The China Question

www.worldecr.com 10 ThE ChInAquESTIOn CHINA including the MEU rule and the restrictions on trade with Huawei, has meant ‘a lot of reshuffling of supply chains and a lot of foregone contracts.’ ‘Regarding Huawei, at first, entities like Qualcomm and Microso and others were able to obtain some limited licences from the Department of Commerce,’ Townsend says. ‘But then, BIS rescinded many of the licences that had been granted and tightened the policy for additional licences. Industry had a real whiplash effect from that, and now you can only really get licences if the products you want to sell will not support 5G technology at all, and even that’s not guaranteed.’ As noted above, to make things even more challenging, in March BIS added another layer of difficulty in the shape of the MIEU Rule, which applies to China, as well as Russia, Venezuela, Cuba, Iran, Syria, and North Korea. ‘e Military Intelligence End-User rule goes beyond the MEU rule in a couple of ways. First, it applies to all products that are subject to US export controls, even the least sensitive, EAR99 products,’ Townsend explains. ‘Second, the rule doesn’t only apply to transfers of items subject to the EAR (Export Administration Regulations); it applies to any item transferred via a US person, even foreign items, and to any service performed by a US person anywhere in the world that may “assist or benefit” a military intelligence end-user.’ Although the definition of MIEU is narrower than the definition of MEU, it could still have a significant and surprising impact. For example, Townsend refers to news and internet reports and US government agency allegations about major Chinese telecoms companies, including Huawei and ZTE, having close ties to Chinese military and intelligences services. ‘With those kinds of allegations in the public domain,’ says Townsend, ‘if you’re a US person anywhere in the world providing services to Huawei or ZTE, even if those items or services don’t involve items that are subject to US export control, you have to ask yourself, “If I’m providing services to Huawei or ZTE and I have reason to believe they have provided services to Chinese military intelligence services, is there reason to believe that my services to them are likely to assist or benefit the Chinese military intelligence services?” at’s a really, really far-reaching rule. It’s much more like a sanctions rule than an export rule.’ No way, Huawei Huawei became the largest casualty of the US-China hi-tech war when in May 2019 then-President Trump signed an EO banning the Chinese telecoms titan from obtaining semiconductors, including chips made by foreign firms developed or produced with US soware or technology. at body blow has not killed Huawei, but it slowed the speed at which the telecoms juggernaut was expanding across the globe. e Trump administration’s core concern with Huawei was over its ties to the Chinese government and fears that its equipment could be used to spy on other countries and companies. In May 2020, a year aer the first action against Huawei, Trump extended the ban for another year. e Biden administration has not reversed Trump’s sanctions and tough regulations on China; in fact it has expanded them. On 4 June 2021, President Biden signed an EO banning Americans from investing in dozens of Chinese companies with alleged ties to defence or surveillance technology sectors, including Huawei and SMIC. Washington has kept up its lobbying with European and other allies to dissuade them from letting Huawei or other Chinese telecoms companies build their next- generation telecoms networks, on grounds the companies could pose a security risk. But small cracks may be appearing in the US global campaign. In late May, British telecoms giant Vodafone’s Italian unit received conditional approval in Italy to use Huawei equipment in its 5G radio access network according to news reports. At the World Mobile Congress in Barcelona in late June, Stephane Richard, CEO of Orange, France’s largest telecoms firm, told Reuters A seat at the table for Compliance Elizabeth Shingler, Tax, Export Controls & Sanctions Manager at KPMG in Philadelphia, observes that, ‘There’s challenges in industry with the new export restrictions because industry does rely on China. I think the next year or so will be really telling about how things evolve.’ Shingler advises that companies should not wait for the government to clarify regulations and instead should get started early on putting together a robust compliance program. She adds that companies must know everything about their clients and about their products and have it all in one place. ‘One of the first steps to managing new requirements is assessing what data you have and where it is located,’ she explains. ‘We see companies struggling to identify the information they need and to validate its accuracy. It’s important to identify early who the parties to the transaction are, not just end-users, so risks can be properly assessed.’ She says that the MEU Rule provides the starting point. ‘But a process needs to be developed to identify other users who may have a nexus to the military. This can crop up when hospitals, universities or research organisations touch the supply chain. Understanding what ties, if any, there are to the military can take some digging and may require the use of a third-party with local expertise,’ she advises. ‘Finally, since these regulations are still evolving, incorporating risk assessments into compliance planning will help the organisation stay close to where the risks are and what is driving them, so meaningful compliance steps can be taken,’ Shingler says. ‘What’s nice to see is that businesses are engaging on these topics now and they want to get ahead of it. I think there’s a lot of awareness that export compliance is a real issue, not a back office function.’ Shingler adds that for companies, compliance needs to be at the ‘forefront of your product-planning process so that licences are in place and people understand that even though they might not sit in compliance, their responsibilities touch export compliance. You kind of have to bring them into the fold and train them on what that means,’ she says, ‘I think, compared to where we were a few years ago, the level of awareness is very impressive.’ Shingler advises that any company with business that touches China needs to think about the impact from the expanded regulations. ‘It’s not just multinationals that have to understand where and how you are touching China.’ ‘As a business, you need a plan for today and you need a plan for tomorrow and you really also need to understand where your business is going and what your relationship with China is going to look like in a few years, so that the export compliance team can start planning for that,’ she explains. ‘To do that, we need the export compliance teams to start being more a part of the business – not siloed. They need to sit shoulder-to-shoulder with their counterparts in the business so they know what’s coming and what looks likely to come, so they can plan appropriately. They need to have a seat at the table.’ Elizabeth Shingler