Chinese Telecom Companies Under Fire: Commerce Moves to Cut Off Huawei From U.S. Technology, With More Restrictions Coming

Morrison & Foerster LLP

The U.S. Department of Commerce (Commerce) has added Huawei Technologies Co. Ltd. (Huawei) and its affiliates to the Bureau of Industry and Security (BIS) “Entity List,” a move that effectively cuts off Huawei from directly or indirectly acquiring U.S.-origin hardware, software, and technology. These new restrictions became effective at 4:15 p.m. Eastern time on May 16 when Commerce displayed the Federal Register Notice implementing the Entity List additions on the public inspection list. We expect more guidance to become available over the next several days as these restrictions are further implemented.

The Entity List additions come in the wake of multiple, rapid-fire actions over the past week by the U.S. Administration, ultimately aimed at Chinese telecommunications businesses. These actions include the May 15 Executive Order declaring a national emergency and mandating regulations to create a new national security review process prohibiting certain transactions involving information and communications technology from certain companies and countries not specified but widely believed to be targeted at Huawei and China. Last week, the Federal Communications Commission (FCC) also denied China Mobile International (USA) Inc.’s application for a license to provide telecommunications services in the United States.

Key Takeaways:

  1. Companies should immediately take measures to curtail the sale or transfer of U.S.‑origin products and technology to Huawei and its affiliates. Companies are required to comply with the Notice now, although it includes a standard “savings clause” exempting items already en route as of May 16.
  2. The Entity List designation affects both U.S. and non-U.S. companies doing business with Huawei. The Entity List Notice requires a license for the sale or transfer to Huawei of any hardware, software, or technology subject to the Export Administration Regulations (EAR), regardless of whether such a sale or transfer takes place outside the United States.
  3. Companies should expect that Commerce will deny licenses to sell to Huawei now that it is added to the Entity List. Although the EAR allows companies to apply for a license to continue to sell or transfer items to a company on the Entity List, any such application will be subject to a presumption of denial.
  4. Huawei’s placement on the Entity List may be temporary, pending additional U.S. government negotiations with China. Commerce’s announcement connects Huawei’s addition to the Entity List to violations of U.S. sanctions against Iran alleged in the DOJ indictment against Huawei earlier this year. The timing of the listing, however, suggests it is more likely a tactical move in the ongoing U.S.-China trade negotiations. Thus, similar to Commerce’s Denial Order against ZTE Corporation (ZTE) last year, Huawei’s placement on the Entity List could be temporary pending further negotiations with China or the implementation of the regulations called for in the May 15 Executive Order.
  5. More national security-related restrictions on business with Chinese telecommunications companies are coming. Commerce has 150 days to issue regulations implementing the Executive Order’s restrictions on U.S. companies buying, transferring, or using certain information and communications technology and services. These implementing regulations will almost certainly include restrictions on transactions with China and entities like Huawei and ZTE. These restrictions are expected to affect U.S. subsidiaries of foreign companies, which are “U.S. persons” subject to the new regime, as well as U.S. companies’ business with any foreign companies that have contracts with entities like Huawei that involve information or communications technology or services.  

Effects of Adding Huawei to the Entity List

Huawei and its affiliates identified in the BIS Notice are effectively banned from receiving any items subject to the EAR, which include:

  1. All U.S.‑origin items wherever located in the world;
  2. Any item exported from the United States (even if not of U.S. origin);
  3. Any foreign-made item that contains more than 25% U.S.-origin content or 10% U.S.-origin content for countries subject to U.S. sanctions (the “de minimis” rule); and
  4. Any foreign-made item that is the direct product of certain controlled U.S.-origin software, technology, or major plant or equipment located abroad.

Huawei’s Entity List designation was reportedly kept on hold during the ongoing U.S.-China tariff negotiations, but, with those negotiations deteriorating, the Administration may be using this as a tactic to ratchet up the pressure on China. If the tariff negotiations are successful, it is possible that the U.S. government may offer Huawei an exit ramp from the Entity List as it did for ZTE. 

Future Restrictions on Information and Communications Technology Based on the Executive Order

The Executive Order prohibits persons subject to U.S. jurisdiction from engaging in any transaction (e.g., acquisition, transfer, or use) involving any property in which any foreign country or national has an interest and where the Secretary of Commerce determines that:

  1. The transaction involves information and communications technology or services designed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a “foreign adversary” (to be identified in regulations, but undoubtedly including China); and
  2. The transaction:
    • Poses an undue risk of sabotage to the design, distribution, or operation of information and communications technology or services in the United States;
    • Poses an undue risk of catastrophic effects on the security of U.S. critical infrastructure or the digital economy; or
    • Otherwise poses an unacceptable risk to U.S. national security.

The Secretary of Commerce must issue implementing regulations within 150 days (i.e., by October 14, 2019), in consultation with the Departments of Treasury, State, Defense, Justice, and Homeland Security, the U.S. Trade Representative, the Director of National Intelligence, the General Services Administration, and the FCC. These regulations must identify foreign adversaries (almost certainly including China) and entities controlled by them (almost certainly including Huawei and ZTE) to be covered by the regulations, identify transactions that warrant particular scrutiny, and establish procedures to license transactions that would otherwise be prohibited.

It remains to be seen whether, as part of this broader effort, the Department of the Treasury's Office of Foreign Assets Control (OFAC) will use its authorities to impose sanctions against Huawei or other Chinese entities. We will continue to monitor these and other U.S. government actions against Chinese entities in the coming days and weeks.

Reema Shocair Ali, a National Security Analyst in the firm’s DC office, assisted in the preparation of this client alert.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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