U.S. Executive Order on WeChat – implications for your business | Publikationen

14 August 2020 Reed Smith Client Alerts

Home Publikationen U.S. Executive Order on WeChat – implications for your business

On August 6, 2020, President Trump issued an Executive Order (EO) targeting WeChat which would prohibit related transactions to be identified by the U.S. Secretary of Commerce (Secretary of Commerce) with effect from September 20, 2020.

Autoren: Denise Jong Leigh T. Hansson

What happened?

On August 5, 2020, the U.S. Secretary of State, Michael R. Pompeo announced the “Clean Network Program” which aims to ban the so-called “untrusted” carriers, applications, mobile application stores, cloud service providers, operators of undersea cables connecting the United States and the global internet. As such, companies that are involved in these businesses, or entities that transact with or rely on vendors that might be impacted are advised to keep abreast of further developments and additional announcements from the U.S. Government regarding the scope of the sanctions in connection with the “Clean Network Program” to assess and plan for contingencies with respect to their business operations and cross-border communication between the United States and other parts of the world.

On August 6, 2020 and following the expansion of the Clean Network Program, President Trump issued EO 13943 of 2020 “Addressing the Threat Posed by WeChat, and Taking Additional Steps to Address the National Emergency With Respect to the Information and Communications Technology and Services Supply Chain”.

In the preamble to the EO, President Trump declared that the spread of WeChat, a messaging, social media and electronic payment mobile application of the Chinese company Tencent Holdings Ltd (Tencent), in the United States poses a threat to the national security, foreign policy and economy of the United States. The mobile application is considered to pose threats to U.S. national security interests as it automatically captures significant amounts of information from users which threatens to allow the Chinese Government access to personal and proprietary information of the users in the United States and reportedly censors content deemed to be politically sensitive, and which may be used for disinformation campaigns that benefit the Chinese Communist Party.

Pursuant to the EO, which goes into effect 45 days after issuance, i.e. on September 20, 2020, any transaction by any person or with respect to any property which is subject to the jurisdiction of the United States. with Tencent or its subsidiaries, as identified by the Secretary of Commerce pursuant to the EO, shall be prohibited except as provided otherwise in statues or pursuant to the EO. The EO specifically refers to any transaction “that is related to WeChat”, but at the moment it is not clear if that would extend to transactions with Tencent.

The EO does not appear to contemplate prohibiting all dealings with the designated entities but, rather, contemplate sanctions applicable to specific transactions. These sanctions, to be determined by the Secretary of Commerce, may range from prohibiting payment processing or financing involving WeChat to the provision of the application in application stores or the installation or use of the application by U.S. persons. While it is difficult to predict what transactions could become subject to sanctions, considering the preamble to the EO, transactions which contribute to risks of national security or foreign policy are likely to be the focus of restrictions to be imposed on or after September 20, 2020.

It is noteworthy that the EO delegates the authority to identify prohibited transactions to the Secretary of Commerce instead of the U.S. Secretary of the Treasury or the U.S. Secretary of State, who are typically responsible for administering financial and commercial sanctions based on the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.). The delegation to the U.S. Department of Commerce - particularly if the Bureau of Industry and Security, which is responsible for administering the Export Administration Registrations (EAR) is involved - gives rise to the possibility that restrictions may take the form of limiting exports of items subject to the EAR (U.S.-origin goods, software and technology, and some foreign-produced items containing or derived from U.S. technology) by adding Tencent and/or its subsidiaries to the Entity List, which identifies foreign parties that are prohibited from receiving some or all items subject to the EAR unless the exporter has obtained a license or there is a waiver or other general license. This is the approach the U.S. Government took with Huawei when Huawei and its overseas-related affiliates were added to the Entity List in 2019.

How does the EO affect your business?

Pursuant to the EO, the Secretary of Commerce may identify and prohibit “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States”:

“any transaction that is related to WeChat by any person…” – Transactions subject to the jurisdiction of the United States and identified by the Secretary of Commerce are prohibited under the EO, regardless of whether the contracting party is a U.S. person or entity or not.
“with respect to any property, subject to the jurisdiction of the United States” – The authorization to prohibit transactions involving property subject to U.S. jurisdiction enables the Commerce Department to adopt an expansive approach, e.g., by prohibiting transactions by non-U.S. entities that involve U.S.-based services. The Commerce Department may decide to issue general licenses for companies to wind down certain operations as often happens.
While at the moment it is not clear the types of transactions prohibited and form of restrictions contemplated under the EO, businesses should be aware that the restrictions may apply to transactions by both U.S. entities and foreign branches/subsidiaries of U.S. companies and other non-U.S. entities where such transactions involve the sanctioned entities and U.S.-based technology, banking or other services.

Assess your business risk in light of the EO – Do you have business dealings with the sanctioned entities, especially transactions which may be considered to contribute to risks of national security or foreign policy? Do you have any plans to conduct business dealings with the sanctioned entities, and if yes, how would they be affected if the potential transaction(s) are subsequently identified as prohibited transactions pursuant to the EO?

Contractual comfort – Do you have clauses in your contracts where the counterparty represents and warrants that it is not a sanctioned person or engaging in activities which could be the subject of sanctions? Do you have clauses in subsisting contracts with the sanctioned entities which would entitle you to suspend performance of your obligations or terminate the contract without liability in the event the counterparty becomes subject to such sanctions?

Seek updated legal advice – As described in the preambles to the EO, countries such as Australia and India have begun to restrict or ban the use of WeChat. It is not clear as of today if Australia and/or India will take further actions in respect of WeChat, and businesses with operations or dealings in those countries should monitor and keep track of any announcements made by the relevant government authorities and seek legal advice as appropriate.

Recommendation for businesses whose employees use WeChat – Until further detail is available, it is not obvious if the requirements would be so extreme as to require U.S. persons to uninstall the relevant application. This makes it difficult to plan ahead given that it is also currently unknown if there would be grace periods in respect of any compliance protocols.

In Asia, it is not uncommon for individuals to use two mobile phones, one provided by the employer for business purposes and the other a personal device. Whilst we do not have guidance for individuals at this time, we would suggest that, as a contingency plan for U.S. entities and foreign branches/subsidiaries of U.S. companies, such corporations should consider making preparations to uninstall the application from mobile phones issued by businesses to their employees so that, if required, implementation can be on an expedited basis. It may be that the immediate future will look a little like the past with corporations restricting the use of social messaging platforms on personal devices for business correspondence and requiring their employees to go back to business by email through corporate accounts. There are of course alternative messaging applications but given the rapid escalation of measures between the United States and China, it is difficult to know which Chinese applications would be at risk of sanctions and which U.S. applications may be at risk of a retaliatory measure by China. Global corporations throughout the world would need to continue to monitor this.

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