On May 15, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced two new rules changes directed at Chinese telecommunications giant Huawei Technologies Co., Ltd. (“Huawei”). As we have previously covered, BIS has named Huawei and 114 of its affiliate companies to its Entity List under the U.S. Export Administration Regulations (the “EAR”). These designations generally prohibit anyone, anywhere in the world from exporting, re-exporting or making an in-country transfer of “items subject to the EAR” to the Huawei Entity List designee companies unless authorized by a BIS license. These most recent rules changes : (i) provide a 90-day extension to BIS’s existing Temporary General License for certain Huawei transactions, and (ii) expand BIS’s existing “foreign-produced direct product rule” in order to prohibit the use of U.S. origin software and technology in producing certain items for the Huawei Entity List designees.
When BIS first added Huawei to the Entity List, BIS also issued a Temporary General License (“TGL”) to authorize the continued performance of limited transactions with Huawei Entity List designees that were initiated prior to May 16, 2019. The TGL was originally set to expire on August 19, 2019, but BIS has extended it several times (see here, here, and here). This most recent extension will extend the TGL through August 13, 2020. Anyone seeking to utilize the TGL should be aware that it requires any exporter, reexporter or in-country transferor to first obtain a written certification statement from the applicable Huawei Entity List designee in order to qualify for the TGL. Additionally, BIS previously solicited comments from the public regarding future extensions of the TGL and BIS’s Federal Register notice indicated that BIS is currently reviewing those comments. Those comments will likely influence whether or how BIS extends the TGL going forward after the current extension expires on August 13, 2020.
Expansion of the Foreign-Produced Direct Product Rule
General Prohibition Three of the EAR has historically imposed a “foreign-produced direct product rule” which extends the EAR’s jurisdiction to cover certain items produced outside of the U.S. through the use of specified U.S.-origin production technology or software (for reference, the EAR broadly defines “technology” as any information necessary for the development, production, use, operation, installation, maintenance, repair, overhaul or refurbishing of an export-controlled item). If someone outside the U.S. uses these specified types of U.S.-origin production technology or software to produce an item outside the U.S., then that resulting item becomes “subject to the EAR” and is subject to the same export, reexport and transfer restrictions that would apply to a U.S. origin item. The foreign-produced direct product rule can apply these restrictions even if the foreign-produced item is manufactured entirely from foreign-origin raw materials with foreign-origin production equipment.
BIS is now amending General Prohibition Three and the foreign-produced direct product rule, effective as of May 15, 2020, in order to also capture foreign-produced items that are produced through the use of over thirty (30) different types of U.S. origin technology or software with knowledge that the foreign-produced items are destined for a Huawei Entity List designee. Once these foreign-produced items become “subject to the EAR”, the EAR prohibits both U.S. and non-U.S. persons from exporting, reexporting or making an in-country transfer of those items to a Huawei Entity List designee. In a recent press release, BIS stated that these new rules will “[restrict] Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad” and also “narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.” The specific types of U.S. origin production technology and software that will trigger this new rule are identified within this amendment by their Export Control Classification Number (“ECCN”). The ECCNs identified in the interim final rule cover various technology and software classified under Category 3, Category 4 and Category 5 Part 1 of the Commerce Control List (“CCL”) which are used to produce and/or test a wide variety of export-controlled electronics which include (but are not limited to) microprocessors, microcircuits, computers, computer components, telecommunications infrastructure and certain raw materials used in their production.
These new foreign-produced direct rules will capture items produced through the use of the specified technology and software and destined for a Huawei Entity List company when those items are manufactured internally by a Huawei Entity List designee or when those items are manufactured by a third party according to specifications produced or developed by a Huawei Entity List designee. Although the new rules do include a “knowledge” requirement, persons using the specified technology and software in transactions which may directly or indirectly involve Huawei should be aware that the EAR broadly defines “knowledge” to include not only actual knowledge that an event is going to occur but also the awareness of a high probability that an event will occur. The EAR will infer that a person has “knowledge” of an event when that person consciously disregards or willfully avoids certain facts which would suggest a violation is likely to occur.
It is also important for persons transacting with any Huawei Entity List designee to also be aware of the EAR’s General Prohibition Ten, which prohibits anyone (whether a U.S. or non-U.S. person) from selling, transferring, exporting, reexporting, financing, ordering, buying, removing, concealing, storing, using, loaning, disposing of, transporting, forwarding or otherwise servicing any item that is “subject to the EAR” with knowledge that an EAR violation has occurred, is about to occur or is intended to occur in connection with the item. As a result, if foreign-produced items become “subject to the EAR” under these new rules, then non-manufacturers in the supply chain could also violate the EAR if they resell, transport, finance or perform other services in connection with the supply of those foreign-produced items to a Huawei Entity List company.
These new rules do feature a savings clause which exempts inter-company transfers among Huawei Entity List companies that were in transit as of May 15, 2020 as well as items produced by third parties pursuant to Huawei Entity List companies’ specifications that entered production prior to May 15, 2020. However, anyone relying on the savings clause should be aware that many of the items subject to this new rule are classified under ECCN classifications which will impose additional export and reexport restrictions which are not lifted by the savings clause. Finally, although the new rules took effect immediately (subject to the savings clause), BIS has indicated that it will accept comments on the impact of these new rules through July 14, 2020. The Federal Register notice details the process that interested parties should follow when submitting these comments.
Husch Blackwell’s Export Controls & Economic Sanctions team continues to monitor the developing Huawei situation. Please contact Cortney Morgan or Grant Leach should you have any questions concerning transactions with Huawei and application of the new BIS rule.