This is the third in a series of articles by Eversheds Sutherland partners Ginger Faulk and Jeff Bialos explaining the legal and regulatory impacts of certain recent US sanctions and export control actions targeting various Chinese entities. Each article explains the regulatory context of the recent rules. Recognizing that this is a highly charged political topic, the article does not condone or promote any governmental actions discussed here but is only explanatory in nature.

If the first time you ever heard of the US “Entity List” was in March 2016, when subsidiaries of mobile telecommunications equipment manufacturer ZTE Corporation were listed, or in March 2017, when ZTE agreed to an $892,360,064 penalty and settlement agreement in order to secure its removal from the list, you are probably not alone. That 2016 listing had to do with allegations of evasion of US sanctions against North Korea and Iran. More recent Entity List designations have derived not only from US economic sanctions but also cite to various other types of US allegations or policy concerns.

In the first article of this series, we discussed US export controls applicable to Huawei as a result of its designation on the Entity List in May 2019. In this article, we delve into the background and regulatory context of the list itself, as compared to other US sanctions lists, and discuss ways it has been used in the last four years under the Trump Administration.

1. What is the Entity List and What are Its Origins?

The Bureau of Industry and Security (“BIS”) at the US Department of Commerce administers US export controls pursuant to the Export Administration Regulations (“EAR”). The EAR generally controls, and in some cases, requires licenses for, exports on the basis of the type of product, the country of export and the reasons for control, e.g. Anti-Terrorism, Nonproliferation, National Security, etc. In contrast, the Entity List imposes comprehensive export controls applicable to particular foreign entities due to specific policy concerns.

The US Entity List was established in 1997. It initially focused on identifying the public entities at risk of causing the diversion of exported items in support of the proliferation of weapons of mass destruction. Since its initial publication, however, the purpose of the Entity List has been considerably expanded to encompass the identification and designation of foreign entities and other persons “reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States.” A committee (known as the “ERC”) composed of the US Departments of Commerce (Chair), State, Defense, Energy and Treasury adds persons to the Entity List by majority vote.

Once an entity is added to the list, it generally follows that exports or re-exports of goods, technology or software (“items”) that are “subject to the EAR” require an export license issued by BIS. As a result, the export and re-export of not only military or dual-use items but all categories of items are subject to a licensing requirement (of course, to the extent that they are deemed to be subject to the jurisdiction of US export controls). Notably, the Commerce Department’s policy is generally one of “presumption of denial” for these types of license applications unless indicated otherwise in the company’s listing.

Jurisdictionally, the ban applies also to non-US persons to the extent that those persons deal in subject US items. Significantly, items “subject to the EAR” includes not only US-origin items and items exported from the US but also non-US-origin items that contain more than a minimal (“de minimis”)  level of controlled US-origin content. Since a licensing requirement generally applies to exports or re-exports of any item to an Entity List entity, this means that any type of US content or component whatsoever, provided it is of sufficient value as compared to the overall fair-market value of the finished item (25% for non-embargoed countries, including China), could cause an item manufactured outside of the US item to be “subject to the EAR” and therefore requiring a license for export or re-export to an Entity List entity.

2. The Entity List and China

Until 2012, there were fewer than 30 Chinese entities on the Entity List. Before President Trump’s 2017 Inauguration, fewer than 100 Chinese entities had ever been listed on the Entity List over its 23-year history. Since then, however, more than 200 Chinese companies have been added to the Entity List, making export controls one of many contentious issues in recent US-China relations. Perhaps most notable was the May 2019 listing of Huawei and its 114 non-US affiliates – an enterprise which recently took the place of Samsung as the world’s largest mobile phone manufacturer (as addressed in our earlier article). More recently, the US added a number of Chinese state-owned enterprises to the Entity List on the basis of their alleged support in advancing Beijing’s territorial claims in the South China Sea. Further, over the last year, more than 38 individuals and entities were added for reasons related to their alleged use of forced labor in the Xinjiang province of China.

One might ask why the US Commerce Department would use the same export control list to address so many varied types of issues. And does it make sense to designate under export controls companies that are the producers of raw materials such as cotton and textile producers in Xinjiang?

The answer lies both in the designation process and in the intended impacts of an Entity List designation. As noted, the ERC is an interagency committee represented by multiple US government departments. Fundamentally, it affords the ERC, the interagency charged with adding companies to the list, the flexibility to address certain conduct by such entities in a more targeted and flexible fashion – as it did with respect to Huawei. In this regard, an Entity List designation does not impose the same outright ban on all commercial and financial dealings as a designation on the US Treasury Department’s Specially Designated Nationals List. It also is intended to signal to industry to use care when doing business with these entities.

In addition to the Entity List, BIS also maintains a Denied Persons List of persons or entities that are the subject of an export denial order. For example, after deciding that ZTE failed to fulfill its commitments under the 2017 settlement by which it secured its removal from the Entity List, BIS issued a denial order in June 2018 that exceeded the terms of the original Entity Listing by also preventing ZTE from directly or indirectly participating in any way in any transaction involving an item subject to the EAR. That denial order was removed following discussions between the Trump Administration and the Chinese government in July 2018.

3. Can a party seek removal from the Entity List?

The ERC also reviews requests for removal from the Entity List. To be removed, the person or entity must submit a request to the chairman of the ERC. In making a determination, the ERC will look favorably upon an entity’s cooperation with the US government and future compliance assurances. The ERC’s decision is final and cannot be appealed as an administrative matter.

4. Conclusion

Recently, the US has made frequent use of the Entity List to target Chinese companies over varied national security concerns. In response, China has introduced its own “Unreliable Entity List” regime, under which foreign entities or individuals that boycott supplies to Chinese companies for non-commercial reasons may be listed. It remains to be seen whether the US Commerce Department will continue to make such an expansive use of the Entity List under the Biden Administration.

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Eversheds Sutherland associate Vedia Biton Eidelman was a contributing author to this article.

Ginger T. Faulk, partner at Eversheds Sutherland, represents multinational companies in matters involving US government regulation of foreign trade and investment. She has extensive experience advising and representing global companies, counseling clients in matters arising under US sanctions, export controls, import and other national security and foreign policy trade-related regulations.

Jeffrey P.  Bialos, partner at Eversheds Sutherland, assists clients in making multi-faceted business decisions, structuring transactions and complying with complex regulatory requirements. A former Deputy Under Secretary of Defense for Industrial Affairs, he brings deep experience in defense, homeland security and national security matters, including antitrust, export controls, foreign investment, industrial security, the Foreign Corrupt Practices Act, and mergers and acquisitions, and procurement.