Companies that do business with the US federal government have seen important changes to the requirements for federal contractors in the past several months as the US Federal Acquisition Regulatory Council (FAR Council) has proceeded with rulemaking for the implementation of Section 889 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L. No. 115- 232) (NDAA). These changes are expected to have significant implications for supply chains involving US federal agency procurement. While the implementation of Section 889 by the FAR Council began over a year ago, the rulemaking process is ongoing, and further guidance that may impact companies’ compliance obligations is expected, as noted below.
Companies are advised to assess their exposure to Section 889 and monitor the situation for the impact of further guidance or rulemaking issued by the FAR Council.
Implementation Steps to Date
Section 889 (“Prohibition on Certain Telecommunications and Video Surveillance Services or Equipment”) of the NDAA imposes new national security-related restrictions, representations, and reporting requirements in connection with the awarding, extending, or renewing of US federal agency contracts, task orders, or delivery orders where there is a nexus (described below) with five Chinese entities in the telecommunications and video surveillance sectors. At present, the five entities targeted under Section 889 (Covered Entities) are Zhejiang Dahua Technology Co Ltd, Hangzhou Hikvision Digital Technology Co Ltd, Hytera Communications Corp Ltd, Huawei Technologies Co, and or ZTE Corp. US authorities may add additional entities to this list.
The rollout of Section 889 regulations has proceeded in two major steps over the past 15 months, which correspond to the two key prohibitions under Section 889. In July 2019, the FAR Council issued an interim rule (the Part A Interim Rule) relating to Section 889(a)(1)(A), or Part A. Part A of Section 889 prohibits US government agencies from “procur[ing] or obtain[ing]” certain telecommunications and video surveillance equipment from the Covered Entities. The Part A Interim Rule became effective on August 13, 2019. One year later, in July 2020, the FAR Council issued a further interim rule (the Part B Interim Rule) relating to Section 889(a)(1)(B), or Part B. Part B is far broader in scope than Part A. As discussed below, Part B prohibits US federal agencies from contracting with any “entity” that “uses” certain telecommunications and video surveillance equipment from the Covered Entities. Part B became effective on August 13, 2020.
Companies should be aware of two anticipated, upcoming steps in the ongoing implementation of Section 889:
- On August 27, 2020, the FAR Council issued another interim rule (SAM Interim Rule) that requires offerors to make an annual representation via the System for Award Management (SAM), following a “reasonable inquiry” on whether the company “does” or “does not” use covered telecommunications equipment or services, or any equipment, system or service that uses covered telecommunications equipment or services. See 48 CFR § 52.204-26(c)(2). The SAM Interim Rule becomes effective on October 26, 2020. If an offeror represents that it “does not” use covered equipment or services via SAM, it need not make separate representations in response to individual solicitations. However, the rule provides no relief or streamlined process for offerors that represent that they “do” use covered equipment or services. Such offerors must provide additional disclosures, as described below.
- The FAR Council indicated in the Part B Interim Rule that is currently considering expanding the definition of the term “entity” for purposes of Part B of Section 889. To be clear, the term “entity” as used in Part B currently applies only to the entity contracting with the US federal agency. An expansion of the scope of this term could require a company, offeror, or bidder (we use the terms interchangeably in this post) for a US federal agency contract to make representations regarding the “use” of the covered telecommunications equipment and services “on behalf of itself and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns.” Such an expansion could pose a significant additional compliance burden on companies.
Compliance with the new Section 889 regulations will present a potentially significant additional compliance burden for companies that do business with US federal agencies. For example, the “reasonable inquiry” mandated for Part B disclosures is presently structured so as to include any “use” of covered equipment or services by the offeror, regardless of geographical location. In addition, as discussed below, key terms relevant to the implementation of Section 889 are either undefined or ambiguous, such as the terms “use” and “entity.”
How Parts A and B of Section 889 Differ
Companies with exposure to US federal agency procurement should understand the broad scope of the Part B regulations that came into force in August 2020. The following provides a brief overview of the requirements imposed under Parts A and B.
Section 889(a)(1) states that the head of any US federal agency may not:
(A) procure or obtain or extend or renew a contract to procure or obtain 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 (Part A); or
(B) enter into a contract (or extend or renew a contract) 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 (Part B).
As the language quoted above indicates, Part A prohibits US government agencies from buying or obtaining “covered telecommunications equipment or services” produced by the Covered Entities (Covered Telecom). Part B of Section 889 is broader in scope than Part A. For example:
- Part B applies regardless of whether the “entity” “uses” the Covered Telecom in the performance of its scope of work under a US federal contract.
- Part B’s prohibition has no de minimis threshold; any quantity of Covered Telecom that is “use[d]” by the “entity” “as a substantial or essential component” or “critical technology” of “any system” may trigger the prohibition in Part B.
In addition to requiring companies to undertake a “reasonable inquiry” (described below) to assess whether they “use” Covered Telecom, Part B requires companies to notify the US government within one business day if they discover the “use” of Covered Telecom during the course of contract performance. See 48 CFR § 52.204-25(d)(2).
Required Actions: Representations and “Reasonable Inquiry”
Pursuant to Section 889, an offeror must make certain representations and undertake a “reasonable inquiry” into the question of whether Covered Telecom is “use[d]” by the offeror. A brief summary of these obligations is provided here:
- Part A representation. Offerors must make the representation provided at 48 CFR § 52.204-24(d)(1) (“Representation Regarding Certain Telecommunications and Video Surveillance Services or Equipment”). This representation states that the offeror “will” or “will not” “provide covered telecommunications equipment or services to the Government in the performance of any contract, subcontract or other contractual instrument resulting from this solicitation.” This impacts solicitations issued on or after August 13, 2019, and resultant contracts, as well as solicitations issued before August 13, 2019, if the award of the resulting contract(s) occurred on or after August 13, 2019. The requirement also applies to future orders under indefinite delivery contracts, and modifications to existing contracts, task, or delivery orders.
If the offeror indicates that it “will” provide Covered Telecom, then the offeror must provide the additional disclosures required under 48 CFR § 52.204-24(e)(1), which differs based on whether the transaction involves equipment or services.
- Part B representation. Offerors must also make the representation provided at 48 CFR § 52.204-24(d)(2), which states that the offeror “does” or “does not” “use covered telecommunications equipment or services, or use any equipment, system, or service that uses covered telecommunications equipment or services.” This impacts solicitations issued on or after August 13, 2020, and resultant contracts, as well as well as solicitations issued before August 13, 2020, if the award of the resulting contract(s) occurred on or after August 13, 2020. As with Part A, the requirement also applies to future orders under indefinite delivery contracts, and modifications to existing contracts, task, or delivery orders.
If the offeror indicates that it “does” use Covered Telecom, then the offeror must provide the additional disclosures required under 48 CFR § 52.204-24(e)(2), which differs based on whether the transaction involves equipment or services.
The Part B Interim Rule indicates that companies are to conduct a “reasonable inquiry” before making the representation at 48 CFR § 52.204-24(d)(2). The specific steps required to be included in a “reasonable inquiry” are not entirely clear based on current regulations. The Part B Interim Rule states the following:
A reasonable inquiry is an inquiry designed to uncover any information in the entity’s possession—primarily documentation or other records—about the identity of the producer or provider of covered telecommunications equipment or services used by the entity. A reasonable inquiry need not include an internal or third-party audit. (emphasis added).
Notably, although an “audit” “need not” be performed, the qualification that the inquiry should be designed to uncover “primarily documentation or other records” suggests that other forms of information in addition to “documentation or other records” may be required in some cases. No further guidance on this point is available. The General Services Administration has indicated since the issuance of the Part B Interim Rule that the scope of the “reasonable inquiry” should include both (i) the equipment and services owned by the company contracting with the US government, as well as (ii) the equipment and services provided to the company by other companies. Significantly, the “reasonable inquiry” is not geographically limited to the United States under current guidance; if the offeror entity “uses” Covered Telecom in its non-US offices or locations, such “use” must be disclosed under current guidance.
Finally, pursuant to the interim rule published by the FAR Council on August 27, 2020, which becomes effective on October 26, 2020, companies that indicate they “do not” provide or use Covered Telecom in their annual SAM representation need not make a separate representation in response to each solicitation. See generally 48 CFR § 52.204-26.
The following terms are defined for purposes of Section 889:
- “Covered telecommunications equipment or services” refers to (1) “[t]elecommunications equipment produced by Huawei Technologies Company or ZTE Corp. (or any subsidiary or affiliate of such entities),” and (2) “[f]or the purpose of public safety, security of Government facilities, physical security surveillance of critical infrastructure, and other national security purposes, video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of such entities).”
- “Critical technologies” are defined to include, but are not limited to, items on the United States Munitions List (USML) identified in the International Traffic in Arms Regulations (ITAR); certain items included on the Commerce Control List (CCL) of the Export Administration Regulations (EAR) controlled for various reasons; and “emerging and foundational technologies” that are controlled under Section 1758 of the Export Control Reform Act of 2018, 50 U.S.C. § 4817. This definition parallels the definition of the term “critical technologies” for purposes of the Committee on Foreign Investment in the United States (CFIUS).
The term “substantial or essential component” is defined as “any component necessary for the proper function or performance of a piece of equipment, system, or service ”See FAR 4.2101; 52-204-25(a).
Ambiguities in Section 889
Certain terms in Section 889 either remain undefined or the FAR Council has signaled that the definition is subject to change. This introduces an element of uncertainty regarding the reach of Section 889 and may complicate companies’ implementation of compliance controls. We outline some of the key ambiguities below.
- “Entity” – The term “entity” applies differently under Part A and Part B. In addition, the FAR Council has indicated that they may revise the definition. We address each of these points in turn below.
First, the Part B Interim Rule notes that the prohibitions in FAR 52.204-25 under Part A are broader in scope, as they “will continue to flow down to all subcontractors.” In other words, to make the representation required under Part A, the offeror must consider whether it, or any subcontractor, “will” or “will not” supply Covered Telecom to the US government. By contrast, under Part B, the Part B Interim Rule indicates that the prohibition “will not flow down because the prime contractor is the only ‘entity’ that the agency ‘enters into a contract’ with, and an agency does not directly ‘enter into a contract’ with any subcontractors, at any tier.” In other words, the question of whether an “entity” “uses” Covered Telecom is answered with respect to the specific entity contracting with the US government agency only. However, as noted above, the inquiry into that entity’s “use” of Covered Telecom is global in scope.
Second, as noted above, the Part B Interim Rule notes that the FAR Council may “expand the scope [of the term “entity”] to require that the prohibition at 52.204-24(b)(2) and 52.204-25(b)(2) applies to the offeror and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns, and expand the representation at 52.204-24(d)(2) so that the offeror represents on behalf of itself and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns, as to whether they use covered telecommunications equipment or services.” In other words, the scope of an offeror’s “reasonable inquiry” is subject to change, based on potential further rulemaking from the FAR Council.
In sum, if the expanded definition of the term “entity” is implemented by the FAR Council, it will likely have significant compliance implications, as companies will potentially be mandated to conduct the required “reasonable inquiry” across its subsidiaries and affiliates to detect the “use” of Covered Telecom.
- “Use” – The Part B Interim Rule did not offer guidance on the meaning or scope of the term “use,” apart from noting that the Part B prohibitions apply “regardless of whether th[e] usage [of Covered Telecom is in performance of work under a Federal contract.” It is unclear, for example, whether the term “use” applies to the contracting entity’s “use” of Covered Telecom outside of the United States in jurisdictions where the Covered Entities occupy dominant positions in the provision of covered equipment and services. Since the term “use” extends to purely commercial activities unrelated to the scope of work under a US federal contract, it could conceivably catch basic telecommunications services in foreign jurisdictions.
In sum, without further clarification of the scope of this term, the compliance obligations of companies remain difficult to define with precision, and could lead to inconsistent practices and enforcement.
Waivers and Exceptions
There are two limited waivers available for the implementation of Section 889:
- Section889(d)(1) provides that the head of a US federal agency may, “on a one-time basis,” issue a waiver to delay the implementation of Section 889 for not more than two years; compliance is mandatory, and may not be delayed beyond August 13, 2022. Waivers are granted on a case-by-case basis and procedures may vary by US federal agency. The applicant must “provides a compelling justification for the additional time to implement the requirements under such subsection, as determined by the head of the executive agency,” and provide “a full and complete laydown of the presences of covered telecommunications or video surveillance equipment or services in the entity’s supply chain and a phase-out plan to eliminate such covered telecommunications or video surveillance equipment or services from the entity’s systems.”
- Section 889(d)(2) provides that a waiver may be issued by the US Director of National Intelligence on a case-by-case basis, “if the Director determines the waiver is in the national security interests of the United States.” However, such waivers are likely to be rare.
There are two general exceptions to the prohibitions under Section 889, which carve out the following activities and equipment:
First, Sections 889(a)(2)(A) and 889(b)(3)(A) authorize US government agencies to procure from an entity that provides a “service that connects to the facilities of a third-party, such as backhaul, roaming, or interconnection arrangements.” The Part B Interim Rule defines these terms in a way that is consistent with existing regulations. However, the Part B Interim Rule clarifies that the exception applies only to the US government agency that is contracting with an entity to provide a service, i.e., it does not apply to a contractor’s use of a service that connects to the facilities of a third-party, such as backhaul, roaming, or interconnection arrangements. In other words, prohibition still prevents a US government agency from entering a contract with a contractor that uses Covered Telecom to obtain backhaul services from an internet service provider, absent a waiver.
The following definitions apply to this exception:
- “Backhaul means intermediate links between the core network, or backbone network, and the small subnetworks at the edge of the network (e.g., connecting cell phones/towers to the core telephone network). Backhaul can be wireless (e.g., microwave) or wired (e.g., fiber optic, coaxial cable, Ethernet).”
- “Interconnection arrangements means arrangements governing the physical connection of two or more networks to allow the use of another’s network to hand off traffic where it is ultimately delivered (e.g., connection of a customer of telephone provider A to a customer of telephone company B) or sharing data and other information resources.”
- “Roaming means cellular communications services (e.g., voice, video, data) received from a visited network when unable to connect to the facilities of the home network either because signal coverage is too weak or because traffic is too high.”
Second, Sections 889(a)(2)(B) and 889(b)(3)(B) carve certain types of equipment out from the definition of Covered Telecom. Specifically, the prohibitions in Section 889 do not cover “telecommunications equipment that cannot route or redirect user data traffic or cannot permit visibility into any user data or packets that such equipment transmits or otherwise handles.” Guidance issued by the General Services Administration on September 21, 2020 (GSA Guidance) indicates that telecommunications equipment installed on a closed network may not meet this exception.
The Part B Interim Rule identifies six “Contractor Actions Needed for Compliance” as part of “a robust, risk-based compliance approach [that] will help reduce the likelihood of noncompliance.” The FAR Council states that these six steps will “most likely be part of the compliance plan,” without mandating the same. We summarize the steps here:
- Regulatory Familiarization. Companies should understand the necessary actions for compliance.
- Corporate Enterprise Tracking. As noted above, Part B of Section 889 requires companies to perform a “reasonable inquiry” into the question of whether the entity “uses” Covered Telecom as a substantial or essential component of any system, or as critical technology as part of any system. The Part B Interim Rule clarifies that this due diligence process “includes examining relationships with any subcontractor or supplier for which the prime contractor has a Federal contract and uses the supplier or subcontractor’s ‘covered telecommunications’ equipment or services as a substantial or essential component of any system.” While the mandated “reasonable inquiry” “need not include an internal or third-party audit,” it must “uncover any information in the entity’s possession—primarily documentation or other records—about the identity of the producer or provider of covered telecommunications equipment or services used by the entity.”
- Education. Companies should provide training for their purchasing/procurement, and materials management teams to ensure familiarity with compliance requirements.
- Cost of Removal (if the entity independently decides to).The FAR Council recommends that, once a company identifies the “use” of Covered Telecom, the company should, if it decides to eliminate the “use” of Covered Telecom, implement procedures to replace Covered Telecom and ensure that any new equipment and services acquired for use by the entity are compliant.
- Representation. As noted above, companies must provide representations regarding compliance with Parts A and B, as applicable. In addition, companies must alert US authorities within one business day if the company discovers that it has “used” Covered Telecom in the course of performance of a US federal government contract.
- Cost to Develop a Phase-out Plan and Submit Waiver Information. The FAR Council recommends that any entities seeking a waiver should (1) develop a phase-out plan to phase-out existing covered telecommunications equipment or services, and (2) provide the required information to US authorities for inclusion in the phase-out plan and the complete laydown of the presence of the covered telecommunications equipment or services.
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HSF NY will continue to monitor developments in the implementation of Section 889. Please get in touch with your usual HSF NY contacts with any questions.