“Contrary to National Security”: The Rise of the Entity List and Individualized Export Controls
The Department of Commerce administers an “Entity List” of corporations and research institutions prohibited from receiving certain U.S. exports. A key component of U.S. policy toward China, the Entity List has generated uncertainty about its complex administrative procedures and led to a host of lawsuits. In light of these concerns, a forthcoming Note considers the procedural safeguards governing the Entity List and offers areas for reform.
According to the Belfer Center, the Bureau of Industry and Security has added 832 entities to the Entity List in the past decade, many of which are in China. Photo: Unsplash.
By: Jacob Pagano
Xiaomi and the Rise of the Individualized National Security Controls
In a decision from March 2021, covered in the JTL Bulletin, the District Court for the District of Columbia granted a motion for preliminary injunction sought by Xiaomi. Xiaomi is a multinational Chinese consumer electronics company whose products include smartphones and, in the future, cars. The Bulletin post considered China’s response; this post focuses on the administrative procedures on the U.S. side. The Xiaomi saga began on January 14, when the Department of Defense (DoD) issued a list of corporations affiliated with the Chinese military, as required per President Trump’s Executive Order No. 13959. The DoD designated Xiaomi as a Communist Chinese military company (CCMC) and prohibited U.S. persons from trading in Xiaomi’s securities. Xiaomi sought relief.
In its motion, Xiaomi urged the court to look carefully at the evidence—and it did. Judge Contreras discussed the DoD memo that served as the basis for Xiaomi’s addition and rejected the government’s argument that DoD’s “listing was rational and supported by evidence.” The court wrote, “there is plainly a lack of substantial evidence to adequately support a finding that Xiaomi is a CCMC.” Xiaomi came off the list.
The targeting of Xiaomi and other Chinese corporations deemed to be affiliated with the Chinese military is commonplace. Although the previous JTL post fairly asserted that the move was part of a “last-ditch effort to protect [Trump’s] tough-on China legacy,” subsequent events suggest otherwise. President Biden has primarily followed Trump’s path, including in a recent executive order designating fifty-nine additional Chinese entities.
While the lack of evidence in the Xiaomi case to support the government’s finding notably deviates from the DoD’s usual practice, the Xiaomi designation itself is not unexpected. Indeed, Xiaomi is just one example of a growing trend whereby administrative agencies, including the DoD and Department of Commerce, issue consequential decisions directed towards specific entities. As Professor Elena Chachko argues, national security and foreign policy decisions are increasingly the domain of highly-individualized adjudications made through specialized bureaucratic processes. While administrative national security addresses a range of threats, China is a primary focus.
Situating the Entity List Within Administrative National Security
The Entity List is among the most striking measures addressed at China. Administered by the Department of Commerce’s Bureau of Industry and Security (BIS), the Entity List contains more than 1,000 entities, including universities and corporations, determined to be acting “contrary to the national security or foreign policy interests of the United States.” Listed entities are prohibited from receiving controlled items, including commercial items and dual-use items, or items with military and civilian applications. Controlled items include hydrophones, underwater microphones that detect submarine movements, and technology used in surveillance systems and integrated circuits.
The End-User Review Committee (ERC), an interagency committee that includes representatives from the Departments of State and Energy and is chaired by the Department of Commerce, votes to add entities. An addition requires a majority vote, and the ERC has at times been split on whether to add a given entity. Hundreds of Chinese entities are on the List, and additions are frequent. For example, in December 2020, BIS added China Communications Construction Company for its role in Chinese military efforts in the South China Sea. In July 2020, BIS added Hong Kong-based Esquel Corporation on grounds it employs forced labor in China’s Xinjiang province. Esquel sought injunctive relief.
One might expect that a listed entity on the Entity List could follow Xiaomi’s successful strategy of contesting the evidentiary basis for its addition. But the rub is that the Entity List is not subject to the Administrative Procedures Act (APA). Critically, the APA provides that in most instances where an agency decision is challenged, courts set it aside if it is “arbitrary, capricious…or otherwise not in accordance with law.”
The APA was key to Xiaomi’s success: the court, following similar prior decisions involving asset restrictions, used the APA’s standard to assess whether DoD’s explanation for adding Xiaomi as a CCMC-affiliate was adequate. In contrast, entities on the Entity List can challenge their placement but cannot point to the APA’s adjudicative requirements. The statutory authority for the Entity List exempts the Entity List from APA review. In addition, the APA contains an exemption for decisions involving “military or foreign affairs functions of the United States,” which some administrative law scholars and the Administrative Conference have criticized.
Judicial Challenges of Entity List Additions and Violations
Thus far, parties have struggled to challenge Entity List adjudications. Still, they have mounted compelling arguments, primarily through due process and ultra vires claims. For example, after BIS determined that global shipping corporation FedEx had transported controlled items to listed entities and imposed a $500,000 penalty, FedEx filed a suit and asserted that it could not be charged for violating the Entity List without a showing of scienter. Under a plain reading of the Export Administration Regulations (EAR), a violation through the transport of restricted items requires knowledge. BIS, however, pointed to a different provision: aiding and abetting violations, a strict liability provision with no knowledge requirement. Under the APA’s “arbitrary and capricious” standard, FedEx’s claim might have had more success. But to succeed on ultra vires grounds, which require a patent misconstruction of a statute, it was doomed. The court dismissed FedEx’s claim.
Similarly, in its complaint seeking removal from the Entity List, clothing manufacturer Esquel contested the process by which it was added to the List. Esquel complained that it was provided no notice of its addition; that it had no opportunity to submit evidence to rebut findings it had used forced labor; and that its List addition created irreparable harm. The court took a deferential approach to the foreign policy questions implicated in the Entity List addition process, emphasized the high bar for a successful ultra vires or due process challenge, and denied the motion. Esquel has appealed.
The minimal judicial review afforded to parties challenging Entity List placement and violations gives heightened importance to existing procedural mechanisms to ensure the Entity List is accurate, revisable, and contestable. To be sure, there are some mechanisms in place, including opportunities for appeal, which are considered by larger interagency committees. The ERC must have “specific and articulable facts” of an entity’s activities to justify an addition. Additionally, entities can seek removal after they have been placed on the List. Another option is to apply for validated program status, a list of trusted users that can access technology that otherwise would require a license. The program, however, has fewer than a dozen Chinese entities.
Reconsidering the Entity List: Procedural Safeguards and Administrative Process
Are these procedural mechanisms sufficient to ensure that legitimate trade interests are not unjustifiably impeded, or is greater oversight needed? To address this question, a forthcoming Note will situate the Entity List within the administrative national security state. Specifically, the Note will outline how the Entity List evolved from a relatively peripheral tool with a limited mandate to a central component in U.S. export policy towards China, and critically examine the procedures governing it.
The stakes are significant. Economic concerns about the impact of the Entity List are substantial, and a growing number of Chinese companies fear that conducting business with U.S. corporations will lead to placement on the Entity List. These concerns are unlikely to abate, as Entity List additions remain frequent. Further, in 2018, Congress passed the Export Control Reform Act of 2018, providing greater authority to BIS. Previously, BIS relied on the Department of Homeland Security to conduct undercover operations and detect individuals seeking to violate the controls. BIS now has authority to conduct such operations on its own, raising potential conflicts overseas. China has responded, signaling its intention to create an entity list, or the “Unreliable Entities List” (不可靠实体清单规定), which would penalize entities for compliance with the U.S. regime. Most recently, China has sought to consolidate a domestic list of vetted suppliers capable of providing access to items controlled by BIS.
Accuracy, procedural integrity, and capacity for efficient updating of the Entity List are critical both to mitigate the List’s collateral economic consequences and to counter Chinese efforts to frame the Entity List as an unjustified political response to China’s economic ambitions. At its best, the Entity List is not that. To the contrary, the Note argues that the List is a well-honed administrative mechanism that can target precise points in the Chinese economy where corporations seek to acquire technology in service of the Chinese military. Still, there are critical ways in which BIS could retool the Entity List to address concerns. The Note will offer areas for such reforms, such as requiring BIS to provide more information of the “specific and articulable facts” justifying Entity List additions and urging greater use of programs that allow Chinese entities to demonstrate their bona fides and obtain otherwise restricted items.
Jacob Pagano is a second-year at Columbia Law School and an Assistant Articles Editor on the Columbia Journal of Transnational Law. He graduated from Amherst College in 2018. He was an extern with Judge Reif at the United States Court of International Trade and will intern in the spring with the USAO for the E.D.N.Y., focusing on national security.