Alerts and Updates
Commerce Department Imposes Heightened Export Controls on Huawei and Many Other Chinese Entities
May 29, 2020
These actions will have significant implications for U.S. and non-U.S. companies that have business relationships with Huawei and many of its affiliates.
The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has recently tightened U.S. export controls on numerous Chinese entities, including Huawei Technologies Co., Ltd. and many of Huawei’s affiliates in China and around the world. These changes relate to:
- A notice published by BIS stating that the validity of a temporary general license (TGL) pertaining to the export, reexport or transfer of certain items relating to certain kinds of transactions involving Huawei and dozens of its affiliates would be extended through August 13, 2020, but that, after such time, the terms of the TGL may be revised or possibly eliminated;
- An interim final rule promulgated by BIS making amendments to the Export Administration Regulations (EAR) that significantly expands export controls over certain foreign-produced items when there is “knowledge” that the items are destined for specified companies on the Commerce Department’s Entity List, including Huawei and many of its non-U.S. affiliates; and
- An announcement by BIS that 33 Chinese companies and institutions will be added to the Entity List for their alleged involvement in either supporting procurement of items for military end use in China or human rights violations and abuses committed in China’s campaign of repression against certain minority groups in the Xinjiang Uighur Autonomous Region.
As discussed below, these actions will have significant implications for U.S. and non-U.S. companies that have business relationships with Huawei and many of its affiliates, as well as the other identified entities.
Background on the Entity List
Given that all three recent actions taken by BIS relate in one way or another to the Entity List maintained by the Commerce Department, it is important to understand what this list is and the restrictions that apply to entities that are on it. Pursuant to Parts 744 and 746 of the EAR, BIS has the authority to place entities on the Entity List that are reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to U.S. national security or foreign policy interests. Entities placed on the Entity List are generally prohibited from receiving some or all items subject to the EAR unless an export license is obtained, with some exceptions, as specifically described in the notice that BIS publishes in the Federal Register relating to the addition of the entity to the list.
Placement of Huawei and Many of Its Non-U.S. Affiliates on the Entity List in 2019
On May 16, 2019, BIS placed Huawei and 68 of its non-U.S. affiliates on the Entity List, including certain ones located in Belgium, Bolivia, Brazil, Burma (Myanmar), Canada, Chile, China, Egypt, Germany, Hong Kong, Jamaica, Japan, Jordan, Lebanon, Madagascar, the Netherlands, Oman, Pakistan, Paraguay, Qatar, Singapore, Sri Lanka, Switzerland, Taiwan, the United Kingdom and Vietnam. In its notice relating to this determination, BIS stated that Huawei and the 68 affiliates would generally be subject to a license requirement for the export, reexport or transfer of all items “subject to the EAR.” Importantly, most goods, software and technology located in or originating from the United States are considered subject to the EAR (as that term is defined under the EAR), and certain items outside of the United States may also be subject to the EAR if they incorporate more than de minimis controlled U.S.-origin content or are produced as the “direct product” of certain controlled U.S.-origin technology. The notice further explained that license applications will be reviewed under a presumption of denial, and that no license exceptions set forth under the EAR could be used for the export, reexport or transfers of items subject to the EAR to Huawei or the 68 affiliates.
However, on May 20, 2019, BIS announced that it was establishing a TGL that would permit four categories of transactions involving the export, reexport or transfer of items subject to the EAR to Huawei and the 68 affiliates, under the licensing requirements and other EAR policies that were in effect for those entities prior to their Entity List designations on May 16, 2019. The eligible kinds of transactions related to: (1) continued operations of existing networks and equipment; (2) support for existing handsets; (3) cybersecurity research and vulnerability disclosure; and (4) engagement with Huawei and its 68 affiliates as necessary for the development of 5G standards by a duly recognized standards body. As stated in the announcement, the TGL was deemed to be effective from May 20, 2019, through August 19, 2019.
Subsequently, BIS has placed additional non-U.S. affiliates of Huawei on the Entity List and has also expanded the applicability of the TGL. For example, on August 19, 2019, BIS added 46 non-U.S. affiliates of Huawei to the Entity List, and on August 21, 2019, BIS announced that it was extending the validity of the TGL through November 18, 2019.
Recent Extension of Validity of the TGL May Be the Last
Most recently, on May 18, 2020, BIS published a notice extending the validity of the TGL through August 13, 2020. Significantly though, when announcing this extension, BIS stated it “is also notifying the public that activities authorized in the TGL may be revised and possibly eliminated after August 13, 2020.” Accordingly, in the view of BIS, companies that have been relying on the TGL should begin analyzing what impact elimination of the TGL would have on them, and they should be prepared to submit license applications to BIS to determine which, if any, activities will be authorized in the event that the TGL is terminated.
Huawei-Related Amendments to the Foreign Direct Product Rule and Entity List
Notwithstanding the extension of the TGL, Secretary of Commerce Wilbur Ross recently announced that BIS would be amending the EAR to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad. Subsequently, on May 19, 2020, BIS published an interim final rule to make the announced amendment to the EAR. Pursuant to the interim final rule, which was stated to take effect as of May 15, 2020, BIS has amended the “foreign-produced direct product rule” as applied to Huawei and many of its affiliates.
Historically, in accordance with the foreign-produced direct product rule, foreign-made items outside of the United States have been subject to the EAR if they are the “direct product” of technology or software controlled on the EAR’s Commerce Control List (CCL) for “national security” reasons. Significantly, the interim final rule expands the reach of the foreign-produced direct product rule to certain items that are manufactured abroad to Huawei specifications using less sensitive EAR-controlled technology and software, including technology or software controlled only for “antiterrorism” reasons, provided that the reexporter, exporter from abroad or transferor (in-country) knows that the item is destined for Huawei or specified affiliates designated in the interim final rule. The interim final rule also restricts the knowing export from abroad, reexport, or transfer (in-country) to designated Huawei entities of items that are developed or produced by designated Huawei entities and are the “direct product” of specified EAR-controlled technology or software. The interim final rule imposes these new requirements through the addition of two new substantive provisions to the EAR.
First, the interim final rule amends General Prohibition Three under the EAR as applied to the designated Huawei entities. Specifically, absent a license from BIS, the amendment prohibits shipments or transfers from outside the United States of any foreign-produced commodity, software or technology:
- That “is produced or developed by” any of the designated Huawei entities;
- That is the “direct product” of technology or software subject to the EAR and identified in any of the numerous export control classification numbers on the CCL relating to the technologies and software required for the production or development of certain electronics in Category 3 (including semiconductors), computers in Category 4 and telecommunications equipment in Category 5; and
- When “there is ‘knowledge’” that the foreign-produced item is “destined to” designated Huawei entities.
In other words, in order to comply with this part of the interim final rule, companies that ship or transfer foreign-made commodities, software or technology outside the United States with “knowledge” that they are destined to any of the designated Huawei entities will need to determine whether the items: (1) were “produced or developed” by any of the designated Huawei entities; and (2) are the “direct product” of software or technology subject to the EAR that is described in the referenced entries in Categories 3, 4 or 5 of the CCL.
Second, the interim final rule also amends the Entity List itself by adding footnote 1, which provides that specified items may not be knowingly reexported, exported from abroad or transferred (in-country) to “footnote 1” entities without BIS authorization. The only Entity List entries tagged with the “footnote 1” designation are the designated Huawei entities. One part of footnote 1 controls non-U.S. items when the items are:
- Produced by a plant or major component of a plant that is a direct product of specified “U.S.-origin” technology or software; and
- The direct product of technology or software produced or developed by a “footnote 1” entity.
Footnote 1 specifies that a “major component of a plant” means “equipment that is essential to the ‘production’ of an item, including testing equipment, to meet the specifications of a design specified” by a footnote 1 entity. As such, BIS authorization would be required for the knowing provision to any of the designated Huawei entities of items manufactured outside the United States to Huawei specifications using semiconductor-related equipment that is the “direct product” of U.S.-origin technology. BIS authorization also would be required for the knowing reexport, export from abroad or transfer (in-country) to footnote 1 entities of non-U.S. items that are the “direct product” of technology or software subject to the EAR and controlled under one of the specified export control classification numbers when the items are produced or developed by footnote 1 entities.
Somewhat surprisingly, the term “produced or developed by” is not defined in the interim final rule. The use of the term “by” would seem to limit the scope of the interim final rule to capture only those items that are “produced or developed by” designated Huawei entities. However, companies that sell products to any of the designated Huawei companies will need to evaluate things carefully and may wish to seek guidance from experienced counsel who possess deep understanding of and experience with U.S. export controls.
The interim final rule was deemed to take effect as of May 15, 2020. However, for newly captured products currently in production, there is a delayed implementation date of 120 days (i.e., through September 14, 2020). In addition, BIS is also accepting public comments on the interim final rule until July 14, 2020.
Recent Addition of Numerous Chinese Entities to the Entity List
Huawei and its affiliates have not been the only Chinese entities recently targeted by BIS. On May 22, 2020, BIS announced that it would add 33 Chinese companies and institutions to the Entity List. Of the 33 new additions, 24 are governmental and commercial organizations based in China, Hong Kong and the Cayman Islands that BIS has stated pose “a significant risk of supporting procurement of items for military end-use in China.” These entities include a number of well-known Chinese companies, such as Qihoo 360 Technology, as well as several Chinese companies that have significant existing commercial ties and investments in the United States. The full list of these 24 entities can be found in the announcement that BIS issued relating to this action.
The other nine Chinese entities, including the Chinese Ministry of Public Security’s Institute of Foreign Science, will be placed on the Entity List for their alleged complicity “in human rights violations and abuses committed in China’s campaign of repression, mass arbitrary detention, forced labor and high-technology surveillance against Uighurs, ethnic Kazakhs, and other members of Muslim minority groups in the Xinjiang Uighur Autonomous Region.” The full list of these entities can be found in the announcement that BIS issued relating to this action.
These new Entity List designations are expected to take effect immediately upon their publication in the Federal Register. Upon such publication in the Federal Register, dealings with these entities that involve items subject to the EAR will generally be prohibited unless specifically authorized by a license from BIS, and license applications involving these designated entities will likely be subject to a “presumption of denial” (i.e., BIS will deny such license applications unless a strong case can be made as to why the proposed transaction will not harm or impair U.S. national security).
About Duane Morris
Attorneys in the firm’s Government Contracts and International Trade Group have considerable experience in assisting clients on a wide range of matters involving U.S. export controls and economic sanctions. Such assistance includes: performing export control classification reviews; advising on the viability of proposed transactions; applying for and obtaining licenses and other kinds of export authorizations from BIS and other U.S. government agencies (e.g., DDTC and OFAC); and developing, implementing and assessing trade compliance programs for companies.
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