On December 18, 2020, the US Department of Commerce Bureau of Industry and Security (BIS) announced the designation of 60 additional Chinese companies to its Entity List, including SMIC, China’s largest semiconductor manufacturer; over 25 affiliates of China State Shipbuilding Corporation (CSSC); and several other companies in a range of sectors (the “Designations”). As of that date, a license is now required for any export, re-export or transfer of technology, goods or software of items subject to US export controls for which any of the targeted entities is a party to the transaction.
This most recent designations follow the US government's previous actions aimed at China including:
- Prohibitions on engaging in securities-related transactions involving 31 entities designated as China military-linked companies, including SMIC and other entities described herein;
- A series of regulatory changes to effectively impose heightened due diligence requirements for potential “military end-use” and “military end-users” involving sales and technology transfers of certain goods, software and technology to commercial entities in China;
- A series of measures to expand the jurisdictional reach of US controls over chipmaking equipment and technologies critical to Huawei’s supply chain; and
- Establishment of an expansive new legal framework for national security review of transactions involving the US information and communications technology and services supply chain.
The regulatory amendments reflecting the Designations will be officially published in the Federal Register December 22, 2020. However, those amendments are effective December 18 (the date of the BIS announcement). An advance copy of the Federal Register notice is available here. We provide below our summary and observations regarding these additions to the Entity List.
What Entities and Individuals Are Targeted by the Designations?
The Designations target 77 parties, including 60 Chinese entities and their affiliates. The Designations are notable for the significance of many of the entities listed, as well as the breadth and range of impacted industries. The Designations can be summarized as follows:
- SMIC-Related Designations. Among the most notable entities included in the Designations are Semiconductor Manufacturing International Corporation Incorporated (SMIC)—China’s largest chipmaker—and 10 of its affiliates. BIS designated these entities based on concerns relating to China’s “Military-Civil Fusion” initiative and what the US government views as material ties between SMIC and the Chinese military. The designated SMIC entities include both mainland China and Hong Kong affiliates.
- CSSC Research Institute Designations. BIS designated 25 research affiliates of CSSC, one of the largest shipbuilding companies in the world, based on what BIS describes as CSSC’s role in acquiring and attempting to acquire US items in support of programs for the People’s Liberation Army of China (PLA). This adds to the existing designation of another CSSC research affiliate in August of this year. As noted below, the Designations also extend to other CSSC affiliates. Notably, CSSC itself has not been added to the Entity List.
- Entities Involved in South China Sea Activities of Concern. BIS designated several entities on the basis of concerns regarding what the United States describes as Chinese efforts to “reclaim and militarize disputed outposts in the South China Sea.” These include several shipbuilders—including another CSSC entity (CSSC Huangpu Wenchong Shipbuilding Co., Ltd.)—as well as a publicly traded engineering and construction firm involved in several key domestic and international infrastructure projects, including ones under the Belt and Road Initiative.
- Human Rights-Related Designations. BIS designated four entities based on US determinations relating to what BIS describes as “wide-scale human rights abuses within China through abusive genetic collection and analysis or high-technology surveillance” and/or the facilitation of export by China of items that “aid repressive regimes around the world.” These Designations span a variety of sectors and include major Shenzhen-based drone maker SZ DJI Technology Co., Ltd. (aka “Da-Jiang Innovations”); the biotech and medical technology firms AGCU Scientech and China National Scientific Instruments and Materials; and Kuang-Chi Group, which is active in aerospace, defense and artificial intelligence.
- Additional Policy-Based Designations of Chinese Entities
- Activities in support of PLA programs. Several academic institutions and companies were designated on the list based on determinations that they were involved in or attempted to acquire US-origin items in support of programs for the PLA. The named entities include Beijing Institute of Technology, Nanjing University of Science and Technology, Nanjing University of Aeronautics and Astronautics, Nanjing Asset Management Co., Ltd., Jiangsu Hengxiang Science and Education Equipment Co., Ltd., and Beijing University of Posts and Telecommunications.
- Activities relating to theft of trade secrets and economic espionage. Several entities and individuals were designated on the basis of alleged involvement in economic espionage and trade secret activities for the purpose of PRC development of products for civilian and military use. These include ROFS Microsystems, Tianjin Micro Nano Manufacturing, Tianjin University and five individuals who have previously been indicted in relation to the activities of concern.
- Impairment of US efforts to counter illicit trafficking in nuclear/radioactive materials. One entity, Tongfang Technology Ltd. (NucTech), was listed based on BIS’s determination that its “less stringent cargo screening” equipment impairs certain US counter-proliferation efforts.
- Designation on Other Grounds. The remaining 18 Designations were based on activities involving other export control and sanctions programs based on determinations that the designated entities and individuals were engaged in certain activities of national security and foreign policy concern. In particular, these include:
- Five Designations of persons in Europe and the UAE based on alleged participation in unauthorized transfers to Mahan Air, a sanctioned party;
- Eight Designations of persons in Bulgaria and Russia based on alleged involvement in illicit procurement activities involving Russia;
- Two Designations of persons in Pakistan based on alleged involvement in unauthorized transfers involving Entity List entities; and
- Three Designations of persons in Malta and the UAE based on alleged involvement in illicit diversion.
What License Requirements Are Triggered?
As a result of the Designations, a license is now required for the export, re-export or transfer of goods, software or technology subject to US export controls (“Covered Items”) whenever any of the named targets is a party to the transaction. BIS takes the position that the licensing requirement applies to listed entities “regardless of their role as a party to the transaction,” including but not limited to when the targeted entity is a purchaser, intermediate consignee, ultimate consignee or end-user.1
A Covered Item for these purposes may include not only US-origin items but any of the following categories of non-US origin items:
- Foreign-origin items containing more than “de minimis” US content (the relevant level depends on the circumstances and can be as low as any US content at all for certain items)
- Certain foreign-produced direct products of US technology
- Any items in the United States
As the above suggests, the level of sophistication or sensitivity of the item (or lack thereof) is immaterial to whether it is subject to these restrictions.
What Is the Likelihood That a License Application Will Be Approved?
Applications for licenses will be reviewed in most cases under a formal policy of “presumption of denial” (which means, as a matter of policy, that BIS is unlikely to grant the application).2 There are, however, certain notable exceptions where “case-by-case” licensing policy applies, pursuant to which BIS (in coordination with other relevant agencies) will consider, without applying a presumption of denial, whether the proposed transaction would be contrary to US national security and foreign policy interests. A summary of the relevant licensing policies under which BIS will review license applications involving the entities listed in the Designations follows3:
- SMIC and Its Designated Affiliates (11 Designations). The applicable licensing policy for the designated SMIC entities is a presumption of denial for “items uniquely required to produce semiconductors at advanced technology nodes 10 nm or below.” For other items, a licensing policy of case-by-case review applies.
- Human Rights-Related Designations (Four Designations). For the four human-rights related Designations identified above—SZ DJI Technology Co., Ltd., AGCU Scientech, China National Scientific Instruments and Materials, and Kuang-Chi Group)—the licensing policy is a case-by-case review for items necessary to detect, identify and treat infectious disease and a presumption of denial for all other Covered Items.
- Pakistan Entity List-Related Designations (Two Designations). For the two Pakistani entities designated in relation to alleged unauthorized transfers to Entity List entities, the special license review policy set forth at part 744.2(d) for restrictions on certain nuclear-related end-uses applies.
- Policy of Denial (Remaining 60 Designations). The remaining 60 persons included in the Designations are subject to a licensing policy of a presumption of denial.
The Designations may have a significant impact on any company engaging in activities that relate to exports, reexports or transfers of all Covered Items (whether goods, software or technology) to the listed entities (even if those targeted entities are not the ultimate end-user). Due to the breadth of the prohibitions under the regulations, licensing requirements may be triggered not only for direct suppliers of these entities but also for others who may indirectly support a prohibited export, reexport or transfer.
While Friday’s announcement of a large number of significant Chinese entities is not unique, it notably comes shortly after the Trump administration’s recent decision to impose broad prohibitions on securities-related transactions involving 31 Chinese entities (including some of the entities referenced above).4 It reflects a continued focus in the waning days of the current administration to adopt a tough stance on China (although, in practice, the administration has demonstrated a willingness to issue licenses notwithstanding the presumption of denial in a number of instances). The underlying national security and foreign policy issues are long-standing, and it remains to be seen whether the Chinese government will adopt a retaliatory posture and whether the Biden administration will adopt a different approach to addressing these issues.
1 Failure to apply for or otherwise ensure a license may lead to significant penalties (including civil penalties of up to the greater of $302,000 per violation or twice the value of the transaction); the denial of the ability to engage in exports involving US goods, software or technology; and other potential restrictions.
2 As the term suggests, however, BIS (in coordination with other agencies involved in the inter-agency review process) may nonetheless consider approval in limited circumstances by a showing that overcomes the presumption that the proposed transaction would cause harm to the relevant national security and/or foreign policy interests.
3 Current as of the date of this Legal Update. Entity List licensing requirements and policies may change and should be reviewed prior to engaging in any transaction directly or indirectly involving a designated party.
4 See our Legal Update of November 16, 2020, US Takes Action to Bar American Investments in Broad Range of Chinese Companies Deemed Linked to the Chinese Military.