The Report and its findings herald a notable shift away from a “free trade” oriented U.S. export policy toward more hardline oversight and regulation of U.S. exports to the PRC and adversaries. According to the House Committee, the Chinese Communist Party’s (CCP) Military-Civil fusion strategy blurs the line between commercial and military items in such a way that requires the United States to abandon the “post-Cold War” distinction between economic and national security. In doing so, the Report calls on licensing officials to act less as the “voice of business” and more as U.S. regulators that are more “willing to deny licenses to export technology” to U.S. adversaries. It remains to be seen whether Congress or BIS will implement any of the recommendations, but it is clear the House Committee has serious concerns about the current state of play.

The Report makes several recommendations to address key areas of weakness in the United States’ approach to U.S. export controls, including the following:

1. Implement a majority vote system for the BIS’s Operating Committee, especially for exports to China. For the fiscal years of 2017–2019, there has been a 60 percent increase in non-consensus decisions of the Operating Committee, which adjudicates escalations from licensing decisions where reviewing agencies are not in agreement. According to the House Committee, these statistics raise concerns that the Operating Committee too often overrides the objections of other agencies by abusing Commerce’s role as both a Chair and a member. Implementation of this recommendation from the House Committee would likely make it more difficult for U.S. industry to obtain favorable licensing decisions through the escalation process.
2. BIS should impose a policy of denial for all exports of national security-controlled items to China to reduce the rate of approval. In 2020, nearly all exports to China of items listed on the Commerce Control List (CCL) were unlicensed. Even where required, BIS granted an overwhelming majority of requests to export or release U.S. software or technology to the PRC. The House Committee concluded that denying the value of these exports, which in 2021 reflected around 1 percent of U.S. exports to China, would hardly effect U.S.-China trade relations, while blunting CCP military ambitions. If implemented, U.S.-regulated firms involved in dual-use transactions with China would face stronger headwinds in obtaining licenses that historically have been granted.
3. BIS (or Congress) should apply a “presumption of denial” for all items subject to the EAR for companies on the Entity List and clearly define the term to mean that a license, no matter the item, will be denied in essentially every instance. BIS’s licensing regime is not strict enough in preventing the proliferation of U.S. technology to prohibited end users and end uses, according to the Report. The Report submits that too many license applications for companies appearing on the Entity List are approved despite being subject to a “presumption of denial,” with BIS approving $60 billion worth of licenses to Huawei during a six-month period between November 2020 and April 2021. Defining the term to limit BIS’s discretion, while also expanding the scope of items subject to the “presumption of denial” standard, would make it much more difficult if not impossible to engage in controlled transactions with Entity Listed PRC companies.
4. BIS should broaden the scope of Entity List requirements to subsidiaries and affiliates, and invest in enhanced, commercially-available mapping tools. The Report cites the effectiveness of the “50 percent rule,” a mechanism that the Treasury Department’s Office of Foreign Assets Control employs when administering economic sanctions against Specially Designated Nationals (SDNs) to “flow-down” U.S. sanctions requirements to certain entities majority owned by SDNs. The Report recommends that BIS similarly adopt, at the very least, a mechanism that would automatically apply Entity List licensing requirements to related PRC-entities in order to mitigate circumvention of U.S. export controls. In addition, the House Committee calls for investment in enhanced tools for screening and identifying linkages of PRC companies to CCP military. This measure, if implemented, could result in more entities being subject to Entity List restrictions, cutting off sales to unlisted subsidiaries.
5. The Department of Commerce must renegotiate its end-use agreement with the PRC or impose greater restrictions on exports to China considering the inability to conduct meaningful end-use checks. Unlike other countries, where U.S. export control officers have a good deal of discretion to conduct end-use checks for up to 5 years after shipment, end-use checks involving PRC shipments must occur within 180 days. Moreover, end-use checks on PRC shipments require PRC approval. According to the Report, this severely hinders BIS’s ability to monitor and ensure compliance with license terms. Should the Department of Commerce successfully re-negotiate these terms, U.S. exporters can expect greater and longer lasting U.S. official involvement in commercial relationships with PRC firms overseas, including more auditing of end users and end uses.

In addition to the above, the Report makes numerous other recommendations, including limitations on standard-setting loopholes, fees for certain export licensing requests, requirements to refer certain licensing decisions or CCL determinations to interested U.S. agencies, intensive review and transfer of EAR99 technologies to the CCL, and a continued push for bilateral and plurilateral export control agreements covering, at a minimum, AI, quantum, and biotechnology.

Key Takeaways:

In the run up to the election, neither Party will want to be regarded as “weak on China” or U.S. national security issues. And it is unlikely that the Commerce Department and BIS will push back against these recommendations in any public way.

So, while the administration and BIS may not implement every recommendation, the Report marks for the new year a movement toward a stricter policy position with respect to China, if not additional “tough on China” measures and rulemaking. As pressure on U.S. regulatory bodies continues to mount, U.S. industry should anticipate increased regulation and greater difficulty in obtaining licenses for export transactions involving China, even where those transactions involve EAR99 designated items.

Please contact our sanctions and export controls team if you require any assistance navigating this development.

Supply Chain Resilience. The EO directs the Committee to consider a covered transaction’s effect on supply chain resilience and security, both within and outside of the defense industrial base. The underlying message is that CFIUS should look broadly at supply chain effects of proposed acquisitions and not just focus on direct national security effects. The concept of the U.S. supply chain writ large as a CFIUS national security concern is relatively new and could lead to CFIUS reviews of more proposed transactions.

U.S. Technological Superiority. The EO identifies sectors crucial to the U.S.’s global technological advantage, including, but not limited to, microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, and the agricultural industrial base. The EO directs the Committee to consider whether or not a transaction would compromise the manufacturing capabilities, services, critical mineral resources, or technologies of the listed sectors.

Industry Investment. The EO also directs the Committee to consider the risks arising from a covered transaction in the context of multiple acquisitions or investments in a single sector or in related sectors in order to safeguard any given sector from compromise / control by an adversarial foreign entity.

Cybersecurity. The EO directs the Committee to consider whether a covered transaction may provide a foreign person, or a third-party, with access to conduct malicious cyber activities, in addition to the cybersecurity posture, practices, capabilities, and access of all parties to the transaction that could afford a foreign person, or third-party, the ability to achieve such activities.

Sensitive Personal Data. The EO directs the Committee to consider whether a covered transaction involves a U.S. business with access to U.S. persons’ sensitive data, and whether the foreign investor has the ability to exploit such information to the detriment of national security, including through the use of commercial or other means.

This EO instructs CFIUS to pay attention to many areas that are already the focus of Committee activity – as reflected in the Committee’s regulations and in much of itsrecent activity. That said, the instruction on supply chains will encourage CFIUS to think more broadly in that area. The EO is also intended as a message to U.S. acquisition targets and to non-U.S. companies thinking about acquisitions, including Chinese companies that have been contemplating a stricter CFIUS landscape, that scrutiny of proposed transactions in the key areas listed will be enhanced even further. The EO is also a message that can be referenced in forthcoming mid-term election races that this administration is intent on protecting U.S. national security as defined very broadly by this EO.

The DPA allows the President to expedite and expand the supply of materials and services from the U.S. industrial base needed to promote the national defense, and explicitly grants authority to address mining and the production of minerals essential to national security. While the DPA permits the President to directly purchase minerals, reports indicate that the administration instead plans to fund mineral surveys and expand or modernize existing facilities. Indeed, the directive tasks the U.S. secretary of defense with conducting feasibility studies for new projects, increasing production of by-products and co-products as well as waste reclamation at existing mines, and upgrading and expanding existing facilities.

President Biden’s memorandum is a continuation of the administration’s policy of establishing more resilient, diverse and secure supply chains in the United States. The administration’s policy is discussed in detail in recently released reports on six critical industrial sectors, and in 100-day supply chain reviews.

The Presidential directive also comes shortly after U.S. Trade Representative Katherine Tai’s testimony before the House Ways and Means Committee, in which Ambassador Tai signaled a shift in strategy for curbing anti-competitive Chinese trade practices. In particular, Ambassador Tai noted that existing tools have failed, and rather than imposing new trade penalties on China, a shift to a form of industrial policy of expanding U.S. production in critical sectors, including key mineral mining and processing, may be appropriate.

Critical minerals – and their importance to America’s industrial bases – have long been a thorn in U.S.-China trade relations. Currently, China is the largest source of mineral commodities for the United States and many critical minerals used in manufacturing are produced exclusively by Chinese companies. In 2021, the United States was 100 percent import-reliant for 17 mineral commodities and at least 50 percent import-reliant for 30 others. With the Administration directing resources toward shoring up and building out domestic capacities for the five identified minerals, companies in those industries or that rely on such minerals should keep watch of opportunities for growth.

Hot Market / Cold War: Is China Your Best Customer or Your Biggest Threat?

March 29^th 12:00 – 1:00 PM ET

Relations between the United States and China have been tumultuous over the last decade -especially in recent years - however, trade and investment ties remain robust between these two economic powers. In this one-hour webinar we will discuss the state of U.S. – China relations and how they have evolved in recent years; whether and where the U.S. should focus on strategic competition or seek cooperative action; the challenges business face doing business in or with China; and what role the Biden Administration, U.S. Congress and other global economic and trade institutions may play in the determining the path forward. Our discussion will feature Kelley Drye International Trade and Government Relations partner, Paul Rosenthal, and Kelley Drye Senior International Trade/Government Relations Advisor, Bill Reinsch, and be moderated by Kelley Drye International Trade Chair, John Herrmann.

Please RSVP here.

In addition to traditional blocking sanctions, the E.O. authorizes U.S. government agencies to impose menu-based sanctions on non-U.S. persons that:

• Have materially contributed to the “international proliferation of illicit drugs” or their means of production;
• Have knowingly received property that constitutes or is derived from the proceeds of the international proliferation of drugs or that was used or is intended to materially facilitate the international proliferation of drugs;
• Have provided financial, material, or technological support for, or goods or services in support of the global drug trade or a sanctioned person;
• Are or were a leader or official of any sanctioned person or any foreign person that has engaged in the foregoing; or
• Are owned, controlled, or directed by, directly or indirectly, any sanctioned person.

The E.O. defines the “international proliferation of illicit drugs” to be any illicit activity to produce, manufacture, distribute, sell, or knowingly finance or transport narcotic drugs, controlled substances, listed chemicals, or controlled substance analogues, as defined in section 102 of the Controlled Substances Act. Parties designated pursuant to the E.O. face a menu of sanctions possibilities, including at least one of the following:

• Blocking sanctions that freeze the sanctioned actor’s U.S. property or interests in property;
• Prohibition on U.S. transfers of credit or payments involving any interest of the sanctioned actor;
• Prohibition on U.S. transactions in foreign exchange in which the sanctioned actor has any interest;
• Prohibition on any U.S. person from investing in or purchasing significant amounts of the sanctioned actor’s equity or debt; and/or
• Imposition of any of the foregoing sanctions on principle executive officers, officers, or the functional equivalent of such officers, of the sanctioned actor.

Pursuant to the new E.O., the Treasury Department’s Office of Foreign Assets Control (OFAC) announced the imposition or updating of sanctions on 25 foreign actors involved in the international trade of illicit drugs. OFAC updated its list of Specially Designated Nationals to designate 10 individuals and 15 drug trafficking organizations (DTOs) from Brazil, China, Mexico, and Colombia, as having materially contributed to the international proliferation of illicit drugs or their means of production. Of particular note is OFAC’s designation of Chinese national Chuen Fat Yip, a trafficker of fentanyl, anabolic steroids, and other synthetic drugs to the United States. According to OFAC, Chuen Fat Yip relies on virtual currency and fund transfers through money-service business and banks to finance his operations. OFAC has recently signaled that it would ramp up efforts to counter illicit activities in which cryptocurrencies and digital payment services play a role.

Please contact our sanctions and export control team with any questions about ensuring compliance with these new sanctions.

The updated Advisory, which echoes the State Department’s annual report on genocide, declares that the Chinese government is committing genocide and crimes against humanity. Given the gravity and extent of these abuses, the updated Advisory notes that “businesses and individuals that do not exit supply chains, ventures, and/or investments connected to Xinjiang could run a high risk of violating U.S. law.” This warning suggests that the U.S. government is likely to take further action against companies and products with ties to Xinjiang.

In the interim, the updated Advisory encourages business, including financial institutions to undertake heighted due diligence to identify potential supply chain or other linkages to Xinjiang and forced labor. However, the updated Advisory, like the original, cautions against relying on third-party audits alone and encourages collaboration with industry groups to share information on risks in the region.

The updated Advisory particularly urges caution with respect to the following sectors that have been identified as using forced labor: Agriculture (including such products as raw cotton, hami melons, korla pears, tomato products, and garlic); Cell Phones; Cleaning Supplies; Construction; Cotton Yarn, Cotton Fabric, Ginning, Spinning Mills, and Cotton Products; Electronics Assembly; Extractives (including coal, copper, hydrocarbons, oil, uranium, and zinc); Fake Hair and Human Hair Wigs, Hair Accessories; Food Processing Factories; Footwear; Gloves; Hospitality Services; Metallurgical grade silicon; Noodles; Printing Products; Renewable Energy (polysilicon, ingots, wafers, crystalline silicon solar cells, crystalline silicon solar photovoltaic modules); Stevia; Sugar; Textiles (including such products as apparel, bedding, carpets, wool); and Toys.

Risks of doing business with companies implicated in Xinjiang-related human rights abuses is not limited to supply chains and inbound merchandise. For example, the United States has imposed a variety of sanctions on Chinese companies involved in human rights abuses in Xinjiang, including technology companies that provide the digital infrastructure necessary for mass surveillance in the region. These measures broadly prohibit U.S. and non-U.S. companies from exporting or transferring U.S.-origin goods, software, and technology to the sanctioned parties.

The updated Advisory is the latest indication that human right concerns will play a central role in the Biden Administration’s approach to China. U.S. businesses should carefully review the updated Advisory in detail and consider their legal and reputational exposure to Xinjiang-related risks with respect to existing relationships and future transactions.

Under the new rule, U.S and non-U.S. exporters are generally prohibited from transferring goods, software, or technology subject to the U.S. Export Administration Regulations (EAR) to listed entities without first obtaining a U.S. export license. License applications involving exports or transfers to most listed companies will face a presumption of denial.

Companies doing business with the listed parties should carefully review whether these rules apply to their operations and implement controls to prevent exports, re-exports, or transfers of items to listed entities, unless licensed by BIS.

The new E.O. resets the U.S. government’s approach to ICTS by ordering a review of the national security threats posed by software applications that collect Americans’ sensitive personal and business data and by foreign adversaries’ access to large repositories of U.S. person data. New restrictions are likely following that review, and companies that rely on software applications owned or managed by companies linked to China or other potential foreign adversaries, should closely watch developments in this space.

New reports on “unacceptable or undue risks” posed by foreign adversary-connected applications

The E.O. directs the Directors of National Intelligence and Homeland Security to provide threat and vulnerability assessments to the Secretary of Commerce. In turn, the Commerce Department will draft two reports on foreign adversary-connected software, defined as software that has the ability to collect, process, or transmit data over the internet. The reports will recommend actions to protect against harm from the sale of, transfer of, or access to U.S. persons’ sensitive data, including personally identifiable information, personal health information, and genetic information. In addition, the Commerce Department will recommend additional actions to address risks associated with software applications that are designed, developed, manufactured, or supplied by persons owned or controlled by, or subject to the jurisdiction or direction of, a foreign adversary.

Several criteria indicate national security risk of ICTS applications

Building on the criteria to assess national security threats listed in E.O. 13873, the new E.O. lists several factors that will be considered when evaluating the risks posed by foreign adversary-connected software, including:

• ownership, control, or management by persons that support a foreign adversary’s military, intelligence, or proliferation activities;
• use of the connected software applications to conduct surveillance that enables espionage, including through a foreign adversary’s access to sensitive or confidential government or business information, or sensitive personal data;
• ownership, control, or management of connected software applications by persons subject to coercion or cooption by a foreign adversary;
• ownership, control, or management of connected software applications by persons involved in malicious cyber activities;
• a lack of thorough and reliable third-party auditing of connected software applications;
• the scope and sensitivity of the data collected; the number and sensitivity of the users of the connected software application; and
• the extent to which identified risks have been or can be addressed by independently verifiable measures.

These criteria will inform the U.S. government’s decision-making framework to adopt a “rigorous, evidence-based” analysis to address risks posed by ICTS transactions involving foreign adversary-connected software.

Further action on ICTS applications likely

Although yesterday’s E.O. rescinds the previous E.O.s dealing with Chinese mobile applications, new restrictions on Chinese and other software that collect large amounts of sensitive U.S. person data are likely to flow from the Commerce Department’s forthcoming report and recommendations, which are expected within 180 days. Furthermore, the E.O. provides the Commerce Department with authority to restrict transactions and business activities that may:

• Pose a risk of sabotage or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of ICTS in the United States;
• Pose a risk of catastrophic effects on the security or resiliency of the critical infrastructure or digital economy of the United States; or
• Otherwise pose an unacceptable risk to the national security of the United States or the security and safety of United States persons.

The report stems from President Biden’s Executive Order 14017 (“EO 14017”), which established a wide-ranging whole-government evaluation of America’s supply chains. The report and recommendation released today concerns 100-day reviews involving four specific supply chains:

• semiconductors and advanced packaging;
• high-capacity batteries;
• critical minerals and other identified strategic materials; and
• active pharmaceutical ingredients.

Trade Enforcement: A recurring theme throughout the document relates to the use of the trade enforcement toolkit, including the establishment of a U.S. Trade Representative-led trade strike force, to identify unfair foreign trade practices that have eroded U.S. critical supply chains and to recommend trade actions to address such practices. The report also specifically recommends a potential Section 232 investigation of neodymium permanent magnets, suggesting that the Biden Administration may use Section 232 as a vehicle to address critical supply chain issues, albeit in a more traditional national security context.

Global Nature of Supply Chains: While many of the reports’ recommendations focus on expanding domestic production and labor, the report also acknowledges the need for global supply chains, and the need to work with partners and allies to achieve resilient supply chains.

Leveraging the Government’s Purchasing Power: The report proposes a number of ways the government can leverage its position as a buyer of critical materials to address supply chain concerns. This includes purchasing materials from domestic sources but also developing standards that foreign materials must meet. The report also suggests a strengthening of the National Defense Stockpile and the use of the Defense Production Act program as additional ways of addressing supply chain deficiencies.

Financing/Investment: A systemic lack of financing and a long-term shortfall in investments are identified as a key themes throughout the report. The report makes several financing recommendations that may present domestic and foreign producers with opportunities to expand production capabilities domestically and also abroad.

Sustainability: Sustainability is a key theme throughout the report, both from developing sustainable production in the U.S., sourcing materials produced sustainably abroad, and encouraging allies and partners and partners to develop sustainable supply chains.

Labor: The report identifies a shortage of skilled labor as a significant supply chain issue and recommends investing in training and development programs to ensure the U.S. labor market can meet manufacturing needs.

The administration is also conducting year-long based supply chain reviews of the following six sectors:

• defense industrial base;
• public health and biological preparedness industrial base;
• information and communications technology (ICT) industrial base;
• energy sector industrial base;
• transportation industrial base; and
• agricultural commodities and food products.

The amended order reflects a growing emphasis on human rights and “democratic values” in U.S. sanctions policy related to China. The White House fact sheet announcing today’s amendment indicated that the Order is intended to prevent the flow of U.S. capital to companies that develop or use surveillance technology to facilitate repression or serious human rights abuse in and outside of China, including technology used to surveil religious or ethnic minorities. Other recent moves, including those in response to Chinese government policies in the Xinjiang region and Hong Kong, have similar human rights policy motivations. The administration may cite to security and adherence to democratic values in imposing future sanctions.

Below, we summarize the key features of the new restrictions and guidance issued by the Office of Foreign Assets Control (“OFAC”).

Companies targeted

The Biden administration indicated that it expects to add additional parties to the NS-CIMC List in the future.

Relevant securities

Wind-down period

Guidance for U.S. financial service companies and investors

• U.S. financial service companies that provide clearing, execution, settlement, and related services can continue to deal in CMIC securities so long as they do not facilitate prohibited transactions by U.S. persons.
• Securities exchanges operated by U.S. persons, along with market makers, market intermediaries and other participants, are not prohibited from effecting U.S. persons’ divesture of publicly traded securities in the listed CMICs during the wind-down period.
• U.S. persons employed by non-U.S. entities are not prohibited from facilitating purchases or sales related to a CMIC security on behalf of their non-U.S. employer or providing investment management or similar services to a non-U.S. person.
• U.S. financial service companies can rely on “information available to them in the ordinary course of business” in conducting due diligence on whether an underlying purchase or sale is prohibited under the amended E.O

* * * * *

Additions to NS-CMIC List

“Delisted” Companies

AEROSPACE CH UAV CO., LTD AEROSPACE COMMUNICATIONS HOLDINGS GROUP COMPANY LIMITED AEROSUN CORPORATION ANHUI GREATWALL MILITARY INDUSTRY COMPANY LIMITED AVIATION INDUSTRY CORPORATION OF CHINA, LTD. AVIC AVIATION HIGH-TECHNOLOGY COMPANY LIMITED AVIC HEAVY MACHINERY COMPANY LIMITED AVIC JONHON OPTRONIC TECHNOLOGY CO., LTD. AVIC SHENYANG AIRCRAFT COMPANY LIMITED AVIC XI’AN AIRCRAFT INDUSTRY GROUP COMPANY LTD. CHANGSHA JINGJIA MICROELECTRONICS COMPANY LIMITED CHINA AEROSPACE TIMES ELECTRONICS CO., LTD CHINA AVIONICS SYSTEMS COMPANY LIMITED CHINA MARINE INFORMATION ELECTRONICS COMPANY LIMITED CHINA COMMUNICATIONS CONSTRUCTION GROUP (LIMITED) CHINA MOBILE LIMITED CHINA NUCLEAR ENGINEERING CORPORATION LIMITED CHINA SHIPBUILDING INDUSTRY COMPANY LIMITED CHINA SHIPBUILDING INDUSTRY GROUP POWER COMPANY LIMITED CHINA STATE SHIPBUILDING CORPORATION LIMITED CHINA TELECOM CORPORATION LIMITED CNOOC LIMITED COSTAR GROUP CO., LTD. CSSC OFFSHORE & MARINE ENGINEERING (GROUP) COMPANY LIMITED FUJIAN TORCH ELECTRON TECHNOLOGY CO., LTD. GUIZHOU SPACE APPLIANCE CO., LTD HUAWEI TECHNOLOGIES CO., LTD. INNER MONGOLIA FIRST MACHINERY GROUP CO., LTD. JIANGXI HONGDU AVIATION INDUSTRY CO., LTD. NANJING PANDA ELECTRONICS COMPANY LIMITED NORTH NAVIGATION CONTROL TECHNOLOGY CO., LTD. PROVEN GLORY CAPITAL LIMITED PROVEN HONOUR CAPITAL LIMITED SHAANXI ZHONGTIAN ROCKET TECHNOLOGY COMPANY LIMITED ZHONGHANG ELECTRONIC MEASURING INSTRUMENTS COMPANY LIMITED

CHINA INTERNATIONAL ENGINEERING CONSULTING CORP. CHINA NATIONAL CHEMICAL CORPORATION (CHEMCHINA) CHINA NATIONAL CHEMICAL ENGINEERING GROUP CO., LTD. (CNCEC) CHINA NUCLEAR ENGINEERING & CONSTRUCTION CORPORATION (CNECC) CHINA SHIPBUILDING INDUSTRY CORPORATION (CSIC) CHINA THREE GORGES CORPORATION LIMITED CRRC CORP. DAWNING INFORMATION INDUSTRY CO (SUGON) INSPUR GROUP SINOCHEM GROUP CO LTD

Certain exports of crude oil, condensates, aromatics, natural gas liquids, hydrocarbon gas liquids, natural gas plant liquids, refined petroleum products, liquefied natural gas, natural gas, synthetic natural gas, and compressed natural gas to CNOOC are excluded from the license requirement, as are exports of items to joint ventures with persons from Country Group A:1 countries that operate outside of the South China Sea.

In the notice, the Commerce Department indicated that CNOOC was added to the Entity List due to the company’s involvement in the South China sea dispute. Suppliers and other companies doing business with CNOOC should carefully review whether these rules apply to their operations and implement controls to prevent exports, re-exports, or transfers of items to CNOOC, unless licensed by BIS.

When the MEU Rule was implemented, it created significant due diligence burdens for the exporting community, because it was incumbent on those companies to determine whether certain entities in China, Russia and Venezuela would qualify as “military end-users.” Although the publication of the MEU List will reduce that burden somewhat, the MEU List is non-exhaustive and BIS stated that an entity’s exclusion from the list does not mean that the entity is not subject to the MEU Rule. For example, BIS specifically cautioned that a party not included on the MEU List, but included on Department of Defense lists of military companies in China, would raise a red flag that would require due diligence. Therefore, even though a transaction with a party included on the MEU List is certainly subject to the MEU Rule, exporters, re-exporters, and transferors (e.g., freight forwarders) are still responsible for conducting their own due diligence to identify potential military end users not yet listed by BIS.

The End-User Review Committee (the interagency body composed of the Departments of Commerce, Defense, Energy, State, and sometimes Treasury) is responsible for adding and deleting additional entities from the MEU List. License applications for transactions that are subject to the MEU Rule (i.e., that include a military end-user and an item enumerated in Supplement No. 2 to Part 744) will be reviewed by BIS subject to a presumption of denial.

Please contact our export control and sanctions team if you have any questions about these developments.

The new rule prohibits U.S. and non-U.S. persons from providing the listed entities with goods, software, or technology (collectively, “items”) that are “subject” to the U.S. Export Administration Regulations (EAR) without first obtaining a license from the Bureau of Industry and Security (BIS), which administers the EAR. License applications involving exports or transfers to most listed companies will face a presumption of denial, although BIS appears willing to entertain license applications for exports of less sensitive items to SMIC and certain items necessary to detect, identify and treat infectious disease to certain other companies, including DJI. The broad license requirement applies to all items in the United States, items made in the United States, and certain non-U.S. items that contain more than de minimis U.S.-origin content or were made using certain U.S.-origin technology.

Companies doing business with the listed parties should carefully review whether these rules apply to their operations and implement controls to prevent exports, reexports, transfers, or releases of items to the listed parties without U.S. government approval.

Please contact our sanctions and export team with any questions regarding this new rule.

As of the date of designation, U.S. persons are prohibited from conducting business with CEIEC and its over 200 subsidiaries without authorization from OFAC and all property and interests in property of the company are blocked (i.e., frozen) under U.S. law. Because of the wide potential reach of the sanctions, OFAC issued General License 38 to allow U.S. persons to wind-down pre-existing business with the company and its subsidiaries over a 45-day period.

Please contact our economic sanctions team if you have any questions about the designation or your sanctions risk profile.

What companies are targeted by the Order?

The Order applies to the securities of any company designated as a “Communist Chinese military company” (CCMC) by the U.S. Department of Defense (DoD) or Treasury’s Office of Foreign Assets Control (OFAC). The Order initially applies to 31 companies previously designated as CCMCs by DoD earlier this year. The Order will also apply to newly listed CCMCs 60 days after they are designated by the U.S. government.

As written, the Order does not appear to apply to subsidiaries of CCMCs that are not explicitly designated by DoD or OFAC. Further guidance from OFAC on that point would be helpful, however.

What securities are subject to the Order?

The Order applies to all publicly traded securities of CCMCs, including securities that are derivative of or are designed to provide investment exposure to CCMC securities. The Order defines “securities” to include those specified in Section 3(a)(10) of the Securities Exchange Act of 1934.

Are there any exceptions?

The Order allows U.S. persons to divest from existing holdings in the currently listed CCMCs until November 21, 2021, provided that the securities are sold to non-U.S. persons. The Order provides for a 365-day divestment period for CCMCs that are designated in the future. Similar divestment periods are available under various OFAC sanctions programs that target securities.

What’s next?

We expect OFAC to issue guidance clarifying the scope of the Order before it becomes effective, as the agency has done for similar sanctions programs in the past. There are a number of questions that could be addressed by the agency, including how the Order will apply to U.S. broker dealers who facilitate divestment activities by U.S. persons and transactions by non-U.S. persons, U.S. and non-U.S. funds that are backed by CCMC securities, and to what extent the Order will apply to subsidiaries of listed CCMCs.

Notably, the Order takes effect only nine days before the inauguration of the Biden administration. The next administration could suspend or modify the Order, although immediate action on the Order may not be a top priority given other challenges the administration is expected to face upon taking office.

The President’s order follows a string of activities set off by an initial order issued in December 2017, that directed the Secretary of Interior to compile a list of “critical minerals” defined as (i) non-fuel minerals or minerals material essential to the economic and national security of the United States, (ii) the supply chain of which is vulnerable to disruption, and (iii) that serves an essential function in the manufacturing of a product, the absence of which would have significant consequences for our economy or our national security.

On May 18, 2018 the Secretary of Interior finalized a list of 35 “critical minerals” meeting this criteria, including:

Aluminum (bauxite), antimony, arsenic, barite, beryllium, bismuth, cesium, chromium, cobalt, fluorspar, gallium, germanium, graphite (natural), hafnium, helium, indium, lithium, magnesium, manganese, niobium, platinum group metals, potash, the rare earth elements group, rhenium, rubidium, scandium, strontium, tantalum, tellurium, tin, titanium, tungsten, uranium, vanadium, and zirconium.

The order also offers several hints at where future federal action might occur. In particular, the order focuses on minerals where supply chains rely on imports from China and other non-market economy countries including rare earth metals, barite, and gallium.

Within sixty days, the Secretary of Interior is directed to prepare a report summarizing its investigation of the United States’ “undue reliance” on critical minerals from “foreign adversaries” and “recommend executive action” including but not limited to imposition of tariffs, quotas, or other import restrictions.

While the order falls short of identifying any process for stakeholders to participate, Kelley Drye & Warren professionals will be closely monitoring the situation and will provide updates as more information becomes available.

Subject to certain limitations, the general license authorizes U.S. persons to engage in activities that are ordinarily incident and necessary to:

• Wind down transactions involving any entity in which XPCC owns a 50% or greater interest;
• Divest or transfer of debt, equity ,or other holdings in an XPCC subsidiary to a non-U.S. person; or
• Facilitate the transfer of debt, equity, or other holdings in an XPCC subsidiary by a non-U.S. person to another non-U.S. person.

Post Update:

Original Post:

As a result, beginning on September 20, users in the United States will likely be unable to download the applications from app stores and application updates will be unavailable. Importantly, the new restrictions do not apply to the use of the mobile applications outside of the United States, which should be a relief to the many U.S. companies whose overseas operations use WeChat to process payments and connect with customers in China and elsewhere. In addition, the new rules generally do not prohibit the continued use of the apps by individual users in the United States who have already installed the programs on their mobile devices.

The following types of “business to business” transactions,[1] spelled out in the WeChat notice, are prohibited under the new rules:[2]

“1. Any provision of services to distribute or maintain the WeChat mobile application, constituent code, or mobile application updates through an online mobile application store, or any online marketplace where mobile users within the land or maritime borders of the United States and its territories may download or update applications for use on their mobile devices;

2. Any provision of internet hosting services enabling the functioning or optimization of the WeChat mobile application, within the land and maritime borders of the United States and its territories;
3. Any provision of content delivery services enabling the functioning or optimization of the WeChat mobile application, within the land and maritime borders of the United States and its territories;
4. Any provision of directly contracted or arranged internet transit or peering services enabling the functioning or optimization of the WeChat mobile application, within the land and maritime borders of the United States and its territories;
5. Any provision of services through the WeChat mobile application for the purpose of transferring funds or processing payments to or from parties within the land or maritime borders of the United States and its territories;
6. Any utilization of the WeChat mobile application’s constituent code, functions, or services in the functioning of software or services developed and/or accessible within the land and maritime borders of the United States and its territories.”

Pursuant to a series of exceptions, Commerce indicated that the following activities are not prohibited by the new rules:

1. Payment of wages, salaries, and benefit packages to employees or contractors;
2. The exchange between or among WeChat/TikTok mobile application users of personal or business information using the mobile applications (to include the transferring and receiving of funds via WeChat);
3. Activities related to mobile applications intended for distribution, installation or use outside of the United States by any person, including but not limited to any person subject to U.S. jurisdiction, and all ancillary activities, including activities performed by any U.S. person, which are ordinarily incident to, and necessary for, the distribution, installation, and use of mobile applications outside of the United States; or
4. The storing of WeChat/Tiktok mobile application user data in the United States.

[1] “Transaction” is defined broadly to include any “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.”

[2] The prohibitions applicable to TikTok are very similar, but exclude paragraph 5, which is specific to WeChat’s payment functionality.

Exporters should use the DOD list as a due diligence tool to identify customers and end users that may be subject to BIS’s recently expanded military end user and end use export controls. Under those rules, U.S. and non-U.S. companies require licenses to ship certain items subject to U.S. control rules to military end users or military end uses in China.

Please let us know if you have any questions about the BIS military end use rule or the updated DOD list.

This action is the most recent in a series of confrontational U.S. trade control measures targeting China. An unnamed senior U.S. official described CCCC as “the Huawei of infrastructure.”

BIS added 36 other companies to the list, including parties in France, Hong Kong, Indonesia, Malaysia, Oman, Pakistan, Switzerland, and the UAE for activities deemed contrary to U.S. national security or foreign policy interests.