United States: US Government Restricts Certain Exports To Huawei And Affiliates By Adding It To Entity List While Permitting Temporary Narrow Exceptions

On May 16, 2019, the US Department of Commerce's Bureau of Industry and Security ("BIS") issued a final rule amending the Export Administration Regulations ("EAR") by adding to the Entity List Huawei Technologies Co., Ltd. and 68 of its non-US affiliates (collectively "Huawei"). The Entity List is maintained by BIS and identifies individuals and entities believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States. In its issuance of the final rule, BIS explained that there is reasonable cause to believe that Huawei has been involved in activities determined to be contrary to the national security or foreign policy interests of the United States. In particular, BIS referenced a 13-count indictment unsealed in January in the Eastern District of New York against Huawei alleging, among other things, that Huawei knowingly and willfully caused the export, reexport and sale of items subject to US jurisdiction to Iran in violation of US sanctions laws.

As a result of this action, which went into effect immediately, additional license requirements will be imposed on, and limitations on most license exceptions will be applied to, both US and non-US persons that wish to export, reexport or transfer items that are subject to the EAR to Huawei. Specifically, they will require a license from BIS before engaging in such transactions. Importantly, however, applications for a license will be subject to a license review policy of "presumption of denial," which means that the application will be denied in most cases. As described in more detail below, items subject to the EAR include goods, software and technology originating in or exported from the United States as well as non-US-origin items that contain more than de minimis levels of controlled US-origin content.

The addition of Huawei to the Entity List will have direct and indirect impacts on Huawei's supply chain, as well as that of its customers. Companies that supply hardware and software services to Huawei will be prohibited from providing such hardware and services without first obtaining authorization from BIS. Moreover, customers that use Huawei components that are subject to the EAR will also be impacted.

To minimize the immediate impact of its action, BIS issued a 90-day temporary general license on May 20, 2019, that will mitigate in the short term the effect of Huawei's designation in limited circumstances. As described in more detail below, the temporary general license, which is effective now, authorizes through August 19, 2019, certain categories of transactions involving Huawei, which will provide affected businesses with additional time to determine a long-term solution to Huawei's designation on the Entity List.

Items "Subject to the EAR"

As noted above, as a result of Huawei being added to the Entity List, all goods, software and technology that are subject to the EAR, including common commercial items classified as "EAR99," will require licensing prior to their export, reexport or transfer to Huawei.

Items "subject to the EAR" generally include all items located in or exported from the United States and all items produced in the United States, wherever located. Importantly, however, items that are not made in the United States but that contain more than a de minimis amount of controlled US-origin content also are subject to US export controls. As a general matter, non-US-made items that contain more than 25 percent of US-origin content by value are also subject to the EAR. (Different US content thresholds may apply for certain foreign-made items, including but not limited to certain items containing US-origin encryption and certain items bundled with US-origin software.) The de minimis threshold calculation includes any content for which BIS licensing would be required were that content to be exported or reexported independently to the foreign-made item's country of destination. Accordingly, items not made in the United States but nonetheless containing more than 25 percent of US-origin content will now require authorization from BIS if exported, reexported or transferred to Huawei, provided that the content is itself subject to BIS licensing requirements.

Temporary General License

Notwithstanding the restrictions detailed above, the temporary general license issued on May 20 authorizes, subject to compliance with other provisions of the EAR, the following transactions involving exports, reexports and transfers to Huawei until August 19, 2019:

  1. Continued Operation of Existing Networks and Equipment: transactions necessary to maintain and support existing and currently fully operational networks and equipment, including software updates and patches, subject to legally binding contracts and agreements executed between Huawei and third parties on or before May 16, 2019.
  2. Support to Existing Handsets: transactions necessary to provide service and support, including software updates or patches, to existing Huawei handsets that were available to the public on or before May 16, 2019.
  3. Cybersecurity Research and Vulnerability Disclosure: the disclosure to Huawei of information regarding security vulnerabilities in items owned, possessed or controlled by Huawei when related to the process of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently fully operational networks and equipment, as well as handsets.
  4. Engagement as Necessary for Development of 5G Standards by a Duly Recognized Standards Body: engagement with Huawei as necessary for the development of 5G standards as part of a duly recognized international standards body (Institute of Electrical and Electronics Engineers, Internet Engineering Task Force, International Organization for Standards, International Telecommunications Union, etc.).

In accordance with the temporary general license, the licensing policies of the EAR that were in effect prior to Huawei's addition on the Entity List are still available for exports, reexports and transfers to Huawei, provided that such transactions fall within the four categories outlined above. For any transaction that qualifies for the temporary general license, the exporter, reexporter or transferor must create a certification statement prior to making an export, reexport or transfer to Huawei. The certification statement must describe how transaction meets the scope of the temporary general license and be kept for recordkeeping purposes by the exporter, reexporter or transferor in accordance with the recordkeeping requirement under the EAR.

Next Steps for Business

Moving forward, both US and non-US persons should evaluate their supply chains for transactions involving Huawei and the extent to which BIS's action could impact their supply chains. With the exception of the transactions authorized under the temporary general license, which is only effective through August 19, any person that provides components that are subject to the EAR to Huawei should expect to be prohibited from continuing exports, reexports or transfers, directly or through third parties, to Huawei. Despite the ability to request authorization for such transactions, these license applications will be subject to a presumption of denial under BIS's license review policy. Similarly, the addition of Huawei on the Entity List will likely impact the supply chain of companies that incorporate Huawei components into their own products, assuming such Huawei components contain certain US-origin content. For example, if Huawei experiences delays in production due to its inability to procure the relevant components for its products, its customers may likewise experience disruptions in their own supply chains. Any company that has dealings with Huawei must carefully assess the extent to which items subject to the EAR are involved and immediately take steps to ensure compliance with Entity List restrictions.

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© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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