On April 28, 2020, the US Department of Commerce Bureau of Industry and Security (“BIS”) published two final rules and a proposed rule designed to impose further restrictions on exports and technology transfers to China, Russia, Venezuela and other countries of national security concern. In announcing these changes, US Secretary of Commerce Wilbur Ross cited efforts by China, Russia and Venezuela to use “civilian supply chains” to acquire US goods and technology for diversion to military and intelligence applications that harm US interests. As a practical matter, all three actions have broad and significant implications for US and non-US entities dealing goods, software and technology in a broad range of applications (notably including items relating to semiconductor, civil aviation, telecommunications, optics and other technologies), and will create new due diligence obligations and licensing requirements for exports, reexports and transfers involving countries of national security concern.
More importantly, the net effect of these rules will be to provide the US government greater visibility and controls over exports, reexports and transfers to civilian end users in China and other affected countries and enhance the corresponding due diligence obligations and licenses for parties in the supply chain affected by these changes.
The rules published yesterday are as follows:
- A final rule, to go into effect June 29, 2020, that significantly expands licensing requirements for export, reexport and transfer (in-country) of a broad range of goods (including materials and equipment), software and technology controls for military end use or military end users in the People’s Republic of China, Russia, or Venezuela (the “MEU Rule”).
- A final rule, to go into effect June 29, 2020, to remove License Exception Civil End Users (“CIV”), an authorization that currently allows for unlicensed exports, reexports or transfers of a range of national security-controlled items to civilian end users in several countries, including China. BIS review will now be required for activities involving purely civilian end uses and previously covered by this license exception.
- A proposed rule, with comments due by June 29, 2020, to modify License Exception Additional Permissive Reexports (“APR”) by removing provisions which authorize non-US companies to reexport from certain lower-risk countries certain national security-controlled items on the CCL to countries of national security concern, including China (the “APR Proposed Rule”).
Summary of Changes
The MEU Rule (Military End Uses and End Users in China, Russia and Venezuela in the “Civil-Military Fusion” Context)
The MEU Rule implements, effective June 29, 2020, several changes related to military end use and military end user controls with respect to China, Russia and Venezuela (15 C.F.R. § 744.21). The key changes are as follows:
- Expansion to “Military End Users” in China and “Increased Diligence” Obligation. The rule expands the current licensing requirement on certain items for Chinese “military end use” to also include Chinese “military end users” (in addition to existing controls on military end users and end uses in Russia and Venezuela). Notably, the agency highlights that this change “will require increased diligence with respect to the evaluation of end users in China, particularly in view of China’s widespread civil-military integration.” BIS defines “military end user” broadly for these purposes to include not only military, law enforcement and intelligence functions but also “any person or entity whose actions or functions are intended to support” military end uses.
- Expansion of Restricted Items. The rule expands the items for which the military end use and end user restrictions on China, Russia and Venezuela apply. The revised Supplement No. 2 to Part 744 adds the following ECCNs in the categories of materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion: 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996 and 9B990. The rule also expands the range of items under ECCNs 3A992, 8A992 and 9A991 already included in Supplement No. 2.
- Expanded Definition of “Military End Use.” The rule broadens the definition of “military end use” to include not only incorporation into any military item but also “any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, ‘development’ or ‘production’” of such items. A military item for these purposes is any item described on the US Munitions List or under an A018 or 600 series classification of the EAR.
- Presumption of Denial. The new rule adopts a presumption of denial for those applying for a license to export, reexport or transfer items to military end users or for military end use in China, Russia and Venezuela.
- Expanded Export Declaration Requirements. The rule expands Electronic Export Information (“EEI”) filing requirements in the Automated Export System (“AES”) to require filings for exports of any items on the CCL to China, Russia or Venezuela regardless of the value of the shipment (with the exception of certain shipments of the US government, certain cooperating governments and international bodies eligible for License Exception GOV). In addition, the EEI filing must include the correct ECCN regardless of the reason for control.
The CIV Rule (Civil End Users in Group D:1 Countries)
- Effective June 29, 2020, the CIV Rule removes License Exception CIV from the EAR. License Exception CIV previously authorized exports, reexports and transfers (in-country) of certain national security-controlled items on the CCL, without prior review by BIS, provided the exception’s criteria were met, to most civil end users for civil end uses in Country Group D:1 (countries of national security concern). BIS decided to remove this license exception due to the “increasing integration of civilian and military technology development in” the D:1 countries.
- Now, a license is required to export, reexport or transfer (in-country) items controlled for national security to D:1 countries.
APR Proposed Rule (Certain Reexports and Transfers Consistent with the Laws of Certain Friendly Jurisdictions)
- The APR Proposed Rule proposes to modify the EAR to no longer allow reexports under License Exception APR to Country Group D:1 countries (including China), with the goal of gaining better visibility into transactions of national security or foreign policy interest to the United States. License Exception APR currently allows for reexports of items controlled for national security reasons to be made from certain friendly jurisdictions (including Hong Kong) to certain destinations, provided that the reexport is consistent with an export authorization from the country of reexport.
The proposed rule would remove countries in Country Group D:1 as a category of eligible destinations for national security-controlled items under License Exception APR.
- The proposed change is “due to variations in how the United States and its partners . . . perceive the threat of civilian and military technology development in countries of concern.” Namely, certain countries have differing licensing review standards for national security-controlled items destined to Country Group D:1, resulting in the reexport of US-origin items from A:1 countries to D:1 countries that would have been denied if exported directly from the United States.
- BIS is seeking public comment on the APR Proposed Rule, which must be received by June 29, 2020.
Key Considerations for Business
These new rules should be understood in the context of the US government’s increased scrutiny on the use of “civilian supply chains” by companies in the commercial sector for acquisition and diversion of products to military application. These rules may pose a number of new considerations and challenges for companies exporting, reexporting or transferring items subject to national security controls as well as companies whose supply chains depend on such items.
- Companies involved directly or indirectly in the trade or transfer of covered goods (including production equipment, materials and finished products), software or technology to China, Russia and Venezuela should carefully consider the risk that the US government may consider their commercial activities to involve “military end users” or “military end uses” and ensure they have appropriate due diligence and risk mitigation in place to address those risks given the current focus on “widespread civil military integration.”
- Companies that rely on, or whose suppliers may rely on, License Exception CIV should evaluate the potential impact of the elimination of that license exception on their current sales and supply chain (including possible license application requirements to BIS).
- Parties should immediately consider updating their AES filing protocol for exports of items to China, Russia or Venezuela to ensure that the new EEI filing requirements— which now apply to shipments of any value, among other requirements—can be met by June 29, 2020.
- While changes under the APR Proposed Rule are not final, parties should identify whether any of their transactions would no longer be permitted if BIS removes D:1 countries as an eligible destination from License Exception APR. Potentially impacted businesses should also consider submitting comments to BIS. Specifically, BIS “does not have a way to readily account for how many items are being authorized for reexport or transfer (in-country) under the provisions of License Exception APR” and thus “is seeking information as to the volume of transactions affected by this proposed change, how the proposed change would affect the amount of time necessary to complete such transactions in the future, and how the proposed change would otherwise affect current business.” Comments are due by June 29, 2020.