President of the United States Signs NDAA, Which Forbids the Use of Chinese Semiconductor Products

President Biden ratified the National Defense Authorization Act for Fiscal Year 2023 (also known as the “FY2023 NDAA”) on December 23, 2022. The FY2023 NDAA’s Section 5949 (“Section 5949”) might well forbid executive agencies from working with enterprises to acquire any electronic components, goods, or services, including covered semiconductor goods or services, from specific Chinese firms. The Federal Acquisition Regulatory (“FAR”) Council will produce regulations enforcing the restrictions no sooner than three years after the legislation date, and the bans on semiconductors will not go into action five years after the date of implementation.

More detailed information about the restrictions is below, as well as the most important lessons for businesses that might be affected:

Part A

The restrictions on semiconductors in Section 5949 go beyond those in Section 889 of the FY2019 NDAA (“Section 889”), that applied to select Chinese corporations’ telecommunications and surveillance goods and services.

Federal executive entities are forbidden by Part A of Section 5949 from buying, acquiring, or negotiating for any electronic components, goods, or services, including those related to specified semiconductors. Any “covered semiconductor products or services” created by Semiconductor Manufacturing International Corporation (“SMIC”), ChangXin Memory Technologies, Yangtze Memory Technologies Corp., or any subsidiary or associate of those organizations are subject to this limitation. A wide variety of electronic devices that are brought into the country, such as mobile phones, networking equipment, and vehicle parts, use technology developed by these businesses or their subsidiaries. These corporations account for a substantial and expanding portion of the semiconductor chips industry. Additional goods or services may be designated as “covered” under Section 5949 if the Secretary of Defense or the Secretary of Commerce determines that they are generated or offered by a company that is linked to, operated by, or under the authority of one of the “foreign countries of concern,” as of now China, Russia, North Korea, or Iran.

Part B

Federal executive organizations are not allowed to deal (or prolong or renew a contract) with a party to buy or acquire electronic components or goods that employ any electronic elements or goods that contain classified semiconductor products or services, according to Part B of Section 5949. Contrary to Part B of Section 889, the restriction does not forbid the consultant from being used encased semiconducting goods or services in the company’s own internal networks; rather, it concentrates on if the obtained electrical components or products part of the individual utilizes parts or products which include covered semiconductor products or services.

Furthermore, despite Part A, this restriction only pertains to goods or services used in “critical systems” that contain protected semiconductor goods or services.

The range of contractors who will be liable to Part B through their agreements may be restricted by the restriction of these limitations to “critical systems”.

Restrictions won’t affect the FCC’s Covered List and aren’t reversible.

The prohibitions will not compel businesses to withdraw or modify any classified semiconductor items or services that are “resident” in current equipment, systems, or services before the effective date, according to a Rule of Construction provision in Section 5949.All through the “lifecycle of such existing equipment,” entities are permitted to employ existing machinery that contains authorized semiconductor items or services. The Rule of Construction clause further states that, unlike Section 889, Section 5949 does not necessitate the Federal Communications Commission (“FCC”) to assign covered semiconductor products or services all over its Covered Communications Equipment Services List retained under the Secured and Trusted Communications Networks Act of 2019. This list covers the communications products and services that the FCC has determined to constitute an enormous risk to American citizens’ safety and security.

Safe Harbors and Waiver Power

The Waiver Power clause in Section 5949 gives the Director of National Intelligence, the Secretaries of Defense, Commerce, Homeland Security, and Energy, in addition to the waiver authorities to lift the restrictions just after the date of issuance for “critical national security interests.” Furthermore, if specific decisions are made in collaboration with the Secretaries of Commerce and Defense or the Director of National Intelligence, the president of an executive agency can exempt prohibitions for a continuous duration of no longer than two years per waiver.

There are other safe harbors included in Section 5949 as well. First, federal contractors are not required to perform formal reviews of, or third-party audits of certifications made by covered companies and subcontractors about the inclusion (or exclusion) of covered semiconductor products or services in electronic devices and parts. Secondly, if they did not produce or install the impacted products, contractors and subcontractors who inform the government that a vital structure comprises either genuine or suspected covered semiconductor products or services may not be liable for civil liability or found to be unresponsible. The notified contractor or subcontractor must try its best to locate and eliminate the protected goods or services from the federal supply if the notice pertains to components or goods, they produced or integrated.

Relevant Dates

The Federal Acquisition Security Council (“FASC”) shall grant suggestions for regulations integrating the restrictions and guidelines to alleviate supply chain risks pertinent to the¬†federal government purchase of semiconductor products and services¬†within two years after the enactment of this Act. The FAR Council must release regulations enforcing the restrictions three years after the law’s passage. The bans on semiconductors will go into effect five years after they were passed.

Information from Global Compliance News

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