On August 6, 2020, the White House issued two executive orders purportedly intended to "address[] the threat posed by" TikTok and WeChat, considered by the White House to be Chinese-owned mobile applications. The broadly worded orders will take effect 45 days after they were issued (September 20 or 21, 2020, depending on timing rules). The orders purport to prohibit U.S. persons, including companies organized or located in the U.S., or non-U.S. persons using property subject to the jurisdiction of the U.S. from carrying out: 1) any transaction with ByteDance Ltd. (ByteDance), the owner of TikTok or its subsidiaries, and 2) any transaction that is "related to WeChat … with Tencent Holdings Ltd." (Tencent) or its subsidiaries.
According to both orders, the Secretary of Commerce (the Secretary) will identify the specific transactions prohibited within 45 days. The orders purport to grant the Secretary the authority to take actions, including adopting rules and regulations, as may be necessary to implement each order. Until these implementing steps occur, many effects of these orders may be unclear.
The ByteDance and WeChat orders will bring about significant uncertainty for U.S. companies. This is consistent with other recent national security executive orders issued by the President under the same authorities, including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA).
To explain the national emergency, both orders cite the May 2019 Executive Order on Securing the Information and Communications Technology and Services Supply Chain (the ICT Order)—which called for restrictions on transactions involving information and communications technology or services (ICT) from foreign adversaries. The May 2020 Executive Order on Securing the United States Bulk-Power System similarly called for restrictions on transactions involving bulk-power system electric equipment from foreign adversaries. In both cases, the suggestion from the government was that the specific "foreign adversaries" at issue were Chinese parties.
Neither of those earlier orders has been fully implemented. For example, under the ICT Order in 2019, the Secretary was granted authority to address ICT-related threats. Using that authority, in November 2019 the Secretary proposed to create a new regime to regulate foreign ICT importation and acquisition, but no regulations have yet been issued. However, that does not mean that the order has had no effect. While the specific regulatory action called for in the ICT Order has not yet occurred, other executive branch entities such as the Federal Communications Commission and the Committee on Foreign Investment in the United States (CFIUS) have hardened their approach to regulation and/or enforcement, e.g., by taking actions against Chinese parties that make ICT.
Given the broad language and many ambiguities in the ByteDance and WeChat orders, and the history of uneven enforcement associated with similar prior orders, it is unclear what impact they will have on U.S. companies that may do business with TikTok, ByteDance, or Tencent. Still, there are a few important takeaways:
First, the orders, on their face, take effect no earlier than 45 days after the August 6 issuance (September 20 or 21, 2020, depending on timing rules), so parties that do business with the affected entities will have a grace period to consider their preferred approach or to decide to wait and see what follows. This grace period might not be particularly helpful, however, since specification of the prohibited actions might not occur until on or just before the effective date of the prohibitions. For this reason, it is difficult to know what adjustments to consider during this waiting period.
Second, the prohibitions at issue seem more consistent with restrictions placed on individuals and entities that have been placed on the Specially Designated Nationals (SDN) list. These are restrictions under regulations promulgated and administered by the Office of Foreign Assets Control (OFAC) at the Treasury Department, not the Commerce Department or the Secretary of Commerce. Commerce Department restrictions generally focus on items that are controlled by the Export Administration Regulations (EAR) including hardware, software, and technology. Because the regulations explaining the prohibition may need to be drafted from scratch by the Department of Commerce and may not follow the traditional model for OFAC SDN listings, it is particularly difficult to forecast the final regulations.
Third, the WeChat order appears to limit the prohibited transactions with Tencent to those related to WeChat. However, many U.S. companies conduct a wide range of business with Tencent and its affiliates and subsidiaries, including receiving investment. If, in the Secretary's rules implementing the order, the prohibitions extend beyond WeChat to Tencent and affiliates or subsidiaries more generally, the impact on U.S. companies could be even more significant.
Fourth, as with the ICT Order, it is possible that the regulations required from the Secretary will arrive later than anticipated or may never appear at all. If no regulations are produced, the orders seemingly would have no direct impact.
Fifth, as occurred in the case of the ICT Order, even if regulations are delayed or are not promulgated, the new orders may have impacts through other regulatory regimes. CFIUS enforcement related to the affected parties or other Chinese ICT companies may be stepped up based on the administration's new priorities. As noted here, CFIUS's enforcement activities have already been on the upswing; the orders may provide further impetus to focus on the ICT space.
Sixth and finally, should the orders take effect, there will be significant potential penalties for violations. Civil penalties under IEEPA, one of the statutory bases for the orders, can be more than $300,000 per violation, and willful offenders may also be subject to criminal penalties and jail time.
As information about the orders develops, there may be opportunities to influence the development of the underlying rules—e.g., through notice and comment on the regulations promulgated by the Secretary. For more information about the executive orders as they develop, please contact Stephen Heifetz, Josh Gruenspecht, Josephine Aiello LeBeau, Anne Seymour, or any member of the firm's National Security practice.
