President Expands Ban on Chinese Military-Industrial Complex Companies Based on Finding of Unusual and Extraordinary Threats – Actions to Address Cybersecurity and Supply Chain Risk Continuing

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Previously we reported on President Trump’s Executive Orders banning U.S. nationals’ investment in designated Chinese companies that pose a threat to our national security under the International Emergency Economic Powers Act. Law360 reports that under that ban a total of 44 companies were designated as Communist Chinese Military Companies (CCMCs).  In addition, we reported on the implementation of requirements of the Federal government and its supply chain not to use or purchase designated Chinese telecommunications and video surveillance equipment and services due to the threats they pose to our national security.  Contractors are now required to report if they use or would deliver covered equipment or services and the agencies are directed not to buy from such contractors unless an exception or exemption applies.

On June 3, 2021, President Biden issued his own Executive Order on the subject, amending Trump’s Executive Order 13959 and revoking Executive Order 13974, with the ultimate result of expanding restrictions on the investment ban to include designated Chinese Military-Industrial Complex Companies (CMICs).  In issuing the Executive Order on Addressing the Threat from Securities Investments that Finance Certain Companies of the People’s Republic of China, President Biden asserts that:

[A]dditional steps are necessary to address the national emergency declared in [the] Executive Order …, including the threat posed by the military-industrial complex of the People’s Republic of China (PRC) and its involvement in military, intelligence, and security research and development programs, and weapons and related equipment production under the PRC’s Military-Civil Fusion strategy.  In addition, I find that the use of Chinese surveillance technology outside the PRC and the development or use of Chinese surveillance technology to facilitate repression or serious human rights abuse constitute unusual and extraordinary threats, which have their source in whole or substantial part outside the United States, to the national security, foreign policy, and economy of the United States, and I hereby expand the scope of the national emergency declared in [the] Executive Order.

The expanded prohibition covers US investment in publicly traded companies that “operate or have operated in the defense and related materiel sector or surveillance technology sector” of the PRC economy, as well as those that are owned and controlled by someone who operates in those sectors (CMICs). Law360 reports that the new list includes 59 companies and the ban will apply starting on August 2, 2021, giving US owners of the securities the opportunity to divest until June 3, 2022. Designation of the companies covered by the CMIC emergency ban will be handled by the Department of Treasury moving forward; the CCMC ban designations had been handled by DoD.

The new list of CMICs includes a number of the companies designated as CCMCs previously, including Huawei.  It also expressly includes a number of entities as “Linked To: Huawei” entities. Notably the list currently does not include Xiaomi Corp., Luokung Technology Corpo, or Gowin Semiconductor Corp., presumably because each of them filed suits to challenge their CCMC designations as unsubstantiated and two thusfar, Xiaomi and Luokung, obtained injunctions from the District Court for the District of Columbia because the Government failed to adequately substantiate their designations.

The threats posed by a global supply chain continue to be a key subject studied by this Administration. The 100-Day Review under Executive Order 14017, Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth, has resulted in the issuance of a 250 page report.  In addition, the President has issued a proposed Fiscal Year 2022 Defense budget that includes provision to address cybersecurity and supply chain issues. We will be analyzing these documents in upcoming blogs – stay tuned!

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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