Since 2018 Huawei has taken centre stage in global headlines. The multifaceted actions which have arisen include alleged sanctions, export controls and intellectual property law violations as well as cyber security risks. In this newsletter, our guest writer, Lauren Murton[1], summarises the major events to date along with how these may impact your business.
With the challenges brought by COVID-19, many are reconsidering their ways of working and looking at digital solutions to adapt and future proof their new working environment. Murton looks at some easy and practical tools which could help you transform your compliance, legal or risk functions: artificial intelligence chatbots, screening tools and data analytics.
Huawei
Since 2018 Huawei has taken centre stage in global headlines. The multifaceted actions which have arisen include alleged sanctions, export controls and intellectual property law violations as well as cybersecurity risks. With no signs of stopping, the below article summarises the major events to date along with how these may have impacted your business.
- Timeline of Key Issues
- Arrest of Huawei’s Chief Financial Officer
Many look back to December 2018 as the starting point of what has become a series of highly complex and interconnected global regulatory developments with Huawei at the centre. Huawei’s Chief Financial Officer and daughter of Huawei’s Chief Executive Officer, Ms Meng Wanzhou were arrested in Canada pursuant to a provisional arrest warrant. The US government requested that Ms Meng be extradited to the US to be prosecuted for her role as a Director of a company called Skycom which it is alleged operated illegally in breach of US sanctions and export control restrictions against Iran and North Korea. To date, Ms Meng remains in Canada and despite seeming lack of progress in her trial, as detailed below the various actions against Huawei continue undeterred.
- Sanctions, Export Control and Intellectual Property US Indictments Against Huawei
In January 2019, several US grand jury indictments were unsealed revealing the US is investigating Huawei in relation to racketeering conspiracy; conspiracy to steal trade secrets; financial fraud; money laundering; conspiracy to defraud the United States; obstruction of justice; and sanctions violations.
Specifically, in relation to the sanctions and export issues, it is alleged that Huawei, acting through a company it controls, Skycom, breached US sanctions and export laws against Iran and North Korea. Amongst the counts Huawei is charged with repeatedly making misrepresentations to its US banks which unknowingly processed transactions related to Iran through the United States. One bank cleared more than $100 million worth of Skycom-related transactions through the United States between 2010 and 2014. Furthermore, it is alleged that Huawei and its principals repeatedly lied to U.S. government authorities including to US Congress and the FBI about its business operations in Iran and North Korea which were not in compliance with US sanctions and export restrictions.
In February 2020, there was a further escalation with a criminal indictment which superseded the above mentioned and added additional charges with respect to Huawei’s alleged conspiracy to steal trade secrets. A copy of this indictment is available here.
Huawei has repeatedly denied these charges (see section below on Huawei’s response) and in relation to the intellectual property allegations has stated that these issues have already been resolved in civil suits.
What does it mean for your business? These cases remain open. It is possible that if Huawei is found guilty of the offences, the US takes further measures against Huawei including but not limited to the imposition of a fine and monitor, criminal conviction for individuals, placing Huawei on the Denied Parties List (similar to ZTE) or even subjecting Huawei to OFAC sanctions. It is important to monitor for updates to these ongoing investigations as further restrictions could be imposed on Huawei.
- US Export Ban Against 115 Huawei Companies
On 15 May 2019, 69 Huawei entities were placed on the US Entity List by the US Bureau of Industry & Security. On 19 August 2019, another 46 Huawei entities were added to the US Entity List. Interestingly, Huawei’s companies registered in the U.S. have not yet been placed on the U.S. Entity List.
What does it mean for your business? The listing of Huawei was ground breaking in that it was the first time the US placed such a large international company on an entity list. The practical impact of this has broadly been that companies (both US and non-US) cannot send US products to Huawei entity listed companies. This has meant significant upheaval to companies who sold US products to Huawei (e.g. Huawei’s suppliers) and to the repair and return operations for Huawei’s customers.
To mitigate the risk of mass disruption notably to consumers, the US has granted temporary general licences to allow for critical support and maintenance to Huawei. These licences have been amended and renewed four times since May 2019. The US has currently opened a comments period valid until 22 April 2020 to review both this approach as well as the substantive licence drafting. Additionally, some companies have been granted specific individual export licences to continue business operations with Huawei. Neither the names of companies which have been granted these licences nor the approvals thereunder have been made public.
- Huawei’s Counter
Huawei’s response to US regulatory scrutiny has been remarkably different from that of other technology companies such as ZTE who settled with the US for a total of $2.29 billion between 2017 and 2018. Huawei’s CEO has issued various press releases denying any wrongdoing by Huawei or its executives. In fact, Huawei has filed various lawsuits against various US regulators. For example, in March 2019, Huawei filed a lawsuit against the US government in relation to a US law prohibiting Huawei from selling its equipment to US federal agencies. The presiding judge rejected Huawei’s claims that this US law is unconstitutional.
Huawei has also restructured its business model to respond to the entity listing of many of its key operating companies. For example, Huawei sold its majority shareholding in its global submarine cable division, which is the key infrastructure underpinning the internet network. However, given Huawei’s key commercial successes are in Asia, the company has managed to remain relatively financially stable despite the various US actions.
- China’s Response
On 31 May 2019, China’s Ministry of Commerce (“MOFCOM“) announced that it would introduce its own list called the ‘Unreliable Entities List’. Companies which demonstrated business activities contrary to Chinese interests could be targeted under this legal mechanism. However, to date China has not placed any company on this list.
Furthermore, China has announced that it will make significant changes to its own Export Law which will mirror some of the broader and more stringent provisions of the US export legislation. The public consultation period to comment upon this draft legislation ended on 26 January 2020. The date of publication of the final version is currently unclear.
- Investigations Into Companies Doing Business With Huawei
The U.S. Department of Justice recently commenced an investigation into US semiconductor company, Alpha and Omega given concerns with this company’s compliance with export control regulations relating to its business transactions with Huawei. The company had been shipping its products indirectly to Huawei through distributors. The Department of Commerce has requested Alpha and Omega temporarily suspend shipments of its products to Huawei.
How does this impact your business? This is another landmark decision by the U.S. Departments of Commerce and Justice. In the case of ZTE, no companies were subjected to review or fine for alleged failure to comply with the U.S. denial order imposed on ZTE. From this case, it is clear that there are risks for companies which seek to continue doing business with Huawei. Companies should carefully monitor their compliance with export and sanction regulations in relation to transactions with Huawei.
- US Chinese Trade Talks- The Solution?
Huawei itself has referred to itself and its executives being ‘bargaining chips’ in the US Chinese trade conflict. However, on 15 January 2020, phase one of the agreement was finally concluded – more information on this is available here. Nevertheless, Huawei was not considered as part of the negotiations. Continued US scrutiny on Huawei has proven that the various issues this company continues to face will unlikely all be resolved by way of US Chinese trade agreements.
- Global Cybersecurity Concerns
Throughout 2019 to date, governments across the globe have been debating the cybersecurity implications of working with Huawei. As a Chinese company which receives significant funding from the Chinese government, concerns have been raised in relation to Huawei’s independence and security protocols.
In the US, a number of actions have been taken from (i) prohibitions on US government departments from procuring Huawei or ZTE equipment and (ii) prohibitions on US companies from using US subsidies and grants to purchase Huawei or ZTE equipment to (iii) a draft bill (National Defence Authorization Act) which would prohibit the sharing of US intelligence with countries which permit operation of Huawei 5G telecommunications technology.
New Zealand, Japan and Australia have all taken the decision to ban Huawei from supplying network equipment for the development of 5G in these countries.
On 14 May 2019, President Trump signed a new Executive Order on Securing the Information and Communication Technology and Services Supply Chain. This executive order seeks to prohibit companies from engaging in certain transactions with U.S. foreign adversaries involving:
- any property in which a foreign country or a national thereof has any interest; and/or
- any information and communication technology and services (“ICTS”) designed, developed, manufactured, or supplied by entities owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and/or
- any undue risk of specified adverse consequences, or an unacceptable risk to U.S. national security or the safety of U.S. persons.
What does it mean for your business? Draft rules to implement the principles of this Executive Order were published on 26 November 2019 and there was a public consultation period to submit comments and suggestions which ended on 10 January 2020. Industry comments were not publicly disclosed however many highlighted that the broad drafting could mean that even non-US companies by virtue of the US persons working within their multinational organisations could find themselves unintentionally impacted. You can find the latest draft of the rules here. Although, there is no final legally effective version, and notably no official list of U.S. foreign adversaries at this stage, these regulatory developments should be monitored.
- Regulatory Watch: What does the future hold?
In recent months, there have been reports of more US action against Huawei as summarised below.
- Further Export Restrictions
The US Department of Commerce is considering making changes to US export rules on de minimis[2] and foreign direct[3] products. What does this mean for your business? These changes will mean that more products become subject to US jurisdiction and as a result cannot be sent to Huawei. This is of particular concern to the semiconductor industry which provides critical chipset components to Huawei for network equipment and mobile phones.
- Sanctions on Huawei
US bipartisan lawmakers have drafted a bill called the Network Act that would add Huawei to the Treasury Department’s Specially Designated Nationals list (the “OFAC SDN list“). The SDN list is a sanctions list and the impact of a listing could be very significant due to the financial restrictions imposed on banks which would in turn heavily restrict payments to and from Huawei. More information on the draft act is available here. What does it mean for your business? The bill is still only in draft and is not yet legally effective. We will continue to monitor and share updates as the situation evolves.
Making your Compliance Programme More Digital
With the challenges brought by COVID-19, many are reconsidering their ways of working and looking at digital solutions to adapt and future proof their new working environment. Below are some easy, practical and highly effective tools which could help you transform your compliance, legal or risk functions.
Artificial Intelligence Chatbots
Do you receive a large volume of emails asking where to find policy documents, for basic definitions or even which member of your team to contact for a particular query? Chatbot technology can help cut out these frequently asked questions to save your time to focus on the more difficult cases which could never be answered by a chatbot.
Chatbots work using an algorithm of matched questions and answers. This means that you can ‘teach’ your chatbot which answers should appear to your frequently asked questions. This also means you can ensure your chatbot answers ‘ask the experts’ when someone asks one of those complicated queries. The development of your team’s own chatbot can be a surprisingly straightforward process with a wide range of options available on the market.
Screening Tools
If you have not already purchased a screening tool, you may find it lifechanging. Amongst the numerous benefits of subscribing to a screening tool, the key advantages include:
- Processing Large Volumes of Data in one go: If you have a significant volume of third parties, you know how much time you may be spending checking each company one by one. Uploading batches of data will drastically reduce your workload.
- Screening while you sleep: Most screening providers offer the option to have automated renewed screening checks. This means once you have input your supplier in the system, the tool can automatically check on an ongoing basis for updates. This provides reassurance that your third-party risk has not changed without your knowledge.
Data Analytics
With both internal and external reporting requirements becoming increasingly more demanding, it can be a full-time job to create the perfect report. The digital solution is data analytics. Using technological advancements in big data and analytics, you can find yourself looking at an overview of key statistics, flagged outliers and comparative trends over time. Once you have an automated dashboard displaying your training numbers, screening alerts and licence applications you will never look back.
Is the Compliance Officer in danger of being replaced by a robot? The answer is no. However, it is definitely possible to improve productivity and efficiency by harnessing technology to save you both time and potentially long-term costs as well. Still not convinced? Leveraging digital technology in the legal world can be challenging but the important thing is finding the tool that will work best in your organisation.
[1] Lauren Murton (Global Trade Manager for Vodafone HQ, based in UK) is an international legal expert specialised in trade law, financial crime, litigation, commercial law, regulatory compliance and governmental policy.
[2] Only products which are subject to the US Export Administration Regulations fall under US jurisdiction. De minimis refers to a minimum amount of US content required for a product to be considered subject to US jurisdiction. For the majority of telecommunication and electronic products to be used in most jurisdictions this threshold is 25%.
[3] The Foreign Direct Product Rule states that if a US tool or technology is subject to a written requirement from the Bureau of Industry and Security and it produces a foreign product, that foreign product is also subject to US jurisdiction.