In a parting move to maximize sanctions pressure on China, on December 18, 2020, the Trump Administration added 59 Chinese entities to the United States (US) Commerce Department “Entity List,” imposing comprehensive controls and licensing requirements on exports and reexports of US goods, technology, and software to the listed companies.

While the 77 newly listed entities are located in numerous countries around the globe, the action is particularly notable for its breadth with respect to China. Among the Chinese entities added to the Entities List were China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC); China Communications Construction Company Ltd. (CCCC); China State Shipbuilding Corporation, Ltd. (CSSC) and several other Chinese shipbuilding companies; and the Beijing Institute of Technology and associated entities.

The stated rationale for the sanctions ranged from alleged support for the Chinese military industrial complex (in the case of SMIC and a number of Chinese science and technology institutes), to support for China’s efforts to assert maritime claims in the South China Sea (in the case of the state-owned shipbuilders and construction companies) to alleged human rights abuses (in the case of Kuang-Chi group and other private entities) and theft of trade secrets.

Of course, the incoming Biden Administration can, by administrative action, remove these sanctions.  Whether and to what degree the incoming Biden Administration decides to continue such efforts to limit Chinese access to certain technologies or penalize Chinese companies for certain conduct remain to be seen.

What is the Entity List?

The Entity List, which is administered by the Bureau of Industry and Security (BIS) of the Department of Commerce, identifies foreign entities and other persons reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the US. A committee (known as the ERC) composed of representatives of the US Departments of Commerce (Chair), State, Defense, Energy and Treasury adds persons to the Entity List by majority vote.¹ Since its creation in 1997, the list has expanded from its initial focus on Weapons of Mass Destruction proliferation to a variety of activities considered contrary to US national security and/or foreign policy interests.

BIS generally requires licenses for exports, reexports, and transfers of items that are “subject to the US Export Administration Regulations” (EAR) to persons on the Entity List.  The licensing requirement will extend to a range of US technology, hardware, chips and software, technical updates and bug fixes, even if supplied from abroad and regardless of the national security sensitivity of the item itself. Items subject to the EAR include both US- and non-US origin items, whether or not they are identified on the Commerce Control List (CCL), as follows:

• US-origin items (goods, software and technology),²
• items that are located in the US, even temporarily; and 
• non-US-origin items that contain more than a de minimis level of controlled US-origin content (for non-embargoed countries, this is 25% US origin content by value). 

The ban applies only to the named affiliates and does not extend automatically to subsidiaries of listed entities.  At the same time, transfer of goods, software or technologies to affiliates of named entities risk violating the sanctions if there is reason to know that a named entity could receive or have access to the items.

Parties desiring to export prohibited items to entities on the Entity List may apply to BIS for a license. Significantly, however, there is generally a policy of “presumption of denial” for license applications involving exports to persons on the Entity List, unless indicated otherwise in the “License Review Policy” accompanying the listing.

A focus on SMIC – China’s largest chipmaker

Notably, in the case of SMIC and ten related entities, BIS imposes a license review policy of presumption of denial for items uniquely required for production of semiconductors at advanced technology nodes (10 nanometers and below, including extreme ultraviolet technology) and case-by-case for all other items.

In the press release announcing SMIC’s addition to the Entity List, Commerce Secretary Wilbur Ross stated the rationale for this action:

We will not allow advanced US technology to help build the military of an increasingly belligerent adversary. Between SMIC’s relationships of concern with the military industrial complex, China’s aggressive application of military civil fusion mandates and state-directed subsidies, SMIC perfectly illustrates the risks of China’s leverage of US technology to support its military modernization... Entity List restrictions are a necessary measure to ensure that China, through its national champion SMIC, is not able to leverage US technologies to enable indigenous advanced technology levels to support its destabilizing military activities.

In designating SMIC, the US thus seeks to limit its ability to acquire certain US technology in support of China’s military modernization.  Notably, SMIC has not been made subject to the “footnote 1” notation that applies to non-US affiliates of Huawei, which expands the scope of chips subject to the ban to those that have been produced in foreign plants or equipment that were designed on the basis of US technology. 

Other than technology or software that is uniquely required to produce semiconductors at advanced technology nodes 10 nanometers or below, BIS will entertain license applications to export or reexport to SMIC on a case-by-case basis. (Generally, the smaller the technology node, the smaller the feature size, producing smaller transistors which are both faster and more power-efficient.)

The latest of several actions to target China “Military Civil Fusion”

This latest action comes in the wake of an Executive Order late last month, as discussed in our previous alert, which bars US investors from trading in publicly traded shares of companies placed on a recently issued Department of Defense (DoD) List of companies that allegedly support the People’s Liberation Army and is part of a whole-of-government effort to target China’s “military civil fusion” doctrine. The DoD List also includes SMIC, CCCC and CSSC, plus dozens of other designated “Communist Chinese Military Companies.” The FTSE, Nasdaq and MSCI have taken actions to remove some of these companies from their indices.

These Entity List designations go even further than the expansion earlier this year of US export licensing requirements for certain exports or reexports to any Chinese “military end user.” It was already anticipated that companies such as SMIC, CCCC, CSSC and the others identified on the DoD list would be presumed to be “military end users” for purposes of that rule. By designating these companies on the Entity List, the US now imposes a license requirement on a much wider array of exports and reexports than those impacted by the “military end user” rule and applies to all items “subject to the EAR” regardless of whether the item is a military or even a dual-use item. 

Full list of entities added to the Entity List on December 18, 2020

The following entities were added to the Entity List:

BULGARIA

• Dimitar Milanov Dimitrov;
• Mariana Marinova Gargova;
• Milan Dimitrov; and
• Multi Technology Integration Group EOOD (MTIG)

CHINA

• AGCU Scientech;
• Beijing Institute of Technology;
• Beijing University of Posts and Telecommunications (BUPT);
• China Communications Construction Company Ltd.;
• China National Scientific Instruments and Materials (CNSIM);
• China State Shipbuilding Corporation, Limited (CSSC) 7th Research Academy;
• China State Shipbuilding Corporation, Limited (CSSC) 12th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 701st Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 702nd Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 703rd Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 704th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 705th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 707th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 709th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 710th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 711th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 712th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 713th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 714th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 715th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 716th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 717th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 718th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 719th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 723rd Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 724th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 725th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 726th Research Institute;
• China State Shipbuilding Corporation, Limited (CSSC) 750th Test Center;
• China State Shipbuilding Corporation, Limited (CSSC) 760th Research Institute;
• Chongqing Chuandong Shipbuilding Industry Co Ltd.;
• Chong Zhou;
• CSSC Huangpu Wenchong Shipbuilding Co., Ltd.;
• DJI;³
• Guangxin Shipbuilding and Heavy Industry Co., Ltd.;
• Guangzhou Taicheng Shipbuilding Industry Co., Ltd.;
• Huisui Zhang;
• Jiangsu Hengxiang Science and Education Equipment Co., Ltd.;
• Jinping Chen;
• Kuang-Chi Group;
• Nanjing Asset Management Co., Ltd.;
• Nanjing University of Aeronautics and Astronautics;
• Nanjing University of Science and Technology;
• Ningbo Semiconductor International Corporation (NSI);
• ROFS Microsystems;
• Semiconductor Manufacturing International (Beijing) Corporation;
• Semiconductor Manufacturing International Corporation (SMIC);
• Semiconductor Manufacturing International (Shenzhen) Corporation;
• Semiconductor Manufacturing International (Tianjin) Corporation;
• Semiconductor Manufacturing South China Corporation;
• SJ Semiconductor;
• SMIC Holdings Limited;
• SMIC Northern Integrated Circuit Manufacturing (Beijing) Co., Ltd.;
• SMIC Semiconductor Manufacturing (Shanghai) Co., Ltd.
• Tianjin Micro Nano Manufacturing (MNMT);
• Tianjin University;
• Tongfang NucTech Technology Ltd.
• Wei Pang; and
• Zhao Gang.

FRANCE

• France Tech Services; and
• Satori Corporation.

GERMANY

• Maintenance Services International (MSI) GmbH; and
• MRS GmbH.

HONG KONG

• SMIC Hong Kong International Company Limited.

ITALY

• Zigma Aviation.

MALTA

• Feroz Ahmed Akbar; and
• Sparx Air Ltd.

PAKISTAN

• Geo Research, and
• Link Lines (Pvt.) Limited.

RUSSIA

• Cosmos Complect;
• Ilias Kharesovich Sabirov; and
• OOO Sovtest Comp.

UNITED ARAB EMIRATES

• Satori Corporation; and
• Sky Float Aviation FZE.

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^1.Supplement No. 5 to 15 CFR § 744.

^2.Supplement No. 1 to 15 CFR § 774.

^3.DJI is the world’s largest drone manufacturer.  The US alleges that DJI used its drones to enable human rights abuses.

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