Effective Compliance Program Crucial In Light of Whole-of-Government Approach in US Export/Investment Control and FCPA Enforcement

Despite the fruitful US-China trade agreement, we alert resilient head-winds decoupling US with China, from cutting off access to federal procurement (see previous alert), to stemming outflow of military/intelligence-sensitive technologies.  This alert highlights the urgency to tailor compliance programs to monitor and comply with US-driven trade, national security, and FCPA (Foreign Corrupt Practice Act) enforcements fused under a “whole-of-government approach.”

1. Executive Summary

While China prioritizes safeguarding “big MNCs’” business continuity to fight coronavirus outbreak, novel, national security-driven enforcement and export/investment control in US increasingly yields to anti-trade headwinds.  US Attorney General William Barr’s speech on China Initiative on February 6, 2020, along with the recent Airbus’ $3.9billion FCPA settlement on both anti-bribery and export control violations, reinforces this direction under the “whole-of-government strategy.” It imposes new compliance obligations to international businesses especially with joint ventures or other forms of US-outbound presence, such as incubators and collaborations potentially involving dual-use technologies.  Although blunt at appearance, such regulatory enforcement flows from the John McCain National Defense Authorization Act for Fiscal Year 2019 (“NDAA”), prior to and notably outside the scope of the Phase-1 US-China Trade Agreement.

It’s advisable to engage with experienced compliance counsels with objectivity to constantly examine and evaluate your vulnerabilities/deficiencies to safeguard, and if necessary, defend integrity, personnel, and assets.

2. Analysis

Summary below is our preliminary, general analysis from trade compliance and corporate counsel perspectives.

2.1 Background: Whole-of-Government Approach & Regulatory Priority

In January 2018, Department of Defense released its report advocating a “whole-of-government approach” to stem the technological flow to China.  Shortly thereafter, bolstered by hearings shifting greater focus to China and Russia as near-peer rivals, US Congress overwhelmingly passed the NDAA, and President Trump swiftly signed it into law in August 2018.  The Export Control Reform Act of 2018 (“ECRA”) and the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) are integral of the NDAA. 

Under §1261(a) of NDAA, this “whole-of-government strategy legislatively targets China as “a principal priority for the United States that requires the integration of multiple elements of national power, including diplomatic, economic, intelligence, law enforcement, and military elements, to protect and strengthen national security”.

ECRA and FIRMA expanded and strengthened the US export control and investment review regimes under CFIUS (Committee on Foreign Investment in United States) to intervene (and block) US-outbound transfer of “critical technology”.

2.2 Focus on Critical Technology & Expanding Control on an Ongoing Basis

A “critical technology” triggering export licensing requirements or CFIUS review no long limits to items controlled on US export control lists, and includes nuclear facilities, and “emerging” or “foundational” technologies that “are essential to the national security of the United States.” An ongoing inter-agency identification process led by Commerce Department will strike such “emerging” or “foundational” technologies, based on inputs such as classified intelligence (“Critical Technology”).

Before NDAA, “covered transactions” by CFIUS limited to US-inbound, controlling foreign investment.  Under FIRRMA’s final implementing regulations, “covered transactions” extends to:

(a) “non-controlling” investments, either inbound or outbound, involving “Critical Technology” determined under ECRA, critical infrastructure, and sensitive personal data (“TID US Business”),

(b) investment in TID US Business with “substantial interest” (>25% equity or voting interests) by a foreign party in which “a foreign government has substantial interest (>49% equity or voting interests),” and

(c) real estate transactions with proximity to military/sensitive sites. Material misstatement or omission in CIFUS filings or evasion or circumvention will be enforcement focuses and subject to significant penalties.

Once the Commerce Department (through its Bureau of Industry and Security (BIS)) identifies and controls a novel “emerging/foundational” technology, it will expand synchronically CFIUS’s jurisdiction over such item, on a rolling basis.  For example, on January 6, 2020, BIS identifies “software specially designed to automate the analysis of geospatial imagery” that triggers export/CFIUS clearance.  See Annex 1 for a list of BIS-proposed representative categories for “emerging technology.”

2.3 Emulation toward Centralized Security Licensing & Control Regime

Despite vast ideological difference, the architecture of “whole-of-government strategy” echoes and emulates with the all-nation approach underlying China’s comprehensive yet evolving security surveillance and control regime.

2.3.1 Chinese National Security and Control Regimes at a Glance

Since the legislation of 2015 National Security Law, China has codified and centralized national security review that mandates unified leadership and concerted action (mainly under the State Council and Central Military Commission) and ensures the “safety and controllability of the core technologies and crucial infrastructure of network and information and the information systems and data in important fields”.  The State Council’s Made-in-China 2025 laid out the overarching principle to strengthen “national security review” in investment and financing, mergers and acquisitions, reorganizations, and tendering and procurement in key areas of manufacturing “vital to the national economy and national security.”  In recent years, China has further codified and substantiated its own national security, cyber-security and export control regimes through promulgation of 2016 Cyber-security Law, 2019 Encryption Law, Cyber-security Multi-level Protection Scheme, to 2019 Draft Export Control Law, 2019 Foreign Investment Law and its Implementation Regulation

These key legislations have revamped, codified and expanded the security control and surveillance framework, from ordinary online sales to critical infrastructure to ensure the core technology and critical infrastructure “safe, controllable.”

In parallel with, rather than subordinate to the State Council (as well as judicial and prosecutory branches), China established in March 2018 the separate Central Commission for Discipline Inspection to further prevent and fight corruption.

2.3.2 Architectural Emulation

Paradoxically, the “whole-of-government approach” through the bi-partisan NDAA emulates the Chinese counterparts’ centralized structure and focuses – trade & investment, cyber-security, core technologies, and surveillance.

2.4 Attorney General and FBI Director Unveiled “Whole-of-Society Reponse”

In his speech on February 6, 2020, US Attorney General William Barr kicked off this “whole-of-government approach” to melt the law enforcement route and national security route, notably after the Trump administration’s conclusion of the Phase-1 US-China Trade Agreement.  He served President George H.W. Bush as Attorney General and focuses on counterterrorism and national security matters since 1990s to the “destruction of enemy.”  He alerted China as a greater threat than Russia, and desires a “similar catalyst” like the “Sputnik moment to help galvanize the nation and bring unity to our response:”

“China has emerged as the United States’ top geopolitical adversary based on competing political and economic philosophies…. Unfortunately, it also involves industrial espionage and theft of technology and intellectual property, as well as forced technology transfers, predatory pricing, leveraging China’s foreign direct investment, and strong-arm sales tactics in target markets, including the use of corruption…. our national security all depend on our continued technological leadership…. ‘China wants the fruits of America’s brain power to harvest the seeds of its planned economic dominance.’”

FBI Director Christopher Wray concurred: “China is taking a multifaceted response, so we’ve got to have a multifaceted response on our end. …We need a whole-of-society response with government and the private sector and the academic sector all working together…. FBI is encouraging our business and academic partners to keep that long view in mind when engaging with China. We’re asking executives and boards of directors to carefully consider who they choose to do business with and who they make part of their supply chains. A decision to enter into a joint venture or contract with a particular vendor might look good to them in the near term, might make a lot of money today, might sound great on the next earnings call, but it might not look so hot a few years down the road when they find themselves bleeding intellectual property or hemorrhaging some of their most sensitive data.”

2.5 More Enforcement Tagging Export Control Violation with FCPA Violation, Paving the Way for Multi-pronged Enforcement.

Recent FCPA enforcement also echoes the emerging “whole-of-government approach” – and penetrates into broader schemes whereby economic sanction/export control violations (at overseas subsidiaries) co-exist or result in books & records violations (for public companies), in addition to bribery.

On September 26, 2019, in the Matter of Quad/Graphics, Inc., in addition to traditional bribery to SOE (state-owned enterprise) customers in China and Peru by “sham sales agents,” the Security Exchange Commission (SEC) also determined that “books and records were falsified to conceal” sanction-prohibited transactions in Peru.  Quad/Graphics, Inc. reached a $ $9,895,334 settlement with SEC and obtained declination from Department of Justice (DOJ) because of self-disclosure.

On January 31, 2020, in United States of America v. Airbus SE, DOJ criminalized the bribery scheme utilizing business partners in countries including China to secure businesses from state-owned enterprise (SOE) customers.  Still separate from this China-related bribery schemes, DOJ also revealed egregious defense-related export control violations in certain non-China countries, whereby Airbus compliance staff resisted legal calls to beef up export compliance, had limited visibility to transaction details of third parties overseas yet certified compliance and failed to verify accuracy of representations of third parties that turned out to be false.  Total combined criminal penalties exceeded $3.9 billion in Airbus’ multi-jurisdiction settlement.

On January 28, 2020, DOJ has brought criminal complaint against a prestigious Harvard nanoscience professor based on allegedly “materially false, fictitious and fraudulent statement” concerning involvement in China’s Thousand Talents Plan.  Shortly thereafter, the current chair of House Committee on Armed Services praised such action as “aggressive espionage efforts and improve awareness within our partners in Academia.” 

More multi-prong enforcement is the logic next step, in light of the overall enforcement actions since 2017 (below).

(Source: Stanford’s FCPA Clearance House)

3. Outlook

These latest enforcements unveil the resolve, resources, and “whole-of-government” readiness of the US regulators to tackle not only traditional FCPA issues but also potential intertwined export control issues (or even intellectual property thefts and economic espionage) that would emerge in future China-related FCPA proceedings.

As AG William Barr warned, US will further intensify pressing major European-based MNCs as “market alternative” to Chinese national champions like Huawei to comply with US foreign and national security policy priorities and enforcements with “unity.”

Would any misuse of these “modernized” export / investment control regimes bring unintended consequences, such as rehabilitating the vicious cycle during McCarthyism period in 1950s?  In 1950s, infringement of business autonomy and political repression in US temporarily prevailed as tit-for-tat to allegedly epidemic Soviet Russia’s espionage and infiltration. 

Would any ramifications lead flow of foreign capital vital to US and global prosperity to countries or regions with relatively lower regulatory burden, including US allies?  Would the regulatory resources eventually be overwhelmed by filings and disclosures by compliant companies, while overlooking those at large?

The objective of ECRA requires the enforcement authorities to “use export controls only after full consideration of the impact on the economy of the United States and only to the extent necessary” for its national security/foreign policy causes, yet the line of “the extent necessary” has sparked ongoing litigation for companies like FedEx who finds itself between a “rock and hard place.”

Those having “joint venture, joint development agreement, or similar collaborative arrangement” (including early stage investment through incubators or simply academia engagement) with Chinese counterparts and involving sensitive dual-use technologies are particularly exposed to the upcoming enforcement.  ECRA mandates “an effective export compliance program and a high quality overall export compliance effort.”  

It’s critical to engage with experienced compliance counsels with objectivity to constantly examine and evaluate your vulnerabilities/deficiencies to safeguard, and if necessary, defend the integrity, personnel, supply chain, and business freedom and survival.

Please feel free to let us know if you have any questions.

Appendix 1: BIS-proposedrepresentative categories for “emerging technology

About the author: Yi Wang, trade and business attorney with public and private sector experience to tackle with regulatory/business challenges. He was one of the two defense counsels to MOFCOM in first Sino-US WTO dispute on semiconductors in 04′, and thereafter, counseled and managed cross-border transactions, regulatory clearance for transactions and trade/FCPA litigation at leading law firms in US/China from 02′ to 14′, and further served with GE Plastics/SABIC from 14′ to 17′. From 17′ to present, he is co-founder of Mind Realizing Law advising international businesses and institutions in operational excellence and private equity transactions with robust anti-corruption / trade compliance perspectives.