SMIC, 60 More Entities Added to the Entity List to Counter China’s ‘Military-Civil Fusion’ Efforts, Alleged Human Rights Abuses and Contested Maritime Claims in the South China Sea

On December 18, 2020, the United States Department of Commerce’s Bureau of Industry and Security (BIS) announced the designation of Semiconductor Manufacturing International Corporation (SMIC), one of the top chip makers in China, and 60 other entities to the Entity List. The designations bring additional licensing requirements and restrictions to U.S. and non-U.S. companies that sell to or otherwise transact business with these entities. The Federal Register notice enacting this announcement is scheduled for publication on December 22, 2020.

Citing the U.S. government’s concerns about SMIC’s perceived ties to China’s government and risks transferring imported U.S. technology to the Chinese military, this announcement joins the series of actions (such as one previously discussed here) that the Commerce Department has taken throughout this year to counter the Chinese government’s “military-civil fusion” efforts and alleged human rights abuses. Additionally, several entities designated have allegedly supported the militarization and maritime claims in the South China Sea, which the United States considers to be an “unprecedented threat” to the shared interests that United States have with its regional allies in terms of offshore resources and geopolitical advantages.

Based on the advance notice of the Federal Register publication, the designations took effect on December 18, 2020. Dealings with these entities involving items subject to the Export Administration Regulations (EAR) (including EAR99 items) are prohibited unless specifically authorized by a BIS license. License applications involving SMIC and any items “uniquely required to produce semiconductors at advanced technology nodes — 10 nanometers or below” will be subject to a presumption of denial. A “presumption of denial” means a license application is likely to be denied unless a strong case can be made as to why a transaction with a listed entity will not harm or impair U.S. national security.

Violations of the Entity List or other EAR restrictions can result in severe civil and criminal penalties, including civil penalties per transaction of more than $300,000 or twice the value of the transaction (whichever is higher) and criminal penalties of up to $1 million and 20 years’ imprisonment. Entities suspected of violating these restrictions can also have their own export privileges revoked, can be debarred from participation in U.S. government contracts and may themselves be added to the Entity List or other denied party lists.

This latest action is another reminder that the current U.S. administration has not slowed down its efforts to impose further export control and national security restrictions involving Chinese companies. In weeks leading up to this designation, SMIC told Reuters it continues to “engage constructively” with the U.S. government and publicly stated that its products are for civilian use only. The Chinese Foreign Ministry also officially stated, as commentary to the United States’ previous public statement about SMIC and other Chinese companies, that “China firmly opposes the United States’ actions that politicize private business partnerships in China” and criticized the United States’ “imposition of sanctions and discriminatory restrictions through the abusive use of claims of national security concerns.”

It remains to be seen whether, and to what extent, the incoming Biden administration will change course in the new year to balance the potential threat posed in various aspects by a small percentage of bad actors against the national and economic interests of allowing and enabling business enterprises in general to thrive in the context of U.S.-China relationship. For more information on these designations or exports and sanctions requirements in general, please do not hesitate to contact Nate Bolin, Mollie Sitkowski, Qiusi Newcom, or any other member of Faegre Drinker’s Customs and International Trade Team.