The first final rule targets Huawei by designating another 38 Huawei affiliates on the Entity List, and further restricting Huawei's ability to access certain foreign-produced items by amending the foreign-produced direct product (FDP) rule in the Export Administration Regulations (EAR). This Huawei-specific final rule is an expansion of the restrictions contained in the prior interim final rule published on 15 May 2020, and further limits Huawei's ability to procure chips made outside of the United States using certain U.S.-origin technology or software, or plant or equipment based on U.S.-origin technology or software. The second final rule expands the scope of Entity List restrictions to apply not only to transactions where the Entity List entity is the consignee or end user of an item subject to the EAR, but also where an Entity List entity is acting as a purchaser or intermediate consignee.
Final rule regarding Huawei-specific changes
Designation of 38 Huawei's non-U.S. affiliates
The final rule adds 38 additional non-U.S. affiliates of Huawei to the Entity List based on the recommendation of the End-User Review Committee (ERC). Specifically, the ERC determined that without a license requirement, there is reasonable cause to believe that Huawei would try to use its non-U.S. affiliates to evade the restrictions imposed on Huawei because of its designation on the Entity List in May 2019. Many of these 38 entities are related to Huawei Cloud Services or Huawei's Open Lab initiative.
Foreign-produced direct product rule amendments
The final rule further expands the FDP rule, set forth in General Prohibition No. 3, with regard to Huawei. A non-U.S. company is now prohibited from supplying a foreign-made item to a listed Huawei entity or where Huawei is a party to the transaction (e.g., as a purchaser or intermediate consignee) if such foreign-made item is the direct product of certain U.S. software or technology, or is produced from certain U.S.-origin plants or major components of a plant that are themselves the product of certain U.S. software or technology, even where the foreign-made item is not based on Huawei designs.
Specifically, the final rule expands the scope of the FDP rule to include activities where an exporter has 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 Huawei.
- When Huawei is a party to any transaction involving the foreign-produced item as a purchaser, intermediate consignee, ultimate consignee, or end user (this change is consistent with the broader Entity List changes described below).
BIS also made a number of conforming changes to implement these restrictions. With respect to licensing policy, BIS indicated in a new note to footnote one of the Entity List that license applications for foreign-produced items controlled by this rule that are capable of supporting the development or production of telecommunication systems, equipment, and devices below the 5G level (e.g., 4G or 3G) will be reviewed on a case-by-case basis, as opposed to being subject to a presumption of denial.
In addition, BIS revised paragraphs (a) and (b) of footnote one of the Entity List to remove certain language that raised questions in the context of items that are jointly produced by Huawei or involve intermingling of technology. Paragraph (a) now only requires the foreign-produced item to be the direct product of software or technology controlled under one of the specified Export Control Classification Numbers (ECCNs), and paragraph (b) applies when the foreign-produced item is produced by any plant or major component of a plant located outside the United States that is itself the direct product of software or technology controlled under one of the specified ECCNs. The relevant ECCNs for purposes of this rule are set forth in Categories 3, 4, and 5 of the Commerce Control List and include items subject to national security (NS) and/or anti-terrorism (AT) controls:
- Technology or software controlled under ECCNs 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001 (subject to NS and AT controls).
- Technology controlled under ECCNs 3E991, 4E992, 4E993, or 5E991 (subject to AT controls only).
- Software controlled under ECCNs 3D991, 4D993, 4D994, or 5D991 (subject to AT controls only).
BIS also added clarifying language to indicate that a major component of a plant means equipment that is essential to the production of an item, including testing equipment, and that a foreign-produced item for these purposes includes foreign-produced wafers, whether finished or unfinished.
Other restrictions on Huawei's ability to access items subject to the EAR
The final rule did not renew the temporary general license (TGL) for Huawei and its non-U.S. affiliates, which expired on 13 August 2020. The final rule, however, preserved only the cybersecurity-related provisions by adding an additional footnote to the Huawei entities' Entity List description. This limited authorization is for the sole purpose of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently "fully operational networks" and equipment.
Note that the TGL certification statements and logs or other records, including any additional support documentation used to substantiate the certification statement related to the use of the TGL are still subject to the EAR's five-year record-keeping or other applicable requirements.
Saving clauses
The final rule includes two savings clauses corresponding to the above-mentioned changes. First, under the savings clause for the Entity List and TGL changes, a shipment of items removed from eligibility for a license exception or export, reexport, or transfer (in-country) without a license (NLR) may still proceed to its destination under its previous eligibility if on 17 August 2020 the items were en route aboard a carrier to a port of export, reexport, or transfer (in-country) pursuant to actual orders for export or reexport to a foreign destination.
Second, under the savings clause for the foreign-produced direct product rule changes, a shipment of certain foreign-produced items now requiring a license can proceed to its destination under the previous license exception eligibility or without a license if on 17 August 2020 the shipment was on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or to the consignee/end user pursuant to actual orders for exports, reexports, and transfers (in-country) to a foreign destination or to the consignee/end user. Moreover, a shipment of certain foreign-produced items now requiring a license that started production prior to 17 August 2020 may proceed as not being subject to the EAR, if applicable, or under the previous license exception eligibility or without a license so long as the items have been exported, reexported, or transferred (in-country) on or before midnight (local time) on 14 September 2020.
Final rule regarding general revisions to the Entity List
The final rule revises Section 744.11(a) of the EAR to clarify that licensing requirements apply not only when there is an export, reexport, or transfer (in country) to a person identified on the Entity List (e.g., as an end user or consignee), but also when a person on the Entity List is involved in the transaction as a purchaser or intermediate consignee.
This may have significant implications to the extent Entity List entities are playing any role in the export, reexport, or in country transfer of an item subject to the EAR. Specifically, this revision addresses concerns that Huawei had been able to provide items to its customers, such as network operators, that it could not obtain for its own use by acting as a purchaser without taking possession of the goods itself.
Next steps
Because the final rules are effective immediately, U.S. exporters should be prepared to comply with the expansion of the FDP rule and the Entity List as of 17 August 2020.
Moreover, because BIS did not renew the TGL in its entirety, any U.S. firms that have business arrangements with Huawei or are users of Huawei equipment should review their compliance obligations in light of these changes.
For further information or assistance, please contact any of the Hogan Lovells lawyers identified below.
Authored by Anthony Capobianco, Aleksandar Dukic, Ajay Kuntamukkala, Beth Peters, Stephen Propst, Adam Berry, and Molly Newell.
