Risks and Considerations for Businesses with Supply Chain Exposure (Entity List Part II)
Designation Risk Factors
Since the initial 1997 publication of the Entity List, and even more since Huawei, grounds for inclusion on the Entity List have expanded to activities sanctioned by the State Department and activities contrary to U.S. national security and/or foreign policy interests.[1] There has been a growing trend in adding Chinese entities to the List, and more specifically since 2020, the U.S. Department of Commerce issued its final rule designating dozens of Chinese entities on its Entity List. The designations follow expanded restrictions on military end users and end uses in China, for example entities which represent a significant risk of supporting procurement of items for military end-use in China; the List also targets parties allegedly complicit in supporting a campaign of human right abuses against minority groups in the Xinjiang Uighur Autonomous Region (“XUAR”), and entities allegedly involved in Chinese efforts to reclaim and militarize disputed outposts in the South China Sea.
The two most determinative designation risk factors frequently cited for including Chinese “persons” on the List are participating in or supporting alleged human rights violations.
Alleged Human Rights Violations 风险因素——被指控违反人权
Military End User or End Use[9] 风险因素——军事最终用户或最终用途
Alleged Human Rights Violations
Alleged Human Rights Violations is the most determinative designation risk factor. In fact, since October 2019 BIS have added 53 Chinese entities to the Entity List for allegedly supporting a campaign of human rights abuses against Uighur Muslims in the Xinjiang Uighur Autonomous Region (“XUAR”), and 15 of these which were implicated in human rights abuses related to forced labor of ethnic minorities from Xinjiang.[2]
The Department of Commerce announced the designation of more entities on May 22, 2020, and stated they are “complicit 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 (XUAR).” [3]
On July 1, 2020, the Department of Commerce together with the U.S. Departments of State, Treasury and Homeland Security issued a supply chain business advisory for businesses with potential exposure in their supply chain to Xinjiang or to facilities outside Xinjiang that use labor or goods from Xinjiang, and warned that risks associated with certain types of involvement with entities that engage in human rights abuses, could include Withhold Release Orders (WROs), civil or criminal investigations, and export controls.[4]
The Advisory identifies heightened risk factors for such businesses and individuals to consider in assessing potential business partnerships with, investing in, and providing other support to companies operating in or otherwise linked to Xinjiang, or employing the labor of individuals from Xinjiang. The main risk factors include but are not limited to[5] :
Certain Activities with Cameras, Tracking Technology, Biometric Devices, or Other Goods and Services: Selling or providing biometric devices, cameras, computers, items with surveillance capabilities, microchips and microprocessors, tracking technology, or related equipment, software, and technology, or maintenance of goods that have been known to arbitrarily track and control the movements of Uyghurs or others in Xinjiang[6]
Certain Technology Joint Ventures, Research Partnerships, and Financial Support: Involvement in joint ventures with PRC government officials and departments, or Chinese companies whose intellectual property has been known to aid the development or deployment of a surveillance system used arbitrarily against members of minority groups or others[7]
Certain Services Provided to Xinjiang’s Internment Camps or Surveillance State[8]
Military End User or End Use
The ‘Military End-User’ (MEU) List (Supplement No. 7 to part 744 of the EAR), not exhaustive list, identifies foreign parties that are prohibited from receiving items described in Supplement No. 2 of Part 744 of the EAR unless the exporter secures a license. These parties have been determined by the U.S. Government to be ‘military end users,’ as defined in Section 744.21(g) of the EAR, and represent an unacceptable risk of use in or diversion to a ‘military end use’ or ‘military end user’ in China.[11]
In a press release,the Department of Commerce stated that they would be adding 24 Chinese entities and that this list “represent a significant risk of supporting procurement of items for military end-use in China.” See BIS Press Release (May 22, 2020).
Any exports, reexports, and in-country transfers of items subject to the Export Administration Regulations (EAR), including EAR99 items, are generally prohibited to or through Entity List parties without a license. BIS will review export licenses under a “presumption of denial” policy and no license exceptions are available at this time. Because of recent measures which may impact US and Chinese trade, Companies therefore engaging in business with the designated entities should review whether they will need to submit a license application, and should assess whether their trade compliance programs include appropriate measures that address these risks. The UN Guiding Principles on Business and Human Rights,[12] the Organization for Economic Co-operation and Development (OECD) Guidelines on Multinational Enterprises,[13] and the International Labor Organization (ILO) Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy[14] provide guidance on best practices for this type of due diligence.
For additional information on the Entity List, see Sections 744.11 and 744.16 of the EAR.
For questions or concerns related to the EAR and its requirements, on compliance and due diligence or if your business has been impacted, please contact our office HUANG & HU PC.
[1] Xinjiang Supply Chain Business Advisory, Issued: July 1, 2020 , https://www.cbp.gov/sites/default/files/assets/documents/2020-Jul/Xinjiang-Supply-Chain-Business-Advisory.pdf.
[2] see Press Release : https://www.commerce.gov/news/press-releases/2021/06/commerce-department-adds-five-chinese-entities-entity-list.
[3] The Department of Commerce's Bureau of Industry and Security (BIS) Press Release (May 22, 2020) : https://2017-2021.commerce.gov/news/press-releases/2020/05/commerce-department-add-nine-chinese-entities-related-human-rights.html.
[4] Xinjiang Supply Chain Business Advisory https://www.cbp.gov/document/guidance/xinjiang-supply-chain-business-advisory ; see also Xinjiang Supply Chain Business Advisory, Issued: July 1, 2020 , https://www.cbp.gov/sites/default/files/assets/documents/2020-Jul/Xinjiang-Supply-Chain-Business-Advisory.pdf.
[5] see also Xinjiang Supply Chain Business Advisory, Issued: July 1, 2020 , https://www.cbp.gov/sites/default/files/assets/documents/2020-Jul/Xinjiang-Supply-Chain-Business-Advisory.pdf.
[6] Id.
[7] Id
[8] Id.
[9] (f) Military end use : In this section, ‘military end use’ means: incorporation into a military item described on the U.S. Munitions List (USML) (22 CFR part 121, International Traffic in Arms Regulations); incorporation into items classified under Export Control Classification Numbers (ECCNs) ending in “A018” or under “600 series” ECCNs; or any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production,” of military items described on the USML, or items classified under ECCNs ending in “A018” or under “600 series” ECCNs.
[10] see MEU List : https://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/1770.
[11] See list : https://www.bis.doc.gov/index.php/documents/regulations-docs/2714-supplement-no-7-to-part-744-military-end-user-meu-list/file.
[12] https://www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf.
[13] https://www.oecd.org/corporate/mne/.
[14] https://www.ilo.org/empent/areas/mne-declaration/lang--en/index.htm.