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BIS Issues Rules on the Scope of Entity List Restrictions and Significantly Limits Activities Involving Huawei

On August 17, 2020, the US Commerce Department's Bureau of Industry and Security (BIS) issued two final rules that expand the scope of licensing requirements for transactions involving parties on the Entity List. Both rules are effective immediately. The first rule (August 17 Entity List Rule) clarifies that a license is required for the export, reexport, or transfer of goods, software, or technology (items) subject to the US Export Administration Regulations (EAR) whenever entities on the Entity List are a party to the transaction.1 The second rule (August 17 Huawei Rule) (i) adds 38 non-US Huawei affiliates to the Entity List; (ii) removes the Huawei Temporary General License (TGL); and (iii) expands the scope of the Foreign-Produced Direct Product Rule (DPR) applicable to Huawei and its listed affiliates.2

Commerce announced in a press release that the changes in the August 17 Huawei Rule "prevent Huawei's attempts to circumvent US export controls to obtain electronic components developed or produced using US technology."3 The State Department also commented that the amendments to the DPR are intended to "prevent Huawei from circumventing US law through alternative chip production and provision of off-the-shelf (OTS) chips produced with tools acquired from the United States."4 The Commerce press release further noted that the clarification of Entity List requirements announced in the August 17 Entity List Rule also target Huawei "when any of the Huawei entities on the Entity List are a party to the transaction, such as by acting as purchaser, intermediate consignee, ultimate consignee, or end user."

 

August 17 Entity List Rule: Exports require a license where Entity List parties are a party to the transaction

This rule revises the EAR to clarify that the Entity List licensing requirements apply to exports, reexports, and transfers of items subject to the EAR when a listed entity is a party to the transaction, regardless of the role that a listed entity has in the transaction (i.e., as a "purchaser," "intermediate consignee," "ultimate consignee" or "end-user").5 Prior to the August 17 Entity List Rule, the EAR's Entity List provisions addressed circumstances in which a listed entity serves as "ultimate consignee" or "end-user" in the transaction. The key impact of the August 17 Entity List Rule is to remove any ambiguity about the scope of transactions covered by the Entity List licensing requirement. BIS states that the August 17 Entity List Rule aligns the treatment of transactions involving entities on the Entity List with the treatment of transactions involving persons on a separate BIS list, the Unverified List.6

 

August 17 Huawei Rule: Significant revisions to the scope of transactions subject to Huawei's Entity List restrictions

BIS took three actions in the August 17 Huawei Rule: (1) adding 38 Huawei entities to the Entity List; (2) replacing the Huawei TGL with a narrow, permanent authorization; and (3) expanding the Huawei-specific DPR.

1. Addition of 38 Non-US Huawei Affiliates to Entity List

On August 17, BIS added 38 non-US affiliates of Huawei to the Entity List, stating that the affiliates have been determined to "present a significant risk of acting on Huawei's behalf to engage in activities determined to be contrary to the national security or foreign policy interests of the United States." BIS previously added Huawei and 114 of its non-US affiliates to the Entity List.7 The August 17 Huawei Rule also makes minor revisions to existing entries on the Entity List for three Huawei entities in China and one in Brazil.

The 38 newly added entities are subject to the same license requirements applicable to Huawei, for all items subject to the EAR. License applications for Huawei-related exports, reexports, and transfers are subject to a presumption of denial. No license exceptions are available for exports, reexports, or transfers (in-country) when a listed Huawei entity is acting as a purchaser, intermediate or ultimate consignee, or end-user as defined in the EAR. For all listed Huawei entities, a license is not required for technology subject to the EAR that is designated as EAR99, or controlled on the Commerce Control List (CCL) for anti-terrorism reasons only, when released to members of a "standards organization" for the purpose of contributing to the revision or development of a "standard."

Entity List Savings Clause

Shipments of items removed from eligibility for a license exception or from export, reexport, or transfer (in-country) without a license as a result of the Entity List additions that were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on August 17, 2020 pursuant to actual orders for export or reexport to a foreign destination, may proceed to that destination under the previous eligibility for a license exception or export, reexport, or transfer without a license. This savings clause does not apply to items that were not so "en route" on August 17, 2020.

2. Expiration of the TGL

The August 17 Huawei Rule allows the previous Huawei-related TGL to expire, replacing it with a narrower, permanent authorization. The authorization excludes only the following exports, reexports, and transfers from the Entity List licensing requirements, instead applying the standard licensing requirements of the EAR:

any exports, reexports, or transfers to Huawei and its listed affiliates for "cybersecurity research and vulnerability disclosure" when the disclosure to the Huawei entity is limited to "information regarding security vulnerabilities in items owned, possessed, or controlled by [Huawei or its non-US affiliates]" that is "related to the process of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently 'fully operational network[s]' and equipment."8

This "limited permanent authorization" applies the same criteria as paragraph (c)(3) (Cybersecurity research and vulnerability disclosure) of the expired TGL.

The expired TGL—amended several times—authorized the use of the pre-Entity List licensing requirements and policies that applied to exports, reexports, and transfers of items related to four categories of activities to Huawei and its listed affiliates.9 The TGL originally authorized four categories of transactions: (1) continued operation of existing networks and equipment; (2) support to existing handsets; (3) cybersecurity research and vulnerability disclosure; and (4) engagement as necessary for development of 5G standards by a duly recognized standards body. BIS repeatedly extended the TGL until August 13, 2020.10

In issuing the August 17 Huawei Rule, BIS determined that the previous authorizations for transactions related to "continued operation of existing networks and equipment" and "support to existing 'personal consumer electronic devices' and 'Customer Premises Equipment'" no longer warrant being included in the EAR and should be allowed to expire. BIS addresses the question of authorization for participation in standards organizations via a June 18, 2020 interim final rule.11

TGL Savings Clause

Shipments of items removed from eligibility for a license exception or from export, reexport, or transfer (in-country) without a license as a result of changes to the TGL that were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on August 17, 2020 pursuant to actual orders for export or reexport to a foreign destination, may proceed to that destination under the previous eligibility for a license exception or export, reexport, or transfer without a license. This savings clause does not apply to items that were not so "en route" on August 17, 2020.

3. Changes to the Huawei-specific DPR

In the August 17 action, BIS revised the Entity List's Footnote 1, significantly expanding the scope of non-US made items (foreign-produced items) subject to General Prohibition 3 (the Direct Product Rule, at EAR section 736.2(b)(3)(vi)) for certain Entity List parties marked with a Footnote 1 designation in the Entity List's license requirement column (a Footnote 1 entity). At present, the only Footnote 1 entities are Huawei and its listed affiliates.

Specifically, the August 17 Huawei Rule amends Footnote 1 to prohibit the export, reexport, or transfer to any party (not just Footnote 1 entities) without a license or license exception of the following foreign-produced items:

Foreign-produced items that meet either (a) or (b):
(a) The foreign-produced item is a direct product of "technology" or "software" subject to the EAR that is specified in Export Control Classification Number (ECCN) 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991; or (b) The foreign-produced item is produced by any plant or major component12 of a plant that is located outside the United States,
when the plant or major component, whether made in the United States or a foreign country, itself is a direct product of US-origin "technology" or "software" subject to the EAR that is specified in ECCN 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991.
When there is "knowledge"13 that any one of the following criteria is met:
(1) The foreign-produced item will be incorporated into, any "part," "component," or "equipment" produced, purchased, or ordered by a Footnote 1 entity; or (2) The foreign-produced item will be used in the "production" or "development" of any "part," "component," or "equipment" produced, purchased, or ordered by a Footnote 1 entity; or (3) A Footnote 1 entity is a party to any transaction involving the foreign-produced item, e.g., as a "purchaser," "intermediate consignee," "ultimate consignee," or "end-user."

 

Previously, on May 19, 2020 (effective May 15), BIS issued an interim final rule setting out an earlier Huawei-specific DPR that captured a narrower set of foreign-produced items.14 The May 19 Huawei-specific DPR applied to the export, reexport, or transfer of foreign-produced items where there was "knowledge" that the item was destined to any Footnote 1 entity and the item was either:

  1. Produced or developed by a Footnote 1 entity and was the direct product of technology or software subject to the EAR and classified under the ECCNs listed above; or was
  2. The direct product of software or technology produced or developed by a Footnote 1 entity and was produced by a plant or major component of a plant located outside of the United States that is itself the direct product of US-origin technology or software classified under the ECCNs listed above.

As of August 17, this previous Huawei-specific DPR is superseded by the new Huawei-specific DPR. BIS has stated that the August 17 expansion of the Huawei-specific DPR is designed to address comments BIS received on the previous rule and to prevent circumvention of the rule by Huawei. To this end, BIS (1) removed the provisions requiring that foreign-produced items involve production or development by Footnote 1 entities; and (2) expanded the licensing requirement beyond exports, reexports, and transfers where there is knowledge that an item is destined to a Footnote 1 entity, to include the three types of Huawei involvement discussed above.

BIS states in a note to Footnote 1 that it will consider license applications on a case-by-case for foreign-produced items caught by Footnote 1 that "are capable of supporting the 'development' or 'production' of telecom systems, equipment and devices at only below the 5G level (e.g., 4G, 3G, etc.)."

The August 17 Huawei Rule does not affect items that are otherwise subject to the EAR, by virtue of US origin or location, the de minimis rule, or the standard DPR. Such items subject to the EAR require a license for export, reexport, or transfer where Huawei or its listed affiliates are party to the transaction as either purchaser, intermediate consignee, ultimate consignee, or end-user under the August 17 Entity List Rule.

DPR Savings Clause

Two savings clauses apply to items caught by the new Huawei-specific DPR.

Shipments of foreign-produced items identified in paragraph (a) to Footnote 1 "that are subject to § 736.2(b)(3)(vi) and now require a license pursuant to [the August 17 Huawei Rule] that were on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or to the consignee/end-user, [on August 17, 2020], pursuant to actual orders for exports, reexports, and transfers (in-country) to a foreign destination or to the consignee/end-user, may proceed to that destination under the previous license exception eligibility or without a license."15

Shipments of foreign-produced items identified in paragraph (b) to Footnote 1 "that are subject to § 736.2(b)(3)(vi) and started "production" prior to [August 17, 2020], are not subject to § 736.2(b)(3)(vi) of the EAR and may proceed as not being subject to the EAR, if applicable, or under the previous license exception eligibility or without a license so long as they have been exported, reexported, or transferred (in-country) on or before September 14, 2020. Any such items not exported from abroad, reexported, or transferred (in-country) before midnight (local time) on September 14, 2020, will be subject to § 736.2(b)(3)(vi) of the EAR and require a license in accordance with [the August 17 Huawei Rule] and other provisions of the EAR."16

 

Conclusion

Companies engaging in export, reexport, or transfer transactions involving Huawei or its non-US affiliates listed on the Entity List, as well as to other entities on the Entity List, should closely study the changes made by the August 17 rules and should monitor BIS' implementation of these new rules. Both rules apply to Huawei and its affiliates. The clarification of what transactions are covered by Entity List licensing requirements in the August 17 Entity List Rule affects export, reexport, and transfer transactions to which any entity listed on the Entity List is a party. Persons dealing in items subject to US export jurisdiction should ensure compliance with all applicable licensing requirements. Consequences of noncompliance can be severe, including significant monetary penalties and in some cases denial of export privileges.

 

1 Clarification of Entity List Requirements for Listed Entities When Acting as a Party to the Transaction under the Export Administration Regulations (EAR), Final Rule, 85 Fed. Reg. 51335 (August 17, 2020), available here.
2 Addition of Huawei Non-US Affiliates to the Entity List, the Removal of Temporary General License, and Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule), Final Rule, 85 Fed. Reg. 51596 (August 17, 2020), available here.
3 Commerce Department Further Restricts Huawei Access to US Technology and Adds Another 38 Affiliates to the Entity List (August 17, 2020), available here.
4 The United States Further Restricts Huawei Access to US Technology (August 17, 2020), available here.
5 See 15 C.F.R. 744.11(a); "Purchaser," "intermediate consignee," "ultimate consignee," and "end-user" are defined terms in section 748.5(c)-(f) and part 772 of the EAR.
6 See 15 C.F.R. 744, Supplement 6, available here.
7 On May 16, 2019, BIS added Huawei and 68 of its non-US affiliates to the Entity List. On August 19, 2020, BIS added an additional 46 non-US affiliates. See our previous client alert, available here.
8 See Footnote 2 to Supplement 4 of 15 C.F.R. 744. "A 'fully operational network' refers to a 'third party' network providing services to the 'third party's' customers. The term 'third party' refers to a party that is not Huawei, one of its listed non-US affiliates, or the exporter, reexporter, or transferor, but rather an organization such as a telecommunications service provider."
9 Temporary General License Final Rule, 84 Fed. Reg. 23468 (May 22, 2019), available here.
10 Huawei Temporary General License Extension Frequently Asked Questions (FAQs) (May 18, 2020), available here.
11 Release of "Technology" to Certain Entities on the Entity List in the Context of Standards Organizations, 85 Fed. Reg. 36719 (June 18, 2020), available here.
12 BIS provides a note to paragraph (b) of Footnote 1 that "a major component of a plant located outside the United States means equipment that is essential to the 'production' of an item, including testing equipment." BIS further comments in the August 17 Huawei Rule, in response to a comment received under the May 19 interim final rule: "Because the definition of production applies to 'all production stages, such as: product engineering, manufacture, integration, assembly (mounting), inspection, testing, [and] quality assurance', [sic] any equipment subject to the Export Control Classification Numbers specified in footnote 1 of supplement no. 4 to part 744 of the EAR that is involved in any of the production stages is considered essential." Addition of Huawei Non-US Affiliates to the Entity List, the Removal of Temporary General License, and Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule), at page 51601, available here.
13 The EAR defines "Knowledge of a circumstance "as including "not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts." 15 C.F.R. § 772.1.
14 Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule) and the Entity List, 85 Fed. Reg. 29849 (May 15, 2020), available here.
15 Addition of Huawei Non-US Affiliates to the Entity List, the Removal of Temporary General License, and Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule), at page 29851, available here.
16 Id.

 

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