Ensuring Supply Chain Compliance with Section 889 of the National Defense Authorization Act Disputes

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Ensuring Supply Chain Compliance with Section 889 of the National Defense Authorization Act

Ensuring Supply Chain Compliance with Section 889 of the National Defense Authorization Act

In August of 2020, Section 889, Part B of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (FY19 NDAA) came into effect, banning the use of certain Chinese telecommunications equipment or services across a supply chain when fulfilling a U.S. government contract.  Although the regulation is part of the NDAA, it’s important to understand that it’s reach extends beyond defense department contracts, to include all U.S. government procurement. Simply put, the regulation prohibits U.S. federal agencies from contracting with any entity that uses telecommunications equipment, systems or services that are procured wholly or partly from one of the banned Chinese entities—anywhere in its global supply chain. This ban presents  serious supply chain risk issues for government contractors.

While the regulation only identifies five Chinese telecommunications and video surveillance equipment and service entities by name, the prohibition is significantly broader. The entities include Huawei Technologies Company, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, and Dahua Technology Company. However, Section 889 also extends the ban to “any subsidiary or affiliate” of each of these five companies, effectively expanding the ban to upwards of hundreds of entities, some of which may not even be registered or based in China.

So, government contractors looking to demonstrate compliance with this requirement should consider taking several steps, at minimum.

Validate That the Banned Entities are not Present in a Supply Chain

Section 889 requires contractors to certify to the U.S. government that their supply chains do not use telecommunications equipment systems or services sourced from the banned entities. To do this, government contractors must ensure that none of the banned entities (or their affiliates or subsidiaries) are present in their supply chain via ownership of suppliers. Ascertaining ownership can be done in two mutually supportive ways. First, a questionnaire-based process helps acquire ownership information directly from a supplier relatively efficiently. However, self-attestation by a supplier, while useful, may be insufficient by itself to meet Section 889 requirements. Therefore, government contractors should consider augmenting this process with an independent search of public records to ensure none of the banned entities have an ownership stake of the contractor’s supply chain partners. Specialized investigative research techniques can be leveraged to efficiently overcome the challenges inherent in independently establishing ownership, such as the need to track ownership across multiple jurisdictions, understand availability and comprehensiveness of public records, navigate paywalls, and overcome language barriers.

Repaper Vendor and Supplier Contracts to Ensure Compliance

As is the case with many regulations, companies are seeking to contractually obligate their vendors and suppliers to ensure compliance, who then expect their next tier to comply with the ban, and so on.   They do this by adding appropriate amendments to their existing vendor and supplier contracts. In legal parlance, this is known as repapering, the efforts usually incorporate an artificial intelligence enabled technology. The technology allows for a labor and cost-efficient method of amending a population of potentially effected agreements.

Conclusion

Section 889 of the FY19 NDAA is a complex, broad and potentially confusing regulation for government contractors. The open-ended nature of the prohibition covering “subsidiaries and affiliates” of the banned Chinese companies could inadvertently result in a government contractor breaking U.S. laws if it is unaware of the ownership of its supplier network. Government contractors could also be liable if one of their own suppliers fails to appropriately comply with this regulation. Ensuring accurate understanding of ownership of suppliers and contractual obligation across a supplier network will help minimize the risk of a government contractor accidentally running afoul of this regulation.

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