Huawei/National Security Sanctions: Entity List Action and IT Supply Chain Restrictions

Late last week, U.S. authorities commenced two initiatives to restrict trade with Huawei Technologies Co. Ltd. ("Huawei") and other Chinese suppliers of electronic systems:

• Effective May 16, 2019, the U.S. Commerce Department's Bureau of Industry and Security ("BIS") added Huawei and 68 Huawei non-U.S. affiliates in 26 countries (collectively, the "Huawei Group") to BIS's Entity List. This action generally forbids anyone to supply Huawei Group items from the United States or that are otherwise subject to the U.S. Export Administration Regulations (the "EAR"). BIS also issued a temporary general license authorizing certain specified transactions with Huawei Group that apparently do not raise national security concerns.
• On May 15, 2019 the President issued an executive order authorizing a general ban on any person subject to the jurisdiction of the United States acquiring, importing or otherwise using, in certain transactions, any information or communications technology or service designed, manufactured, developed or supplied by to-be-designated non-U.S. persons. The Trump Administration is expected to apply this ban to Huawei and other Chinese suppliers that the U.S. government treats as posing a U.S. national security risk.

Background

United States authorities have intensified enforcement and policy initiatives to address alleged threats to U.S. national security by Chinese suppliers of electronic systems.

Since at least as early 2010, Huawei and Zhongxing Telecommunications Equipment Corporation ("ZTE") have been the subject of investigations and other inquiries by U.S. authorities regarding suspected potential trade violations and other alleged national security-related irregularities. In 2017 and 2018, the U.S. government settled criminal and civil charges against ZTE regarding alleged violations of U.S. export control and embargo requirements. United States enforcement against ZTE nearly bankrupted the company and leaves it under far-reaching and costly U.S. monitoring arrangements.

Huawei and its CFO, Wanzhou Meng, became a subject of criminal investigations by U.S. authorities. In December 2018, Canadian authorities arrested Ms. Meng, and U.S. officials have been pursuing her extradition to the United States. U.S. prosecutors allege Huawei and Ms. Meng violated U.S. economic sanctions requirements by, among other things, creating corporate structures and other arrangements to hide Huawei's allegedly unlawful supply of items to U.S.-embargoed countries such as Iran. In January 2019, U.S. federal prosecutors also filed criminal charges against Huawei affiliates for trade secrets violations.

Key Points

1. Entity List Action: With BIS's placement of the Huawei Group on the Entity List, the EAR prohibit unlicensed exports, reexports and in-country transfers of items – hardware, software (including software updates) or technology (including design and manufacturing know-how) – that are subject to the EAR to listed Huawei Group entities. It is critical, then, to understand the circumstances in which an item is subject to EAR. In general, an item is subject to the EAR if:

• It is in the United States, no matter where it was created. So most unlicensed exports from the United States to the Huawei Group are forbidden;
• It was created in the United States. So most items created in the United States are subject to the EAR no matter where they are today;
• It was created abroad but contains over-de minimis levels of export-controlled U.S.-origin content. Detailed "de minimis analyses" are often needed to determine whether a foreign-made item meets the de minimis criteria; or
• It is the "direct product" of certain U.S.-origin technology or software or production facility or portion thereof.

The Huawei Group Entity List action will be effective retroactively as of May 16, 2019.

The BIS temporary general license authorizes the following transactions:

• Continued operation of existing networks and equipment;
• Support to existing handsets;
• Cybersecurity research and vulnerability disclosure; and
• Engagement as necessary for development of 5G standards by a duly recognized standards body.

This license is expected to be expanded over the next few weeks, as U.S. officials learn more about the impact of the Entity List action on U.S. firms.

2. Supply Chain Security Executive Order: The executive order – titled "Securing the Information and Communications Technology and Services Supply Chain" – prohibits certain acquisitions, importations, transfers, installations, dealings in, or uses of any information and communications technology or service (any of which is a "transaction") produced or supplied by persons designated as being a "foreign adversary" or owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary – a foreign government or a foreign non-government person engaged in a long-term pattern or serious instances of conduct significantly adverse to the U.S. national security and safety of U.S. persons.

   The executive order authorizes the U.S. government to determine, among other things, (i) which countries or persons are to be treated as being foreign adversaries, (ii) which technologies or countries warrant scrutiny and (iii) which transactions are subject to the executive order restrictions. Over the next 150 days, the Commerce Department – in consultation with other government agencies – is to publish regulations to implement the executive order. The Commerce Department is expected to apply executive order restrictions to products of Huawei, ZTE and other Chinese suppliers of electronic systems.

   Before the executive order, the Congress enacted a prohibition on certain procurement by federal executive agencies of products and services by Huawei, ZTE and a few other Chinese companies (Section 889a of the U.S. National Defense Authorization Act for Fiscal Year 2019 of August 2018). The executive order goes beyond the U.S. government procurement restrictions and covers certain procurement by private parties.

   The situation remains fluid with respect to Huawei and requires careful attention to avoid compliance issues.