China orders domestic companies to defy US sanctions, trapping global banks in a compliance crossfire as geopolitical risk hits the international financial system

China has issued an unprecedented directive ordering Chinese companies to ignore US sanctions — a direct act of defiance that exposes the global banking sector to acute compliance risk. The instruction represents a sharp departure from Beijing's historical approach: while China has routinely criticised unilateral sanctions as illegitimate, it has previously allowed its largest companies to quietly comply, in order to protect access to the US financial system and avoid secondary sanctions blowback. The reversal places international banks in an impossible position. Lenders with operations in both the US and China face conflicting legal obligations: complying with US sanctions law exposes them to retaliation under Chinese law, while following Beijing's instruction risks OFAC (the US Office of Foreign Assets Control, the primary sanctions enforcement body) penalties and potential loss of correspondent banking relationships in dollar markets. The flashpoint is the broader US-Iran conflict, which has prompted Washington to impose sanctions on Chinese refiners purchasing Iranian oil in defiance of the US embargo. Beijing's counter-move — telling Chinese firms to ignore those sanctions — marks a new phase of financial confrontation between the two largest economies. For City lawyers advising financial institutions, this creates immediate demand for sanctions screening reviews, cross-border compliance gap analysis, and assessment of contractual force majeure (unforeseeable circumstances) clauses where counterparty compliance is now legally uncertain. Banks with correspondent relationships touching Chinese entities are particularly exposed.

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