United States: Commerce Department Proposes Rule To Review Broad Range Of ICTS Transactions

On November 26, the US Department of Commerce issued a long-awaited proposed rule (Proposed Rule) implementing new restrictions designed to protect the US information and communications technology and services (ICTS) supply chain from foreign threats. The rule would, if implemented, establish a regulatory review process for ordinary commercial transactions involving ICTS. Reviews would be conducted by the Commerce Department, either at its own initiative or upon a referral by another agency, and could lead to transactions being prohibited or subject to mitigation requirements. Unlike in the procedures used by the Committee on Foreign Investment in the United States (CFIUS), the parties to an ICTS transaction would not submit a notice to trigger the review.

If the measure is implemented, companies and investors engaged in ICTS-related transactions would need to carefully assess any issues a potential transaction may raise under the new rule and may need to work with the Commerce Department to alleviate or help it assess any possible concerns. In the shorter term, companies should assess the benefits of submitting comments on the proposed rule to help shape the review procedures as the Commerce Department develops them.

Background

As we have described, President Trump’s May 2019 executive order, E.O. 13873, directed the Commerce Department to protect the US information and communications infrastructure from foreign threats. It did not specifically identify China or any Chinese telecommunications suppliers by name. But it has been widely presumed that the executive order was intended to target Huawei equipment and services exported to the United States. E.O. 13873 established a framework for the United States to prohibit US companies and others subject to US jurisdiction from purchasing or using certain services or equipment provided or produced by suppliers of concern when such purchases would present “undue” or “unacceptable” risk to US national security.

In the Proposed Rule, the Commerce Department reiterates concerns expressed in E.O. 13873 that the US “ICTS supply chain has become increasingly vulnerable to exploitation and is an attractive target for espionage, sabotage, and foreign interference activity” and that “ICTS that are designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary augment our adversaries’ ability to create or exploit vulnerabilities in ICTS to potentially catastrophic effect.” The Proposed Rule establishes procedures for the Commerce Department to “identify, assess, and address” transactions involving ICTS that could pose an undue risk to US telecommunications and information systems, critical US infrastructure or the US digital economy.

The Proposed Rule is open for public comment through December 27, 2019. This comment period provides an opportunity for companies to express their views on an extraordinary expansion of US regulatory review over a broad category of private commercial transactions that may—or may not—threaten the national security, foreign policy or economy of the United States.

Reviewable Transactions

According to a Commerce Department press release and the Proposed Rule itself, Commerce would conduct “a case-by-case, fact-specific approach” to evaluate transactions involving ICTS to determine which transactions should be prohibited or mitigated. 

Specifically, transactions that meet all the following criteria would fall within the scope of the Commerce Department’s regulatory review:

  1. The transaction is conducted by any person subject to the jurisdiction of the United States or involves property subject to the jurisdiction of the United States;
  2. The transaction involves any property in which any foreign country or a national thereof has an interest (including through an interest in a contract for the provision of the technology or service); and
  3. The transaction was initiated, pending, or completed after May 15, 2019, regardless of when any contract applicable to the transaction was entered into, dated or signed, or when any license, permit, or authorization applicable to such transaction was granted. Transactions involving certain ongoing activities, including but not limited to managed services, software updates, or repairs, would constitute transactions that was [sic] completed on or after May 15, 2019 even if a contract was entered into prior to May 15, 2019.
  4. Prohibited Transactions

    The Proposed Rule contemplates that the “acquisition, importation, transfer, installation, dealing in or use of ICTS by any person” may be prohibited or require transaction-specific mitigation where the transaction meets both of the following criteria, in addition to the three criteria identified above:

  5. The transaction involves information and communications technology or services designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and
  6. The transaction:
  1.  Poses an undue risk of sabotage to or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of information and communications technology or services in the United States;
  2. Poses an undue risk of catastrophic effects on the security or resiliency of United States critical infrastructure or the digital economy of the United States; or
  3. Otherwise poses an unacceptable risk to the national security of the United States or the security and safety of United States persons.

Process for Identifying Prohibited Transactions

Under the Proposed Rule, the Commerce Department would initiate reviews upon its own determination, in response to a written referral from another agency or based on information submitted by private parties that the Commerce Department determines to be credible. Notably, the parties to a transaction would not be required to submit a notice initiating the review, so it is unclear how the Commerce Department might receive relevant information before a transaction is completed. The Commerce Department’s evaluation would consider information from US and foreign government agencies, publicly available information, and information maintained by the parties to the transaction.

If the Commerce Department reaches a preliminary determination that a transaction presents undue or unacceptable risk, the Commerce Department would be required to notify the parties and provide a 30-day opportunity for the parties to oppose the preliminary determination and provide information in support of their opposition, which could include proposed measures for mitigation. The Commerce Department would then have an additional 30 days to complete its evaluation and issue a written final determination to the parties, either prohibiting the transaction, allowing the transaction or allowing the transaction subject to mitigation measures. 

Importantly, the Commerce Department would have sweeping discretion to “vary or dispense with” the specified procedures as necessary to prevent public harm or to protect national security interests. The parties to a transaction would not be informed of a preliminary determination or afforded an opportunity to respond if notice to the parties would not be “consistent with national security.”

Despite the commercial uncertainty inherent in the proposed procedures, the Proposed Rule would not provide any mechanism for the parties to obtain advisory opinions or declaratory rulings in advance of entering into commercial transactions that might be subject to review, prohibition or mitigation.

Opportunity to Comment

The public has 30 days from the date of publication, or until December 27, 2019, to comment on the Proposed Rule. This includes comments on possible categorical prohibitions or exclusions for certain classes or categories of transactions, as well as methods for mitigation of risk that should make otherwise prohibited transactions permissible. Specifically, the Commerce Department has requested comments on the following topics:

  • Instances where the Commerce Department should consider categorical exclusions or classes of persons whose use of ICTS can never violate E.O. 13873.
  • Transactions involving types or classes of ICTS where the transaction should be prohibited because it could present an undue or unacceptable risk, but where that risk could be reliably and adequately mitigated to prevent such risk. Commenters have also been asked to comment on the form that the mitigation should take.
  • The method that the Commerce Department could rely on to ensure that mitigating measures are consistently and effectively executed, as well as ways to ensure that it is kept informed of technological changes and other changed factual circumstances that may render the mitigating measures insufficient.
  • The relatively broad definition of “transaction” that the proposed rule would implement, i.e., “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service,” as well as how to interpret those terms (especially “dealing in” and “use of”).
  • The record keeping requirements that would apply to transactions subject to the Proposed Rule.

The Commerce Department has discouraged comments on the definition of the term “foreign adversary”—currently defined to mean “any foreign government or foreign non-government person determined by the [Commerce] Secretary to have 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 for the purposes of Executive Order 13783 [sic]”—by emphasizing that such a determination “is a matter of executive branch discretion.”

Companies should monitor the implementation of the Proposed Rule and should strongly consider the benefits of submitting comments to the Commerce Department. As the Commerce Department acknowledges in the Proposed Rule, “[a] majority of entities today, large or small, utilize some manner of ICTS ….” WilmerHale is prepared to advise clients on whether participation in the rulemaking makes sense for their business and to assist as needed in formulating and submitting comments or assessing the business implications of the Proposed Rule.

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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