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Contractor Charged for Selling Chinese Tech
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A major theme in U.S. procurement policy in recent years has been a broad skepticism of — and sometimes outright hostility to — the inclusion of companies and technology from the People’s Republic of China in the U.S. defense industrial base.
One manifestation of this theme is the prohibition against delivering or utilizing certain covered telecommunications equipment and services by federal government contractors, a rule arising from Section 889 of the National Defense Authorization Act for fiscal year 2019.
While Section 889 has been a focal point for contract compliance efforts by contractors, a recent announcement from the U.S. Attorney’s Office for the District of New Jersey illustrates the government may be willing to use federal criminal statutes to enforce these types of prohibitions.
The statutory language of Section 889 and the implementing procurement regulations contain two related prohibitions against these covered telecommunications equipment and services, which includes all equipment or services produced and provided by Huawei Technologies Co. or ZTE Corp. and video surveillance and telecommunications equipment or services produced and provided by Hytera Communications Corp., Hangzhou Hikvision Digital Technology Co. or Dahua Technology Co. or any subsidiaries or affiliates of the five entities.
The first prohibition took effect on Aug. 13, 2019 and provides that “the head of an executive agency may not … procure or obtain or extend or renew a contract to procure or obtain any equipment, system or service that uses covered telecommunications equipment or services as a substantial or essential component of any system or as critical technology as part of any system.”
Effective on Aug. 13, 2020, this prohibition was extended to federal loan and grant funds and prohibits agencies from expending any such funds on covered telecommunications equipment or services. Because state and local governments regularly receive federal loans and grants, they are generally prohibited from using any of those funds to purchase covered telecommunications equipment or services. This prohibition on delivery to the government of covered equipment and services was viewed as the easier to implement of the two statutory requirements.
That is because the second part of the rule, which took effect on Aug. 13, 2020, prohibits government agencies from contracting with any “entity” that “uses” these “covered telecommunications equipment or services as a substantial or essential component of any system or as a critical technology of any system.”
This prohibition applies even if the use of the equipment or services is wholly unrelated to the delivery of products or services to a government customer, and this has pushed the defense industrial base to undertake a comprehensive review of its information technology systems to ensure equipment from these Chinese companies is identified and removed.
This prohibition on use has posed particular challenges in parts of the world where Chinese telecommunications technology may be ubiquitous and/or built into the local communications infrastructure.
Compliance with Section 889 typically has been viewed as a matter of compliance with contractual requirements and, potentially, a matter of contractor responsibility. Notably, Section 889 was part of the NDAA and dictates federal procurement policy but was not drafted to include any specific criminal penalty for non-compliance.
Hence it was notable when on Jan. 4, the U.S. Attorney’s Office announced that it has filed criminal wire fraud and false statement charges against the CEO of a company that is alleged to have knowingly sold certain surveillance and security cameras to prosecutors’ offices, sheriffs’ offices and police departments in the state of New Jersey.
The government’s complaint alleges that the CEO knew that state and local customers were subject to Section 889 prohibitions when expending certain funds used to buy cameras manufactured by Hangzhou Hikvision Digital Technology Co. and falsely represented to those customers that the cameras that he was selling were compliant with Section 889 requirements.
The complaint specifically notes that the CEO helped certain customers obtain federal funding to purchase products that he was selling and that approximately $15 million of the $35 million in cameras and equipment purchased by state and local government customers from the CEO’s company was federally funded.
The complaint further alleges that the CEO’s company sent wire transactions to an unnamed entity that was identified as one of the five entities or their affiliates that are defined within Section 889 as providers of covered telecommunications equipment. When purchasing cameras from the prohibited company, the CEO’s company allegedly would take steps to conceal the origins of the cameras, including by requesting that the branding of the cameras be removed. The CEO allegedly informed state and local customers that his company had previously sold these cameras to federal agencies when he had not.
The alleged facts paint a picture of particularly extreme and willful efforts to skirt the Section 889 requirements, which may have pushed the U.S. attorney to file criminal charges against this individual.
However, these charges also reflect that the U.S. government at large is increasingly focused on supply chain security, particularly as it relates to China and that the government may be willing to utilize criminal statutes to pursue egregious instances of non-compliance with supply chain security requirements. ND
Ryan Burnette is a special counsel, Susan B. Cassidy is a partner and Darby Rourick is an associate in the Washington, D.C., office of Covington and Burling LLP.
Topics: Global Defense Market
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