Government Contracts & Investigations

Securing the Supply Chain

By | April 15, 2021

Numerous pieces of legislation and regulation have been issued in recent years to address the increased threats to the supply chain.  We previously reported on the various aspects of the Section 889 ban on the Government and government contractors’ use and delivery of covered Chinese telecommunications and video surveillance equipment, components and services, and the Section 889 rip and replace requirements being implemented through the Federal Acquisition Regulation (FAR). The Department of Defense (DoD) is engaged in the development of a list of covered product and services entities to identify security threats and facilitate the implementation of Section 889 prohibitions.  Contractors across the supply chain are taking steps now to check whether they have or use such covered products or services so that they can rip and replace and truthfully certify their status in the mandatory representations and certifications contained in the System for Award Management (SAM) registration, which registration is essential for doing business with the Federal government.

In addition, activities have also been taking place that impact even those that don’t consider themselves to be government contractors or subcontractors. In July 2020, the Federal Communications Commission (FCC) designated Huawei Technologies Company and ZTE Corporation as “national security threats.”  In March 2021, the FCC issued additional designations of five Chinese companies, Huawei Technologies Co, ZTE Corp, Hytera Communications Corp, Hangzhou Hikvision Digital Technology Co and Zhejiang Dahua Technology Co., “found to pose an unacceptable risk to U.S. national security.”  There is also litigation involving such designation pending – Huawei has challenged the declaration in the U.S. Court of Appeals for the Fifth Circuit. And on April 14, 2021, Law360 reported that the Biden Administration’s Department of Commerce has issued its second subpoena against Chinese information and communications technology companies using authority under the Trump Administration’s executive order which prohibits transactions with foreign actors that threaten national security. Under that authority, the Department Commerce may investigate to determine whether the entity poses a national security threat.

Congress in the Consolidated Appropriations Act of FY 2021, passed at the end of 2020, appropriated $1.895 billion to “remove, replace, and dispose of communications equipment and services that pose a national security threat.” On March 22, 2021, the FCC issued a proposed rule to modify its Secure and Trusted Communications Networks Reimbursement Program in order to set ground rules for the issuance of payments to fund this rip and replace rule.  Comments were due on April 12, 2021, and reply comments are due on April 26, 2021.

One thing is clear from these activities – there is a bipartisan recognition that covered equipment and services pose a national security threat in the U.S. and abroad, and this Administration is not likely to seek a roll back of the prohibition and requirements.

Government contractors previously have been told in the FAR rule that they are not required to “audit” but are to certify based on what they know.  However, the Government cannot contract with them if they use or provide this equipment and/or services absent an applicable exception or waiver. Even those that are not direct contractors need to take note as the rule applies to the government contractor supply chain in direct and not-so-direct ways.

For some there may be a carrot to implementation in the form of compensation for the rip and replacement given the FY 2021 Congressional appropriation and the FCC’s recent proposed rule; for others there may be the stick that they will not be able to obtain government contracts or subcontracts, or have options under existing contracts exercised! Stay tuned for further developments as infrastructure proposals or bills are being considered.  The author believes it is likely that they too will address this aspect of national security, and that the path of identifying and replacing equipment and services in the supply chain that pose a threat to national security may become a larger part of that agenda.

If you have questions about this advisory, or government contract supply chain matters, contact the author or your Stinson counsel.

Contact Susan Ebner for more information.