On August 20, 2020, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) published a final rule[1] that further tightens restrictions under the Export Administration Regulations (“EAR”) on Huawei Technologies Co., Ltd. and its affiliates designated on the Entity List administered by BIS (“Huawei”) (the “Final Rule”).  The Final Rule: (i) expands the prohibition on providing items manufactured with controlled U.S. technology or software to Huawei to include all items transferred to Huawei or for a Huawei device, whether or not specifically designed by or for Huawei ; (ii) removes most of the Temporary General License (“TGL”) that permitted some transactions involving Huawei, including activities that support existing networks and equipment; and (iii) added 38 non-U.S. affiliates of Huawei to the Entity List.  The Final Rule was published in the Federal Register on August 20, but became effective upon being made available for public inspection on August 17.

In a contemporaneous final rule,[2] BIS clarified that license requirements for entities included on the Entity List apply regardless of the role that the listed entity has in the transaction (i.e., purchaser, intermediate consignee, ultimate consignee or end-user) (the “Entity List Final Rule”).  This clarification applies to all entities on the Entity List, not just Huawei.

Expanded Scope of Foreign-Produced Items Considered Subject to the EAR

The Final Rule expands a May 15, 2020 interim final rule that restricted Huawei from receiving semiconductor and other products produced outside the United States using certain U.S. software and technology (the “Interim Final Rule”).  We previously summarized the scope and impact of the Interim Final Rule here.  To examine how the Final Rule expands the scope of foreign-produced items subject to U.S. export controls, we begin with a brief recap of the Interim Final Rule.

The Interim Final Rule expanded the rules governing the direct products of U.S.-origin software or technology provided to Huawei, deeming them “subject to the EAR” (restricted by U.S. export controls).  The Interim Final Rule required a U.S. license for the export, re-export, or transfer to Huawei of: (i) foreign-produced items produced or developed by Huawei (e.g., designed by Huawei for manufacture by a third-party foundry) that are the direct product of software or technology subject to the EAR and specified in certain Export Control Classification Numbers (“ECCNs”) (whether or not the final product is controlled by those ECCNs);[3] and (ii) foreign-produced items that are the direct product of software or technology produced or developed by Huawei and are produced using a plant or major component of a plant that is a direct product of the same U.S.-origin technology or software.  The relevant plant or component need not incorporate equipment manufactured in the United States; it need only be based on U.S.-origin technology or software.  These rules are incorporated in “Footnote 1” to the Entity List, which applies to each of the designated Huawei entities.

The Final Rule makes a number of important changes that significantly expand the scope of the export controls applicable to components destined for Huawei equipment.  First, it is no longer required that the item be exported, re-exported, or transferred to a Huawei entity; instead, any item that will be incorporated into, or will be used in the production or development of, any item produced, purchased, or ordered by Huawei (for example, shipments to Huawei contract manufacturers are now covered) or that Huawei purchases or receives now requires a license.  Second, it is no longer necessary that the foreign-produced item be produced or developed by Huawei, meaning that off-the-shelf technology is also covered.  The Final Rule also clarifies that a “major component” of a plant includes any element used to conduct engineering, manufacture, integration, assembly (mounting), inspection, testing, or quality assurance, and that it applies to components physically manufactured outside the United States if based on one of the controlled U.S.-origin technologies.  In short, any item produced based on the relevant categories of U.S.-origin technology or software in any meaningful way—which covers a wide swath of the electronics industry—may no longer be provided for use by Huawei or in any Huawei product without obtaining a license or violating U.S. law.

Under the Final Rule, the presumption remains that any license application will be denied.  However, there will be a case-by-case review policy 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.).

Removal of Most of the TGL

In conjunction with designating Huawei on the Entity List in May 2019, BIS issued a temporary license allowing some transactions with Huawei to continue to support a transition away from Huawei equipment, notably activities that support existing networks and equipment.  Since then, the TGL was amended and extended multiple times.

In the Final Rule, BIS explained that the U.S. government has decided to allow the TGL to expire.  The only remaining portion of the TGL, now incorporated permanently in a second footnote to Huawei’s Entity List designation, authorizes exports, re-exports, and transfers to Huawei for cybersecurity research and vulnerability disclosure as long as the disclosure is limited to information regarding security vulnerabilities in Huawei items needed for ongoing cybersecurity research to protect existing third-party networks.

Additional Non-U.S. Affiliates of Huawei Designated on Entity List

BIS designated Huawei and 68 of its non-U.S. affiliates on the Entity List in May 2019.[4]  In August 2019, an additional 46 non-U.S. affiliates of Huawei were designated on the Entity List.[5]  The Final Rule adds an additional 38 non-U.S. affiliates of Huawei located in 21 countries[6] to the Entity List.  There are now 153 Huawei entities designated on the Entity List; to the extent any remaining Huawei entity is not listed, it is technically not restricted, but parties would be well advised to engage in careful diligence to ensure that a non-listed entity is not acting as an intermediary for a listed one and that, consistent with the Entity List Final Rule discussed below, no listed entity has a role in the transaction.

Entity List Final Rule

The Entity List Final Rule clarifies that exports, re-exports, and in-country transfers prohibited pursuant to the Entity List are prohibited regardless of the role the listed person or company plays in the transaction (e.g., as purchaser rather than end-user).

[1] 85 Fed. Reg. 51596 (Aug. 20, 2020).

[2] 85 Fed. Reg. 51335 (Aug. 20, 2020).

[3] ECCNs 3E001, 3E002, 3E003, 3E991, 4E001, 4E992, 4E993, 5E001, 5E991, 3D001, 3D991, 4D001, 4D993, 4D994, 5D001, and 5D991.

[4] 84 Fed. Reg. 22961 (May 21, 2019).

[5] 84 Fed. Reg. 43493 (Aug. 21, 2019).

[6] The affiliates are located in China, Argentina, Brazil, Chile, Egypt, France, Germany, India, Israel, Mexico, Morocco, the Netherlands, Peru, Russia, Singapore, South Africa, Switzerland, Thailand, Turkey, the United Arab Emirates, and the United Kingdom.