Effective Today – New Export Control Restrictions on Military End Users and End Uses in China, Russia, and Venezuela

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Bureau of Industry and Security Issues Guidance on Rule

The new Bureau of Industry and Security (“BIS”) rule prohibiting certain exports, reexports, and transfers of items to “military end-users” and “military end-uses” in China, Russia, and Venezuela is effective today.

The new rule creates additional due diligence burdens on manufacturers and exporters in the materials processing, technology, electronics, telecommunications, information security, sensors and lasers, and propulsion sectors.  Under the new rule, exporters are prohibited from knowingly exporting, reexporting, or transferring enumerated items to the armed forces, certain state-owned enterprises, defense contractors, and other companies that develop, produce, maintain, or use military items in China, Russia, or Venezuela.

Although the rule is effective today, it includes a savings clause that provides that any item on the dock for loading or already en route as of today may be shipped until July 27, 2020.  In addition, certain aspects of the newly expanded Electronic Export Information (“EEI”) filing requirements are delayed until September 27, 2020.

Late Friday, BIS published a series of Frequently Asked Questions (FAQs) regarding the new restrictions.  Based on the FAQs, BIS expects exporters to perform robust due diligence to determine whether the rule applies.  Exports should consider developing and documenting internal processes and procedures to ensure compliance with this rule.  Given the administration’s focus on enforcing export controls rules with these countries, especially China, caution is warranted.  Below are key aspects of the BIS guidance:

  • The restrictions apply to several types of entities.  The rule not only applies to traditional foreign military and related organizations, but also to governmental organizations, state-owned enterprises (“SOEs”), and other private companies that support “military end-uses.”
  • The restrictions can apply to items that are not intended for a military end-use if those items are for export to a military end-user An end-use statement that a product will not be used for a military end-use is therefore a necessary, but not a sufficient, part of the due diligence required by this rule.
  • Subsidiary agencies or authorities of military end-users may be, but are not necessarily, also military end-users To determine whether such an agency or authority also qualifies, the exporter must analyze its nexus and relationship to the military end-user, what role the agency or authority serves to the public, and whether it develops or uses military items.  The FAQs specifically identify military hospitals as an example of an entity that must be analyzed on a case-by-case basis.
  • Affiliated companies are not necessarily subject to the same restrictions as their related entities. Exporters must perform due diligence to determine the relationship between the affiliates.  If the parent or subsidiary is directly involved in military end-uses, and the specific end-user’s activities are “relevant” to those end-uses, then it is a factor that the exporter must consider in making its determination.  If a direct nexus exists between the two entities, it is very likely that the end-user will be subject to the restrictions in the rule.
  • Sales to distributors that sometimes supply military end-users will be subject to the restrictions if the exporter has knowledge that the distributor intends to supply your items for a military end-use Therefore, sales to distributors that supply military end-users are not necessarily subject to the restrictions.  However, it is now necessary to educate your distributors on these restrictions and to gain assurance that your items will not be re-exported or transferred to such end-users.

This rule will have a significant effect on exporters in certain industries, given its application to less sensitive goods, including most industrial pumps controlled under ECCN 2B999 and mass market software controlled under ECCN 5D992, among other items.  Companies need to adopt procedures to determine whether the new rule applies to their products and to determine whether sales of those items involve prohibited military end users or end uses.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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