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Key Takeaways from the Section 889 Part B Regulations Banning Chinese Telecommunications Equipment from Contractor Systems

by Eleanor M. Ross

On July 14, new acquisition regulations implementing Part B of Section 889 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 were published. In Section 889, Congress sought to exclude certain Chinese telecommunications and video surveillance equipment from the federal Government supply chain. Part A, which prohibits the Government from obtaining covered telecommunications equipment and services from prohibited Chinese sources, went into effect on August 13, 2019. Part A was focused on avoiding the sale to the U.S. Government of telecommunications equipment or services produced or provided by five Chinese companies, or any of their subsidiaries or affiliates. Part B seeks to end contractors’ use of such equipment and services in their own internal systems. The new regulations prevent the Government from entering into contracts with “an entity that uses 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.” This regulation thus governs more than what the contractor provides to the Government. Rather it prohibits contractors from using such equipment and services in their own operations. The regulations are slated to become effective August 13, 2020, but may be included in contracts prior to that date if performance will begin after August 13th.

The Part B regulations correspond in many ways to the Part A regulations.

1. Key definitions remain the same.

The Part A and Part B regulations apply the same definitions to the following terms:

  • “covered telecommunications equipment or services” is telecommunications or video surveillance equipment or services produced or provided by Huawei Technologies Company, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, Dahua Technology Company, or any subsidiary or affiliate of these entities;
  • “covered foreign country” means the People’s Republic of China;
  • “critical technology” is defined by FIRRMA; and
  • “substantial or essential component” means any component necessary for the proper function or performance of a piece of equipment, system, or service.

2. The regulations apply to all contracts, including micro-purchases and
commercial-off-the-shelf items.

As was true of the Part A regulations, the FAR Council issued a determination that the Part B regulations should apply to contracts at or below the simplified acquisition threshold and to acquisitions of commercial items.

3. Contractors will certify on SAM whether they use covered telecommunications
equipment or services.

The Part B regulations require contractors to represent (1) whether they use covered telecommunications equipment or services, or (2) use any equipment, system, or service that uses covered telecommunications equipment or services. Contractors will be required to certify on SAM annually. If the contractor certifies that it does not use such equipment or services, or any system, equipment or service that uses covered telecommunications equipment or services, the contractor will not be required to complete the individual certification on each contract.

Despite these similarities, there are also several notable differences between the implementation of Part A and Part B regulations that will require careful attention by contractors.

1. There is no requirement to flow down the provision to subcontractors.

Unlike the Part A regulations, the Part B regulations need not be included in subcontracts. Section 889(a)(1)(B) only prohibits the Government from “contracting” with an entity that uses covered telecommunications equipment or services. Because the prime contractor is the only entity that enters into the contract with the Government, it is the only entity that is
covered by the regulations. Prime contractors, therefore, are not required to include this provision in their flow-downs.

2. An entity need only engage in a “reasonable inquiry” to determine whether it
uses covered telecommunications equipment or services.

Under the Part B regulations, a company may certify that it does not use covered telecommunications equipment or services after conducting a “reasonable inquiry.” A “reasonable inquiry” is one “designed to uncover any information in the entity’s possession about the identity of the producer or provider of” covered telecommunications equipment or services. Notably, this appears not to require an entity to seek information from its subcontractors or suppliers, as that information would not be “in the entity’s possession.” The regulation also explains that a reasonable inquiry does not require an internal or third-
party audit.

The rule also includes guidance on what the Government expects from a contractor’s approach to compliance with the provision. The rule explains that contractors should adopt a “robust, risk-based compliance approach,” which includes developing a compliance plan for implementing the provision. The inclusion of the risk-based compliance approach and
reasonable inquiry standards may mitigate some of the concern related to the broad implications of the regulation.

It is worth noting that the “reasonable inquiry” standard does not apply to the Part A regulations, so contractors must still ensure that they are conducting the requisite due diligence to ensure that they will not provide the Government with covered telecommunication equipment or services.

3. The final rule may expand application of the certification to affiliates, parents,
and subsidiaries of the contractor that are domestic concerns.

Although not yet included in the interim rule, the FAR Council is considering whether to expand the scope of the representation required by the Part B regulations to include affiliates, subsidiaries, and parents of the contractor that are domestic concerns. In the section addressing “Specific Questions for Comment,” the Council seeks feedback on the impact such an expansion would have on a contractor’s ability to make the required certification.

Comments on the interim rule must be submitted by September 14, 2020. As a result of the statutory implementation deadline of August 13, 2020, the rule will go into effect prior to the receipt of comments and the promulgation of a final rule.

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