By Procopio Senior Associate Michael Jones

Continuing a trend of restricting exports to certain foreign entities, the U.S. government took two actions on May 15, 2020, to further control exports of certain technologies deemed critical to US interests:

1. Expanding the direct product rule to further restrict exports to certain entities including Huawei and/or its affiliates.
2. Extending the temporary general license (TGL), originally granted on May 19, 2019, for certain export activities related to Huawei and its affiliate entities.

Companies that sell, directly or indirectly, to Huawei and/or its affiliates need to reevaluate the transactions that are occurring to avoid violation of the expanded restrictions, resulting in potential fines and penalties including potential loss of export privileges.

Direct Product Rule Revisions

The Direct Product Rule is now expanded to prohibit exports of equipment, technologies or software falling into certain export classifications (ECCNs), if the export has knowledge that foreign manufactured goods are destined to specific entities on the prohibited entity list, even if those exports are not restricted for National Security reasons. Pre-May 15 this rule only limited export if technology or software controlled for National Security reasons was involved.

The Notice expanding the Direct Product Rule identifies more than 15 export classifications, including technology associated with the electronic devices (including semiconductor devices and associated manufacturing equipment), computer equipment, or telecommunications equipment being covered by the expanded Direct Product Rule. This new rule prohibits export of technology or software that can be used to manufacture electronic devices, computers or telecommunications equipment that will be knowingly exported to Huawei and its affiliates on the prohibited entity list. Further, the list could be expanded at any time to include non-Huawei entities.

Though the rule is effective May 15, 2020, foreign produced items that started production prior to May 15, 2020 may be exported, reexported, or transferred, so long as the process is completed within 120 days (e.g. by September 14, 2020).

TGL Extended Through August 13, 2020

As discussed in a previous article, the U.S. Commerce Department added Huawei Technologies and its affiliates to the Prohibited Entity list on May 16, 2019, effectively banning any exports to these entities without an export license from the Commerce Department. At the same time, a temporary general license (TGL) was granted, allowing certain activities with Huawei to continue within narrow guidelines. The original TGL was was set expire in August 2019, but was modified in August 2019 and then re-extended in November and March, respectively.

Though the TGL was again scheduled to expire on May 15, the U.S. Government extended the TGL through August 13, 2020 without modifying any of the permitted activities. In view of the extension of the TGL, companies may continue to perform the same activities under the TGL as prior to May 15 so long as they are still in compliance with the requirements of the TGL.

Practical Tips

The above actions demonstrate the continued importance of export control compliance, particularly with respect to supply chain management. Companies may wish to consider the following guidelines:

1. If a prohibited entity (e.g., Huawei or its listed affiliates) is in your supply chain, then check the ECCNs of the exported technology, to determine whether your activity falls within the scope of the Direct Product Rule
    a. If so, for foreign –produced items already in production on May 15, 2020, make sure those items are exported, reexported, or transferred by September 14, 2020 at the latest
    b. For foreign-made items starting production on or after May 15, 2020, make sure a license is obtained prior to export
2. Ensure that the necessary policies are aligned with the TGL, and provide necessary reminders, training and resources for those most likely to be impacted by the rule (e.g., researchers, technical sales, product development).

Conclusion

In view of these rules in combination with additional rules implemented in January and April, companies exporting US origin goods, software or technology must continually monitor the revolving restrictions in order to ensure they do not run afoul of the Export Laws.