Evan Abrams, an Associate at Steptoe LLP, came back on RiskWatch to discuss the Notice of Proposed Rulemaking aimed at regulating connected vehicles linked to China and Russia. Evan advises clients on anti-money laundering and anti-corruption issues and recently co-authored this blog post on the Steptoe website detailing the proposed regulation. Here is a link to Evan’s bio if you’d like to get in touch.
The Scope of the U.S. Dept. of Commerce’s Proposed Connected Vehicles Rule
The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) recently issued a significant Notice of Proposed Rulemaking (NPRM) that would heavily regulate the import and sale of connected vehicles and critical technology, including vehicle connectivity systems (VCS) and automated driving systems (ADS), that have ties to China or Russia. Issued on September 26, 2024, the Proposed Rule aims to mitigate national security risks from potential surveillance and sabotage by foreign adversaries.
If finalized, the new regulations would have major implications across the automotive industry. The rules would prohibit knowingly importing or selling connected vehicles that incorporate covered VCS or ADS software designed, developed, manufactured, or supplied by certain persons linked to China or Russia. The NPRM would also prohibit importing VCS hardware from these countries.
Automotive Industry Implications
The proposed definition of “connected vehicle” is very broad, encompassing any vehicle that can communicate with external networks via Bluetooth, cellular, satellite, or Wi-Fi – which describes the vast majority of new vehicles manufactured today. The rule specifically targets the connectivity and autonomous driving capabilities enabled by VCS and ADS technologies.
Importantly, BIS is taking an expansive view of what constitutes a “link” to China or Russia that would trigger the prohibitions. This includes only entities based in those countries, entities owned or controlled by them, entities acting under their direction, and entities in which China- or Russia-linked parties have the power to impact key business decisions.
While the NPRM does provide some limited exemptions and a path for specific authorizations, its overarching industry implications are extensive. Noncompliance with the new rules could lead to severe penalties, including substantial fines and even criminal charges for willful violations.
Most significantly, companies would need to submit detailed Declarations of Conformity to BIS certifying that they have not engaged in any prohibited transactions. Compiling these declarations will require rigorous supply chain due diligence to verify that no prohibited entities are involved in covered activity.
BIS Compliance Obligations and Supply Chain Due Diligence
Notably, the NPRM places significant emphasis on due diligence: Companies will be required to thoroughly vet third-parties, suppliers, and contractors to comply with the new regulations. Moreover, the complexity of the automotive supply chain calls for enhanced due diligence instead of third-party screening software, which would suffice for other industries.
Given the NPRM’s broad definition of what constitutes a “foreign interest” linked to China or Russia, companies will need to dig deep to uncover potential ties to China or Russia with an emphasis on identifying ownership, control, or influence links that would trigger the prohibitions.
Moving Forward: Connected Cars & National Security Concerns
The proposed rule is open for public comment until October 28, 2024. Automakers, suppliers, and other stakeholders in the industry should carefully review the NPRM and consider submitting feedback on its technical and economic implications. Concurrently, affected parties would be wise to begin assessing their supply chains and compliance procedures to prepare for a potentially final rule.
The automotive connectivity and automation technologies being targeted are critical to the future of the industry. Ultimately, this proposed rule reflects the escalating technology competition between the U.S. and its key rivals – a trend unlikely to abate any time soon.
For those interested in exploring the topic further, Evan Abrams has published a detailed article, and his bio is available on the Steptoe website.
And, for those learning more about Vcheck’s supply chain due diligence capabilities, contact us.
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