The U.S. Department of Commerce is making aggressive use of the “Entity List,” which imposes a restrictive licensing regime on exports of U.S.-origin goods and technology to designated foreign parties. Non-U.S. companies should understand the legal criteria and types of conduct that could prompt their addition to the Entity List, the potential consequences of being added to the Entity List, and the procedural options available to appeal or modify a listing.
The addition of Chinese telecommunications giant Huawei Technologies Co., Ltd. to the U.S. Department of Commerce’s Entity List in May 2019 underscores the willingness of the U.S. Government to employ this powerful regulatory enforcement tool notwithstanding its adverse impact on U.S. relations with a major trading partner as well as on domestic U.S. companies that sell goods and technology to the listed foreign party. Addition to the Entity List can have severe consequences for foreign companies dependent on a U.S. supply chain for goods and technology essential to their manufacturing processes or other vital business operations, as in most instances it precludes exports of U.S.-origin items to the listed foreign party. Foreign companies engaged in violations of U.S. export control or sanctions laws, proliferation activities, or the theft of intellectual property from U.S. companies are particularly at risk for addition to the Entity List, and no foreign company, no matter how prominent or well connected to a foreign government, is immune from being listed.
Impact of Addition to Entity List
The Entity List is a list of non-U.S. parties that are prohibited from receiving items subject to the Department of Commerce’s Export Administration Regulations (“EAR”) unless the exporter receives a license.1 This prohibition precludes the export, reexport, or transfer (in-country) of specified U.S.-origin items to any party named on the Entity List without a license from the Commerce Department’s Bureau of Industry and Security (“BIS”).2 License applications are usually subject to a license review policy where there is a presumption of denial, and in most instances no license exceptions are available for the export, reexport, or transfer (in-country) to a party on the Entity List of items subject to the EAR.3 BIS publicly maintains that the prospects for license approval amidst a presumption of denial “depend on a number of factors, including the item, end-use and end-user,”4 but it is an uphill battle to obtain a license in that circumstance.
Foreign parties eligible for the Entity List may include a business, individual, research institution, or government organization, and branches and operating divisions of a listed entity are considered a part of the listed entity.5 Because this restrictive licensing policy applies to “any item subject to the EAR,”6 it applies broadly not only to items specified on the Commerce Control List (“CCL”) but also to “EAR99”7 items which come within the jurisdiction of the Commerce Department but are not listed on the CCL and generally do not require a license to be exported or reexported. U.S. companies which export their products to a foreign party named to the Entity List are subject to civil penalties if they do not comply with the resulting more restrictive licensing policy governing exports to their foreign purchaser and, in the event of a willful violation, are subject to criminal penalties.8 Thus, a foreign party’s addition to the Entity List can have the effect of strangling its access to supplies of U.S equipment, parts, or technology – even low-technology consumer goods that EAR99 items typically represent.
Criteria and Procedures for Addition to the Entity List
The standards for adding a foreign party to the Entity List are broad and elastic, giving the U.S. Government considerable discretion in determining whether to add a foreign party to the Entity List. Commerce Department regulations specify that entities – and “those acting on behalf of such entities” -- may be added “for which there is reasonable cause to believe, based on specific and articulable facts, that the entity has been involved, is involved, or poses a significant risk of being or becoming involved in activities that are contrary to the national security or foreign policy interests of the United States….”9 The term “contrary to the national security or foreign policy interests of the United States” is not elucidated, but “[a]n “illustrative list” in Commerce Department regulations contains the following “examples” of conduct qualifying for addition to the Entity List: