Warning: Communications with Hong Kong and China May Be, Literally, "Off the Hook"

6 min

Companies that must communicate with those in Hong Kong or mainland China—including vendors, suppliers, or manufacturers—take notice. You are facing a new U.S. government initiative that, if implemented, would seriously complicate the ability to engage in business with these jurisdictions. At best, the initiative will complicate and increase the cost of doing business with China-based businesses. At worst, it could cut off internet use between the U.S. and these places altogether. Here is what is happening.

On April 24, citing national security concerns, the Federal Communications Commission (FCC or "Commission") issued Orders to Show Cause against four companies (China Telecom Americas, China Unicom Americas, Pacific Networks, and ComNet LLC). These four companies are indirectly owned and controlled by the Chinese government. The Orders directed each of the four companies to show cause why the Commission should not revoke their domestic and international authorizations allowing each company to operate in the U.S. If revoked, or if other restrictions are imposed upon the four state-owned companies, such action will affect not only companies in the U.S. that are customers of the Chinese companies, but also U.S. enterprises that may not be aware that their communications to counterparts in China and Hong Kong originate or terminate on these carriers. If you have questions or concerns about how this development may affect you, contact Venable immediately.

The FCC's Actions Regarding Chinese Communications Companies

The U.S. relationship with China has been complicated in recent years by a number of U.S. initiatives, such as the U.S.-China trade war administered by the Office of the U.S. Trade Representative (USTR), increased scrutiny of Chinese transactions by Treasury's Committee on Foreign Investment in the United States (CFIUS), and strengthening of U.S. export controls against China by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce.

Against the backdrop of these other actions, it is clear that the U.S. has not shied away from strong action when it comes to China. As for the FCC, Chairman Pai, in a press release announcing the Orders, raised national security concerns over the companies' ownership, stating that the Orders reflected a "deep concern" about their "vulnerability to the exploitation, influence, and control" of the Chinese government. Additionally, the Orders highlight the Commission's 2019 rejection—on national security grounds—of China Mobile USA's application to provide international telecommunications services (China Mobile) as a basis for the current Orders to Show Cause.

With respect to China Telecom, the Commission also predicates its Show Cause Order on a National Telecommunications and Information Administration (NTIA) Recommendation—filed on behalf of the executive branch agencies—requesting that the FCC revoke and terminate China Telecom's international section 214 authorizations. The NTIA Recommendation states that China Telecom's continued access to U.S. telecommunications infrastructure poses "unacceptable national security and law enforcement risks," and accordingly, China Telecom's authorizations should be terminated.

The NTIA Recommendation also states that the executive branch's request is based on "changed circumstances[,]" including increased concerns regarding the Chinese government's "malicious cyber activities[,]" and China Telecom's "apparent failure to comply with U.S. federal and state cybersecurity and privacy laws[.]" Notably, the other three companies subject to the Show Cause Orders have not been the subject of similar NTIA Recommendations.

The Show Cause Orders direct the companies to file a written response demonstrating why they are not subject to the exploitation, influence, and control of the Chinese government and demonstrating their ongoing qualifications to hold domestic and international section 214 authorizations. The Orders further direct each company to provide a description and listing of their subscribers and other customers for domestic and international services. The public disclosure of this kind of information would raise public relations, competitive, and privacy issues. Reportedly counsel to China Telecomm intends to supply this sensitive information about customers and end users under seal so that it is seen only by FCC staff.

Originally, the written responses were due 30 days from the Commission's April 24 Show Cause Orders. However, the companies have each been granted a short extension of time. China Telecom's response is now due June 8, while China Unicom, Pacific Networks, and ComNet's responses are due June 1.

Businesses Most Likely to Be Affected

The complexity of the modern communications world makes it almost impossible for us to know exactly what businesses are likely to be affected. Obviously, Customers of Record—businesses in the U.S. that have directly contracted with any of the Chinese communications companies named above—will be affected by any revocation or restrictions imposed by the FCC. But these orders almost certainly will also impact companies that do not deal directly with the Chinese carriers.

This is because, just as the FCC controls the "landing rights" of foreign telephone and internet service providers seeking to provide service to entities in the U.S., China controls landing rights of access for telephone and internet traffic entering or originating in China. So, even if you do not purchase services directly from one of the four companies subject to the FCC Show Cause Orders, and regardless of your U.S. carrier, all electronic roads into China lead to a Chinese company. This derivative risk should be of particular concern to companies engaged in transactions with China and Hong Kong through the internet. The Chinese companies under examination particularly promote their internet services and their ability to provide that service in China.

The impact of the FCC's action likely will be felt by many companies engaged in China trade, as illustrated by the following businesses. In each line of business, the potential FCC decision will impact capacity, flow, cost, and data security, among other issues.

Payment processing. Lack of, or delay in, the ability to communicate confidently among the multiple parties required for real-time, secure payment and settlement of credit and debit card transactions will impact almost every retail, and many wholesale, transactions, particularly in the ecommerce world.

Cross-border shipping and ordering (manufacturing, pharmaceuticals, nutraceuticals, etc.). Any disruption of the increasing reliance on internet-transmitted shipping and financing documents will have ripple effects through every step of the ordering, manufacturing, shipping, storing, and delivery process, with, at present, unknown consequences.

Telecommunications. The number of companies relying on a growing, not shrinking, number of "pipes" to transmit voice and data is constantly increasing. Reversing the growth in capacity will increase costs and restrict commerce increasingly reliant on instantaneous, secure, and accurate communications.

Banking & Investment Houses. Banks and investment companies require secure, reliable, and private electronic communications. If, as may be the result of the FCC proceeding, U.S. carriers of this information search for alternative providers in China, the essential trust needed for secure transmission of critical information may break down.

Insurance. Like financial services, insurance depends on secure, reliable, and trustworthy electronic communications. To the extent the Chinese government is seen to be involved in, or have the ability to alter, coverage-related data, the underlying ability to rely on transmissions to and from China is adversely impacted.

If your company does significant business with entities in China or Hong Kong – especially if it is engaged in one or more of the business lines outlined above – we urge you to watch this proceeding closely and formulate plans and procedures to deal with its potential outcomes. Venable is here to help.