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May 22, 2019
Huawei and affiliates added to the Bureau of Industry and Security’s Entity List effectively barring US exports to the company
Effective 16 May 2019, the United States (US) Department of Commerce, Bureau of Industry and Security (BIS) issued a Final Rule announcing the addition of Huawei Technologies Co Ltd. (Huawei) and 68 of its non-US affiliates to the Entity List for activities contrary to the security interests of the US.1 Export or re-export transactions subject to the jurisdiction of the US with Huawei and its affiliates will require export licenses from BIS that will be subject to a presumption of denial and the authorization of license exceptions is limited. Items that are already in-transit to Huawei as of 16 May are subject to a “Savings Clause” and will be permitted.
The US Department of Justice charged Huawei, its Chief Financial Officer, Meng Wanzhou, and two affiliated companies, Huawei Device USA Inc. and Skycom Tech Co. Ltd., on 28 January 2019 with violating US sanctions against Iran, bank fraud and obstruction of justice. Ms. Meng was arrested in Vancouver, Canada and the US launched extradition proceedings, which remain ongoing.
Huawei, the world’s largest supplier of telecom equipment, is headquartered in the People’s Republic of China (PRC) and operates in 170 countries and employs 180,000 people worldwide. It has reportedly built at least 50 3G networks in 36 countries and has implemented 70% of Africa’s 4G networks. Huawei and other Chinese tech companies are involved in everything from new undersea Internet cables and national data networks to selling millions of mobile phones on the African subcontinent. The Chinese companies are competing with other vendors for leadership in developing 5G cellular technology, with such technological advancements bringing an increase in speed and responsiveness of wireless networks and the capacity to handle more connected devices. The addition of Huawei and its affiliate companies to the Entity List could have wide-ranging impact because of the forthcoming ubiquity of interconnected devices and how such extensive devices and equipment transmit information and access the 5G networks.
Addition of Huawei to the Entity List
On 15 May 2019, US President Trump signed an Executive Order declaring a national emergency in response to threats by foreign adversaries creating and exploiting vulnerabilities in information and communication technology or services. The Order prohibits the acquisition, importation, transfer, installation, dealing in or use of any information and communications technology or service by any person where the transaction poses a risk to the national security or foreign policy of the United States. All US governmental agencies were directed to take all appropriate measures within their authority to carry out the provisions of the Order.2
Shortly thereafter, BIS added Huawei and 68 of its affiliates to the Entity List because the US Government found probable cause that Huawei acted “contrary to the national security and foreign policy interests of the United States.” Specifically, the US District Court for the Eastern District of New York indicted Huawei on 13 counts of violating and conspiring to violate the International Emergency Economic Powers Act (IEEPA) for “knowingly and willfully causing the export, re-export, sale and supply, directly and indirectly, of goods, technology and services from the United States to Iran and the government of Iran without obtaining a license from [OFAC].”3 Huawei also allegedly obstructed the Office of Foreign Assets Control (OFAC)’s investigation through “deceitful and dishonest means.”
As a consequence, BIS now requires US exporters and foreign re-exporters to apply for a license to export, re-export, or transfer (in country) any commodity, software or technology (collectively “items”) subject to the EAR to Huawei and its affiliate entities. Items “Subject to the EAR” include all items in the United States, all US-origin items wherever located, and non-US items containing more than a de minimis level of US-controlled content.4
BIS imposed a “presumption of denial” on these licenses, which effectively means the license application will likely not be granted and Huawei will not be able to procure or obtain any items subject to the EAR.
What to expect next?
Actions for businesses
Any company involved in US-China trade, or operating in industries with heightened risk (e.g. telecommunications, semiconductors, technology) is encouraged to identify the potential impact of the addition of Huawei (and related companies) to the Entity List and subsequently enhancing their export compliance programs to avoid potential violations. Immediate actions for such companies should include:
1. See 84 FR 22961, 21 May 2019.
2. See Executive Order on Securing the Information and Communications Technology and Services Supply Chain https://www.whitehouse.gov/presidential-actions/executive-order-securing-information-communications-technology-services-supply-chain/.
3. 84 FR 22961, 21 May 2019.
4. See 15 §CFR 734.3.
7. 84 FR 23468, 22 May 2019.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, Chicago
Ernst & Young LLP, Dallas
Ernst & Young LLP, Houston
Ernst & Young LLP, Irvine
Ernst & Young LLP, New York
Ernst & Young LLP, Portland
Ernst & Young LLP, San Diego
Ernst & Young LLP, San Francisco
Ernst & Young LLP, San Jose
Ernst & Young LLP, Seattle