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US Bans Exports to Huawei and Announces Broader Transaction Review Program
 

Effective May 16, 2019, the US Commerce Department’s Bureau of Industry and Security (BIS) added Huawei Technologies Co. Ltd. – the largest telecommunications equipment provider in the world – and 68 of its non-US affiliates (collectively, Huawei) to the Bureau’s Entity List. As a result of this action, US and non-US exports or transfers of US goods, software, or technologies (including non-US items containing more than a de minimis amount of US content) to Huawei and its listed affiliates require a BIS export license. BIS will presumptively deny applications for such licenses, so the impact on Huawei, which uses US technology and components in its equipment, could be severe.

President Trump took related action on May 15, 2019, declaring the threat posed by foreign adversaries with respect to US communications networks to be a national emergency. He issued Executive Order No. 13873 (the EO), in which he instructed the Commerce Department to block transactions involving technology and services (relating to IT and communications) that pose unacceptable risks to US communications networks, US critical infrastructure, the digital economy in the United States, or national security. The Commerce Department will issue implementing rules or regulations within 150 days, or by October 12, 2019. The rules may, among other things, deem particular countries or entities to be prohibited foreign adversaries and establish criteria for prohibiting transactions involving particular technologies and market participants.

Together, these actions appear to represent an effort by the Trump Administration to strike a blow to China’s telecommunications sector.

Huawei Manufacturing May Be Impacted and Global Communications Networks Could be at Risk

The Commerce Department announced that its action stemmed from “information available to the Department that provides a reasonable basis to conclude that Huawei is engaged in activities that are contrary to US national security or foreign policy interest.” Huawei’s inclusion in the Export Administration Regulations (EAR) Entity List is effective as of May 16, 2019, and will be formally published in the Federal Register on May 21, 2019. As a result of this new listing, BIS will require a license for the export of any items subject to the EAR to Huawei or its listed non-US affiliates.

Which Entities Will Be Subject to Restrictions?

BIS has added Huawei and 68 of its non-US affiliates, located in 26 jurisdictions, to the Entity List. Among these entities are a number of affiliates located in Europe, the Middle East, Africa, and the Americas, as well as companies whose names do not include reference to Huawei. In general, Entity List restrictions apply only to listed entities and their respective branches and operating divisions. The restrictions do not extend to a listed entity’s parent, subsidiaries, sister companies, or legally distinct affiliates unless such entities are specifically named in a listing or separately included on the Entity List. Nonetheless, other companies – including companies not affiliated with Huawei – could risk breaching the EAR if they act as an agent or front for Huawei and facilitate transactions that would otherwise be prohibited in light of Huawei’s designation on the Entity List.

How Will Huawei’s Listing Impact Companies Doing Business with Huawei?

BIS is imposing a licensing requirement for exports to Huawei of “all items subject to the EAR,” and there is a presumption that license applications for such exports to Huawei will be denied. As a result, the new designation requires a BIS export license for US and non-US persons to export, re-export, or transfer US-origin goods, software, and technology to the listed Huawei entities and affiliates, even with respect to items that would not otherwise be subject to a licensing requirement under US export controls. Export licensing exceptions that are typically available under the EAR are no longer available with respect to Huawei.

Moreover, the licensing requirement applies not only to exports from the United States of US goods, software, and technology, but also to indirect exports from anywhere in the world of non-US goods, software, or technology that contain more than a de minimus amount of US content. If Huawei is reliant on US technology and components for its foreign-manufactured equipment as has been reported, the Commerce Department’s action could have a significant and negative effect on Huawei’s manufacturing operations.

If Huawei’s listing impacts the reliable supply of Huawei communications equipment to network operators, this could result in the degradation of reliable communications networks, particularly outside of the United States where Huawei equipment is more prevalent.

Is Huawei in the Same Position as ZTE in 2018?

BIS can take more restrictive action than adding a company to the Entity List. It did so in 2018 when it added ZTE to the Denied Persons List, a list of people and companies whose US export privileges have been denied. Although BIS took more severe action against ZTE than it has to date against Huawei, adding Huawei to the Entity List could have the practical effect of cutting it off from access to critical manufacturing components.

The Entity List restrictions should not prohibit Huawei from continuing to manufacture and distribute products using its existing inventory of components containing US technology, but Huawei might not be able to source new components after it exhausts its stockpile. It also should not necessarily restrict Huawei from providing services, such as managed services and network maintenance, that do not require US input (e.g., US software updates or US technical expertise).

It is possible that BIS may take a flexible approach for certain export activities related to Huawei, for example, by issuing general licenses or providing license exceptions to allow for continued reliable network operation. Whatever approach the Commerce Department takes in the near term, however, its addition of Huawei to the Entity List does not preclude it from taking further action against Huawei in the future, such as by adding Huawei to the Denied Parties List.

EO Promises New Program for US Regulation and Review of IT and Communications Transactions

President Trump’s EO – entitled “Executive Order on Securing the Information and Communications Technology and Services Supply Chain” – authorizes the establishment of a potentially expansive new framework for US government review of transactions involving foreign information and communications technology or services (ICT). As such, the EO has potentially broad reach, even though it appears to be rooted in the Trump Administration’s opposition to Chinese telecommunications firms Huawei and ZTE.

Until new rules are promulgated under the EO, the status quo prevails and the EO does not immediately target any particular transactions, entities, or countries. In the near future, however, the EO could effectively cut off US involvement – including use of the US financial system or US-owned ICT hardware (e.g., cloud servers) anywhere in the world – from certain ICT-related activities.

What Does the EO Cover and How Will it Work?

The EO broadly prohibits any acquisition, importation, transfer, installation, dealing in, or use – by US persons or with respect to US property – of any ICT (i) in which a foreign country or national has an interest; (ii) that the Commerce Department determines is “designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary”; and (iii) that the Commerce Department determines poses an unacceptable risk to US ICT, critical infrastructure, digital economy, or national security and safety. The EO does not identify foreign adversaries, foreign countries, or foreign entities that might fall within the scope of this prohibition. Instead, the EO provides that the implementing rules and regulations – due in 150 days, or by October 12, 2019 – may specify particular countries, persons, and ICT that are covered by this new program.

The EO also states that the Commerce Department will establish a system of preclearance, review, or control of covered transactions. Specifically, the EO states that the implementing rules and regulations may recognize particular technologies and market participants as “categorically included” in or “categorically excluded” from the EO’s prohibitions. The EO further authorizes the Commerce Department to promulgate rules that would establish procedures for licensing certain transactions and for entering into agreements to mitigate potential concerns. This could be good news for potentially affected companies, which may be able to obtain licenses or negotiate mitigation agreements under the new rules.

Who are Foreign Adversaries?

The EO defines a “foreign adversary” 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.” This definition provides the Administration with considerable leeway to determine whether conduct is “significantly” adverse to US interests and whether there is a “long-term pattern” of such conduct. It is difficult to predict the scope of activities that may be deemed to pose a national security threat.

What Risks Does the EO Target?

The EO defines three categories of risks that can result in a transaction being prohibited: (i) “undue risk” of sabotage to or subversion of ICT systems or services in the United States; (ii) “undue risk of catastrophic effects” to US critical infrastructure or the US digital economy; and (iii) other “unacceptable risk to the national security of the United States or the security and safety of US persons.”

While the EO clearly targets the telecommunications sector, it also reaches beyond communications to other networks, including infrastructure and the digital economy, that could have vulnerabilities.

Potential Impact on Businesses

Considered in context, the EO and the new ITC program appear to target China’s tech sector, and Huawei and ZTE in particular. In this regard, the program appears to have strong bipartisan support. Democratic Senator Mark Warner, the ranking member on the Senate Intelligence Committee, called the EO a “needed step” that “reflects the reality that Huawei and ZTE represent a threat to the security of US and allied communications networks.”

Accordingly, companies should assess their exposure to Huawei and ZTE – not only in their own networks, but also in non-US markets where they may have acquisition targets or where there may be opportunities for strategic growth. Companies should also consider how the ICT hardware and services at their non-US operations could expose critical US systems to risk.

The EO grants the Commerce Department significant authority, however, that could affect a broad range of global transactions beyond those related to Huawei and ZTE. For example, US and non-US companies with research and development centers or joint ventures in China may find themselves or their ICT targeted under the new program.

Finally, companies contracting with the US government – especially those located outside the United States – should prepare for the likely designation of Huawei or ZTE as “foreign adversaries.” Even if a contractor does not supply the US government with ITC goods and services, its use of Huawei or ZTE technology or services could implicate the EO’s prohibitions, depending on the form of the implementing regulations.

Conclusion

US and non-US companies that do business related to Huawei or its products should review their compliance and shipping systems, contingency plans, and contractual positions. More broadly, companies should consider their exposure to ICT that may be affected by the EO and its implementing regulations, particularly in their supply chains and with respect to international growth strategies. While the action against Huawei and the impending new regulations targeting ICT transactions may present potentially significant business disruption risk to some companies, it may present opportunities for others.

Our Global Sanctions and Trade team will continue to monitor export controls and sanctions in the information and communications technology sector and will provide additional updates on any significant further developments. Please contact any member of our Global Sanctions and Trade team if you have any questions or would like to discuss any of these points.









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