” may no longer be sufficient, as Chinese courts may consider compliance with U.S. sanctions to be unlawful under domestic law and override such clauses. Similarly, dispute resolution clauses selecting arbitration or foreign courts may not fully prevent proceedings in China.
RECOMMENDATIONS
Under these circumstances, companies should place particular focus on strengthening their contractual protections. Contracts should be drafted with greater flexibility, allowing parties to suspend or refuse performance where there is a risk of sanctions exposure, rather than only where performance is strictly illegal.
It is also important to address conflicting legal obligations directly. Contracts 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. At the same time, they should include practical mechanisms to deal with these situations, such as requiring the parties to consult in good faith, explore alternative legal arrangements, or seek relevant licences or exemptions from OFAC and/or MOFCOM. In addition, there should also be consideration of provisions to manage dispute risk, such as indemnities or limits on where claims can be brought.
We also recommend the consideration and development of internal policies to address conflict of laws situations regarding sanctions. If such a situation comes to pass, there is often considerable pressure to make prompt – and correct – decisions. An organisation that has undertaken proper scenario planning coupled with obtaining expert advice will be far better equipped to make those decisions.
