Mind-Realizing Law

Responsible Value Creation

Public Procurement Ban by US to Cut Off Chinese ICT Products/Services

Posted by on July 31, 2020

Below please find the regulatory update on impending ban against Chinese information and communication technologies (ICT) in US federal procurement.

1. Executive Summary

August 13, 2020 will be the significant date witnessing the full implementation of the controversial yet bi-partisan John McCain National Defense Authorization Act for Fiscal Year 2019 (“NDAA”) to cut off access to US federal procurement by Chinese national champions and leading companies in ICT sector, as we alerted.  On July 14, 2020, the U.S. Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) released the second interim rule to be effective on August 13, 2020 to implement section 889(a)(1)(B) of the NDAA prohibiting Tier-1 suppliers using “covered” Chinese ICT technology.  On August 13, 2019, these three executive agencies released the first interim rule prohibiting any federal agency from procuring, directly or indirectly, “covered” Chinese ICT products or services.  These two interim rules, together, establish workable framework to execute the NDAA-mandated ban against covered Chinese ICT products, services and critical technologies on a sweeping and ongoing basis, after August 13, 2020 (“August 2020 Ban Against Chinese ICT”). 

2. Analysis

Below are our preliminary comments about the background, key requirements, and impacts.

2.1 Background: Sectoral, Whole-of-Government Approach to Decouple Chinese ICT from Public Procurement by August 20’

The August 2020 Ban against Chinese ICT aims to “mitigate risks across the supply chains … and further integrate national security considerations into the acquisition process.”  It aligns the executive branches to confront China as envisaged under Section 1261 of the John McCain NDAA. It follows the May 15 2019 Executive Order declaring “national emergency” over “acquisition, importation, transfer, installation, dealing in, or use of any information and communication technology or services” by “persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary.”

It materializes a sectoral, whole-of-government approach by US to “unplug” upstream revenue streams of targeted state-owned enterprises (SOEs) and private national champions deemed unilaterally as state-influenced, either controlled or connected, beyond Huawei.

2.2 What’s Prohibited?

Sections 889(a)(1)(A) and 889(a)(1)(B)of NDAA prohibitions respectively focus on:

(a) prohibiting the US government’s own use of covered telecommunications equipment and services with rules in place effective since August 13, 2019, and

(b) prohibiting the US government’s ability to contract with companies that use the covered products or services at the requisite threshold. 

The interim rule requires contractors to identify the use of covered telecommunications products and services in their operations, and the prohibition under 889(a)(1)(B)of NDAA will take effect on August 13, 2020.

Wide Range of Impacted Downstream Sectors Beyond ICT

The impacted downstream sectors will beyond ICT, and in a range of industries—including in the health-care, education, automotive, aviation, and aerospace sectors.

Further Expandable Scope Concerning Critical Technology

Such “covered products or services” refers to “any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.”

The “critical technology” terminology follows with those under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) (Pub. L. 115-232).  A “critical technology” under FIRMMA includes those controlled on US export control lists, and further 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 the Bureau of Industry and Security (BIS) under Commerce Department will strike such “emerging” or “foundational” technologies, based on inputs such as classified intelligence.

As such, the definition of “critical technology” is fluid.  So does the scope of the “covered (ICT) products or services,” as further illustrated below.

2.3 Compellingly High Bars Against Waivers and Narrow Exceptions

Waivers are subject to compellingly high bars including congressional oversight, and will expire no later than August 13, 2022.  At the supplier side, high bars exist against a waiver request, which must provide:

(1) A compelling justification for the additional time to implement the requirements under 889(a) (1)(B);

(2) a full and complete laydown of the presences of covered ICT items or services in the supplier candidate entity’s supply chain; and

(3) a phase-out plan to eliminate such covered ICT items or services from the supplier candidate entity’s systems.

This does not preclude supplier candidate to informally consult with the head of the procuring executive agency on such matter.

At the procuring entity side, compellingly high threshold will also be in place before and after granting such waiver:

It immediately triggers checking the accountability of the “effectiveness” of the supply chain risk management of the procuring executive agency as well as inter-agency information sharing under Federal Acquisition Security Council (FASC) concerning such waiver request.  Moreover, it requires both prior notice and consultation with the Office of Director of National Intelligence (ODNI) and post-waiver notice to appropriate Congressional committees within 30 days of granting such waiver.  Besides those items substantiating the waiver request such as phase-out plan, such notice to appropriate Congressional committees must contain an attestation by the agency that the waiver-granting would not present “a material increase in risk to U.S. national security.”

Exception only applies to eligible emergency situations “to enable effective mission critical functions or emergency response and recovery.” To invoke such exception, the head of the emergency-waiver-granting agency must, within 30 days of award, notify the ODNI, the FASC, and the Congress of the waiver issued under emergency circumstances. 

An exception exclusively by Director of National Intelligence as “DNI waiver” applies separately from these waivers.  Additionally, the ODNI, in consultation with the FASC, will issue, on an ongoing basis, for use in informing agency waiver decisions, guidance describing categorical uses or commonly-occurring use scenarios where presence of covered telecommunications equipment or services is likely or unlikely to pose a national security risk.

3. Outlook

In the 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, and alerted China as a greater threat than Russia, and desires “unity to our response:”  By contrast, Huawei’s founder publicly cautions over the abusive nationalism and close-mindedness within China that are taking advantage of Huawei’s situation (calling them the most harmful to China) and encouraging the next generation to learn genuine American spirits (entrepreneurial, contribution of immigrants & openness, along with foundation of STEM education etc.)

Risk management over the full implementation of such sweeping ban will be challenging yet critical to the continuity of growth projections of many Chinese ICT companies.  This is because the impact to the Chinese ICT sector is strategically designed as “less painful,” through serial measures rather than at once, with phase-out plans, which will take time to complete by August 2022 (given the 2-year maximum time for waiver under these rules). 

Moreover, so far the prohibition against supplying entities “using” Chinese ICT limits at prime contract level, providing a sense of potentially false comfort to some, absent anti-fraud/false claim enforcement yet to come.

Besides faithfully dealing with the punitive tariff exclusions, export control sanctions, international businesses must thoroughly assess and re-due diligence their relationships and activities with customers/suppliers/collaborators, from both trade compliance and corporate governance perspectives.  MNCs must better integrate their risk management functions within their respective organizations holistically in terms of both operational compliance and M&A activities leveraging the globally digitally-oriented societies and economies, against the headwinds attempting to decoupling technologically and economically with China.

International companies must stay vigilant with effective trade compliance programs to avoid becoming potential collateral damages, and engage in active advocacy to safeguard their businesses, assets and personnel. 

Please feel free to contact us should you have any questions.

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.

(This briefing first appeared at China Big Idea. For more information or subscription, please visit https://chinabigidea.substack.com/)

注：中文概要如下：

美国政府采购进一步”脱钩”中国敏感信息通讯设备与技术的行政法规将于2020年8月13日生效，该联邦采购禁令客观上不以宏观、地缘、大选等等热点所转移，不因目前微信/抖音禁令在维权与剥离交易的热点事件所影响，不受限于某公司目前被热议的在美违宪诉讼，不局限于具体产品品牌大小与交易金额，并且该禁令影响范围将是动态与深远的。众所周知，政府采购市场准入客观受限，往往是在更广的商业市场边缘化的开始，在美国也无法例外。

对于供给端，将随着未来美国商务部对”关键技术”不时的识别令而逐步扩大，涉及广泛的中国信息通讯技术企业，只要被单方面认定为与政府存在联系/影响/控制。

依照美国主要联邦采购部门（国防部、总务管理署和航天局）对NDAA（《约翰麦凯恩2019财年国防授权法案》）于2019年以及近期实施的两部暂行条例(“暂行条例”或“联邦采购禁令”)：

自2019年8月13日起，除非满足例外/豁免，除非该法被宣布违宪，美国联邦机构不得再采购指定实体(包括华为、中兴、威视等等移动、监控设备制造商)来自中国的敏感电信设备以及关键技术，如果这些产品/服务属于”作为任何系统的重要或必要组件的”“被涵盖的电信设备或服务”，或者作为任何系统一部分的“关键技术”。

对于明确被指定的实体，暂行条例要求供应商若发现不合规情形，必须在1个工作日报告，并在10个工作日内提交整改措施，该等要求必须下达到分包商，并适用于广泛的美国联邦机构的采购，包括分散采购的零星采购，而不仅仅是集中采购。

而自2020年8月13日起，美国联邦政府采购将不得与任何”使用”来自中国的敏感电信设备以及关键技术的实体存在合同关系。

联邦财政已拨出数百亿美元的预算，将优先协助使用联邦资金的企业/实体实现与该等“涵盖的电信设备或服务……或……关键技术”（或者简言之敏感的中国电信技术/产品）脱钩。所谓关键技术，包括基础与前沿技术(具体定义与范围与修订后的美国对外资国家安全审查委员会CFIUS执法相互衔接，并与美国出口管制改革法（ECMA）的相关细则相衔接，体现了在麦凯恩NDAA法案项下，针对某“竞争对手”举国体制策略(a-whole-of-government strategy)的要旨。

在采购禁令的资金使用端，尽管目前限于联邦采购一级供应商(包括主要五百强等等国际企业)，后者寻求一般豁免的路径，现实上面临极高的门槛，必须在则必须制订并落实具体的剥离计划，获得具体采购行政部门部长级别的书面批准，受国会监督，并必须在2022年8月13日失效。

换言之，2022年8月13日将是彻底脱钩的时限。亟需在经济与社会数字化导向发展趋势中实现企业发展的跨国公司和国际化路上的中国领先企业，须在运营层面和投融资/并购层面的合规管控上，将垂直、全球视野的贸易合规事宜有效地融入企业风险管理，并与法务、合规、内控等相关集团职能支持紧密协作，针对试图在技术和经济上与中国脱钩的逆风常态化的商业与监管环境，确保充分知悉下的重大决策与公司治理，有效维护其业务、资产与人员的合法权益。

具体专业支持，请循专业法律与合规顾问专业建议。有问题随时联系。

王屹 2020年8月12日