The U.S. Department of Commerce, Bureau of Industry and Security (BIS) released impactful new rules on April 28, 2020, that significantly heighten controls on exports to China, Russia, and Venezuela under the Export Administration Regulations (EAR). Industry has only 60 days to implement the new rules. The effective date is June 29, 2020.
Briefly, the new rules:
Expand the export licensing requirements for China to include “military end users,” in addition to the previous terminology “military end use.”
Broaden the list of items for which the EAR licensing requirements and review policy apply.
Expand the definition of “military end use.”
Create a new reason for control under the EAR with the associated review policy for Regional Stability (RS) for certain items exported to China, Russia, or Venezuela.
Add Electronic Export Information (EEI) filing requirements in the Automated Export System (AES) for exports to China, Russia, and Venezuela.
In line with U.S. national security and foreign policy objectives, the new rules broaden the U.S. government’s visibility into and ability to deny or condition exports, reexports, and transfers (in-county) involving certain items on the Commerce Control List (CCL) that are destined to military end users or end uses in China, Russia, or Venezuela.
China licensing requirements expanded to include “military end users”
In 2007, the U.S. government implemented licensing requirements for certain items intended for “military end use” in China. This rule now adds “military end user” (i.e., who will ultimately use the product) restrictions for China. Russia and Venezuela already are restricted for both “military end use” and “military end user.” This expansion will require increased diligence with respect to the evaluation of end users in China, particularly in view of China’s widespread civil-military integration.
The definition of “military end user” did not change. It includes the army, navy, air force, marines and coast guard, plus the national guard/police, government intelligence and reconnaissance organizations.
Broadens the list of items for which the licensing requirements and review policy apply
The rule adds additional items subject to the military end use and end user license requirements in Supplement no. 2 to part 744 of the EAR. The following Export Control Classification Numbers (ECCNs) are now added: 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990. Additionally, the range of controlled items is expanded in ECCNs 3A992, 8A992, and 9A991.
Among the newly added products are encryption items, including many types of software that incorporate or call on common encryption functionality. Other new items include certain microchips and integrated circuits, electronic testing and processing equipment, telecommunications test equipment, and materials processing equipment, such as mining and drilling equipment.
Under the new rule, BIS is implementing a license review policy of presumption of denial. This strict policy is consistent with the existing review policy for certain exports, reexports, and transfer (in-country) of microprocessors and associated software and technologies for military end uses and end users.
Revised “military end use” definition
The existing definition of “military end use” (how the product will ultimately be used) applies to transactions where the item is for “development,” “production,” or “use” of military items. This definition was revised and the scope expanded to include any item that merely supports or contributes to the operation, maintenance, repair, overhaul, refurbishing, “development,” or “production” of military items described on the USML, or items classified under ECCNs ending in “A018” or under “600 series” ECCNs (items with military applications that migrated from the ITAR to EAR under Export Control Reform).
The “end use” definition refers to both direct use (for parts, components or subsystems of weapons and other defense articles) and indirect use (weapon design and development, testing, repair and maintenance).
Create Regional Stability (RS) control for items exported to China, Russia, or Venezuela
Existing license requirements for items in a .y paragraph of a 9x515 or “600 series” ECCN to China, Russia, or Venezuela are found in in section 744.21 of the EAR and not on the CCL. This new rule relocates the existing licensing requirements to the relevant ECCNs on the CCL. Accordingly, the “reason for control” will be RS.
Additional EEI Filing Requirements
Current EEI filing requirements exempt exporters from:
filing the EEI for shipments of $2,500 or less (unless a license is required), and
entering the ECCN in the EEI when the reason for control is anti-terrorism (AT) only.
The new rules dramatically expand the export filing requirements – and, of course, the administrative burden on U.S. exporters shipping to these three countries. First, all shipments from the United States to China, Russia, or Venezuela will require EEI filings regardless of value. The only exception is if the shipment is eligible for EAR License Exception GOV. Second, the ECCN must be entered on the EEI filing, even if no license is required.
This amendment to the EEI reporting requirements is designed to ensure that BIS and other U.S. government trade enforcement agencies have increased visibility into shipments to jurisdictions of significant concern. Thus, we anticipate the changes will result in increased enforcement activity.
The rule covered in this article is one of three released on April 28, 2020. The second rule eliminates License Exception Civil End Users (CIV), which authorized the export of certain items controlled for National Security (NS) reasons to countries in Country group D:1, including China, Russia, and Venezuela. These two rules are final. The third rule is a proposal to modify license exception Additional Permissive Reexports (APR), which currently authorizes the reexport of U.S. origin items from third countries to China and other Country Group D:1 destinations. The proposed rule removes the Country Group D:1 as eligible destinations and will require a license from the U.S. government for such reexports.
The US government has expressed concern about efforts by China to deliberately erase the line between military and civilian sectors, or civil-military fusion. The U.S. government’s response is to increase the oversight of exports to China, Russia, and Venezuela with more responsibility placed on exporters for vetting transactions. Do you know who will ultimately use your product, or how your product will ultimately be used? Do you know if your customer provides support to a “military end user”? While it is often challenging to provide this level of detail, an increasingly thorough review of each transaction and enhanced export due diligence must occur before shipping to China, Russia, or Venezuela.
Additionally, the rule has placed new, across the board, EEI filing requirements for exports to China, Russia, and Venezuela. This is a major change to EEI filing processes and may increase the risk of errors. Even if a license is not required, the failure to comply with the new EEI requirement may result in a violation of both the EAR and the Foreign Trade Regulations (FTR).
As the effective date nears, exporters should evaluate their readiness for the new rules and adjust their compliance processes accordingly.