EO prohibits U.S. persons from engaging in certain transactions involving eight Chinese apps

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On 5 January 2021, President Donald Trump issued Executive Order (EO) 13971 on "Addressing the Threat Posed By Applications and Other Software Developed or Controlled By Chinese Companies," which prohibits U.S. persons from engaging in certain transactions to be specified by the Secretary of Commerce with persons that develop or control the following Chinese software applications (including their subsidiaries): Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office. The restrictions will go into effect 45 days after the date of the EO, on 19 February 2021.

Background of the EO

The EO states that action must be taken to address the threat posed by certain Chinese connected software applications, on the basis that these applications capture sensitive personally identifiable information (PII) and private information from users in the United States. This EO prohibits U.S. persons from engaging in certain transactions with persons that develop or control CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office, as well as their subsidiaries.

While it is unclear which specific conduct this EO is designed to prohibit, other recent EOs and their interpretation by federal agencies and courts may be instructive in understanding this latest EO. On 6 August 2020, President Donald Trump issued an EO on “Addressing the Threat Posed by TikTok,” imposing restrictions on U.S. persons’ activities involving TikTok. This EO relied on the earlier authority of the 2019 EO on “Securing the Information and Communications Technology and Services Supply Chain,” issued on 15 May 2019. The TikTok EO did not define the precise scope of the restrictions on U.S. persons, but the Department of Commerce subsequently issued implementing regulations that went into effect on 27 September 2020. While these restrictions targeted service providers rather than individual users, they would effectively have degraded the TikTok application’s functionality in the United States and rendered it unusable.

Federal courts considered these restrictions in several cases across the country, including TikTok v. U.S. (D.D.C.) and Marland v. Trump (E.D.Pa.), as described in greater detail in our prior client alert. The courts have generally held that the restrictions of these prior EOs unduly infringed upon personal communications and ran afoul of exceptions for informational materials in the International Emergency Economic Powers Act (IEEPA), which is itself a source of statutory authority for these EOs. Considering the courts’ focus on the informational materials exception in dealing with previous EOs seeking to curtail Chinese applications, this EO was likely drafted with an explicit focus on financial applications to overcome this line of reasoning and to avoid being struck down on similar grounds.

For details, please see below a summary of the EO’s definitions and key prohibitions, as well as future regulations authorized by the EO.

Definitions provided by the EO

Connected Software Application

Section 3(a) of the EO defines “connected software application” to mean software, a software program, or group of software programs, designed to be used by an end user on an end-point computing device and designed to collect, process, or transmit data via the Internet as an integral part of its functionality.

Personally Identifiable Information

Section 3(d) of the EO defines “personally identifiable information” as information that, when used alone or with other relevant data, can identify an individual.

United States Person

Section 3(e) of the EO defines “United States person” to include any U.S. citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States. This definition does not appear to include foreign subsidiaries of U.S. companies.

Key Prohibitions

Section 1(a) of the EO prohibits the following:

any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with persons that develop or control the following Chinese connected software applications, or with their subsidiaries, as those transactions and persons are identified by the Secretary of Commerce (Secretary) under subsection (e) of this section: Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office.

Notably, Section 1(e) of the EO gives the Secretary of Commerce 45 days to specify the kinds of transactions that will be prohibited, and the entities that will be subject to the prohibitions. Therefore, Section 1(a) is best understood as indicating the maximum scope of such prohibitions, not the minimum. As with the TikTok EO, the Secretary may choose to prohibit only a subset of the transactions that could potentially be covered under the EO.

Section 2(a) prohibits any transaction by a U.S. person or within the United States that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the prohibition set forth in this order.

Section 2(b) prohibits any conspiracy formed to violate any of the prohibitions set forth in this order.

Future regulations authorized by the EO

Section 4 of the EO authorizes the Department of Commerce to promulgate regulations to implement the EO, in consultation with Department of the Treasury and the Department of Justice.

Next steps

Businesses should remain alert to additional actions, whether under forthcoming EOs from either the current or incoming administration, or implementing regulations or guidance from involved agencies. This EO will not take effect until several weeks into the Biden administration and it is unclear whether the new administration will implement the EO by February 2019, choose to modify or rescind it, delay its implementation, or take some other action.

If the EO goes into effect, financial institutions should also consider their compliance obligations, including AML obligations, connected to financial transactions related to the parties named in this EO.

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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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