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January 6, 2020

Stroock Special Bulletin

By: Chris Griner, Shannon Reaves, Gregory Jaeger, Christopher R. Brewster, Erin Bruce Iacobucci

A new year and a new decade are upon us, and new regulations governing transactions with national security implications will soon be in place. U.S. government reviews of foreign investments, facility security clearances, export controls and anti-corruption compliance are among the areas that will be affected by these changes.

Department of the Treasury (Treasury):

We will see notice of proposed rules for the Committee on Foreign Investment in the United States (CFIUS or the Committee) filing fee requirements for transactions notified to CFIUS likely in the next few weeks.  The authority to impose filing fees was a feature of the Foreign Investment Risk Review Modernization Act of 2019 (FIRRMA).  Treasury  will use filing fee revenue to address Government Accountability Office findings that CFIUS lacked adequate resources to deal with the volume of notified transactions.  FIRRMA authorized the Committee to charge a filing fee up to 1 percent of the value of the notified transaction, or $300,000, whichever is less, to be adjusted annually.[1]

We will see a published list of excepted foreign states, a key part of new regulations providing exemptions for certain investors from some of CFIUS’s expanded authorities under FIRRMA.  While FIRRMA does not identify any specific countries as eligible for the exemption, it authorizes CFIUS to discriminate among foreign investors based upon country of origin.  The proposed regulations issued on September 17, 2019,[2] state that an initial list of countries will be identified prior to the proposed rules being fully implemented.  Additional countries will be considered on a country-by-country basis following the implementation of FIRRMA.

We will see the final draft of the regulations implementing FIRRMA within the next month.  FIRRMA specifies that these regulations must be in place by February 13, 2020.  We do not expect to see many changes or revisions from the proposed rules in the final draft.[3]

Department of Commerce (Commerce):

On January 6, 2020, Commerce issued an interim final rule controlling the export of artificial intelligence software specially designed to automate the analysis of geospatial imagery.  The interim final rule requires a license for all destinations except Canada and becomes effective today: January 6, 2020.[4]  Comments to the interim final rule are due March 6, 2020.  The license requirement is temporary and must be renewed each year.  Commerce expects to seek multilateral controls for the same technology within the year.  These new controls are part of a larger effort required by the Export Control Reform Act of 2018 (ECRA) for Commerce, in consultation with the Departments of Defense, Energy and State, to identify and control “emerging and foundational technology.”  These technology definitions are important not only to export controls, but also to expanded CFIUS authority in these areas.  The interim rule follows the publication of an advanced notice on proposed rulemaking on November 19, 2018, listing 14 broad technology areas it was reviewing as potential “emerging” technology categories (“Export ANPRM”).[5]  We expect Commerce to continue rolling out new controls for other technology categories listed in the Export ANPRM throughout the next few months.

On November 27, 2019, Commerce released proposed rules implementing a May 2019 Executive Order requiring Commerce, in consultation with the Department of Defense, Department of Homeland Security, United States Trade Representative, Attorney General, Office of Director of National Intelligence and the Federal Communications Commission, to issue regulations pertaining to new authorities to block or suspend the use, within the jurisdiction of the United States, of certain telecommunications and information security technology and services connected with a “foreign adversary.”  The new rules are likely, at least in part, a continuation of the actions to date by the Administration and Congress to block the equipment of specific Chinese entities from being installed in the United States.[6]  The new rules, however, decline to name any companies or name any specific “foreign adversary” potentially expanding the review authorities to other companies in China and countries other than China.[7]

Department of State (State):

On December 26, 2019, State issued an interim final rule effective March 25, 2020, on new definitions concerning space-related activities and communications, and activities excluded under the International Traffic in Arms Regulations (ITAR).[8]  The interim rule establishes a new definition of ‘‘activities that are not exports, reexports, retransfers, or temporary imports’’ and includes within that definition launching items into space, providing technical data to U.S. persons within the United States or within a single country abroad, and moving a defense article between states, possessions and territories of the United States.  The new definitions clarify that electronic transmission and storage of unclassified technical data via foreign communications infrastructure that is effectively encrypted using end-to-end encryption does not constitute an export requiring State’s approval.

State also added a new section under the ITAR to address the provision of “access information” to an unauthorized foreign person.  The new section defines access information as information that allows an unauthorized foreign person access to encrypted technical data in an unencrypted form, such as through decryption keys, network access codes, or passwords.  The new section further provides that an authorization is required to release technical data through access information to the same extent that an authorization is required to export the technical data when it is unsecured by encryption.

Department of Defense (DoD):

On December 20, 2019, President Trump signed into law the National Defense Authorization Act for Fiscal Year 2020.  Section 847 requires the DoD to update its process for assessing and mitigating risks related to foreign ownership, control or influence (FOCI).  This updated assessment process may require new and expanded disclosures of foreign beneficial owners of certain contractors and subcontractors performing on unclassified contracts.  Potentially, the new process could extend to certain contractors and subcontractors the requirement for FOCI mitigation controls that are  traditionally reserved for contractors and subcontractors performing on classified contracts.  Unclassified contracts that could be covered by these new rules include DoD contracts for non-commercial products greater than $5 million, research and development contracts, and those designated by a senior Department official as warranting such protections for reasons related to national security, cybersecurity or protection of sensitive personal data.[9]

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If you have any questions, please do not hesitate to contact:

Chris Griner

Shannon Reaves

Gregory Jaeger

Tatiana O. Sullivan

Christopher R. Brewster

Erin Bruce Iacobucci

[1] For more information on FIRRMA, see Stroock Special Bulletin, “CFIUS Reform Flies, But With Clipped Wings,” (July 26, 2018), available at:  https://www.stroock.com/news-and-insights/cfius-reform-flies-but-with-clipped-wings/.

[2] See Stroock Special Bulletin, “Long-awaited CFIUS Regulations Published for Comment,” (Sept. 18, 2019), available at: https://www.stroock.com/news-and-insights/long-awaited-cfius-regulations-published-for-comment/.

[3] Please see the following for both sets of proposed regulations as published: Department of the Treasury, Office of Investment Security,  Proposed Rule, 31 CFR Part 800, “Provisions Pertaining to Certain Investments in the United States by Foreign Persons,” 84 Fed. Reg. 50174 (09/24/2019), available at: https://www.federalregister.gov/documents/2019/09/24/2019-20099/provisions-pertaining-to-certain-investments-in-the-united-states-by-foreign-persons; see also Department of the Treasury Office of Investment Security, Proposed Rule, 31 CFR Part 802, “Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States,” 84 Fed. Reg. 50214 (09/24/2019), available at: https://www.govinfo.gov/content/pkg/FR-2019-09-24/pdf/2019-20100.pdf.

[4] See Department of Commerce, Bureau of Industry and Security, Interim Final Rule, 15 CFR 774, “Addition of Software Specially Designed To Automate the Analysis of Geospatial Imagery to the Export Control Classification Number 0Y521 Series,” 85 Fed. Reg. 459 (01/06/2020), available at: https://www.govinfo.gov/content/pkg/FR-2020-01-06/pdf/2019-27649.pdf.

[5] Department of Commerce, Bureau of Industry and Security, Advance notice of proposed rulemaking (ANPRM), 15 CFR Part 744, “Review of Controls for Certain Emerging Technologies,” 83 Fed. Reg. 58201 (11/19/2018), available at: https://www.govinfo.gov/content/pkg/FR-2018-11-19/pdf/2018-25221.pdf.

[6] See John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“NDAA”) (Pub. L. 115–232), Section 889(a)(1)(A), available at: https://www.congress.gov/115/plaws/publ232/PLAW-115publ232.pdf.

[7] To review the complete text of the proposed rules, please see the following: Department of Commerce, Proposed Rule, 15 CFR Part 7, “Securing the Information and Communications Technology and Services Supply Chain,” 84 Fed. Reg. 65316 (11/27/2019), available at: https://www.govinfo.gov/content/pkg/FR-2019-11-27/pdf/2019-25554.pdf.

[8] See Department of State,  Interim Final Rule, 22 CFR Part 120, “International Traffic in Arms Regulations: Creation of Definition of Activities That Are Not Exports, Reexports, Retransfers, or Temporary Imports; Creation of Definition of Access Information; Revisions to Definitions of Export, Reexport, Retransfer, Temporary Import, and Release,” 84 Fed. Reg. 70887 (12/26/2019), available at: https://www.pmddtc.state.gov/sys_attachment.do?sysparm_referring_url=tear_off&view=true&sys_id=1d508454db82c8505c3070808c961968.  The deadline for comments from interested parties is January 27, 2020.

[9] See National Defense Authorization Act for Fiscal Year 2020, Pub. L. No. 116-92, at Sec. 847, “Mitigating risks related to foreign ownership, control, or  influence of Department of Defense contractors or subcontractors,” available at: https://www.congress.gov/116/bills/s1790/BILLS-116s1790enr.pdf.