On March 1, 2023, the U.S. Department of Defense (“DoD”) adopted, without change, Defense Federal Acquisition Regulation Supplement (“DFARS”) Case No. 2022-D010, Employment Transparency Regarding Individuals Who Perform Work in the People’s Republic of China (88 Fed. Reg. 12861), updating provisions at DFARS 225.7021 and adding contract clauses at 252.225-7057 and 252.225-7058. This latest DFARS rule reflects a shifting regulatory landscape aimed at increasing transparency and oversight of U.S. transactions involving China.
In line with this strategy, the Biden Administration is expected to announce new outbound investment restrictions (recently discussed here), which will increase the U.S. Government’s oversight of capital moving from the United States to China and, for the first time, potentially deny proposed outbound investments in certain Chinese industries, such as the semiconductor industry.
Adoption of this final rule also comes alongside several other provisions in the Fiscal Year 2022 National Defense Authorization Act, Pub. L. No. 117-81 (“FY 2022 NDAA”), that focus on strengthening the U.S. supply chain security posture and restricting reliance on goods and services from U.S. adversaries. These provisions include Section 848, Prohibition on Certain Procurements from the Xinjiang Uyghur Autonomous Region and Section 851, Modifications to Printed Circuit Board Acquisition Restrictions.
In accordance with this broad strategy to limit exposure to China, DFARS Case No. 2022-D010 implements Section 855 of the FY 2022 NDAA, which we previously discussed in our August 2022 blog (available here). Some of the key takeaways include:
- Section 855 requires covered entities (defined as companies performing work on a defense contract valued above $5 million in China) to disclose to the DoD in the entity’s proposal if the entity employs one or more individuals who will perform work in China. DoD is prohibited from making or extending an award if an entity fails to make the required disclosure.
- The new disclosure requirement does not apply to defense contracts for commercial products or commercial services.
- If an entity is unable or unwilling to make the required disclosure (as determined by the senior procurement executive based on national security concerns), waivers may be available. Contracting Officers should submit waiver requests to Defense Pricing and Contracting, Contract Policy (“DPC/CP”) via email at osd.pentagon.ousd-a-s.mbx.dpc-cp@mail.mil. See PGI 227.7021.
If you have questions about this new rule or other supply chain restrictions, please reach out to the Sheppard Mullin Supply Chain Management Team, including the authors. We are here to help you navigate the complicated issues surrounding international supply chains, and, in particular, restrictions relating to China.