On May 22, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) added 33 Chinese entities and research institutions to its prohibited “Entity List.” This latest action illustrates the U.S. government’s continued effort to pressure the Chinese government to halt its controversial practices related to “military-civil fusion” of commercial and military-related enterprises and to respond to alleged human rights abuses in China’s Xinjiang province. The designations bring additional licensing requirements and restrictions to U.S. and non-U.S. companies that sell to or otherwise transact business with these entities or institutions.
With this listing, BIS determined that two dozen entities “represent a significant risk of supporting procurement of items for military end-use in China.” These entities include many well-known Chinese companies, such as Qihoo 360 Technology, a software company that has been a household name in China for over a decade. Some of these companies also have significant existing commercial ties and investments in the United States. BIS designated the other nine entities due to their alleged role in enabling high-technology surveillance “in human rights violations and abuses committed in China’s campaign of repression, mass arbitrary detention, forced labor and high-technology surveillance against Uighurs, ethnic Kazakhs, and other members of Muslim minority groups in the Xinjiang Uighur Autonomous Region. . . ”
The designations are expected to take effect immediately upon publication of the additions in the Federal Register and allow no grace period for compliance. Dealings with these entities that involve items subject to the Export Administration Regulations (EAR) are prohibited unless specifically authorized by a BIS license. Applications involving designated entities will subject to a “presumption of denial,” meaning that unless a strong case can be made as to why a transaction with a listed entity will not harm or impair U.S. national security, a license application is likely to be denied.
Violations of the Entity List or other EAR restrictions can result in severe civil and criminal penalties, including civil penalties per transaction of more than $300,000 or twice the value of the transaction (whichever is higher) and criminal penalties of up to $1 million and 20 years’ imprisonment. Entities suspected of violating these restrictions can also have their own export privileges revoked, can be debarred from participation in U.S. government contracts and may themselves be listed on the Entity List or other denied party lists.
Although the Chinese Foreign Ministry denounced these designations as “violat[ing] the basic norms governing international relations” and undermining “the legitimate rights and interests of the Chinese enterprises,” the U.S. government has in the past years demonstrated a committed effort in initiating further export control and national security restrictions involving China. It is therefore expected that more Chinese entities and individuals will continue to be designated under the Entity List or other U.S. government denied party and sanctions lists in the coming months.
In this regard, it is noteworthy that new legislation that would give the president expanded authority to sanction Chinese officials over alleged human rights violations is expected to pass the House of Representatives by a significant margin later this week. This follows the overwhelming passage of a companion bill in the Senate earlier this year. These developments collectively underscore the ongoing shift in U.S. policy toward to China that is receiving strong bipartisan support in Washington. Companies doing business in China or with Chinese companies should continue monitoring future developments and be prepared to take prompt action to protect their interests.
For more information on these designations or exports and sanctions requirements in general, please do not hesitate to contact Nate Bolin, Mollie Sitkowski, Qiusi Newcom, or any other member of Faegre Drinker Biddle & Reath LLP’s Customs and International Trade Team.