Biden Administration Examining Public Feedback on Provisional ICTS Regulation

The U.S. Department of Commerce has published an interim final rule (IFR) to implement Executive Order 13873, which aims to secure the information and communications technology and services supply chain. The rule, effective from March 22, 2021, seeks industry comments by the same date to inform a potential final rule.

The IFR defines ICTS as information and communications technology and services, including cloud and network management services, landline and wireless networks, networked devices, and software that enables those devices and services. It covers any acquisition, importation, transfer, installation, dealing in, or use of any ICTS, including ongoing activities such as managed services, data transmission, software updates, repairs, or the platforming or data hosting of applications for consumer download.

The IFR designates China (including Hong Kong), Cuba, Iran, North Korea, Russia, and Venezuela's Maduro regime as foreign adversaries. Under the IFR, a covered transaction is only applicable if it is conducted by any person subject to the jurisdiction of the United States or involves property subject to the jurisdiction of the United States, involves any property in which any foreign country or a national thereof has an interest, is initiated, pending, or completed on or after January 19, 2021, and involves one of the six enumerated ICTS categories.

The IFR does not generally capture common carriers transporting ICTS goods, unless they know, or should have known, they were providing transportation services related to prohibited transactions. It also exempts ICTS transactions that the Committee on Foreign Investment in the United States (CFIUS) is actively reviewing or has already reviewed.

The IFR creates a new defined term 'ICTS transaction,' and it establishes a pre-clearance licensing mechanism for potentially covered transactions. Parties will have 30 days to respond to the initial written determination before the Secretary makes a final determination as to whether the ICTS transaction is: (1) prohibited; (2) not prohibited; or (3) permitted pursuant to the adoption of negotiated mitigation measures.

Parties to a transaction under review will only be informed that the Secretary is reviewing their transaction and that it should be prohibited or requires mitigation when they are provided copies of Commerce's initial written determination explaining its rationale. The Secretary's assessment will be guided by considerations such as the market share and technical capabilities of the ICTS product or service at issue, the degree of influence the foreign adversary has over the design, manufacture, and supply of the ICTS product or service, and the nature of the vulnerability and degree of threat implicated by the ICTS transaction.

The IFR does not apply to the acquisition of ICTS items by a U.S. person as a party to a transaction authorized under a 'U.S. government-industrial security program.' Commerce is developing the published procedures for the licensing mechanism, which will establish criteria for seeking a license, including that license applications will be reviewed within 120 days or the license will be deemed granted.

It is important to note that the designation of China as a 'foreign adversary' under these new regulations may be subject to changes or reviews in the future, especially under the administration of Donald Trump beginning in 2025. Parties will not create a negative inference or unfavorable presumption with respect to a transaction for not seeking pre-approval.

In summary, the U.S. Commerce Department's interim final rule aims to secure the information and communications technology and services supply chain by identifying, mitigating, prohibiting, or unwinding covered transactions involving foreign adversaries that pose an undue or unacceptable risk to U.S. national security. The rule establishes a pre-clearance licensing mechanism and provides criteria for seeking a license, while also exempting certain transactions from its scope.