DoD Updates Section 1260H List of Chinese Military Companies Operating Directly or Indirectly in the United States

Key Points

• On January 31, 2024, the Department of Defense (DoD) released an update to its list of “Chinese military companies” that are “operating directly or indirectly in the United States” in accordance with the statutory requirement of Section 1260H of the National Defense Authorization Act for Fiscal Year 2021, P.L. 116-283. The revised Section 1260H List is available here.
• While designation on the Section 1260H List alone has no current legal consequences (unlike, e.g., sanctions and export controls restricted party lists), Section 805 of the FY 2024 NDAA, passed in December 2023, imposes new contracting restrictions on DoD with respect to entities on the Section 1260H List or any entity subject to the control of such an entity, which will become effective on June 30, 2026. Implementing regulations for this law are forthcoming by DoD.
• As many restricted party screening platforms include entities listed on the Section 1260H List, we expect companies to undertake closer scrutiny of entities on the Section 1260H List given the reputational considerations associated with such a listing.

Background

Section 1260H of the Fiscal Year (FY) 2021 National Defense Authorization Act (NDAA) (Section 1260H List) states that the Secretary of Defense shall annually (until the end of 2030) “identify each entity Secretary determines, based on the most recent information available, is operating directly or indirectly in the United States or any of its territories and possessions, that is a Chinese military company” (emphases added). See our prior client alert for additional background on this topic.

For purposes of Section 1260H, “Chinese military company” means an entity that is “engaged in providing commercial services, manufacturing, producing, or exporting” and is either:

(1)  “directly or indirectly owned, controlled, or beneficially owned by, or in an official or unofficial capacity acting as an agent of or on behalf of, the People’s Liberation Army or any other organization subordinate to the Central Military Commission of the Chinese Communist Party”; OR

(2)  “identified as a military-civil fusion contributor to the Chinese defense industrial base."^[i]

The term “military-civil fusion contributor” includes any of the following:

(A) Entities knowingly receiving assistance from the Government of China or the Chinese Communist Party through science and technology efforts initiated under the Chinese military industrial planning apparatus.

(B) Entities affiliated with the Chinese Ministry of Industry and Information Technology, including research partnerships and projects.

(C) Entities receiving assistance, operational direction or policy guidance from the State Administration for Science, Technology and Industry for National Defense.

(D) Any entities or subsidiaries defined as a “defense enterprise” by the State Council of the People’s Republic of China.

(E) Entities residing in or affiliated with a military-civil fusion enterprise zone or receiving assistance from the Government of China through such enterprise zone.

(F) Entities awarded with receipt of military production licenses by the Government of China, such as a Weapons and Equipment Research and Production Unit Classified Qualification Permit, Weapons and Equipment Research and Production Certificate, Weapons and Equipment Quality Management System Certificate or Equipment Manufacturing Unit Qualification.

(G) Entities that advertise on national, provincial and non-governmental military equipment procurement platforms in the People’s Republic of China.

(H) Any other entities the Secretary determines is appropriate.^[ii] (emphasis added)

Department of Defense (DoD) published the initial Section 1260H List in June 2021 and last updated it in October 2022.

New Additions to the Section 1260H List

In announcing the updated Section 1260H List, DoD highlighted, as it has before, how this list is part of “an important continuing effort in highlighting and countering the [People’s Republic of China’s (PRC)] Military-Civil Fusion Strategy,” which, according to DoD, “supports the modernization goals of the People’s Liberation Army (PLA) by ensuring its access to advanced technologies and expertise are acquired and developed by PRC companies, universities, and research programs that appear to be civilian entities.”

The updated Section 1260H List includes 17 new entities, as noted in the appendix, and also removed three entities from the prior version. Several of these newly-listed entities (like some of those previously listed on the Section 1260H List) are also designated on other U.S. restricted party lists, such as the U.S. Department of Commerce, Bureau of Industry and Security’s (BIS) Entity List and Military End User List (MEU List) and the U.S. Department of Treasury, Office of Foreign Assets Control’s (OFAC) Non-Specially Designated Nationals (SDN) Chinese Military-Industrial Complex Companies List (NS-CMIC List). However, some of the newly listed entities are not listed on any other restricted party list at this time.

Other than the new government contracts prohibitions described in more detail below that will take effect after June 2026, and unless the Section 1260H List entity appears on another restricted party list, mere designation on the Section 1260H List does not currently carry any independent legal effect. However, as described in more detail below, Congress is considering several legislative proposals to enhance the legal consequences of a Section 1260H List listing.

New Government Contracts Prohibitions Associated with Section 1260H List

Section 805 of the FY 2024 NDAA, which President Biden signed into law on December 22, 2023, (see here) imposes prohibitions on purchases by DoD of goods or services produced or developed by Chinese military companies identified on the Section 1260H List and entities that they control.

Effective June 30, 2026, DoD will be prohibited from executing new contracts with entities on the Section 1260H List and entities under their control, as well as renewing or extending current contracts with such entities. And, effective June 30, 2027, DoD will be prohibited from purchasing end products or services produced or developed by affected entities indirectly through third parties. Notably, the contemplated prohibitions are not identical to prior contracting prohibitions, such as Section 889 of the FY 2019 NDAA. Unlike Section 889, for example, this new statute does not prohibit DoD from purchasing end products that contain components from affected entities as long as the purchase is not directly from one of these entities. Specifically, for indirect purchases, Section 805 has an exception excluding the purchase of components generally and as part of an end product. Additionally, the prohibition only applies to DoD, not the federal government writ large.

DoD has one year to issue rules implementing the June 2026 restriction and 545 days for the June 2027 restriction. The specifics of the Section 805 implementing regulations will likely require prime contractors to DoD to conduct expanded diligence to determine whether there are goods or services produced or developed by the identified Chinese military companies (and entities under their control) in their supply chain in order to maintain its compliance with the outlined restrictions.

Impact

The updated Section 1260H List is consistent with the Biden administration’s broader coordinated “strategic competition” strategy and approach to China, including under export controls administered by BIS, import laws administered by U.S. Customs and Border Protection (CBP), sanctions administered by OFAC and by other means, including other trade controls addressing U.S. foreign policy concerns associated with human rights, forced labor and other issues.

While the legal impact of a Section 1260H List designation standing alone is limited, such a designation could nevertheless carry reputational risks as many reputable restricted party screening providers will screen against the Section 1260H List, requiring companies reviewing those screening results to consider their risk profile. In addition, companies should be mindful that some Section 1260H List entities are also designated on other restricted party lists, which can carry more severe consequences.

U.S. Congress

On January 29, 2024, two days prior to the publication of the new Section 1260H List, several Senators sent a letter to Secretary of Defense Lloyd Austin pressing DoD “to publish the names of ‘Chinese military companies’ operating directly or indirectly in the United States, as required by Section 1260H of the Fiscal Year 2021 National Defense Authorization Act.” The senators also requested a briefing on why DoD had failed to publish a revised Section 1260H List in 2023 despite the annual requirement to do so. Despite the subsequent publication of the updated Section 1260H List, given the high degree of interest on the Hill regarding this topic, we expect members of Congress will continue to press their request for a briefing on the process for determining how DoD develops, updates and publishes the list.

Finally, Congress is also actively considering legislation that could require the Executive Branch to impose more severe restrictions on Section 1260H List entities, e.g., CMIC or SDN blocking sanctions administered by OFAC. The interest by Congress signals that oversight of the matter continues and will likely result in additional congressional activity.

_{^[i]Section 1260H(d)(1)(B) of the FY 2021 NDAA.[ii] Section 1260H(d)(2) of the FY 2021 NDAA.}

Appendix