On January 2, 2025, the US Department of Defense added a number of entities to its list of “Chinese military companies" (CMC List). While being named to this list, by itself, does not prohibit US businesses from continuing to do business with these companies, it can act as an indication that further US government action is under consideration and/or that there are broader US government concerns with these entities. As a result, these designations add another layer of compliance complexity for US investors and companies.
The US Department of Defense (DOD) updated its CMC List as required by Section 1260H of the National Defense Authorization Act (NDAA) of 2021. The entities added to the list include prominent Chinese companies such as Tencent (the parent company of WeChat) and COSCO shipping. The immediate consequences of being on the CMC List are limited, and US persons may generally do business with companies on the CMC List (unless they are prohibited under other US regulations).
The main impact of inclusion on the CMC List was originally limited to reputational harm. However, the 2024 and 2025 NDAAs added DOD procurement prohibitions linked to the CMC List that require defense contractors to conduct increased due diligence of their supply chain and lobbyists, because DOD cannot award business to a company if it has prohibited links to entities on the CMC List. This increased diligence applies not only to the supply chain, but also to associations with lobbying firms that do business with companies on the CMC List.
Inclusion on the list also indicates that the US government may be contemplating additional restrictions on activities with these companies, including those imposed by other agencies, such as the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the US Department of Commerce Bureau of Industry and Security (BIS). US companies will need to prepare to comply with new prohibitions that may be imposed by other US regulators. US companies may also need to consider potential Chinese law risks, which can result if a US company takes adverse actions against a listed entity.
Section 1260H of the 2021 NDAA requires DOD to publish annually a list of “Chinese military companies” that DOD determines are operating directly or indirectly in the United States (the CMC List). The NDAA defines Chinese military companies broadly to include any entity that engages in providing commercial services, manufacturing, producing, or exporting, and:
Military-civil fusion is a Chinese Communist Party strategy that enlists Chinese civilian research and commercial industries to enhance the development and acquisition of technology necessary to advance China’s military capabilities, blurring the lines between strictly commercial and defense activities. The 2021 NDAA identifies the following factors for DOD to determine whether an entity is a military-civil fusion contributor:
Tencent and other companies added to the list stated that they will appeal the determination through a new DOD reconsideration mechanism that allows the designated companies to provide an explanation and evidence that they should be removed from the list. If this process fails, companies may sue the government to be removed from the list, as has happened in past cases.
The immediate effect on US persons is limited, but the CMC List is evolving beyond a tool once believed only to cause reputational damage. Although the 2021 NDAA establishing the CMC List does not restrict US persons or companies from doing business with the listed entities, subsequent NDAAs impose requirements on DOD related to the CMC List that restrict US defense contractors’ (including subcontractors’) business with DOD if they engage with certain third parties (discussed below). Inclusion on the CMC List also increases the risk that the US government will impose further prohibitions on these entities that could more broadly affect US businesses and investors.
Prohibition on DOD Direct and Indirect Procurement of Goods, Services, and Technology
Section 805 of the 2024 NDAA prohibits DOD from procuring goods, services, and technology produced or developed by entities on the CMC List. Specifically, DOD may not:
These prohibitions take effect in June 2026 (direct procurement) and June 2027 (indirect procurement). The law will therefore require US defense contractors to change their supply chains to eliminate goods and services from companies on the CMC List if they want to be considered for a DOD contract.
Prohibition on Contracting with Entities that Contract with Lobbyists for CMC List Companies
Section 851 of the 2025 NDAA provides a new and unique challenge to US businesses, prohibiting DOD from contracting with an entity (including any parent or subsidiary companies) if that entity is party to a contract with a “covered lobbyist.” Section 851 defines “covered lobbyist” as any entity that engages in lobbying activities (as described in the Lobbying Disclosure Act) for any entity on the CMC List. This prohibition takes effect June 2026. Thus, DOD contractors will now need to delve into their lobbying relationships to ensure they are not engaging lobbyists who also work for CMC List entities. This could also impact mixed lobby/law entities as well, though that appears subject to further interpretation.
Section 851 provides an exception for contractors that conducted “reasonable” due diligence into their lobbyists’ activities and determined they were not “covered lobbyists.” As a result, in order to continue to obtain DOD contracts, businesses will be required to evaluate their lobbyists’ activities to verify those lobbyists are not also working for any entities on the CMC List.
Potential for Further Congressional Action Relating to Consulting Firms Doing Business with DOD
Although not fully implemented, once regulations are issued, Section 812 of the 2024 NDAA will require that consulting firms that wish to do business with DOD (defined as an entity that provides consulting services and is assigned a North American Industry Classification System Code beginning with 5416) provide DOD with a certification that:
Once implemented, Section 812 will prohibit DOD from entering into contracts with entities unable to make this certification. Covered foreign entities include:
DOD is currently drafting regulations to implement Section 812. According to a published statement from DOD, proposed regulations may issue within the first quarter of 2025.
Section 812 does not directly implicate entities on the CMC List. However, the Joint Explanatory Statement accompanying the 2025 NDAA indicates consulting companies doing business with entities on the CMC List are also in Congress’s crosshairs. The Joint Explanatory Statement requires the Comptroller General of the United States to submit a report regarding national security risks posed by consulting firms that contract with both DOD and the Chinese government or its proxies or affiliates.
The report will address the extent to which DOD collects information on contracts performed on behalf of the Chinese government (and proxies and affiliates) by consulting firms that hold or have held contracts with DOD and evaluate the extent to which DOD has assessed the risks posed by such consulting firms, including the risk of deliberate or inadvertent sharing of confidential or proprietary information. Congress also requires the report to identify DOD’s ability to identify, evaluate, and resolve organizational conflicts of interest when awarding consulting contracts, and challenges in determining whether a potential contractor also performs work for China.
The Joint Explanatory Statement does not expressly state that this would include entities on the CMC List, but the order’s inclusion with references to the lobbyist prohibition and the CMC List suggest that Congress expects consulting firms that do business with entities on the CMC List will be included (or that new restrictions on consulting firms may be legislated in the future).
Risks to US Businesses Under China’s Blocking Statutes and Anti-Foreign Sanctions Law
US businesses (including US defense contractors and consulting firms) considering taking adverse actions (including termination) against Chinese companies designated as CMCs may face legal risk under Chinese law. The Chinese government has enacted blocking statutes and the Anti-Foreign Sanctions Law, which authorize retaliatory measures against foreign entities perceived to undermine China's national interests or entities sanctioned by other nations. These measures can include fines, asset seizures, private lawsuits in China for damages, and restrictions on business operations in China. Additionally, individuals and companies may be placed on China’s “unreliable entities list,” which can bar them from trade, investment, and other economic activities in China.
To reduce this risk, US companies that do business with or in China can take active steps to protect themselves against charges by Chinese authorities that an adverse decision was based on the Chinese company’s inclusion on the CMC List. This can include, for example, documenting nondiscriminatory and commercially reasonable grounds for the action.
The CMC List as a Harbinger of Future Sanctions and Other Restrictions on US Business Activities
While US persons are not prohibited from engaging in business dealings with the listed entities solely due to their addition to the CMC List, inclusion on the CMC List may foreshadow US government intent to add the entities to other, more restrictive lists administered by the US government. A number of the entities added to the list are also currently subject to OFAC sanctions and BIS export control restrictions, suggesting some cross-pollination as well.
For instance, OFAC, which administers and enforces the US government’s economic sanctions programs, has authority to impose a variety of prohibitions on activities with non-US parties, including adding them to the Specially Designated Nationals and Blocked Persons list (the SDN List). OFAC prohibits US persons from most dealings with parties on the SDN List without authorization from OFAC. Typically, absent additional information that would more directly implicate one or more US sanctions regimes, OFAC would not add any of these entities to the SDN List.
However, OFAC also administers non-SDN sanctions programs with narrower prohibitions. One program, the Non-SDN Chinese Military Industrial Complex Companies (CMIC) List, prohibits US persons from purchasing or selling any publicly traded securities (including derivatives and any securities that provide exposure to those securities) of any Chinese entities designated by the Secretary of the Treasury as operating in the Chinese defense or surveillance technology sector.
Other transactions with these companies are not prohibited under the CMIC sanctions. Several companies on the CMC List are already on OFAC’s CMIC List, and it is not a stretch to think that inclusion on the CMC List would cause OFAC to scrutinize whether the entity should also be designated as a CMIC Non-SDN party. This possibility may apply with greater emphasis to those newly added CMCs that are public companies.
Similarly, BIS, which regulates US exports, maintains the Entity List. The Entity List consists of non-US parties determined to be a national security concern. Companies on the Entity List are subject to export restrictions and US companies generally will need to obtain a license from BIS for the export of any goods and technology subject to US export control jurisdiction to an Entity List party. While US companies can do business with companies on the Entity List, any exports that require a license from BIS are usually subject to a policy of denial. As with the CMIC List, many of the companies added to DOD’s CMC List are also on the Entity List. This suggests that the newly added entities may become or already be candidates for inclusion on the Entity List.
Congress may also use the CMC List to impose stronger restrictions through legislation. In response to the publication of the CMC List, the Chairman of the House Select Committee on the Chinese Communist Party (CCP) indicated support for further restricting US businesses from working with or funding Chinese companies determined to support the CCP’s military development.
While inclusion of these companies on the CMC list may have limited immediate effects on most businesses, all US persons and companies doing business with or investing in these entities face increased risk that the US government could impose future restrictions prohibiting business activities more broadly, although such sanctions would not be automatic and would depend on the unique criteria of each agency.
US government contractors will need to incorporate additional due diligence processes to verify the sources of their products and services, and to confirm that any third parties they use to lobby on their behalf are not also engaged with entities on the CMC List. Lobbyists and potentially consulting firms may also need to decide between US defense clients or their Chinese clients. Moreover, US businesses must take into account an adverse action under Chinese law, such as fines, restrictions, or inclusion on China’s “unreliable entities list,” which could significantly impact operations and market access in China. These risks necessitate a thoughtful approach to contract terminations or other adverse actions against CMC-listed entities.
Finally, because of the increased negative effects of the CMC List, listed companies will be more likely to challenge their designation, both through DOD’s administrative appeals process, as well as through US courts. Previous efforts have met with mixed results. For example, DOD removed Hesai Technology Co., from the CMC List after Hesai challenged its listing in US District Court for the District of Columbia. DOD shortly thereafter redesignated Hesai based on different information.
Advanced Micro-Fabrication Equipment Inc. China and SZ DJI Technology Co. Ltd. also challenged their inclusion on the list. DJI asserted both financial and reputational harm due to their designation, including cancellation of contracts to purchase its products. In December 2024, DOD removed Advanced Micro-Fabrication Equipment from the list. DJI remains on the list, and its case with the DC District Court remains pending.
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