New Restrictions on Exports to Huawei and Other Entity List Entities
© , Sandler, Travis & Rosenberg, P.A. Originally published in the [08/19/2020] issue of the Sandler, Travis & Rosenberg Trade Report. Reprinted by permission.
The Bureau of Industry and Security has issued new regulations intended to prevent attempts by Huawei Technologies Co. Ltd. to circumvent U.S. export controls to obtain electronic components developed or produced using U.S. technology. However, these changes will also affect exports to any foreign entity on the BIS Entity List. Both rules were effective as of Aug. 17.
For more information on these regulations, please contact Kristine Pirnia.
In May BIS amended the foreign-produced direct product rule to “narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.” BIS has now issued a final rule that also applies this control to transactions where (1) U.S. software or technology is the basis for a foreign-produced item that will be incorporated into, or will be used in the production or development of, any part, component, or equipment produced, purchased, or ordered by any Huawei entity on the Entity List; or (2) any Huawei entity on the Entity List is a party to such a transaction, such as a purchaser, intermediate consignee, ultimate consignee, or end-user. BIS states that this change is designed to further restrict Huawei from obtaining foreign-made chips developed or produced from U.S. software or technology to the same degree as comparable U.S. chips.
This rule also removes a temporary general license for Huawei and its non-U.S. affiliates and replaces it with a permanent but more limited authorization restricted to providing ongoing security research critical to maintaining the integrity and reliability of existing and currently fully operational networks and equipment. This change effectively removes the previous authorization for certain activities necessary for the continued operations of existing networks and equipment as well as the support of existing mobile services.
Finally, this rule adds 38 more Huawei affiliates across 21 countries to the Entity List because there is reasonable cause to believe Huawei would otherwise seek to use them to evade the restrictions imposed by the Entity List. This action imposes a license requirement for exports of all items subject to the Export Administration Regulations to these entities.
Entity List Entities
In a separate rule, BIS has amended its regulations to clarify that Entity List license requirements apply to all entities involved in a transaction subject to the EAR, not only as an ultimate consignee or end-user but also as a purchaser or intermediate consignee. BIS explains that freight forwarders and other intermediate consignees may have access to items subject to the EAR, which creates a risk of diversion when such entities are listed on the Entity List. Similarly, a purchaser may coordinate all aspects of the purchase of items subject to the EAR, from specifying the exporter, reexporter, or transferor, including designating the ultimate consignee that will receive the goods, to specifying the logistical arrangements made to effect delivery to the ultimate consignee. Accordingly, BIS states, when a person is listed on the Entity List, that person’s participation as a purchaser or intermediate consignee in an export, reexport, or transfer (in-country) of items subject to the EAR presents a risk that the person’s involvement in a transaction may circumvent the basis for their inclusion on the Entity List.
Given the extent of Huawei’s supply chain in the U.S., companies should be screening or re-screening their customer, vendor, and other third-party data against the list of Huawei affiliates to identify any potential ongoing or pending transactions with these parties and set up appropriate controls to ensure compliance with U.S. export control laws. Violations can result in significant financial penalties, denial of export privileges, and reputational damage.