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April 29, 2020

Re-Export Risks for Canadian Companies Doing Business With Huawei

On May 16, 2019, pursuant to the Final Rule, the Bureau of Industry and Security (BIS) amended the Export Administration Regulations (EAR)1  by adding Huawei Technologies Co., Ltd. and 68 non-US affiliates, most notably Huawei Technologies Canada Co., Ltd. (collectively, Huawei) to Supplement No. 4 to part 744 (the Entity List).2  Under § 744.11(b), persons are added to the Entity List if there is reasonable cause to believe, based on specific and articulable facts, that the person 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.3

Significantly, the BIS imposed a license requirement on all items subject to the EAR and a license review policy of presumption of denial for all license applications relating to exports, reexports, or transfers (in-country) to Huawei. Additionally, no license exceptions are available for exports, reexports, or transfers (in-country) to Huawei. Therefore, any exports, reexports, or transfers (in-country) of any items subject to the EAR to Huawei requires a license. Under the Export Control Reform Act of 2018, failure to obtain a license when required by applicable EAR regulations constitutes a violation, and violators may be subject to both criminal and civil penalties.4

Pursuant to 15 C.F.R. § 734.14, a reexport means, in pertinent part, (i) an actual shipment or transmission of an item subject to the EAR from one foreign country to another foreign country, including the sending or taking of an item to or from such countries in any manner; and (ii) releasing or otherwise transferring technology or source code subject the EAR to a foreign person of a country other than the foreign country where the release or transfer takes place (a deemed reexport).5

Additionally, technology and software are released through:

  • Visual or other inspection by a foreign person of items that reveal technology or source code subject to the EAR to a foreign person
  • Oral or written exchanges with a foreign person of technology or source code in the United States or abroad6  

Further, any act causing the release of technology, through the use of access information or otherwise, to yourself or another person requires an authorization to the same extent an authorization would be required to export or reexport such technology or software to that person.7

The Final Rule presents a unique risk for Canadian companies or universities who utilize US-origin items or technology that may be subject to the EAR (EAR Technology) and simultaneously do business with Huawei. Specifically, Canadian companies risk violating the EAR by reexporting EAR Technology to Huawei. For instance, if EAR Technology is viewed or inspected and communicated via oral or written exchanges to Huawei, this constitutes a release of EAR Technology, thereby violating the EAR. Further, Canadian companies allowing Huawei representatives to utilize EAR Technology received from their US counterparties as part of a collaboration between the Canadian company and Huawei also constitutes a transfer (in-country). This scenario is especially relevant in a university setting where a Canadian university and Huawei are engaged in a joint research collaboration. Again, this would constitute a violation of the EAR absent a license from the BIS or an exception within the EAR. 

The penalties for violating the EAR are serious and costly. Apart from unquantified reputational and other harm, violations of the EAR are subject to both criminal and administrative penalties. Criminal penalties can include up to 20 years of imprisonment and up to $1 million USD in fines per violation or both. Administrative monetary penalties can reach up to $300,000 USD per violation or twice the value of the transaction, whichever is greater. It is important to note that these are maximum penalties absent any mitigating factors.

It is paramount for Canadian companies and universities doing business with Huawei to ensure that they are not violating the EAR or any other US export control laws. 

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1 15 C.F.R. subchapter C, parts §§ 730-774: The Code of Federal Regulations (C.F.R.) is the codification of the general and permanent rules and regulations (sometimes called administrative law) published in the federal register by the executive departments and agencies of the federal government of the United States.
2 Supplement No. 4 to 15 C.F.R. § 744.
3 15 C.F.R. § 744.11(b).
4 50 U.S.C. §§ 4801-4852.
5 15 C.F.R. § 734.14.
6 15 C.F.R. § 734.15.
7 Id.
 

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