Today, the U.S. Department of Commerce announced new prohibitions on certain transactions involving the WeChat and TikTok mobile applications pursuant to two Executive Orders issued last month.  The new restrictions, spelled out in Federal Register notices available here and here, restrict U.S. companies from providing certain services to Tencent and ByteDance that support the continued distribution and operation of the WeChat and TikTok mobile applications in the United States.

As a result, beginning on September 20, users in the United States will likely be unable to download the applications from app stores and application updates will be unavailable.  Importantly, the new restrictions do not apply to the use of the mobile applications outside of the United States, which should be a relief to the many U.S. companies whose overseas operations use WeChat to process payments and connect with customers in China and elsewhere.  In addition, the new rules generally do not prohibit the continued use of the apps by individual users in the United States who have already installed the programs on their mobile devices.

The following types of “business to business” transactions,[1] spelled out in the WeChat notice, are prohibited under the new rules:[2]

“1. Any provision of services to distribute or maintain the WeChat mobile application, constituent code, or mobile application updates through an online mobile application store, or any online marketplace where mobile users within the land or maritime borders of the United States and its territories may download or update applications for use on their mobile devices;

  1. Any provision of internet hosting services enabling the functioning or optimization of the WeChat mobile application, within the land and maritime borders of the United States and its territories;
  2. Any provision of content delivery services enabling the functioning or optimization of the WeChat mobile application, within the land and maritime borders of the United States and its territories;
  3. Any provision of directly contracted or arranged internet transit or peering services enabling the functioning or optimization of the WeChat mobile application, within the land and maritime borders of the United States and its territories;
  4. Any provision of services through the WeChat mobile application for the purpose of transferring funds or processing payments to or from parties within the land or maritime borders of the United States and its territories;
  5. Any utilization of the WeChat mobile application’s constituent code, functions, or services in the functioning of software or services developed and/or accessible within the land and maritime borders of the United States and its territories.”

Both notices also warn that the Commerce Department may prohibit additional types of transactions related to WeChat and TikTok in the future.  The WeChat restrictions are effective on Sunday, September 20, 2020.  Paragraph 1 of the TikTok prohibitions is also effective on September 20, with the remaining TikTok prohibitions coming into force on Nov. 12, 2020.

Pursuant to a series of exceptions, Commerce indicated that the following activities are not prohibited by the new rules:

  1. Payment of wages, salaries, and benefit packages to employees or contractors;
  2. The exchange between or among WeChat/TikTok mobile application users of personal or business information using the mobile applications (to include the transferring and receiving of funds via WeChat);
  3. Activities related to mobile applications intended for distribution, installation or use outside of the United States by any person, including but not limited to any person subject to U.S. jurisdiction, and all ancillary activities, including activities performed by any U.S. person, which are ordinarily incident to, and necessary for, the distribution, installation, and use of mobile applications outside of the United States; or
  4. The storing of WeChat/Tiktok mobile application user data in the United States.

Please contact us if you have any questions about how these new rules impact your business, or your TikTok habit.

[1] “Transaction” is defined broadly to include any “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.”

[2] The prohibitions applicable to TikTok are very similar, but exclude paragraph 5, which is specific to WeChat’s payment functionality.

On September 14, 2020, the U.S. Department of Treasury, as Chair of the Committee on Foreign Investment in the United States (CFIUS), published final regulations changing the mandatory CFIUS declaration requirements for transactions involving U.S. businesses that produce, design, test, manufacture, or develop  critical technologies. Previously, the regulations provided that a CFIUS declaration was mandatory for certain critical technology transactions where the U.S. business involved was part of a listed industry.  The new regulations provide that a CFIUS declaration is mandatory where the critical technology would require a “U.S. regulatory authorization” for export, re-export, transfer (in-country), or re-transfer of such technology to certain parties or foreign persons in the ownership chain.  In short, if a U.S. company would need an export license to transfer technology (know how required to develop, produce or use an export controlled product) to a foreign purchaser of the U.S. company, CFIUS review is mandatory.

The new regulations follow Treasury’s issuance of a proposed rule on May 21, 2020, as discussed in greater detail in our previous blog post.  These final regulations take effect October 15, 2020, and would not apply to transactions completed before October 15, 2020.

The new regulations will result in an increased number of mandatory CFIUS filings for certain countries, especially China and Russia, that have stringent export control requirements.  Companies will need to shift from conducting due diligence based on the industry of the target business to analyzing whether an export license would be required to release the U.S. business’s critical technology either to the non-U.S. company acquirer or to a person with 25 percent or more voting interest in the acquirer.  CFIUS notes that this voting percentage can apply in certain cases to the acquirer’s general partner, or equivalent.

Where a mandatory declaration is required, it must be filed prior to the completion of the transaction.  Failure to timely file can result in significant penalties – up to the transaction value.

We are happy to help your company understand how this final rule or related CFIUS developments may impact your business.

 

Importers of vinyl flooring filed a case at the U.S. Court of International Trade (CIT) on September 10, challenging the Administration’s application of tariffs on products from China on Lists 3 and 4 pursuant to USTR’s intellectual property Section 301 investigation.

The complaint alleges that the President’s imposition of tariffs to products on these lists, which covers approximately $320 billion in trade, exceeded authority granted by the Trade Act of 1974 and that the agency’s implementation of the tariffs violated provisions of the Administrative Procedures Act.  In addition to striking down the tariffs, the legal action seeks the refund of duties paid by the plaintiffs, with interest, for imported products on List 3.

We are alerting clients with interest in List 3-covered products of the potential litigation opportunity for filing a similar claim at the CIT to preserve the ability to obtain duty refunds.  A two-year statute of limitations applies to the Administration’s action, which runs from the date of publication of the notice (September 21, 2018).  As such, the time to act is short.  Interested parties who wish to file their own claims must do so no later than September 21, 2020.

Precedent suggests, if List 3 is found to be unlawfully promulgated, there may be an opportunity for all importers – including non-litigants – to obtain duty refunds through refund requests filed with Customs and Border Protection (CBP) or through an administrative refund process established by CBP.  There is no guarantee, however, that such precedent would be followed.  Filing a court claim would be a conservative approach and would likely result in an earlier refund.

We are available to prepare complaints for interested clients to preserve the ability for duty refunds at the earliest opportunity.  While the litigation route might not make sense for every importer, there are instances where such an approach may be advisable.  Factors that may weigh in favor of filing suit may include the amount of total duties paid under Lists 3 and/or 4A, the public nature of the lawsuit, and the cost of participating in such an action.

If you have List 3 Section 301 China tariffs and interested in pursuing such an action, please contact us immediately for an assessment of your company’s specific situation and no later than Thursday, September 17, 2020.  Given the short filing deadline, please have prepared:

  • The Harmonized Tariff Schedule number(s) under which you imported merchandise on Lists 3 and/or 4;
  • An estimated date range of the import shipments;
  • An estimate of the total value of Section 301 duties paid; and
  • The identity of the importer of record/party responsible for duty payment.

For more information please contact Jennifer McCadney or Brooke Ringel.

On August 28, 2020, the U.S. Department of Defense (DOD) updated its list of “Communist Chinese military companies” that provide expertise and technological support to the Chinese military.  The list, which includes a number of large state-owned enterprises in China, does not impose sanctions or export restrictions on the listed companies, although some of the companies are separately included on the Bureau of Industry and Security’s (BIS) Entity List.

Exporters should use the DOD list as a due diligence tool to identify customers and end users that may be subject to BIS’s recently expanded military end user and end use export controls.  Under those rules, U.S. and non-U.S. companies require licenses to ship certain items subject to U.S. control rules to military end users or military end uses in China.

Please let us know if you have any questions about the BIS military end use rule or the updated DOD list.

Today the Bureau of Industry and Security (BIS) added 24 Chinese state-owned companies to the Entity List for their role in the construction of artificial islands in the South China Sea.  The Entity List prohibits the export, re-export, and transfer (in-country) of items subject to the Export Administration Regulations (EAR) to these companies without a license from BIS.  Five of the newly designated companies are subsidiaries of China Communications Construction Co. (CCCC), a leading contractor for China’s “Belt and Road Initiative” to develop infrastructure and trade links globally.

This action is the most recent in a series of confrontational U.S. trade control measures targeting China.  An unnamed senior U.S. official described CCCC as “the Huawei of infrastructure.”

BIS added 36 other companies to the list, including parties in France, Hong Kong, Indonesia, Malaysia, Oman, Pakistan, Switzerland, and the UAE for activities deemed contrary to U.S. national security or foreign policy interests.

On August 20, the Bureau of Industry and Security (“BIS”) published a final rule (“final rule”) amending the Export Administration Regulations (“EAR”) to expand restrictions on transactions involving Huawei entities that are included on BIS’s Entity List (“designated Huawei entities”).  The newly expanded rule applies to a broader range of items produced outside of the United States, including certain generic, commercial off-the-shelf items, and is the most recent step in a series of U.S. trade control actions targeting China.

At a high level, the new rule prohibits the export, re-export, or transfer of certain items produced outside the United States if you know that the foreign-made item will be incorporated into or used in the “production” or “development” of an item intended for a designated Huawei entity or if the foreign-made item will be provided to a designated Huawei entity.  The rule also applies to shipments involving certain foreign-made items where Huawei plays any role, including as a purchaser, intermediate consignee, ultimate consignee, or end-user.

The following foreign-made items are subject to the new rule:

  • Foreign-made items that are direct products of technology or software subject to the EAR and that are classified under Export Control Classification Numbers (ECCNs) 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991; or
  • Foreign-made items that are produced by a non-U.S. plant or major component of a non-U.S. plant if that plant or major component is itself a direct product of U.S.-origin technology or software classified under those ECCNs.[1]

This is the second time BIS has expanded the EAR’s “Direct Product Rule” for shipments involving Huawei.  A previous version of the rule, which was issued on May 15, 2020, was more limited in scope, and only applied to: 1) items that were produced using specified equipment that was the direct product of certain U.S. software or technology; and 2) items that were the direct product of software or technology produced or developed by a Huawei entity included on the Entity List.

The August 20 rule also adds 38 additional Huawei companies to the Entity List and replaces a temporary general license with an authorization that allows parties to provide limited security cybersecurity research to designated Huawei entities.  Other transactions involving Huawei that are subject to the new rule require a license from BIS.  Such license requests will generally be reviewed pursuant to a “policy of denial,” unless the transaction involves items that are only capable of supporting equipment at below the 5G level (e.g., 4G and 3G technology).

 

[1] The new rule contains a savings clause excluding from control certain foreign-made items that were in production prior to August 17, 2020 until September 14, 2020.  The savings clause is narrow in scope and should be reviewed carefully.

On August 20, 2020, the Bureau of Industry and Security (BIS) will publish a final rule confirming that the Entity List licensing requirements apply to all transactions in which a listed party plays a role – including where the listed party is the ultimate consignee, end-user, purchaser, or intermediate consignee.  The new rule formally codifies longstanding BIS policy on the scope of the Entity List’s requirements, which generally prohibit exports, reexports and in-country transfers of items subject to the Export Administration Regulations (EAR) that involve a party on the Entity List without a license.

Prohibited party screening programs should screen every party to a transaction to properly identify shipments that implicate the Entity List’s restrictive controls.

Updated August 24, 2020: CBP has extended the transition period for compliance with this rule change by 45 days until November 9, 2020. See the CSMS notice here.

Yesterday, U.S. Customs and Border Patrol (CBP) issued a new rule that requires importers to begin marking Hong Kong goods as “made in China” for purposes of 19 U.S.C. § 1304.  Goods that are entered or withdrawn from warehouse for consumption into the United States after September 25, 2020 will be subject to the new requirements.  The rule was issued pursuant to last month’s Executive Order (E.O.) on Hong Kong Normalization, which requires U.S. government agencies to update their regulations to eliminate the differential treatment between China and Hong Kong under U.S. international trade rules.

Importers should act now to ensure that subject imports are properly marked.  As CBP notes in the rule notice, failure to comply with marking requirements will result in the imposition of a 10 percent ad valorem duty.

Last Thursday, the President issued two executive orders (“E.O.s”) targeting social media applications TikTok (and its parent company, ByteDance) and WeChat (and its parent company, Tencent Holdings).  The E.O.s direct the Department of Commerce (“DOC”) to prohibit transactions involving the applications.  Companies that deal directly with TikTok or WeChat in the United States and abroad or use their services need to evaluate the scope of those activities and determine if they will be affected by the E.O.s.

The E.O.s were issued pursuant to the national emergency declared in E.O. 13873 regarding information and communication services in the United States that are controlled by persons within the jurisdiction of a “foreign adversary.”  In issuing the E.O.s, the President cited concerns that the Chinese government could gain access to Americans’ personal information collected by the applications, among other policy considerations.  The President has the power to issue the directives under the International Emergency Economic Powers Act (“IEEPA,” 50 U.S.C. 1701 et seq.), which provides the President with the authority to declare national emergencies and implement sweeping trade controls based on national security concerns.

The intended scope of the E.O.s is not clear due to ambiguous language used in Section 1, which contain the E.O.s’ primary prohibitions.  Here is an excerpt of that section from the TikTok order: Continue Reading President Issues Executive Orders Targeting TikTok and WeChat

On Friday, OFAC issued its first designations under the new Hong Kong sanctions program imposed by E.O. 13936.

OFAC added 11 current and former Hong Kong government officials, including Carrie Lam, Hong Kong’s Chief Executive, to its List of Specially Designated Nationals (SDN List).  As a result, all property and interests in property of the designated officials in the United States or within the possession or control of U.S. persons must be blocked and reported to OFAC.  U.S. persons, companies, and financial institutions are also broadly prohibited from conducting business dealings with the designated officials.

U.S. companies that do business with Hong Kong’s government should ensure that they do not engage in direct or indirect business dealings with the sanctioned officials, which OFAC is likely to view as a violation of the E.O.  Foreign financial institutions that provide services to the officials should also examine their institutions’ potential exposure under U.S. secondary sanctions authorized under the Hong Kong Autonomy Act of 2020 (HKAA).