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August 8, 2018 – On August 1, 2018, following action by the House of Representatives, the U.S. Senate passed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“NDAA”). The legislation is now before President Trump, who is widely expected to sign it into law. In addition to providing funding for U.S. defense, the legislation includes landmark reforms to the process used by the Committee on Foreign Investment in the United States (“CFIUS”) to review foreign acquisitions and investments in the United States and makes significant changes to the dual-use export control regime. The bill also takes aim at major Chinese firms, with a ban on U.S. government procurement of certain telecommunications equipment manufactured by Huawei, ZTE, and other suppliers.
While the NDAA’s proposed CFIUS reforms include a new short-form declaration option that is expected to streamline foreign investment review involving countries friendly to the United States, other provisions in the NDAA highlight a broader and growing concern among U.S. lawmakers regarding China. Among other changes, the NDAA would expand CFIUS’s authority to review foreign investments involving sensitive real estate in close proximity to U.S. military sites (China’s activity with similar real estate transactions has previously drawn concern from U.S. lawmakers), and would enhance export licensing requirements for exports to countries subject to arms embargos (including China). The NDAA’s prohibition on government procurement from major Chinese contractors expands on a similar Department of Defense policy announced in May of this year.
Foreign Investment Review
CFIUS is an inter-agency body authorized to review the national security implications of proposed foreign investments in the United States. If CFIUS concludes that an acquisition of a U.S. business threatens to impair U.S. national security, it can ultimately recommend that the President use statutory authority to block the acquisition. The current push for CFIUS reform was prompted, in part, by concerns that the existing regulatory framework was inadequate to allow for the meaningful review of national security implications of the increase in Chinese investments in the U.S. technology sector.
The Foreign Investment Risk Review Modernization Act (“FIRRMA”), contained in §§ 1701-1728 of the NDAA, expands the scope of transactions subject to CFIUS review, reforms the procedures through which the Committee conducts its reviews, clarifies the process for seeking judicial review, and authorizes CFIUS to charge filing fees, as follows:
The Export Controls Act of 2018 (“Act”), contained in §§ 1751-1768 of the NDAA, provides permanent statutory authority for the Export Administration Regulations (“EAR”), which control the export of dual-use goods and technology that have both civilian and military uses. The most notable changes that would be required by the Act include a requirement that the U.S. Department of Commerce (“Commerce”) control “emerging and foundational technologies,” the adoption of new procedures for license applications, and an increase for the maximum civil penalty for violations of the EAR to $300,000 or twice the value of the transaction (thereby matching the penalty scheme that currently applies to the EAR under the International Emergency Economic Powers Act, or “IEEPA”).
Chinese Procurement Ban
Additionally, the NDAA includes a statutory ban on the procurement by U.S. government agencies of telecommunications equipment or services sold by Huawei Technologies Company or ZTE Corporation (or any of their subsidiaries or affiliates), or video surveillance and telecommunications equipment or services sold by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any of their subsidiaries or affiliates). The prohibition becomes effective one year after enactment of the NDAA. Further, starting two years after enactment of the NDAA, federal agencies will be prohibited from contracting with any entity that uses telecommunications or video surveillance equipment or services acquired from any of these Chinese firms.
Earlier this year, Commerce penalized ZTE for violating U.S. sanctions against Iran and North Korea. In June, Commerce announced that it had reached a deal to lift most of those penalties, leading many lawmakers to voice frustration that the firm had escaped accountability. The NDAA stops short of restoring those penalties, but clearly puts Chinese technology firms into the cross hairs, and signals Congress’s readiness to take bipartisan action to sanction firms perceived to pose a threat to U.S. national security.