Worldwide: DoD Updates Section 1260H List Of Chinese Military Companies Operating Directly Or Indirectly In The United States

[Gunnar Larson]

Oh no! I think STX may fall under:

Entities affiliated with the Chinese Ministry of Industry and Information
Technology, including research partnerships and projects.

 - Stacks’ strong third-party presence in Hong Kong extends to China.
> One of Stacks’ board members has served as a leader of a Shanghai based
> incubator.

----

https://www.mondaq.com/unitedstates/export-controls--trade--investment-sanctions/1423466/dod-updates-section-1260h-list-of-chinese-military-companies-operating-directly-or-indirectly-in-the-united-states?email_access=on


Worldwide: DoD Updates Section 1260H List Of Chinese Military Companies
Operating Directly Or Indirectly In The United States

13 February 2024


On January 31, 2024, the Department of Defense (DoD) released an update to
its list of "Chinese military companies" that are "operating directly or
indirectly in the United States" in accordance with the statutory
requirement of Section 1260H of the National Defense Authorization Act for
Fiscal Year 2021, P.L. 116-283. The revised Section 1260H List is available
here.
While designation on the Section 1260H List alone has no current legal
consequences (unlike, e.g., sanctions and export controls restricted party
lists), Section 805 of the FY 2024 NDAA, passed in December 2023, imposes
new contracting restrictions on DoD with respect to entities on the Section
1260H List or any entity subject to the control of such an entity, which
will become effective on June 30, 2026. Implementing regulations for this
law are forthcoming by DoD.
As many restricted party screening platforms include entities listed on the
Section 1260H List, we expect companies to undertake closer scrutiny of
entities on the Section 1260H List given the reputational considerations
associated with such a listing.
Background
Section 1260H of the Fiscal Year (FY) 2021 National Defense Authorization
Act (NDAA) (Section 1260H List) states that the Secretary of Defense shall
annually (until the end of 2030) "identify each entity Secretary
determines, based on the most recent information available, is operating
directly or indirectly in the United States or any of its territories and
possessions, that is a Chinese military company" (emphases added). See our
prior client alert for additional background on this topic.

For purposes of Section 1260H, "Chinese military company" means an entity
that is "engaged in providing commercial services, manufacturing,
producing, or exporting" and is either:

(1) "directly or indirectly owned, controlled, or beneficially owned by, or
in an official or unofficial capacity acting as an agent of or on behalf
of, the People's Liberation Army or any other organization subordinate to
the Central Military Commission of the Chinese Communist Party"; OR

(2) "identified as a military-civil fusion contributor to the Chinese
defense industrial base." 1

The term "military-civil fusion contributor" includes any of the following:

(A) Entities knowingly receiving assistance from the Government of China or
the Chinese Communist Party through science and technology efforts
initiated under the Chinese military industrial planning apparatus.

(B) Entities affiliated with the Chinese Ministry of Industry and
Information Technology, including research partnerships and projects.

(C) Entities receiving assistance, operational direction or policy guidance
from the State Administration for Science, Technology and Industry for
National Defense.

(D) Any entities or subsidiaries defined as a "defense enterprise" by the
State Council of the People's Republic of China.

(E) Entities residing in or affiliated with a military-civil fusion
enterprise zone or receiving assistance from the Government of China
through such enterprise zone.

(F) Entities awarded with receipt of military production licenses by the
Government of China, such as a Weapons and Equipment Research and
Production Unit Classified Qualification Permit, Weapons and Equipment
Research and Production Certificate, Weapons and Equipment Quality
Management System Certificate or Equipment Manufacturing Unit Qualification.

(G) Entities that advertise on national, provincial and non-governmental
military equipment procurement platforms in the People's Republic of China.

(H) Any other entities the Secretary determines is appropriate. 2 (emphasis
added)

Department of Defense (DoD) published the initial Section 1260H List in
June 2021 and last updated it in October 2022.

New Additions to the Section 1260H List
In announcing the updated Section 1260H List, DoD highlighted, as it has
before, how this list is part of "an important continuing effort in
highlighting and countering the [People's Republic of China's (PRC)]
Military-Civil Fusion Strategy," which, according to DoD, "supports the
modernization goals of the People's Liberation Army (PLA) by ensuring its
access to advanced technologies and expertise are acquired and developed by
PRC companies, universities, and research programs that appear to be
civilian entities."

The updated Section 1260H List includes 17 new entities, as noted in the
appendix, and also removed three entities from the prior version. Several
of these newly-listed entities (like some of those previously listed on the
Section 1260H List) are also designated on other U.S. restricted party
lists, such as the U.S. Department of Commerce, Bureau of Industry and
Security's (BIS) Entity List and Military End User List (MEU List) and the
U.S. Department of Treasury, Office of Foreign Assets Control's (OFAC)
Non-Specially Designated Nationals (SDN) Chinese Military-Industrial
Complex Companies List (NS-CMIC List). However, some of the newly listed
entities are not listed on any other restricted party list at this time.

Other than the new government contracts prohibitions described in more
detail below that will take effect after June 2026, and unless the Section
1260H List entity appears on another restricted party list, mere
designation on the Section 1260H List does not currently carry any
independent legal effect. However, as described in more detail below,
Congress is considering several legislative proposals to enhance the legal
consequences of a Section 1260H List listing.

New Government Contracts Prohibitions Associated with Section 1260H List
Section 805 of the FY 2024 NDAA, which President Biden signed into law on
December 22, 2023, (see here) imposes prohibitions on purchases by DoD of
goods or services produced or developed by Chinese military companies
identified on the Section 1260H List and entities that they control.

Effective June 30, 2026, DoD will be prohibited from executing new
contracts with entities on the Section 1260H List and entities under their
control, as well as renewing or extending current contracts with such
entities. And, effective June 30, 2027, DoD will be prohibited from
purchasing end products or services produced or developed by affected
entities indirectly through third parties. Notably, the contemplated
prohibitions are not identical to prior contracting prohibitions, such as
Section 889 of the FY 2019 NDAA. Unlike Section 889, for example, this new
statute does not prohibit DoD from purchasing end products that contain
components from affected entities as long as the purchase is not directly
from one of these entities. Specifically, for indirect purchases, Section
805 has an exception excluding the purchase of components generally and as
part of an end product. Additionally, the prohibition only applies to DoD,
not the federal government writ large.

DoD has one year to issue rules implementing the June 2026 restriction and
545 days for the June 2027 restriction. The specifics of the Section 805
implementing regulations will likely require prime contractors to DoD to
conduct expanded diligence to determine whether there are goods or services
produced or developed by the identified Chinese military companies (and
entities under their control) in their supply chain in order to maintain
its compliance with the outlined restrictions.

Impact
The updated Section 1260H List is consistent with the Biden
administration's broader coordinated "strategic competition" strategy and
approach to China, including under export controls administered by BIS,
import laws administered by U.S. Customs and Border Protection (CBP),
sanctions administered by OFAC and by other means, including other trade
controls addressing U.S. foreign policy concerns associated with human
rights, forced labor and other issues.

While the legal impact of a Section 1260H List designation standing alone
is limited, such a designation could nevertheless carry reputational risks
as many reputable restricted party screening providers will screen against
the Section 1260H List, requiring companies reviewing those screening
results to consider their risk profile. In addition, companies should be
mindful that some Section 1260H List entities are also designated on other
restricted party lists, which can carry more severe consequences.

U.S. Congress
On January 29, 2024, two days prior to the publication of the new Section
1260H List, several Senators sent a letter to Secretary of Defense Lloyd
Austin pressing DoD "to publish the names of 'Chinese military companies'
operating directly or indirectly in the United States, as required by
Section 1260H of the Fiscal Year 2021 National Defense Authorization Act."
The senators also requested a briefing on why DoD had failed to publish a
revised Section 1260H List in 2023 despite the annual requirement to do so.
Despite the subsequent publication of the updated Section 1260H List, given
the high degree of interest on the Hill regarding this topic, we expect
members of Congress will continue to press their request for a briefing on
the process for determining how DoD develops, updates and publishes the
list.

Finally, Congress is also actively considering legislation that could
require the Executive Branch to impose more severe restrictions on Section
1260H List entities, e.g., CMIC or SDN blocking sanctions administered by
OFAC. The interest by Congress signals that oversight of the matter
continues and will likely result in additional congressional activity.

Footnotes

1. Section 1260H(d)(1)(B) of the FY 2021 NDAA.

2. Section 1260H(d)(2) of the FY 2021 NDAA.

Appendix
Entities Identified as Chinese Military Companies Operating in the United
States in accordance with Section 1260H of the William M. ("Mac")
Thornberry National Defense Authorization Act for Fiscal Year 2021 (Public
Law 116-283)**

360 Security Technology Inc. (Qihoo 360)

Advanced Micro-Fabrication Equipment Inc. China (AMEC)

Aerospace CH UAV Co., Ltd (S-SEA)

Aviation Industry Corporation of China Ltd. (AVIC)

AVIC Aviation High-Technology Company Limited (AVIC Aviation Hi-Tech)

AVIC Heavy Machinery Company Limited (AVIC Heavy Machinery)

AVIC Jonhon Optronic Technology Co., Ltd. (AVIC Jonhon)

AVIC Shenyang Aircraft Company Limited (AVIC Shenyang)

AVIC Xi'an Aircraft Industry Group Company Ltd. (AVIC Xi'an)

Jiangxi Hongdu Aviation Industry Co., Ltd. (Hongdu Aviation)

Zhonghang Electronic Measuring Instruments Company Limited (ZEMIC)

Beijing Megvii Technology Co., Ltd. (Megvii)

Beijing Zhidao Chuangyu Information Technology Co., Ltd. (Knownsec)

BGI Genomics Co., Ltd. (BGI)

Chengdu JOUAV Automation Tech Co., Ltd. (JOUAV)

Chengdu M&S Electronics Technology Co., Ltd. (M&S Electronics)

China Aerospace Science and Industry Corporation Limited (CASIC)

Aerosun Corporation (Aerosun)

China Communications Construction Group (Limited) (CCCG)

China Communications Construction Company Limited (CCCC)

China Construction Technology Co., Ltd. (CCTC)

China Electronics Corporation (CEC)

China Electronics Technology Group Corporation (CETC)

Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)

China General Nuclear Power Corporation (CGN)

China Mobile Communications Group Co., Ltd. (China Mobile Comm)

China Mobile Limited (China Mobile)

China National Chemical Corporation Ltd. (ChemChina)

China National Chemical Engineering Group Corporation (CNCEC)

China National Nuclear Corporation (CNNC)

China National Offshore Oil Corporation (CNOOC)

CNOOC Limited

China North Industries Group Corporation Limited (Norinco Group)

Inner Mongolia First Machinery Group Co., Ltd. (Inner Mongolia)

China Railway Construction Corporation Limited (CRCC)

China South Industries Group Corporation (CSGC)

Costar Group Co., Ltd. (Costar)

China SpaceSat Co., Ltd. (China SpaceSat)

China State Construction Engineering Corporation Limited (CSCEC)

China State Construction Group Co.

China State Shipbuilding Corporation Limited (CSSC)

China Marine Information Electronics Company Limited (China Marine Info
Elec)

China Telecom Group Co., Ltd. (China Telecom)

China Telecom Corporation Limited

China Telecommunications Corporation

China Three Gorges Corporation (CTG)

China United Network Communications Group Co., Ltd. (China Unicom)

China Unicom (Hong Kong) Limited (China Unicom HK)

CloudWalk Technology Co., Ltd (CloudWalk)

CRRC Corporation Limited (CRRC)

Dawning Information Industry Co., Ltd. (Sugon)

Global Tone Communication Technology Co Ltd. (GTCOM)

Guizhou Aviation Technical Development Co., Ltd. (Guizhou Aviation Tech)

Hesai Technology Co., Ltd. (Hesai)

Huawei Investment & Holding Co., Ltd. (Huawei Holding)

Huawei Technologies Co., Ltd. (Huawei)

IDG Capital Partners Co., Ltd. (IDG Capital)

Inspur Group Co., Ltd. (Inspur)

NetPosa Technologies, Ltd. (NetPosa)

Semiconductor Manufacturing International Corporation (SMIC)

Semiconductor Manufacturing International (Beijing) Corporation (SMIC
Beijing)

Semiconductor Manufacturing International (Shenzhen) Corporation (SMIC
Shenzhen)

Semiconductor Manufacturing International (Tianjin) Corporation (SMIC
Tianjin)

Semiconductor Manufacturing South China Corporation (SMIC South China)

SMIC Holdings Limited (SMIC Holdings)

SMIC Northern Integrated Circuit Manufacturing (Beijing) Co., Ltd (SMIC
NICM)

SMIC Semiconductor Manufacturing (Shanghai) Co., Ltd (SMIC Shanghai)

Shanghai Yitu Network Technology Co., Ltd. (Yitu)

ShenZhen Consys Science & Technology Co., Ltd. (Consys)

Shenzhen DJI Innovation Technology Co., Ltd. (DJI)

Wuhan Geosun Navigation Technology Co., Ltd. (Geosun)

Yangtze Memory Technologies Co., Ltd. (YMTC)

Zhejiang Dahua Technology Co., Ltd. (Dahua)

* Bold typeface indicates that the entity is new to this list as of January
31, 2024
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