In 2023, the biggest question on clients' minds was the ramping up of U.S. export controls targeting semiconductors and advanced computing.
In October, the U.S. Commerce Department unveiled new rules to tighten further a sweeping set of export controls first introduced a year previously, reducing the types of semiconductor manufacturing equipment and advanced computing that companies can sell to China.
In particular, the new rules expand the export restrictions beyond mainland China and Macau to include 21 other countries on which the United States maintains an arms embargo, including Iran and Russia. Because U.S. export controls follow the item, both U.S. persons and non-U.S. persons can incur liability for violations of the rules.
This year, we continue to see an expansion of the regulation on information and communication technology. At the end of January, the U.S. government proposed to expand the scope of controls on American cloud computing companies, requiring them to determine whether foreign entities are accessing U.S. data centres to train AI models. These rules will require both U.S. and non-U.S. providers of certain infrastructure as a-service to maintain records on the end-users of their services and in some circumstances, file reports to the U.S. Government. While this rule is not yet effective, it shows the U.S. government is comfortable with imposing compliance obligations not only on U.S. persons but non-U.S. resellers and providers as well. We are keeping a close eye on these developments.
Reverse CFIUS
Another big development in 2023 was the signing in August of the highly anticipated Executive Order addressing outbound U.S. investments in critical technologies in so-called ‘countries of concern'. That order marked the first official step in the lengthy process to introduce what has been dubbed a ‘reverse CFIUS' process, doing for outbound investments what the Committee on Foreign Investment in the United States (CFIUS) does through its inbound foreign transaction reviews.
On 21 June 2024, the U.S. Department of the Treasury issued a notice of proposed rulemaking (the Proposed Rule) to implement the Outbound Investment Security Program introduced pursuant to Executive Order 14105 (EO 14105).
The Proposed Rule, would prohibit – or, in some cases, require notification of – certain investments involving so-called Covered National Security Technologies and Products in the following three sectors: (i) semiconductors and microelectronics; (ii) quantum information technologies; and (iii) artificial intelligence.
These prohibitions and notification requirements would apply to transactions with a Covered Foreign Person (defined to include persons of a Country of Concern engaged in certain specified activities) by (i) a U.S. Person or (ii) a Controlled Foreign Entity of a U.S. Person.
As a practical matter, the Proposed Rule – if and when it becomes effective – would require parties seeking to invest in Chinese entities and non-Chinese entities with holdings in China to conduct additional due diligence to determine whether their investments are captured by the new regulations.
Treasury is requesting comments on the Proposed Rule until 4 August 2024. Although there is no deadline for Treasury to issue the final rule after the comment period ends, it is anticipated that the final rule could be issued as early as the fourth quarter of 2024 or early 2025.
As a practical matter, the Proposed Rule – if and when it becomes effective – would require parties seeking to invest in Chinese entities and non-Chinese entities with holdings in China to conduct additional due diligence to determine whether their investments are captured by the new regulations.
Sanctions updates
In January 2024, the U.S. implemented additional sanctions measures and trade restrictions on Russia and Belarus as a result of the ongoing war in Ukraine. Those restrictions identified additional sanctions targets, expanding the scope of industry sector sanctions and refining some existing export controls on the two countries.
Suggestions of a comprehensive embargo on all dealings with Russia have so far failed to achieve unanimous agreement and as a result, companies continue to do business with Russia while navigating the fast-changing sanctions landscape.
Addressing trade restrictions
With sanctions and export control regimes continuing to expand in scale and scope, organizations need to pay close attention to developing requirements. We recommend businesses build compliance provisions into sales agreements to ensure customers are aware that items may become subject to restrictions and that suppliers will not risk being in breach of the latest rules.
In addition to contractual protections, which may include termination clauses with respect of breaches, companies should conduct enhanced due diligence on potential customers, factor in additional time for compliance and maintain active lines of communication with counterparties around these issues.
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