Huawei’s new tech restrictions could be costly for federal grant recipients
WEB EXCLUSIVE: Huawei’s New Tech Restrictions Could Be Costly for Federal Grant Recipients (UPDATE)
Organizations that receive federal grants or loans could suffer a shock because of a new interim rule released by the Federal Acquisition Regulation Council that targets the acquisition and use of certain Chinese telecommunications technologies, according to legal experts.
Section 889 (a) (1) (B) of the Fiscal Year 2019 National Defense Authorization Act prohibits federal agencies, including the Pentagon, from purchasing telecommunications or video surveillance technology from some Chinese companies or to contract with organizations that use this technology.
Section 889 specifically targets systems built by Huawei Technologies Co., ZTE Corp., Hytera Communications Corp., Hangzhou Hikvision Digital Technology Co, Dahua Technology Company or any other company – including affiliates and subsidiaries – owned or controlled by the People’s Republic of China.
The interim rule implementing Part B of Section 889 – which took effect on August 13 – will have major implications for recipients of federal grants and loans – including nonprofits performing related work. in defense – said Dismas Locaria, partner of the Washington, DC Venable law firm. Although recipients of grants and loans can use prohibited technologies, they can no longer bill the government for them.
It will affect “nonprofits that do all kinds of work for the US government,” he said. “What’s difficult is that a lot of this work will be done overseas. “
Many organizations that receive federal grants and loans operate around the world and often in hot spots around the world, he noted. While companies like Huawei aren’t known in the United States, they are in a number of countries overseas.
“Some of them [Chinese] companies are quite predominant outside of the United States, ”he said. Here at home “most people have Apple or Samsung. But internationally, Huawei is huge.
Additionally, there are many federal grants going to nonprofits that work in China, Locaria said. For these organizations, they almost have an obligation to use equipment made by Huawei, he said.
“In many ways, they are the # 1 option in many countries,” he said.
The Rule 889 rule as it applies to grants and loans for nonprofits is much stricter than for entrepreneurs, Locaria noted. Entrepreneurs cannot use banned technology at all, no matter where the money is coming from to acquire it, he said. However, the Pentagon has obtained a temporary waiver clearance until September 30 for contractors who supply items deemed to be of low risk to national security, such as food.
For grants and loans, organizations can use equipment banned from contractors, but they cannot charge the federal government for it, he said.
“It’s quite different in terms of treatment, but it’s definitely going to impact everyone,” he said.
Already, Venable’s lawyers have been contacted by clients who are “scrambling” to comply with the regulations, Locaria said. However, many organizations are probably not aware of the new rule, he added.
“I imagine there are a lot of people out there who don’t even know it’s over there, and they’re going to scramble… when they find out it’s over there,” he said.
For contractors, they will have to certify that they are not using prohibited equipment. However, for grant and loan recipients, there is no certification. Organizations simply will not be allowed to charge the federal government for such equipment, he said.
“This will likely come out during the government side invoice review and audits… and during the repayment of your grant activities,” Locaria said.
This could lead to sticker shock when it comes time for organizations to report expenses, and the rule could be very costly, he noted.
For example, if an organization recently refurbished its security systems at a cost of millions of dollars and used prohibited equipment that was previously authorized, it may have to shoulder the cost, he said.
If “their plan is to recoup that through their indirect costs over a period of time, well, you won’t be able to recoup those costs,” he said.
Locaria said he hopes most organizations can turn to new technologies that aren’t banned, but in some countries, especially China, there aren’t many options. “It will definitely be a burden,” he said.
The first hurdle for a grant or loan recipient will be determining whether they own equipment made by the banned companies, he explained. The next will be to determine if they can move away from these systems; if they cannot, they will not be able to bill the government for the related expenses.
“If you can’t charge the government, that means you are absorbing these costs,” he said.
The process of determining whether or not an organization is using prohibited technology could be overwhelming, Locaria said.
“A Huawei cell phone is really easily identifiable, but a lot of these guys… provide microchips” that are built into devices, he said. “They don’t have the branded technology; it is buried inside. “
However, Locaria doesn’t think an organization should take their equipment apart to see if a system includes a microchip or other prohibited technology.
“I think the best you can do is to be able to kind of apply the principles of the contract,” he said. “On the contract side, you’re supposed to do a reasonable investigation. So I would say a reasonable inquiry would be, “What is my equipment?” … [But] I don’t think it’s reasonable for you to have to tear up your gear to look at every microchip.
Update: This story has been updated to note that the Pentagon has been granted a temporary waiver until September 30 for certain Section 889 rules for contractors who supply items to the military deemed low risk to national security, such as food.