BIS Issues New Huawei Restrictions

Tweet

Sept. 7, 2020

The Bureau of Industry and Security (BIS) issued a final rule, effective August 17, 2020, making three important changes to controls for Huawei and its listed non-U.S. affiliates under the Export Administration Regulations (EAR). These changes include:

• 38 non-US affiliates of Huawei were added to the Entity List, bringing the total number of Huawei entities on the list to 153.
• The temporary general license (TGL) for Huawei and its non-U.S. affiliates was eliminated and replaced by a more limited permanent authorization.
• Amendment of General Prohibition Three, the foreign-produced direct product rule, to expand control over certain foreign-produced items.

 

Entity List Additions

Huawei and its affiliates on the Entity List are subject to licensing requirements for the export, re-export or transfer of all items subject to the EAR. License applications for Huawei and related entity for exports, re-exports, and transfers are subject to a presumption of denial. There are no license exceptions available a listed Huawei entity is a purchaser, intermediate or ultimate consignee, or end-user. No license is required for technology subject to the EAR that is designated as EAR99, or controlled on the Commerce Control List (CCL) for anti-terrorism reasons only, when released to members of a "standards organization" for the purpose of contributing to the revision or development of a "standard."

Expiration of the Temporary General License

When Huawei was placed on the Entity List in May of 2019, the TGL was established for Huawei and its affiliates allowing certain transactions involving:

• continued operations of networks and equipment;
• existing handsets;
• cybersecurity research and vulnerability disclosure; and
• transactions necessary for the development of 5G standards by a standards body.

The TGL underwent several modifications over the last year but has now officially expired. In its place BIS has created "a more limited permanent authorization that will further protect US national security and foreign policy interests." This limited authorization permits the export, re-export or transfer (in country) of items subject to the EAR if the disclosure to the designated Huawei entities is limited to:

"'cybersecurity research and vulnerability disclosure" when the disclosure to the Huawei entity is limited to "information regarding security vulnerabilities in items owned, possessed, or controlled” by Huawei or its non-US affiliates when that information is "related to the process of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently 'fully operational network' and equipment.

The initial TGL authorizations for transactions related to "continued operation of existing networks and equipment" and "support to existing 'personal consumer electronic devices' and 'Customer Premises Equipment'" will no longer be available.

Direct Product Rule

The original 2019 export restrictions on Huawei appeared to allow the company and its affiliates to purchase semiconductors made outside the United States with U.S. software and equipment. When BIS issued the interim final rule in May 2020, the agency included a Huawei carve out in General Prohibition 3. However, this rule only covered products that are developed or produced by Huawei or the direct product of Huawei's software or technology and not generic, commercial products. The new final rule was designed to address this, something BIS considers to be circumvention of the earlier rule.

The new DPR removes the requirement that the merchandise be either developed or produced by a designated Huawei entity or the direct product of Huawei software or technology. Instead, under the new DPR, the party exporting, re-exporting or transferring the foreign product need only have knowledge that either:

• the foreign-produced item 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 designated Huawei entity; or
• a designated Huawei entity is a party to any transaction involving the foreign-produced item (e.g., as a purchaser, intermediate consignee, ultimate consignee, or end user).

Under the DPR, items must still be the direct product of US-origin technology or software that falls into certain specified ECCNs or the direct product of a plant where a major component of the plant is the direct product of one of the listed ECCNs.

Because the DPR items longer need be designed or produced by Huawei, a license is required for export, re-export or transfer if the company engaging in the transaction has a reason to know that Huawei will be a party to a transaction for a downstream product containing that are the direct product of US-origin software or technology that fall under the specified ECCNs, or the direct product of a plant where a major component of the plant is the direct product of one of the specified ECCNs.

BIS will consider license applications on a case-by-case basis for foreign-produced items that "are capable of supporting the 'development' or 'production' of telecom systems, equipment and devices at only below the 5G level (e.g., 4G, 3G, etc.)."

Conclusion

The new final rule will greatly limit Huawei’s access to semiconductor chips because U.S. software and equipment is essential to the semiconductor production process. However, there are wider implications for any companies engaging in export, re-export, or transfer transactions with designated Huawei entities. If you have questions on how the new rule may impact your organization contact an attorney at Barnes, Richardson & Colburn LLP.