On January 4, 2024, the U.S. Attorney’s Office for the District of New Jersey announced that it has filed criminal wire fraud and false statement charges against the Chief Executive Officer (CEO) of a company that knowingly sold certain surveillance and security cameras to prosecutors’ offices, sheriffs’ offices, and police departments in the state of New Jersey that were prohibited by Section 889.

As described in more detail in a prior client alert, Section 889 contains two prohibitions.

Section 889(a)(1)(A) took effect on August 13, 2019 and provides that “The head of an executive agency may not … procure or obtain or extend or renew a contract to procure or obtain any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.”  A similar prohibition, Section 889(b)(1), effective on August 13, 2020, is imposed on loan and grant funds, and prohibits agencies from expending any such funds on covered telecommunications equipment or services.  Because state and local governments regularly receive federal loans and grants, they are generally prohibited from using any of those funds to purchase covered telecommunications equipment or services.

Section 889(a)(1)(B) took effect on August 13, 2020 and prohibits the head of an executive agency contracting with (including extending or renewing a contract) any “entity” that “uses” “covered telecommunications equipment or services as a substantial or essential component of any system or as a critical technology of any system.”  In each case, covered telecommunications equipment or services includes all telecommunications equipment or services produced and provided by Huawei Technologies Company or ZTE Corporation, and video surveillance and telecommunications equipment or services produced and provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company, or any subsidiaries or affiliates of the five entities.

The Complaint alleges that the CEO (1) knew that state and local customers were subject to Section 889 prohibitions when expending certain funds used to buy cameras manufactured by Hangzhou Hikvision Digital Technology Company, and (2) falsely represented to those customers that the cameras that he was selling were compliant with Section 889 requirements.  The Complaint specifically notes that the CEO helped certain customers to obtain federal funding to purchase products that he was selling, and that approximately $15 million of the $35 million in cameras and equipment purchased by state and local government customers from the CEO’s company was federally funded. 

The Complaint further alleges that the CEO’s company sent wire transactions to an unnamed entity that was identified as one of the five entities or their affiliates that are defined within Section 889 as providers of covered telecommunications equipment.  The Complaint also alleges that when purchasing cameras from the prohibited company, the CEO’s company would take steps to conceal the origins of the cameras, including by requesting that the branding of the cameras be removed.  The compliant also states that the CEO informed state and local customers that his company had previously sold these cameras to federal agencies when he had not. 

Ultimately, although the facts described by the Complaint paint a picture of more extreme and willful efforts to skirt Section 889 requirements, the charges reflect that the Government is increasingly focused on supply chain security, and that is willing to bring criminal action for non-compliance where it feels that prosecution is appropriate. 

Tags: Cybersecurity, Department of Defense, DoD, NDAA
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Photo of Susan B. Cassidy Susan B. Cassidy

Susan Cassidy co-chairs Covington’s Aerospace and Defense Industry Group, and has been advising government contractors for more than 35 years on the requirements imposed on companies contracting with the U.S. Government.

Susan’s practice focuses on the intersection of cybersecurity, national security, and supply…

Susan Cassidy co-chairs Covington’s Aerospace and Defense Industry Group, and has been advising government contractors for more than 35 years on the requirements imposed on companies contracting with the U.S. Government.

Susan’s practice focuses on the intersection of cybersecurity, national security, and supply chain risk management for companies that sell products and services to the U.S. Government. Susan advises contractors at all phases of the procurement cycle, and regularly:

advises clients on compliance obligations imposed by the FAR, DFARS, and other agency regulatory requirements;
leads internal and government False Claims Act (FCA) investigations addressing allegations of violations of government cybersecurity, national security, supply chain, quality, and MIL-SPEC requirements; and
advises clients who have suffered a cyber breach where U.S. government information may have been impacted.

In her work with global, national, and start-up contractors, Susan advises companies on all aspects of government supply chain issues including:

Government cybersecurity requirements, including the Cybersecurity Maturity Model Certification (CMMC), DFARS 252.204-7012, FedRAMP, controlled unclassified information (CUI), and NIST SP 800-171 requirements;
Evolving sourcing issues such as Section 889, counterfeit part requirements, Section 5949 semiconductor product and service restrictions, and limitations on sourcing a variety of products from China; and
Federal Acquisition Security Council (FASC) regulations and product exclusions.

 

Susan previously served as senior in-house counsel for two major defense contractors (Northrop Grumman Corporation and Motorola Incorporated) and is Chambers rated in both Government Contracts and Government Contracts Cybersecurity. Chambers USA has quoted sources stating that “Susan’s in-house experience coupled with her deep understanding of the regulatory requirements is the perfect balance to navigate legal and commercial matters.”

Susan is a former Public Contract Law Procurement Division Co-Chair, former Co-Chair and current Vice-Chair of the ABA PCL Cybersecurity, Privacy and Emerging Technology Committee.

Susan’s pro-bono work extends to assisting veterans in a variety of matters, as well as providing advice to elderly clients on their wills and other end-of-life planning documents.

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Photo of Ryan Burnette Ryan Burnette

Ryan Burnette is a government contracts and technology-focused lawyer that advises on federal contracting compliance requirements and on government and internal investigations that stem from these obligations. Ryan has particular experience with defense and intelligence contracting, as well as with cybersecurity, supply chain…

Ryan Burnette is a government contracts and technology-focused lawyer that advises on federal contracting compliance requirements and on government and internal investigations that stem from these obligations. Ryan has particular experience with defense and intelligence contracting, as well as with cybersecurity, supply chain, artificial intelligence, and software development requirements.

Ryan also advises on Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) compliance, public policy matters, agency disputes, and government cost accounting, drawing on his prior experience in providing overall direction for the federal contracting system to offer insight on the practical implications of regulations. He has assisted industry clients with the resolution of complex civil and criminal investigations by the Department of Justice, and he regularly speaks and writes on government contracts, cybersecurity, national security, and emerging technology topics.

Ryan is especially experienced with:

Government cybersecurity standards, including the Federal Risk and Authorization Management Program (FedRAMP); DFARS 252.204-7012, DFARS 252.204-7020, and other agency cybersecurity requirements; National Institute of Standards and Technology (NIST) publications, such as NIST SP 800-171; and the Cybersecurity Maturity Model Certification (CMMC) program.
Software and artificial intelligence (AI) requirements, including federal secure software development frameworks and software security attestations; software bill of materials requirements; and current and forthcoming AI data disclosure, validation, and configuration requirements, including unique requirements that are applicable to the use of large language models (LLMs) and dual use foundation models.
Supply chain requirements, including Section 889 of the FY19 National Defense Authorization Act; restrictions on covered semiconductors and printed circuit boards; Information and Communications Technology and Services (ICTS) restrictions; and federal exclusionary authorities, such as matters relating to the Federal Acquisition Security Council (FASC).
Information handling, marking, and dissemination requirements, including those relating to Covered Defense Information (CDI) and Controlled Unclassified Information (CUI).
Federal Cost Accounting Standards and FAR Part 31 allocation and reimbursement requirements.

Prior to joining Covington, Ryan served in the Office of Federal Procurement Policy in the Executive Office of the President, where he focused on the development and implementation of government-wide contracting regulations and administrative actions affecting more than $400 billion dollars’ worth of goods and services each year.  While in government, Ryan helped develop several contracting-related Executive Orders, and worked with White House and agency officials on regulatory and policy matters affecting contractor disclosure and agency responsibility determinations, labor and employment issues, IT contracting, commercial item acquisitions, performance contracting, schedule contracting and interagency acquisitions, competition requirements, and suspension and debarment, among others.  Additionally, Ryan was selected to serve on a core team that led reform of security processes affecting federal background investigations for cleared federal employees and contractors in the wake of significant issues affecting the program.  These efforts resulted in the establishment of a semi-autonomous U.S. Government agency to conduct and manage background investigations.

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Photo of Darby Rourick Darby Rourick

Darby Rourick is a government contracts lawyer that advises on federal contracting compliance requirements and on government and internal investigations that stem from these obligations. She has particular experience in federal cybersecurity and information technology supply chain issues. Darby has an active investigations…

Darby Rourick is a government contracts lawyer that advises on federal contracting compliance requirements and on government and internal investigations that stem from these obligations. She has particular experience in federal cybersecurity and information technology supply chain issues. Darby has an active investigations practice and advises contractors when faced with cyber incidents involving government information, as well as representing contractors facing allegations of cyber fraud under the False Claims Act. She also counsels clients on cybersecurity incident response; compliance with federal cybersecurity laws, regulations, and standards; supplier and subcontractor security issues; and cybersecurity related investigations.

Darby has particular regulatory experience with:

Government cybersecurity supply chain issues like the Cybersecurity Maturity Model Certification (CMMC), DFARS 7012, and NIST SP 800-171 requirements; and
Information handling, marking, and dissemination requirements, including those relating to Covered Defense Information (CDI) and Controlled Unclassified Information (CUI)

She also assist clients when allegations of non-compliance arise with procurement requirements, such as in the following areas:

Procurement fraud and FAR mandatory disclosure requirements;
Allegations of violations of cybersecurity regulation;
Cyber incidents and data spills; and 
Compliance with MIL-SPEC requirements, the Qualified Products List, and other sourcing obligations.

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