Commerce Department Issues Proposed Rule to Secure the Information and Communications Technology and Services Supply Chain

On November 27, 2019, the U.S. Department of Commerce (“Commerce”) published a proposed rule, “Securing the Information and Communication Technology and Services Supply Chain,” that would implement Executive Order 13873 of May 15, 2019 that we discussed in our prior client alert. Specifically, the proposed rule details the process that Commerce intends to deploy to identify, assess and address certain information and communication technology and service (“ICTS”) transactions that pose an undue risk to critical infrastructure or the digital economy in the United States, or an unacceptable risk to U.S. national security or the safety of United States persons, and therefore are to be prohibited. Commerce proposes to review transactions on a case-by-case basis for undue or unacceptable risk rather than designate particular technologies, participants or transactions as being categorically exempt or prohibited. At the same time, it is understood that the U.S. government’s focus of concern is Huawei and other Chinese telecom equipment suppliers.

Under the proposed rule, Commerce could prohibit, require mitigation for or require unwinding of a transaction that:

1. is conducted by any person subject to the jurisdiction of the United States or involves property subject to the jurisdiction of the United States;
2. involves any property in which any foreign country or a national thereof has an interest (including through an interest in a contract for the provision of the technology or service);
3. was initiated, pending or completed after May 15, 2019, regardless of when any contract applicable to the transaction was entered into, dated or signed, or when any license, permit or authorization applicable to such transaction was granted;
4. involves ICTS designed, developed, manufactured or supplied by persons owned by, controlled by or subject to the jurisdiction or direction of a “foreign adversary”; and
5. poses an undue risk of sabotage to or subversion of ITCS in the United States or of catastrophic effects on the security or resiliency of U.S. critical infrastructure or the U.S. digital economy, or otherwise poses an unacceptable risk to U.S. national security or the security and safety of U.S. persons.

“Foreign adversary” is defined as “any foreign government or foreign non-government person determined by the [Commerce] Secretary to have engaged in a long-term pattern or serious instances of conduct significantly adverse” to U.S. national security or security and safety of U.S. persons. The proposed rule does not identify any foreign adversaries.

If Commerce evaluates a transaction, the parties to the transaction would receive direct written notice of the evaluation as well as notice of Commerce’s preliminary and, ultimately, final determinations regarding the transaction. Within 30 days after notification of an evaluation of and preliminary determination with respect to a transaction, and explanation of the basis for the determination, to the extent an explanation can be provided consistent with national security, the parties would have the opportunity to submit an opposition and information in support thereof. The parties could include proposed mitigation measures. The Commerce Secretary would be required to issue a final determination within 30 days of receipt of any information from the parties pursuant to the prescribed regulatory process.

If Commerce determines that a transaction presents an undue or unacceptable risk as described above, then the Commerce Secretary may impose measures to mitigate the transaction’s risks or may prohibit the transaction, including by requiring that the parties engaged in the transaction immediately suspend use of the ICTS that poses the undue or unacceptable risk, even if such ICTS has been installed or was in operation prior to the Commerce Secretary’s determination. The written final determination would be issued to the parties and a summary of the Commerce Secretary’s determination would be made public.

Unlike the process administered by the Committee on Foreign Investment in the United States, the proposed rule does not provide for the pre-submission of a transaction by the parties. The proposed rule specifically provides that the Commerce Secretary will not issue an advisory opinion or a declaratory ruling with respect to a particular transaction.

Under the proposed rule, any person who violates, attempts or conspires to violate, or causes a violation of any determination under the rule, or makes any false statements or conceals material facts to the U.S. government in connection with action under the proposed rule, may be subject to a civil monetary penalty under the International Emergency Economic Powers Act, as amended (“IEEPA”), of up to $302,584, as adjusted annually for inflation, or an amount equal to twice the value of the violative transaction. In addition, any person who violates material provision of a mitigation measure or material condition imposed by the U.S. government pursuant to the proposed rule would may be subject to a fine under IEEPA of up to $320,584 or the value of the transaction.

Comments on the proposed rule may be submitted through http://www.regulations.gov, Docket No. DOC–2019–0005. The deadline for submitting comments has been extended from December 27, 2019 to January 10, 2020.