As we said in one of our posts, trade sanctions are still operating during the pandemic. In fact, Chinese tech companies have emerged as a new focus of the US sanctions regime. Among the sanctioned companies is ByteDance Ltd., the owner of TikTok, the popular video-sharing application. So, is it still legal to download TikTok?

 

US Declares National Emergency Threat from Foreign-Owned ICTS Companies

On May 15, 2019, Executive Order (EO) 13873 on Securing the Information and Communications Technology and Services Supply Chain identified a threat to the national security of the United States in the form of “foreign adversaries” able to exploit vulnerabilities in information and communications technology and services (ICTS). ICTS, the EO continues, store and communicate vast amounts of sensitive information, facilitate the digital economy, and support critical infrastructure and vital emergency services so can therefore be used to commit malicious cyber-enabled actions, including economic and industrial espionage against the United States and its people. Relying on the sweeping powers of the International Emergency Economic Powers Act (IEEPA), the EO declared a national emergency with respect to this threat, which was extended for another year on May 13, 2020.

IEEPA gives the US President broad authority to regulate a variety of economic transactions following a declaration of national emergency and is the statutory basis of the US sanctions regime. Accordingly, the EO authorized the Commerce Secretary to lead an interagency review process of any future “acquisition, importation, transfer, installation, dealing in, or use” of any ICTS by any person subject to US jurisdiction involving a foreign country or national. The EO prohibited any transaction involving ICTS “designed, developed, manufactured, or supplied” by persons owned or controlled by or subject to the jurisdiction or direction of a foreign adversary that could undermine the integrity of ICTS in the US or pose an undue risk to its critical infrastructure or digital economy. The Commerce Secretary is nevertheless authorized to negotiate and design measures that could be put in place as a precondition for approval of the prohibited transactions. Although not stated in the EO, one of those mitigating measures appears to be some US equity control in a company sanctioned under this EO.

Regulations for the EO proposed on November 26, 2019 defined, among other things, what is a “foreign adversary”. There is no need to read this document to understand that the term encompasses China.

Also on May 15, 2019, using another tool in the sanctions arsenal, the Chinese company of Huawei was designated by the Department of Commerce and placed on the Entities List. The basis provided was the Department’s conclusion that Huawei was engaged in activities that violate the IEEPA, among other things. A license is now required for US persons to do any business with Huawei, and for “anyone, anywhere in the world” to trade in US-origin commodities, software or technology with Huawei and 68 of its affiliated companies in 26 different countries. (A gentle reminder that you should always screen a foreign party before engaging in business; here is a useful screening tool for US persons.)

What Does This Have to Do With TikTok?

On August 6, 2020, two new EOs stated that additional steps needed to be taken to address the threats discussed in EO 13873. The documents, EO 13492 and EO 13493, identified threats derived from the spread of two mobile applications developed and owned by Chinese companies — TikTok owned by ByteDance, Ltd. and WeChat, owned by Tencent Holdings, Ltd. Both applications are widely used by millions of people doing billions of downloads globally, including in the US. In the process, the EOs state, the applications capture “vast swaths of information” from its users, potentially allowing the Chinese Communist Party access to Americans’ personal information to track locations of government employees, build dossiers for blackmail, and conduct corporate espionage. The EO also finds that the applications are used by the Chinese Communist Party to monitor and aid in the suppression of Chinese citizens. The EOs prohibited persons subject to US jurisdiction from doing “any transactions”  with ByteDance Ltd., Tencent Holdings Ltd., or their subsidiaries without obtaining a license. Attempts to bypass these provisions were also prohibited.

Following Commerce Department statements of September 18, 2020 and September 19, 2020 clarifying the EO, a Commerce Department Rule was issued on September 24, 2020 with respect to ByteDance. The rule provided that any transaction by any person subject to US jurisdiction with ByteDance or its subsidiaries involving the following information and communications technology or services was prohibited:

Transactions Prohibited After September 27, 2020:
    1. Any provision of services to distribute or maintain the application, constituent code, or application updates through an online mobile application store within U.S. borders.
Transactions Prohibited After November 12, 2020:
    1. Any provision of internet hosting services enabling the functioning or optimization of TikTok in the U.S.;
    2. Any provision of content delivery network services enabling the functioning or optimization of TikTok in the U.S.;
    3. Any provision of directly contracted or arranged internet transit or peering services enabling the functioning or optimization of TikTok within the U.S.;
    4. Any utilization of TikTok’s constituent code, functions, or services in the functioning of software or services developed and/or accessible within the U.S.; or
    5. Any other transaction that may be identified in the future under the authority of EO 13492.

With respect to WeChat, the Department of Commerce prohibited all of the above transactions as of September 20, 2020. Most importantly, however, injunctions issued by the US District Courts at the request of ByteDance, TikTok users, and TenCent have temporarily stopped these prohibitions from taking effect. The U.S. has appealed.

With respect to TikTok, other developments may lead to a solution outside of the courtroom. On August 14, 2020, another tool was unleashed against ByteDance. The Committee on Foreign Investment in the United States (CFIUS) is an inter-agency committee with the authority to block or impose conditions on corporate transactions involving the foreign acquisition of entities that are US owned and/or operate in the U.S. in the interests of U.S. national security. A CFIUS Order of August 14, 2020 stipulated that the 2017 acquisition by ByteDance Ltd. of Musical.ly, which had amplified the social media capabilities of TikTok, had been a breach of national security to the extent used in connection with commercial activities in the U.S. and was retroactively prohibited. ByteDance was given 90 days to divest the U.S. operations and assets of TikTok [and destroy any data obtained from TikTok or Musical.ly users in the U.S.] A buyer is subject to approval by the CFIUS process. Factors to be considered include: (i) US interest(s) of buyer(s); and (ii) whether a buyer has any relationship with ByteDance.

Essentially, ByteDance was presented with the choice of either having the TikTok application banned or of selling some or all of its interest to US entities. ByteDance has opted for divestment. On September 19, 2020, the Trump Administration tentatively approved an agreement between ByteDance, on the one hand, and Oracle and Walmart, on the other, to create a new U.S.-based company, TikTok Global. Oracle and Walmart, US companies, would own 20 percent, placing more equity into U.S. hands. The parties have until November 12, 2020 (with the possibility of another 30 days) to ink the deal. If successfully concluded, this step will end enforcement of the announced prohibitions against TikTok.

So, Is It Still Legal to Download TikTok?

Yes, pending future developments for the moment it is still legal to download TikTok. Furthermore, individual users are not the intended target of these sanctions. So even should the prohibitions kick in, individual users should be able to use the application, if it is still available, though perhaps at a degraded capacity.

The Department of Commerce has made it clear that the prohibitions do apply to “business-to-business transactions”. So, it bears watching to see whether the ByteDance deal is approved by the November 12, 2020 deadline. If it is not, the CFIUS Order gives the discretion of another 30 days to complete the deal. Until the smoke clears, this is not the time to enter into or expand ICTS transactions with ByteDance to support its US operations. The sanctions do not apply to ByteDance operations outside of the U.S. Contact us to learn more about how these new trade sanctions could impact your business.