United States: U.S. Adds Chinese Giant Huawei And Non-U.S. Affiliates To Entity List; Grants Limited Reprieve

Overview

  • On May 16, the U.S. Department of Commerce added Huawei and many of its non-U.S. affiliates to the Entity List.
  • All commodities, software and technology subject to the Export Administration Regulations require a license to be exported, reexported or transferred (in country) to those on the Entity List; the granting of licenses to Huawei and its listed affiliates will be subject to a policy of denial.
  • Effective May 20, the Department issued a Temporary General License authorizing certain limited activities related to the use of existing Huawei technology.
  • In the lead-up to the Entity List designations, the U.S. government also issued an executive order regarding threats to U.S. information and communication technology and services.
  • These changes point to the imperative that U.S. entities (as well as non-U.S. entities that deal in U.S. origin goods or technologies) remain current on U.S. export restrictions and have appropriate procedures to ensure compliance in a rapidly changing regulatory environment.

Executive Order on Threats to U.S. Communication Technology

On May 15, President Trump issued Executive Order 13873, declaring a national emergency under the authority of the International Emergency Economic Powers Act (IEEPA) with respect to foreign threats against U.S. information and communication technology and services. The Order directed various U.S. governmental agencies to publish regulations implementing the Order within 150 days.

The Order does not refer specifically to Huawei or to China, but it creates a framework to prohibit the purchase or use of telecommunications equipment by a “foreign adversary,” which is defined as “any foreign government or foreign non-government person engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons.” The Secretary of Commerce, in consultation with other agencies, has authority to review products of and purchases by telecommunications firms connected to any foreign adversary as well as the ability to ban any “acquisition, importation, transfer, installation, dealing in, or use” of any information and communications technology or service from an adversarial company or government.

The Order follows widely reported concerns that Huawei devices and services expose the United States to national security, foreign policy and economic risks. The Order observes that “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services . . . to commit malicious cyber-enabled actions, including economic and industrial espionage against the United States and its people.”

Huawei and Affiliates Placed on Entity List

On May 21, the Commerce Department published a notice in the Federal Register, effective May 16, effectuating the addition of Huawei and many of its affiliates to the Entity List. This publication followed a May 15 announcement of the Department’s intention. Designation on the Entity List restricts exports, reexports and transfers to Huawei and its designated affiliates of goods, software and technology subject to the Export Administration Regulations (EAR). Items subject to the EAR include goods, software and technology that are (1) located in the United States, whatever their origin; (2) U.S.-origin, wherever located; (3) foreign-produced and incorporating more than a de minimis amount of export-controlled U.S.-origin content; or (4) foreign direct products of U.S.-origin technology controlled for national security reasons.

The Department determined that Huawei is engaged in activities contrary to the national security and foreign policy interests of the United States. Specifically, Huawei is alleged to have violated IEEPA, conspired to violate IEEPA by providing prohibited financial services to Iran, and obstructed justice in the investigation of those alleged violations, among other things. The Administration may adjust its treatment of Huawei in response to broader developments in negotiating U.S.-Chinese trade.

Transactions with those on the Entity List require parties to apply for licenses, the granting of which, in the case of Huawei and its listed affiliates, is subject to a policy of denial. U.S. companies have responded immediately. China pushed back against the restrictions, and its foreign ministry spokesperson noted in a briefing, “It’s wrong, it is abusing national security, and targeting specific enterprises with discriminatory policies goes against fair competition principles.” Huawei further noted that the restrictions will economically harm U.S. companies that rely on Huawei products and disrupt global collaboration and mutual trust. Huawei has repeatedly denied that its products pose a security threat, and China stands behind it, noting that it intends to take necessary measures to protect the rights of Chinese firms.

A Limited Exemption

On May 20, the Bureau of Industry and Security (BIS) announced that it would issue a Temporary General License (TGL) to authorize specific, limited engagement in transactions with Huawei and its affiliates that were added to the Entity List, effective for 90 days through August 19, unless the Department chooses to extend it. The TGL took effect on May 20. Commerce Secretary Wilbur Ross noted that the TGL will allow operators who rely on Huawei equipment to make other arrangements and will allow the Department some leeway in evaluating the situation and proposing appropriate long-term measures for foreign and domestic “telecommunications providers that currently rely on Huawei equipment for critical services.”

The TGL authorizes certain activities for the continued operations of existing telecommunications networks and mobile telephone services. The transactions specifically authorized by the TGL include transactions necessary to the continued operation of existing networks and equipment, support to existing handsets, cybersecurity research and vulnerability disclosure related to equipment currently owned, controlled, or possessed by the listed entities, and necessary engagement for the development of 5G standards. For transactions covered by the TGL, exporters may proceed under previously applicable authorizations.

The TGL is not all-encompassing. It does not cover most transactions. Further, use of the TGL is predicated on the creation of a certificate in advance of any export identifying the transaction and outlining how it meets the criteria for the TGL. This certification must be maintained pursuant to the EAR’s record-keeping requirements. Other than the transactions specifically provided for in the TGL, any exports, reexports or transfers (in country) of items subject to the EAR continue to require a license.

Huawei’s CEO Ren Zhengfei addressed the Chinese media earlier this year, explaining that Huawei had prepared for a U.S. ban and that its 5G telecommunications would not be affected by the sanctions. He stated that the temporary license “bears little meaning.”

Evaluate Your Business to Ensure Compliance

Huawei’s global reach means the noted restrictions have worldwide implications for companies in a plethora of industries. Both U.S. and non-U.S. companies should take stock of ongoing, pending and expected exports, reexports and transfers (in country) of goods, software and technology subject to the EAR involving Huawei or any of its affiliates or other entities listed on the Entity List. If such transactions are in process or contemplated, they should be immediately halted and evaluated under the TGL before proceeding.

Common sense does not always prevail in export controls, and companies should be careful and certain before proceeding with a potentially restricted transaction. Notably, parties outside the United States ‒ even with no connection to a U.S. entity ‒ may be restricted to the extent they reexport or transfer items subject to the EAR. U.S.-origin items exported from the United States continue to be subject to the EAR unless and until they are incorporated into a foreign-origin item at a level below the applicable de minimis threshold.

Should you wish to apply for a specific license to transact with a party on the Entity List, be mindful of a presumption of denial. Any request should appropriately explain why the proposed transaction is not contrary to the national security, foreign policy and economic protection rationale behind the license.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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