Executive Summary
On 2 May 2026, China’s Ministry of Commerce (MOFCOM) issued a prohibition order under its Blocking Rules concerning Hengli (Dalian) and four other refineries. The order prohibited entities under Chinese jurisdiction from recognising, enforcing, or complying with the relevant measures. This was the first time China had invoked the Blocking Rules to address this type of legal conflict. However, Hengli’s own response exposed the limits of the order. It redefines the obligations of domestic entities, but does little to induce overseas banks, traders and other counterparties to resume business with entities on the Specially Designated Nationals (SDN) List.
Key Points
- On 24 April 2026, the US Office of Foreign Assets Control (OFAC) designated Hengli Petrochemical (Dalian) Refinery Co., Ltd. on the Specially Designated Nationals and Blocked Persons List (SDN List) pursuant to Executive Order (EO) 13902 over alleged Iranian oil purchases.
- Being placed on the SDN List blocks the entity’s property within US jurisdiction, generally prohibits US persons from dealing with it, and restricts access to dollar clearing through the US financial system. Non-US parties may also face secondary sanctions risk.
- Hengli denied purchasing Iranian oil and said it would seek removal from the sanctions list through legal channels.
- Trade sources said that Hengli had bought at least 2 million barrels of West African crude and was seeking further non-sanctioned supply. These transactions would likely be routed through middlemen to reduce sellers’ exposure to secondary sanctions risk.
Analysis
The SDN List creates a clearly codified risk for overseas third parties: any non-US entity that materially facilitates sanctioned transactions may face secondary sanctions risk. However, China’s prohibition order did not create an equivalent reverse consequence. The original Chinese text does not clearly identify who the order is imposed on. That means its scope must instead be read through the 2021 Blocking Rules, which apply to Chinese citizens, legal persons and other organisations. It also does not specify what direct consequences overseas actors would face under the order if they continued to act in accordance with the SDN List. Although this does not mean that Beijing lacks other countermeasures, within this prohibition order itself, there is no written penalty for overseas counterparties as explicit as the risk created by the SDN List. The result of this asymmetry is foreseeable in overseas parties’ risk calculations. The prohibition order can change the compliance obligations of entities within China, but it is unlikely to change the behaviour of overseas banks, crude oil traders and any other counterparties. Facing one clear consequence and one silence, continuing to comply with the SDN List is the lower-risk option.
Hengli’s own response confirms these limits. After being placed on the SDN List, Hengli quickly sought removal from the US blacklist, while also turning to non-sanctioned crude from West Africa. Trade sources said these transactions could be completed through a chain of middlemen. This shows that the SDN List and the secondary sanctions risk it creates are still imposing concrete constraints on Hengli’s overseas operations. Hengli’s response has stayed outside the order’s reach. It has adjusted its crude sourcing and transaction structure to reduce counterparties’ exposure.
Policy Implications
- The prohibition order mainly acts on entities within China. Yet the restoration of Hengli’s overseas transactional access still depends on the risk calculations of overseas counterparties. The tool’s scope of constraint (domestic entities) and the location of access decisions (overseas actors) do not structurally overlap.
- Whether the order can move beyond domestic compliance obligations and genuinely affect overseas access depends on whether the current consequence gap for overseas actors can be filled.
Bibliography
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