Proposed Rule2023-26479
Interpretation of Foreign Entity of Concern
Primary source
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Published
December 4, 2023
Issuing agencies
Energy Department
Abstract
The U.S. Department of Energy (DOE or the Department) provides this notification of proposed interpretive rule and request for public comment on its interpretation of the statutory definition of "foreign entity of concern" (FEOC) in the Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Law (BIL). This statutory definition provides that, among other criteria, a foreign entity is a FEOC if it is "owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation." In this document, DOE proposes to clarify the term "foreign entity of concern" by providing interpretations of the following key terms: "government of a foreign country;" "foreign entity;" "subject to the jurisdiction;" and "owned by, controlled by, or subject to the direction of."
Full Text
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<title>Federal Register, Volume 88 Issue 231 (Monday, December 4, 2023)</title>
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[Federal Register Volume 88, Number 231 (Monday, December 4, 2023)]
[Proposed Rules]
[Pages 84082-84089]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-26479]
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DEPARTMENT OF ENERGY
10 CFR Chapter III
RIN 1901-ZA02
Interpretation of Foreign Entity of Concern
AGENCY: Office of Manufacturing and Energy Supply Chains (MESC), U.S.
Department of Energy.
ACTION: Notification of proposed interpretive rule; request for
comments.
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SUMMARY: The U.S. Department of Energy (DOE or the Department) provides
this notification of proposed interpretive rule and request for public
comment on its interpretation of the statutory definition of ``foreign
entity of concern'' (FEOC) in the Infrastructure Investment and Jobs
Act, also known as the Bipartisan Infrastructure Law (BIL). This
statutory definition provides that, among other criteria, a foreign
entity is a FEOC if it is ``owned by, controlled by, or subject to the
jurisdiction or direction of a government of a foreign country that is
a covered nation.'' In this document, DOE proposes to clarify the term
``foreign entity of concern'' by providing interpretations of the
following key terms: ``government of a foreign country;'' ``foreign
entity;'' ``subject to the jurisdiction;'' and ``owned by, controlled
by, or subject to the direction of.''
DATES: DOE invites stakeholders to submit written comments on its
interpretation. DOE will accept comments, data, and information
regarding this interpretation no later than January 3, 2024. Only
comments received through one of the methods described in the ADDRESSES
section will be accepted.
ADDRESSES: Interested persons are encouraged to submit comments using
the Federal eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a>. Follow the
instructions for submitting comments for RIN 1901-ZA02.
Alternatively, interested persons may submit comments, including
comments containing information for which disclosure is restricted by
statute, such as trade secrets and commercial or
[[Page 84083]]
financial information (hereinafter referred to as Confidential Business
Information (CBI)) and appropriately marked as such, by email to
<a href="/cdn-cgi/l/email-protection#377172787450425e5356595452775f461953585219505841"><span class="__cf_email__" data-cfemail="cd8b88828eaab8a4a9aca3aea88da5bce3a9a2a8e3aaa2bb">[email protected]</span></a>. Please include RIN 1901-ZA02 in the subject
line of the message. Please submit comments in Microsoft Word, or PDF
file format, and avoid the use of encryption.
FOR FURTHER INFORMATION CONTACT: Mallory Clites, U.S. Department of
Energy, Office of Manufacturing and Energy Supply Chains at Email:
<a href="/cdn-cgi/l/email-protection#4e080b010d293b272a2f202d2b0e263f602a212b60292138"><span class="__cf_email__" data-cfemail="1452515b5773617d70757a7771547c653a707b713a737b62">[email protected]</span></a>, Telephone: 202-287-1803.
SUPPLEMENTARY INFORMATION:
Table of Contents
A. Background and Purpose
B. Proposed FEOC Terminology Interpretations
I. Foreign Entity
II. Government of a Foreign Country
III. Subject to the Jurisdiction
IV. Owned by, Controlled by, or Subject to the Direction
C. Explanation of Proposed Interpretation
I. Foreign Entity
II. Government of a Foreign Country
III. Subject to the Jurisdiction
IV. Owned by, Controlled by, or Subject to the Direction
a. Control via 25% Interest
b. Control via Licensing and Contracting
D. Additional Request for Comments
E. Public Comment Process
F. Confidential Business Information
G. Approval of the Office of the Secretary
A. Background and Purpose
Section 40207 of BIL (42 U.S.C. 18741) provides DOE $6 billion to
support domestic battery material processing, manufacturing, and
recycling. Section 40207(b)(3)(C) directs DOE to prioritize material
processing applicants that will not use battery material supplied by or
originating from a ``foreign entity of concern'' (FEOC). Similarly,
section 40207(c)(3)(C) directs DOE to prioritize manufacturing
applicants who will not use battery material supplied by or originating
from a FEOC and prioritize recycling applicants who will not export
recovered critical materials to a FEOC. FEOC is defined in BIL section
40207(a)(5). The relevant paragraph lists five grounds upon which a
foreign entity is considered a FEOC. Subparagraphs (A), (B), and (D)
address entities designated as foreign terrorist organizations by the
Secretary of State, included on the Specially Designated Nationals and
Blocked Persons List (SDN List) maintained by the Department of the
Treasury's Office of Foreign Assets Control (OFAC), and alleged by the
Attorney General to have been involved in various illegal activities,
including espionage and arms exports, for which a conviction was
obtained, respectively. Subparagraph (C) states that a foreign entity
is a FEOC if it is ``owned by, controlled by, or subject to the
jurisdiction or direction of a government of a foreign country that is
a covered nation (as defined in [10 U.S.C. 4872(d)(2)]).'' The
``covered nations'' are the People's Republic of China (PRC), the
Russian Federation, the Democratic People's Republic of North Korea,
and the Islamic Republic of Iran (10 U.S.C. 4872(d)(2)). BIL section
40207(a)(5) provides no further definition of the term ``foreign
entity'' or of the terms used in subparagraph (C).
Subparagraph (E) of BIL section 40207(a)(5) provides an additional
means by which an entity may be designated to be a FEOC: a foreign
entity is a FEOC if it is ``determined by the Secretary [of Energy], in
consultation with the Secretary of Defense and the Director of National
Intelligence, to be engaged in unauthorized conduct that is detrimental
to the national security or foreign policy of the United States.''
In addition to affecting which entities DOE will prioritize as part
of its BIL section 40207 Battery Materials Processing and Battery
Manufacturing and Recycling Grant Programs, the term is cross-
referenced in section 30D of the Internal Revenue Code (IRC) (26 U.S.C.
30D), as amended by the Inflation Reduction Act of 2022 (IRA). Section
30D provides a tax credit for new clean vehicles, including battery
electric vehicles. Section 30D(d)(7) excludes from the definition of
``new clean vehicle'' ``(A) any vehicle placed in service after
December 31, 2024, with respect to which any of the applicable critical
minerals contained in the battery of such vehicle (as described in
[section 30D(e)(1)(A)]) were extracted, processed, or recycled by a
[FEOC] (as defined in section 40207(a)(5) [of BIL] (42 U.S.C.
18741(a)(5))), or (B) any vehicle placed in service after December 31,
2023, with respect to which any of the components contained in the
battery of such vehicle (as described in section 30D(e)(2)(A)) were
manufactured or assembled by a [FEOC] (as so defined).''
DOE is issuing this proposed guidance regarding which foreign
entities qualify as FEOCs as a result of being ``owned by, controlled
by, or subject to the jurisdiction or direction of a government of a
foreign country that is a covered nation.'' DOE considers this proposed
guidance to be a proposed interpretive rule for purposes of section 553
of the Administrative Procedure Act (APA) (5 U.S.C. 551 et seq.) and
does not consider this guidance to be a legislative rule subject to the
procedural requirements of that section. For the purposes of this
document, DOE uses the term ``interpretive rule'' and ``guidance''
interchangeably. Subsequent to the issuance of this interpretive rule,
DOE intends to promulgate separate regulations implementing the
Secretary's ``determination authority'' contained in BIL section
40207(a)(5)(E) (42 U.S.C. 18741(a)(5)(E)).
In accordance with section 553 of the APA, public notice and
opportunity for comment is not required for an interpretive rule.
Nevertheless, to get the benefit of input from the public and
interested stakeholders, the Department specifically requests comments
on its proposed interpretation of the terms discussed herein. This
document is intended to solicit public feedback on the DOE
interpretation to better understand stakeholder perspectives prior to
implementation of finalized guidance. The Department will consider all
comments received during the public comment period, and modify its
proposed approach, as appropriate, based on public comment.
This proposed guidance proceeds as follows: Section B provides
DOE's interpretation of the relevant terms related to whether a foreign
entity is a FEOC as the result of being owned by, controlled by, or
subject to the jurisdiction or direction of a government of a foreign
country that is a covered nation; Section C provides an explanation of
DOE's interpretation, along with citations to analogous provisions in
other statutory and regulatory contexts that DOE consulted in making
its interpretation; and Section D identifies some specific topics on
which DOE requests comment from the public.
B. Proposed FEOC Terminology Interpretations
DOE proposes to clarify the term ``foreign entity of concern'' by
providing interpretations for the following terms within BIL section
40207(a)(5)(C) (42 U.S.C. 18741(a)(5)(C)): ``government of a foreign
country;'' ``foreign entity;'' ``subject to the jurisdiction;'' and
``owned by, controlled by, or subject to the direction of.'' These
terms are interpreted separately, recognizing that the terms have
unique meaning. DOE also proposes interpretations of additional terms
necessary to provide clarity.
For DOE's proposed guidance, an entity is determined to be a FEOC
under BIL section 40207(a)(5)(C) if it meets the definition of a
``foreign entity,'' (Section B.I) and either is ``subject to the
[[Page 84084]]
jurisdiction'' of a covered nation government (Section B.III) or is
``owned by, controlled by, or subject to the direction of'' (Section
B.IV) the ``government of a foreign country'' (Section B.II) that is a
covered nation.
I. Foreign Entity
DOE proposes to interpret ``foreign entity'' to mean:
(i) A government of a foreign country;
(ii) A natural person who is not a lawful permanent resident of the
United States, citizen of the United States, or any other protected
individual (as such term is defined in 8 U.S.C. 1324b(a)(3));
(iii) A partnership, association, corporation, organization, or
other combination of persons organized under the laws of or having its
principal place of business in a foreign country; or
(iv) An entity organized under the laws of the United States that
is owned by, controlled by, or subject to the direction (as interpreted
in Section IV) of an entity that qualifies as a foreign entity in
paragraphs (i)-(iii).
II. Government of a Foreign Country
DOE proposes to interpret ``government of a foreign country'' to
mean:
(i) A national or subnational government of a foreign country;
(ii) An agency or instrumentality of a national or subnational
government of a foreign country;
(iii) A dominant or ruling political party (e.g., Chinese Communist
Party (CCP)) of a foreign country; or
(iv) A current or former senior foreign political figure.
Senior foreign political figure means (a) a senior official, either
in the executive, legislative, administrative, military, or judicial
branches of a foreign government (whether elected or not), or of a
dominant or ruling foreign political party, and (b) an immediate family
member (spouse, parent, sibling, child, or a spouse's parent and
sibling) of any individual described in (a). ``Senior official'' means
an individual with substantial authority over policy, operations, or
the use of government-owned resources.
III. Subject to the Jurisdiction
DOE proposes that a foreign entity is ``subject to the
jurisdiction'' of a covered nation government if:
(i) The foreign entity is incorporated or domiciled in, or has its
principal place of business in, a covered nation; or
(ii) With respect to the critical minerals, components, or
materials of a given battery, the foreign entity engages in the
extraction, processing, or recycling of such critical minerals, the
manufacturing or assembly of such components, or the processing of such
materials, in a covered nation.
IV. Owned by, Controlled by, or Subject to the Direction
DOE proposes that an entity is ``owned by, controlled by, or
subject to the direction'' of another entity (including the government
of a foreign country that is a covered nation) if:
(i) 25% or more of the entity's board seats, voting rights, or
equity interest are cumulatively held by that other entity, whether
directly or indirectly via one or more intermediate entities; or
(ii) With respect to the critical minerals, battery components, or
battery materials of a given battery, the entity has entered into a
licensing arrangement or other contract with another entity (a
contractor) that entitles that other entity to exercise effective
control over the extraction, processing, recycling, manufacturing, or
assembly (collectively, ``production'') of the critical minerals,
battery components, or battery materials that would be attributed to
the entity.
Cumulatively held. For the purposes of determining control by a
foreign entity (including the government of a foreign country), control
is evaluated based on the combined interest in an entity held, directly
or indirectly, by all other entities that qualify under the above
interpretation of ``foreign entity.'' Additionally, an entity that
qualifies as a ``government of a foreign country that is a covered
nation'' enters into a formal arrangement to act in concert with
another entity or entities that have an interest in the same third-
party entity, the cumulative board seats, voting rights, or equity
interests of all such entities are combined for the purpose of
determining the level of control attributable to each of those
entities.
Indirect control. For purposes of determining whether an entity
indirectly holds board seats, voting rights, or equity interest in a
tiered ownership structure:
<bullet> If a ``parent'' entity (including the government of a
foreign country) directly holds 50% or more of a ``subsidiary''
entity's board seats, voting rights, or equity interest, then the
parent and subsidiary are treated as equivalent in the evaluation of
control, as if the subsidiary were an extension of the parent. As such,
any holdings of the subsidiary are fully attributed to the parent.
<bullet> If a ``parent'' entity directly holds less than 50% of a
``subsidiary'' entity's board seats, voting rights, or equity interest,
then indirect ownership is attributed proportionately.
Section C, contains multiple scenarios illustrating how to
determine when an entity is indirectly controlled under this
interpretive rule.
Effective control means the right of the contractor in the
contractual relationship to determine the quantity or timing of
production, to determine which entities may purchase or use the output
of production, or to restrict access to the site of production to the
contractor's own personnel; or the exclusive right to maintain, repair,
or operate equipment that is critical to production.
In the case of a contract with a FEOC, a contractual relationship
will be deemed to not confer effective control by the FEOC if the
applicable agreement(s) reserves expressly to one or more non-FEOC
entities all of the following rights:
(i) To determine the quantity of critical mineral, component, or
material produced (subject to any overall maximum or minimum quantities
agreed to by the parties prior to execution of the contract);
(ii) To determine, within the overall contract term, the timing of
production, including when and whether to cease production;
(iii) To use the critical mineral, component, or material for its
own purposes or, if the agreement contemplates sales, to sell the
critical mineral, component, or material to entities of its choosing;
(iv) To access all areas of the production site continuously and
observe all stages of the production process; and
(v) At its election, to independently operate, maintain, and repair
all equipment critical to production and to access and use any
intellectual property, information, and data critical to production,
notwithstanding any export control or other limit on the use of
intellectual property imposed by a covered nation subsequent to
execution.
C. Explanation of Proposed Interpretation
The term FEOC, as used in both BIL section 40207 and IRC section
30D, is intended to address upstream supply chains of individual
entities that may benefit from direct or indirect federal government
financial support. As such, the interpretations proposed above are
intended to be structured as, to the greatest degree possible, bright-
line rules that would allow individual entities to readily evaluate
whether their upstream suppliers would or would not be considered
FEOCs. In the case of the
[[Page 84085]]
Battery Manufacturing and Recycling Grants Program in BIL section
40207, a bright-line rule will afford eligible entities using their
grants for battery recycling greater clarity in avoiding the export of
recovered critical materials to a FEOC.
I. Foreign Entity
To be considered a FEOC under BIL section 40207(a)(5) (42 U.S.C.
18741(a)(5)), the statute requires that the entity be a ``foreign
entity.'' However, section 40207 does not define ``foreign entity.''
The interpretation of ``foreign entity'' in this proposed guidance
aligns closely with the definition of ``foreign entity'' contained in
the 2021 National Defense Authorization Act (NDAA) (15 U.S.C. 4651(6)),
which informs certain Department of Commerce programs related to
semiconductors. Both the interpretation proposed in this guidance and
the 2021 NDAA definitions define foreign entities to include three main
categories of entities: (1) a government of a foreign country and a
foreign political party; (2) a natural person who is not a lawful
permanent resident of the United States, citizen of the United States,
or any other protected individual (as such term is defined in 8 U.S.C.
1324b(a)(3) (addressing unfair immigration-related employment
practices)); or (3) a partnership, association, corporation,
organization, or other combination of persons organized under the laws
of or having its principal place of business in a foreign country.
DOE's interpretation in this proposed guidance specifically
provides that entities organized under the laws of the United States
that are subject to the ownership, control, or direction of another
entity that qualifies as a foreign entity will also qualify as
``foreign entities'' for the purposes of BIL section 40207(a)(5)(C).
The 2021 NDAA definition of foreign entity allows for U.S. entities to
be considered foreign in this way and also provides an additional list
of criteria by which such persons may be considered foreign due to
their relationship with the three main categories of foreign entities.
While these criteria are relevant for the purposes of the Department of
Commerce programs at issue, which are primarily concerned with
preventing the transfer of semiconductor technology to covered nation
governments, DOE assesses that the criteria are not necessary for the
purpose of evaluating covered nation-associated risk to the battery
supply chains, because the natural persons and corporate entities that
are relevant to the battery supply chain are already encompassed in the
identified criteria for ``foreign entity.'' DOE's interpretation
ensures that governments of covered nations cannot evade the FEOC
restriction simply by establishing a U.S. subsidiary, while otherwise
maintaining ownership or control over that subsidiary.
II. Government of a Foreign Country
``Government of a foreign country'' is a term used to determine
whether an entity is ``owned by, controlled by, or subject to the
jurisdiction or direction of a government of a foreign country.'' It is
also used in the proposed interpretation of ``foreign entity'' in
paragraph (i) of Section B.I.
The proposed interpretation of the term ``government of a foreign
country'' contained within this notice includes subnational
governments, which can have significant ownership or control of firms
in the vehicle supply chain. In the covered nations at issue here,
there exist many subnational and local government-owned entities, that
play a large role in their nation's economies, and local state-owned
enterprises (SOEs) are a large driver of regional economies. This term
also includes instrumentalities, which include separate legal entities
that are organs of a state but where ownership may be unclear, such as
a utility or public financial institution. This interpretation aligns
with the definition of ``foreign government'' promulgated by the
Department of the Treasury in its regulations implementing the
Committee on Foreign Investment in the United States (CFIUS) program
(31 CFR 800.221). That definition includes ``national and subnational
governments, including their respective departments, agencies, and
instrumentalities.''
The proposed interpretation of the term ``government of a foreign
country'' also includes senior foreign political figures. This
inclusion recognizes the reality of government influence over business
entities in covered nations, which is often exercised through
individuals representing the government on corporate boards or acting
at the direction of the government or to advance governmental interests
when serving as an equity owner or through voting interests in an
otherwise privately held business. This interpretation aligns with the
Defense Department's National Industrial Security Program Operating
Manual (NISPOM) regulatory definition of ``foreign interest'' (32 CFR
117.3) and associated ``foreign ownership, control or influence''
(FOCI) regulations (32 CFR 117.11), which recognize as FOCI the
influence of a representative of a foreign government with the power to
direct or decide issues related to a U.S. entity. In addition, in order
to deal with the situation in which officials leave their official
positions in order to exert the same type of influence on behalf of the
government, the interpretation also includes former senior government
officials and former senior party leaders. Inclusion of former
officials is consistent with regulatory definitions in other contexts.
For example, the Bank Secrecy Act (BSA) private banking account
regulations (relating to due diligence program requirements for private
banking accounts established, maintained, administered, or managed in
the United States for foreign persons) administered by the Department
of the Treasury's Financial Crimes Enforcement Network (FinCEN) include
both current and former officials in the definition of ``senior foreign
political figure'' (31 CFR 1010.605(p)). Those regulations provide
further interpretation of the term ``senior official'' that DOE has
also included to provide additional clarity.
In the specific context of the CCP in the PRC, DOE considers its
interpretation of ``government of a foreign country'' to include
current members of Chinese People's Political Consultative Conference
and current and former members of the Politburo Standing Committee, the
Politburo, the Central Committee, and the National Party Congress
because they qualify as ``senior foreign political figures.''
Finally, the inclusion of immediate family members of senior
foreign political figures in the interpretation of ``government of a
foreign country'' aligns with the BSA private banking regulation. Those
regulations include the immediate family members of a senior foreign
political figure in their definition of ``senior foreign political
figure'' (31 CFR 1010.605(p)(1)(iii)). Immediate family members in
those regulations mean spouses, parents, siblings, children, and a
spouse's parents and siblings (31 CFR 1010.605(p)(2)(ii)).
III. Subject to the Jurisdiction
If an entity is ``subject to the jurisdiction'' of a government of
a foreign country that is a covered nation, the entity is a FEOC. DOE's
proposed interpretation provides an objective standard, consistent with
the common understanding of ``jurisdiction,'' rather than a subjective
standard that relies upon an individual nation's understanding of its
own jurisdictional reach. As such, the interpretation first recognizes
that any organization formed
[[Page 84086]]
under the laws of the government of a covered nation is a national of
that nation and therefore subject to its direct legal reach. Cf. 28
U.S.C. 1332(c)(1) (noting that, for the purposes of diversity
jurisdiction, ``a corporation shall be deemed to be a citizen of every
. . . foreign state by which it has been incorporated and of the . . .
foreign state where it has its principal place of business'').
Second, DOE's proposal accounts for the fact that several critical
segments of the battery supply chain today are predominantly processed
and manufactured within covered nation boundaries,\1\ and recognizes
that a covered nation will be able to exercise legal control
(potentially forcing an entity to cease production or cease exports)
over an entity with respect to any critical minerals that are
physically extracted, processed, or recycled, any battery components
that are manufactured or assembled, and any battery materials that are
processed within those boundaries, even if the entity is not legally
formed under the laws of the covered nation. See Third Restatement
(Foreign Relations) (1986) section 402(1) (stating that a state has
``jurisdiction to prescribe law with respect to [conduct, persons, and
interests] within its territory''). At the same time, DOE's
interpretation recognizes that such an entity, which is not legally
formed in a covered nation but has production activities inside a
covered nation, may also have separate production activities that occur
outside the covered nation. In that case, the covered nation does not
have jurisdiction over those outside production activities. Therefore,
under the proposed guidance, an entity that is not legally incorporated
in a covered nation could be nevertheless considered a FEOC under the
jurisdiction prong with respect to the particular critical minerals,
battery components, or battery materials that are subject to the
jurisdiction of a covered nation. But the entity would not be
considered a FEOC with respect to its activities related to other
critical minerals, battery components, or battery materials that are
not subject to the jurisdiction of a covered nation.
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\1\ 100-day-supply-chain-review-report.pdf (<a href="http://whitehouse.gov">whitehouse.gov</a>).
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Finally, when an entity is a FEOC due to it being ``subject to the
jurisdiction'' of a covered nation, subsidiaries of the FEOC are not
automatically considered to also be FEOCs solely based on their parent
being a covered nation jurisdictional entity. However, a subsidiary
entity would be a FEOC itself if it is also either (1) ``subject to the
jurisdiction'' of the covered nation, pursuant to Section B.III, or (2)
``controlled by'' a covered nation government, pursuant to Section
B.IV.
DOE's interpretation is supported by statutory and regulatory
choices made in similar contexts, including: the 2021 NDAA definition
of ``foreign entity'' (15 U.S.C. 4651(6)); and the NISPOM regulatory
definition of ``foreign interest'' (32 CFR 117.3). The above
interpretation of ``subject to the jurisdiction'' provides clarity to
original equipment manufacturers (OEM) that removing FEOCs from their
supply chain will require removal of any critical minerals, battery
components, and battery materials that are directly produced within the
boundary of a covered nation.
IV. Owned by, Controlled by, or Subject to the Direction
If an entity is ``owned by, controlled by, or subject to the
direction'' of (hereinafter ``controlled by'') a government of a
foreign country that is a covered nation, the entity is a FEOC. The
term is also used in paragraph (iv) of the proposed interpretation of
foreign entity to account for situations where a U.S. entity is
sufficiently controlled to be considered foreign. DOE's proposed
interpretation provides for both (1) control via the holding of 25% or
more of an entity's board seats, voting rights, or equity interest, and
(2) control via license or contract conferring rights on a person that
amount to a conferral of control.
Not all foreign entities are considered FEOCs. However, if an
entity is a foreign entity that is ``controlled by'' a covered nation
government, that entity is a FEOC. A subsidiary of that FEOC is not
automatically considered a FEOC itself unless the subsidiary is either
(1) ``subject to the jurisdiction'' of a covered nation government, or
(2) ``controlled by'' a covered nation government (including via direct
or indirect control, such as through joint ventures, or via contracts
that confer effective control to a FEOC). As such, a FEOC that is
controlled by a covered nation government may hold an interest in a
subsidiary, even an interest above 25%, and that subsidiary may still
not be a FEOC if the covered nation's level of control of the
subsidiary falls below 25% (see scenario 3 below).
a. Control via 25% Interest
DOE's interpretation of control is informed by careful analysis of
corporate structure within the battery supply chain. In the battery
industry, the primary methods by which a parent entity, including a
government of a foreign country, exercises control over another entity
is through voting interest, equity ownership, and/or boards of
directors. Parent entities may exercise control via majority ownership
of shares, voting interest, or board seats, and also through minority
holdings. Furthermore, parent entities may act in concert with other
investors to combine minority holdings to exercise control. As a
result, an effective measure of control is one that considers multiple
permutations of majority and minority holdings of equity, voting
rights, and board seats that can cumulatively confer control.
While there are several prominent companies within the battery
supply chain that are majority-owned by covered nation governments,
particularly in the upstream mining segment, the predominant form of
state ownership and influence in most segments of the battery supply
chain is through minority shareholding, voting rights, or board seats.
DOE has evaluated a range of supply chain entities for which covered
nation governments and officials with cumulative holdings between 25%
and 50% have meaningful influence over corporate decision-making, even
in cases of subsidiary entities operating in other jurisdictions and in
the case of multiple minority shareholders acting in concert. However,
DOE's assessment of the battery supply chain strongly suggests that
minority control can attenuate with multiple tiers of separation
between the state and the firm performing the covered activity.
DOE recognizes that a bright-line metric for control will be
necessary to ensure that OEMs can feasibly evaluate the presence of
FEOCs within their supply chains. Informed by empirical evidence in the
battery supply chain and choices made in other regulatory contexts,
discussed further below, DOE's interpretation establishes a 25%
threshold and guidance on calculation of the attenuation of control in
a tiered ownership structure. In the case of majority control by a
covered nation government, that control is not diluted such that
outright ownership (50%+) confers full control. This ensures that a
government-controlled company that has majority ownership of a
subsidiary passes along control. However, multiple layers of minority
control by a government may become so attenuated that an entity would
no longer be classified as a FEOC. This bright-line threshold and
guidance on how to calculate control will enable an evaluation of
battery supply chains and facilitate any required reporting or
[[Page 84087]]
certification of whether that supply chain includes products produced
by a FEOC. This same analysis applies to joint ventures, such that if
the government of foreign country that is a covered nation controls,
either directly or indirectly, 25% or more of a joint venture, then
that joint venture is a FEOC.
DOE's interpretation is supported by choices made in a variety of
statutory and regulatory regimes and it has devised a method that
accounts for the specific circumstances present in the battery
industry. DOE takes a broad approach to the interests that count
towards the 25% threshold, considering board seats, voting rights, and
equity interest. This is consistent with FOCI regulations, which
evaluate ownership based on equity ownership interests sufficient to
provide ``the power to direct or decide issues affecting the entity's
management or operations'' (32 CFR 117.11(a)(1)). The interpretation
that the interests of two entities with an agreement to act in concert
may be combined to establish a controlling interest is similar to
concepts in Securities and Exchange Commission rules defining
beneficial ownership in instances of shareholders acting in concert (17
CFR 240.13d-5) and CFIUS regulations that consider arrangements to act
in concert to determine, direct, or decide important matters affecting
an entity as one means by which two or more entities may establish
control over another entity (31 CFR 800.208(a)). Different thresholds
of control are used in different statutory and regulatory contexts
(see, for example, 26 U.S.C. 6038(e)(2), (3) (defining control with
respect to a corporation to mean actual or constructive ownership by a
person of stock possessing more than 50% of the total combined voting
power of all classes of stock entitled to vote or 50% of the total
value of shares of all classes of stock of a corporation, and control
with respect to a partnership to generally mean actual or constructive
ownership of a more than 50% capital or profit interest in a
partnership); and 26 U.S.C. 368(c) (defining control with respect to
certain corporate transactions to mean the ownership of stock
possessing at least 80% of the total combined voting power of all
classes of stock entitled to vote and at least 80% of the total number
of shares of all other classes of stock of the corporation)). However,
there are a number of analogous regulatory contexts in which a 25%
threshold for considering an entity controlled is used. For instance,
the Department of Commerce's final rule in Preventing the Improper Use
of CHIPS Act Funding, implementing a very similar FEOC provision, uses
a 25% threshold with respect to voting interest, board seats, and
equity interests (88 FR 65600; Sept. 25, 2023). The State Department,
in its International Traffic in Arms Regulation (ITAR) regulations,
established a presumption of foreign control where foreign persons own
25% or more of the outstanding voting securities of an entity, unless
one U.S. person controls an equal or larger percentage (22 CFR 120.65).
FinCEN's BSA private banking account regulations (31 CFR
1010.605(j)(1)(i)) and Beneficial Ownership Reporting Rule (31 CFR
1010.380(d)) also contain 25% ownership thresholds. See also 15 CFR
760.1(c) (defining ``controlled in fact'' using a 25% threshold for
cases where no other person controls an equal or larger percentage of
voting securities). In some of these other contexts, the 25%
calculation is based on a particular form of control (e.g., only voting
shares). DOE's interpretation broadens the forms of control that are
relevant to the 25%, because doing so accords with statutory concerns
related to the corporate structure of the battery industry.
DOE's interpretation of indirect control includes guidance on how
to calculate the attenuation of control in a tiered ownership
structure. In the case of majority control, that control is not
attenuated such that outright ownership (50%+) confers full control.
The proposed approach recognizes the reality that a parent entity that
holds a majority of the voting interest, equity, or board seats in a
subsidiary has unilateral control over that subsidiary and can direct
that subsidiary's ability to exercise influence and control over its
own subsidiaries. However, in the case of multiple tiers of minority
control by a government, the actual ability of the government to
influence the operations of a subsidiary may become so attenuated that
the subsidiary would no longer reasonably be deemed ``controlled'' by
the government. This understanding of how to calculate a parent
entity's indirect ownership and control of sub-entities is similar to
OFAC's 50% Rule, under which ``any entity owned in the aggregate,
directly or indirectly, 50% or more by one or more blocked persons is
itself considered to be a blocked person.'' See U.S. Dept. of the
Treasury, Revised Guidance on Entities Owned by Persons Whose Property
and Interests in Property are Blocked (Aug. 13, 2014).
When calculating whether an entity is a FEOC based on whether the
government of a covered nation directly or indirectly holds 25% or more
of its voting share, equity interest, or board seats, DOE's
interpretation would not factor in any voting share, equity interest,
or board seats held by an entity that is a FEOC solely by virtue of
being subject to the covered nation's jurisdiction.
The following scenarios illustrate indirect control in a tiered
ownership structure:
1. If Entity A cumulatively holds 25% of Entity B's board seats,
voting rights, or equity interest, then Entity A directly controls
Entity B. If Entity B cumulatively holds 50% of Entity C's board seats,
voting rights, or equity interest, then Entities B and C are treated as
the same entity, and Entity A also indirectly controls Entity C.
[cir] If Entity A is the government of a foreign country that is a
covered nation, Entities B and C are both FEOCs.
2. If Entity A cumulatively holds 50% of Entity B's board seats,
voting rights, or equity interest, then Entity A is the direct
controlling ``parent'' of Entity B, and Entities A and B are treated as
the same entity. If Entity B cumulatively holds 25% of Entity C's board
seats, voting rights, or equity interest, then Entity C is understood
to be directly controlled by Entity B and indirectly controlled by
Entity A.
[cir] If Entity A is the government of a foreign country that is a
covered nation, Entities B and C are both FEOCs.
3. If Entity A cumulatively holds 25% of Entity B's board seats,
voting rights, or equity interest, then Entity A directly controls
Entity B. If Entity B cumulatively holds 40% of Entity C's board seats,
voting rights, or equity interest, then Entity B directly controls
Entity C. However, because Entity A does not hold 50% of the board
seats, voting rights, or equity interest of Entity B, and Entity B does
not hold 50% of the board seats, voting rights, or equity interest of
Entity C, Entity A's indirect control of Entity C is calculated
proportionately (25% x 40% = 10%). Based on that proportionate
calculation, Entity A will be considered to hold only a 10% interest in
Entity C, which is insufficient to meet the 25% threshold for control
contemplated under this proposed guidance.
[cir] If Entity A is the government of a foreign country that is a
covered nation, Entity B is a FEOC. But Entity A holds only a 10%
interest in Entity C, which is less than the 25% threshold requirement
to deem Entity C controlled by Entity A. Therefore, Entity C is not a
FEOC via the indirect control of Entity A.
[[Page 84088]]
b. Control via Licensing and Contracting
DOE is concerned that if ``controlled by'' covered only direct and
indirect holding of board seats, voting rights, and equity interest by
the governments of covered nations, such governments may seek to evade
application of the interpretation by instead controlling FEOCs that
contract with non-FEOC entities to be the producer of record while the
FEOC maintains effective control over production. Because such
arrangements would defeat congressional intent, DOE proposes an
interpretation of ``controlled by'' that includes ``effective control''
through contracts or licenses with a FEOC that warrant treating the
FEOC as if it were the true entity responsible for any production.
Many contractual and licensing arrangements do not raise these
concerns. Therefore, to provide a reasonably bright-line test for
evaluation of upstream battery supply chains that include numerous
contracts and licenses, DOE has proposed in Section B.IV a safe harbor
for evaluation of ``effective control.'' A non-FEOC entity that can
demonstrate that it has reserved certain rights to itself or another
non-FEOC through contract would not be deemed to be a FEOC solely based
on its contractual relationships.
DOE also recognizes that even if an entity's contractual
relationship with a FEOC confers effective control over the production
of particular critical minerals, battery components, or battery
materials, the contracting entity would not necessarily be controlled
by the government of a covered nation for critical minerals, battery
components, or battery materials that were not produced pursuant to
that contract or license. Therefore, under the proposed guidance, an
entity could be considered a FEOC with respect to the particular
critical minerals, battery components, or battery materials that are
effectively produced by the FEOC under a contract or license but not
with respect to other critical minerals, battery components, or battery
materials that are produced by the entity outside the terms of the
contract or license with a FEOC.
The concept that an entity can be controlled via contract is
supported by choices made in various regulatory contexts, including
CFIUS regulations that include an understanding that control can be
established via contractual arrangements to determine, direct, or
decide important matters affecting an entity (31 CFR 800.208(a)).
Further, intellectual property can be licensed restrictively, or even
misused, to give the intellectual property owner rights beyond the
typical ability to exclude others from making, using, selling, and/or
copying the intellectual property for a limited time. In this scenario,
ownership of a facility by an entity that does not have 25% voting
interest, equity, or board seats held, directly or indirectly, by the
government of a covered nation, would not be sufficient if a FEOC
licensor or contractor maintains effective control through other
mechanisms. Accordingly, DOE has proposed a definition of effective
control that identifies criteria that would indicate that a license or
contract provides the licensor or contractor with the ability to make
business or operational choices that otherwise would rest with the
licensee or principal. The criteria selected reflect various known
mechanisms in restrictive or overreaching licenses such as lack of
access by the licensee or principal to information and data (e.g.,
control parameters or specification and quantities of material input
for equipment) that are necessary to operate equipment critical to
production at necessary quality and throughput levels. This lack of
access could be tantamount to the licensor or contractor having
effective control over the licensee or principal.
D. Additional Request for Comments
As explained in Section A, DOE requests comment on its proposed
interpretations outlined in Section B, as well as the reasoning
provided in Section C. Subsequent to the issuance of this interpretive
guidance, DOE intends to promulgate separate regulations implementing
the Secretary's determination authority contained in BIL section
40207(a)(5)(E). As such, DOE also requests comment on the following.
DOE recognizes that entities could attempt to evade ownership and
control restrictions in various ways without materially changing the
extent to which they are, in fact, subject to the ownership, control,
or direction of a covered nation as defined in this guidance. Section
40207(a)(5)(E) of BIL includes as FEOCs those foreign entities
``determined by the Secretary [of Energy], in consultation with the
Secretary of Defense and the Director of National Intelligence, to be
engaged in unauthorized conduct that is detrimental to the national
security or foreign policy of the United States.'' Accordingly, DOE
requests comment on whether use of this determination authority could
provide a tool for limiting attempts to evade such restrictions and
what DOE may deem ``unauthorized conduct.'' DOE requests specific
comment on whether, in addition to or instead of defining ``owned by,
controlled by, or subject to the direction of'' to include effective
control via contractual arrangement, DOE should consider whether a
given contractual or licensing arrangement, or operational practice
with a contractor or licensor, is a means of evading restrictions on
production by a FEOC that would warrant use of its determination
authority in BIL section 40207(a)(5)(E). For example, DOE recognizes
that even if certain rights are reserved by a non-FEOC licensee in its
contractual arrangement with a FEOC, a FEOC licensor may nevertheless
compel the licensee through leverage or coercion to not exercise the
licensee's contractual rights. DOE could construe any such overt
compulsion by a FEOC licensor as unauthorized conduct, potentially
subject to the determination authority. DOE requests comment on whether
there are any other circumstances related to contractual arrangements
between entities and FEOCs that could constitute unauthorized conduct,
potentially subject to the determination authority.
In addition, in recognition of the fact that it may be particularly
difficult to definitively evaluate the contractual relationships of
upstream suppliers, DOE is also considering whether to provide entities
with the opportunity to voluntarily request a review of contracts and
licensing arrangements by DOE in order to provide additional certainty
regarding whether effective control by a FEOC is present. DOE requests
comment on whether such a voluntary pre-review process would be
beneficial and administrable, including input on what process steps
would be reasonable and the types of documents that should be submitted
for review.
E. Public Comment Process
Comments submitted can be public or confidential.
Do not submit to <a href="http://www.regulations.gov">www.regulations.gov</a> information claimed as CBI.
Comments submitted through <a href="http://www.regulations.gov">www.regulations.gov</a> cannot be claimed as
CBI. Comments received through the website will waive any CBI claims
for the information submitted. For information on submitting CBI, see
the Confidential Business Information section.
F. Confidential Business Information
Pursuant to 10 CFR 1004.11, any person submitting information that
he or she believes to be confidential and exempt by law from public
disclosure should submit via email two well-marked copies: one copy of
the
[[Page 84089]]
document marked ``confidential'' including all the information believed
to be confidential, and one copy of the document marked ``non-
confidential'' with the information believed to be confidential
deleted. Submit these documents via email at <a href="/cdn-cgi/l/email-protection#3472717b775a5b405d5751745c451a505b511a535b42"><span class="__cf_email__" data-cfemail="b6f0f3f9f5d8d9c2dfd5d3f6dec798d2d9d398d1d9c0">[email protected]</span></a>. DOE
will make its own determination about the confidential status of the
information and treat it according to its determination.
G. Approval of the Office of the Secretary
The Secretary of Energy has approved publication of this
Notification of proposed interpretive rule; request for comments.
Signing Authority
This document of the Department of Energy was signed on November
28, 2023, by Giulia Siccardo, Director, Office of Manufacturing and
Energy Supply Chains, pursuant to delegated authority from the
Secretary of Energy. That document with the original signature and date
is maintained by DOE. For administrative purposes only, and in
compliance with requirements of the Office of the Federal Register, the
undersigned DOE Federal Register Liaison Officer has been authorized to
sign and submit the document in electronic format for publication, as
an official document of the Department of Energy. This administrative
process in no way alters the legal effect of this document upon
publication in the Federal Register.
Signed in Washington, DC, on November 28, 2023.
Treena V. Garrett,
Federal Register Liaison Officer, U.S. Department of Energy.
[FR Doc. 2023-26479 Filed 12-1-23; 8:45 am]
BILLING CODE 6450-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.