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.