With the imminent transfer of power to President-Elect Biden on January 20, 2021, the Trump Administration has spent its final days engaging in a last-minute blitz of rulemaking further targeting export licensing requirements and restrictions involving technology and sanctions primarily with China. Each of these actions are notable in their own right; taken together, they represent agencies furiously working to buttress President Trump’s national security and foreign trade agenda, particularly with respect to U.S. tightening of export licensing requirements and sanctions on entities in China, before the expiration of his term.
Interim Final Rule Establishing National Security Review of U.S. Information and Communications Technology Transactions
On January 19, 2021, the U.S. Department of Commerce published an interim final rule on Securing the Information and Communications Technology and Services Supply Chain. This publication establishes the processes and procedures by which the Secretary of Commerce will “identify, assess, and address” certain transactions with “foreign adversaries” involving information or communications technology that are deemed to “pose an undue or unacceptable risk” to U.S. national security.
The rule follows up from an initial proposal published on November 27, 2019, and is intended to carry out Executive Order 13873, issued on May 15, 2019, in which President Trump cited the “unusual and extraordinary threat” to the U.S. posed by the “unrestricted acquisition or use in the United States of information and communications technology or services designed, developed, manufactured, or supplied” by entities in a foreign adversary country. The Executive Order authorized the Commerce Department to prohibit transactions involving information and communications technology or services (“ICTS Transactions”) with entities under the jurisdiction of a “foreign adversary.”
In the Interim Final Rule, the Commerce Department has identified China (including the Hong Kong SAR), Cuba, Iran, North Korea, Russia, and the Maduro Regime in Venezuela as “foreign adversaries.” The rule sets forth the procedures by which it may review an ICTS Transaction between a U.S. person (or involving property subject to U.S. jurisdiction) and a foreign adversary. The purpose of the review is to determine whether the ICTS Transaction poses an “undue or unacceptable risk” to the United States and, if such a finding is reached, determine whether to prohibit the ICTS Transaction or propose “mitigation measures” by which the ICTS Transaction may be permitted.
The scope of products and services that could constitute an “ICTS Transaction” is exceptionally broad. It includes the following categories:
Critical infrastructure designated under Presidential Policy Directive 21;
Software, hardware, or other products or services integral to wireless local networks, mobile networks, satellite payloads, satellite operations and control, cable access points, wireless switching points, core networking systems, or long- and short-haul networks;
Software, hardware, or other products or services integral to data hosting or computing services that would use, process, or retain sensitive personal data on greater than 1 million U.S. persons;
Certain surveillance or monitoring devices (including webcams), home networking devices, or unmanned aerial systems (including drones);
Certain software designed for connecting with and communicating via the internet, including desktop, web-based, mobile, and gaming applications; or
Products or services integral to artificial intelligence, quantum key distribution, quantum computing, drones, autonomous systems, or advanced robotics.
While the interim rule does not appear to impose an affirmative obligation by U.S. persons to report ICTS Transactions to the Commerce Department, such persons may be required to furnish “complete information” related to the transaction under oath. That obligation can extend to being issued subpoenas for the production of books and records, witness testimony and depositions, and other obligations tantamount to a federal investigation.
The interim rule is expected to go into effect 60 days from the date of publication, or on March 20, 2021. However, Commerce continues to solicit public input and comments on the scope and content of the interim rule.
Designation of Xiaomi, 8 Other Companies As “Communist Chinese Military Companies”
On Thursday, January 14, the U.S. Department of Defense (“DOD”) added nine companies, including smartphone manufacturer Xiaomi Corporation, to its list of companies designated as “Communist Chinese Military Companies.” Under Section 1237 of the National Defense Authorization Act of 1999, the DOD is obligated to maintain a list of entities that are “operating directly or indirectly in the United States or any of its territories and possessions that are Communist Chinese Military Companies.”
This list was first populated in June 2020, with additional entities added in August and December 2020. With the latest additions from January 14, there are now 44 entities, including telecommunications company Huawei, Hikvision, and Semiconductor Manufacturing International Corp. (“SMIC”).
The direct effect of the DOD’s designation is that, in conjunction with Executive Order 13959, dated November 12, 2020, U.S. persons are prohibited from investing in publicly traded or derivative securities of any designated entity as of January 11, 2021. Any U.S. person who holds securities in a designated entity has until November 11, 2021 to divest itself of those securities. Beyond this, there may be additional indirect consequences resulting from the designation of an entity as a “Communist Chinese Military Company,” including possible treatment of such entities as “military end-users” subject to export restrictions pursuant to Section 744.21 of the Export Administration Regulations.
The DOD further announced with this action that it will “continue to update the list with additional entities as appropriate.”
Publication of Hong-Kong Related Sanctions Regulations
Finally, on January 15, 2021, The U.S. Office of Foreign Assets Control (“OFAC”) published its long-awaited Hong Kong Related Sanctions regulations pursuant to Executive Order 13936, issued on July 14, 2020. In that Executive Order, the President determined that Hong Kong “is no longer sufficiently autonomous to justify differential treatment in relation to the People’s Republic of China,” and that the situation with Hong Kong “constitutes an unusual and extraordinary threat” to the national security and foreign policy interests of the United States.
The Hong Kong Related Sanctions Regulations, which are published in “abbreviated” form to provide immediate guidance to the public, provides for the blocking of transactions with persons or entities designated under E.O. 13936 who have been determined to be responsible for or complicit in activities contributing to the degradation of Hong Kong’s autonomy or democratic processes, including human rights abuses in Hong Kong. OFAC indicated that it intends to supplement this publication with a more comprehensive set of regulations, which may include additional interpretive and definitional guidance, general licenses, and statements of licensing policy.
While all of the above rules have their roots in earlier-issued Executive Orders or legislation, they show executive agencies moving quickly in the waning days of the Trump Administration to carry out the effects of these orders. It will be unclear to what extent these rules will remain in their current form once the Biden Administration takes over after January 20, 2021.
Should you have any questions concerning these developments, please contact one of the trade professionals listed here.