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Commerce Department’s New ICTS Rule Raises Additional Considerations for Cross-Border Transactions

On January 19, 2021, the Commerce Department issued an interim final rule to implement the Executive Order on Securing the Information and Communications Technology and Services Supply Chain (E.O. 13873), which was issued on May 15, 2019. The interim rule comes after the November 2019 proposed rule implementing E.O. 13873.

Originally posted on Pillsbury Global Law Blog

The interim final rule empowers the Commerce Department to conduct CFIUS-like reviews of transactions involving the acquisition, importation, transfer, installation, dealing in, or use of “information and communications technology or services” (“ICTS Transactions”) between U.S. persons and certain “foreign adversaries,” across six defined categories of products. These reviews may be self-initiated by the Commerce Department or requested by parties to a transaction and add a significant new consideration for applicable mergers and acquisitions, sourcing and managed service arrangements, cross-border investment and other commercial arrangements that have touchpoints with China, Hong Kong, Russia and several sanctioned jurisdictions.

The impact is immediate, enabling the Commerce Department to review ICTS Transactions initiated, pending, or completed on or after January 19, 2021.

 

Who is Considered a “Foreign Adversary”

The interim final rule maintains the definition for “foreign adversaries” in the proposed rule of E.O. 13783, which means:

any foreign government or non-government person determined by the Secretary of Commerce (the “Secretary”) to have engaged in a long-term pattern or serious instances of conduct significantly adverse to national security of the U.S. or security and safety of U.S. persons for the purposes of E.O. 13783.”

The interim final rule initially defines “foreign adversaries” to include the following foreign governments and non-government persons:

  1. China, including Hong Kong;
  2. Cuba;
  3. Iran;
  4. North Korea;
  5. Russia; and
  6. the Maduro Regime in Venezuela.

The scope of prohibited ICTS Transactions include transactions between U.S. persons and a “person owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary.” The definition of this category of persons includes the following:

  1. Any person, wherever located, who acts as an agent, representative, employee, or any other capacity at the order, request, direction, or control of a foreign adversary;
  2. A person whose activities are directly or indirectly supervised, directed, controlled, financed or subsidized in whole or in majority part by a foreign adversary;
  3. Any person wherever located who is a citizen or resident of a nation-state controlled by a foreign adversary;
  4. Any corporation, partnership, association, or organization organized under the laws of a nation-state controlled by a foreign adversary; or
  5. Any corporation, partnership, association, or organization, regardless of where it is organized, that is owned or controlled by a foreign adversary.

The interim final rule broadly captures the aforementioned category of persons regardless of whether they are owned or controlled by a foreign government. The Commerce Department will periodically consult with appropriate agency heads and may add to, subtract from, supplement, or otherwise amend the list. Subsequent changes will be announced in the Federal Register.

ICTS Transactions Impacted by the Rule

Consistent with the proposed rule, the scope of impacted ICTS transactions remains broad across sectors with no categorical exemptions of specific industries or geographic locations.

Transactions involving certain technologies, hardware, or software are considered covered ICTS Transactions, including the following:

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