The U.S. Department of Commerce Bureau of Industry and Security (“BIS”) is cracking down on foreign governments that prevent the end-use checks the BIS uses to ensure compliance with Export Administration Regulations (“EAR”).

BIS’s mission is broad, explains the Assistant Secretary for Export Enforcement, Mathew Axelrod: to “protect sensitive American goods from falling into the wrong hands.”[1] End-use checks are one method used in carrying out this mission, and recent policy updates announced by BIS emphasize the significance of end-use checks and the consequences exporters may face if they are not in timely completed.

On October 7, 2022, BIS amended § 744.11 of the EAR to specifically address situations where end-use checks are prevented due to a sustained lack of cooperation by a host government.[2] At the same time, BIS added 31 parties to the Unverified List and provided new timelines for adding and removing parties to and from its Unverified and Entity Lists via a policy memorandum.[3]

In general, the Unverified and Entity Lists administered by BIS act as enforcement mechanisms. Foreign parties can be placed on the lists for various reasons, including when BIS is unable to conduct end-use checks due to a host government’s lack of cooperation. Parties placed on these lists face additional licensing requirements and trade restrictions for items subject to the EAR.

The Unverified List (“UVL”)

The UVL is located in Supplement No. 6 to Part 744 of the EAR. Foreign entities may be added to the UVL pursuant to § 744.15(c) of the EAR, which states that parties may be included on the list when BIS cannot verify – due to reasons outside the control of the U.S. government – the bona fides of a foreign party involved in export, reexport, or transfer (in-country) of goods subject to the EAR.[4] End-use checks allow the government to verify the bona fides of a foreign party, or in other words, to ensure the legitimacy and reliability of the end-use or end-user of an EAR-controlled item. Section 744.15(c) lists illustrative examples of situations where BIS cannot carry out end-use checks, including a scenario where an end-use check is prevented due to a host government’s lack of cooperation.[5] When this occurs, BIS is unable to verify the bona fides of a foreign party, and as a result, the party involved may end up listed on the UVL.

Placement on the UVL generates additional trade barriers for a listed party and any entities involved in transactions with them.[6] Most significantly, before exporting, reexporting, or transferring (in-country) goods subject to the EAR that do not have a license requirement, parties must first obtain a “UVL statement” from any UVL-listed entity involved in the transaction.[7] The statement must include the name of the listed entity, an end-user address, a statement that the listed entity agrees not to use, reexport, or transfer the items in any way prohibited under the EAR, and declaration of the ultimate end-use and end-user of the items.[8] In addition, exports, reexports, and transfers involving the listed party may no longer benefit from license exceptions and must comply with mandatory Electronic Export Information (“EEI”) procedures.[9]

These additional requirements are meant to mitigate the risk that items exported by the listed parties are diverted for users or uses that harm U.S. policy or national security.[10]

The Entity List – Added Criterion

The Entity List is set forth in Supplement No. 4 to Part 744 of the EAR. It specifically targets parties that are involved, or at significant risk of becoming involved, in activities contrary to the national security or foreign policy of the United States.[11] Parties on the list are not eligible for license exceptions, and exports, reexports, or transfers (in-country) involving parties on the Entity List are subject to additional licensing requirements.[12] These requirements are item-specific and will be listed in the license requirement column corresponding with a party’s entry on the Entity List.[13]

Section 744.11(b) of the EAR provides an illustrative list of activities warranting a party’s addition to the Entity List, which includes the support of persons engaged in acts of terror, acting to enhance the military capability of governments designated by the Secretary of State to have repeatedly supported acts of terrorism, and the development, repair, or other involvement with weapon production that threatens U.S. national security or foreign policy.[14]

The new EAR rule, effective October 7, 2022, added a criterion to the § 744.11(b) list of activities that represent a risk to U.S. national security and/or foreign policy.[15] Parties that have been added to the UVL because a host government prevented the completion of an end-use check may now face being added to the Entity List where:

A sustained lack of cooperation by the host government to schedule and facilitate the completion of an end-use check of entities identified on the Unverified List pursuant to § 744.15, resulting in sufficient concern such that the End-User Review Committee believes that prior review of exports, reexports, or transfers (in-country) involving the entity and the possible imposition of license conditions or license denial enhance BIS’s ability to prevent violations of the EAR.[16]

As such, not only may parties be added to the Entity list as a result of their own actions, they now face being added when a relevant host government prevents an end-use check. This amendment reflects the clarification by BIS that a sustained lack of cooperation by a host government relating to end-use checks poses a significant risk to U.S. national security and foreign policy, especially when those checks involve parties already listed on the UVL.[17]

The New Policy: 60-Day-Two-Step

In addition to the EAR amendment, BIS also released an accompanying policy memorandum that introduces new deadlines for end-use checks.[18] End-use checks must be “scheduled and conducted promptly,” and must be conducted within 60 days of a BIS request.[19] If an end-use check has not been conducted within 60 days, the process of placing the foreign party on the UVL will be initiated.[20]

In addition, following a party’s listing on the UVL due to a host government’s lack of cooperation in conducting an end-use check, a second 60-day clock will begin to run.[21] If an end-use check cannot be completed within this second 60-day period, the process for placing the party on the Entity List will then be initiated.[22] It should also be noted that the memo states that this 60-day clock was initiated upon publication of the Memorandum for parties already listed on the UVL.[23]

Conclusion

In addition to § 744.11 amendments and the new two-step policy, BIS also added 31 parties to the UVL, all located in China.[24] At the same time, nine parties were removed from the UVL after BIS was able to verify their bona fides.[25] It is unclear whether the parties added to the list are subject to the new 60-day clock, as BIS did not publish the names of the parties it added because a host government failed to cooperate in facilitating an end-use check.

Regardless, the amendments to the EAR as well as the policy memorandum clearly suggest a stricter approach to the timely completion of end-use checks and host government cooperation. As a result, the addition of a multitude of parties to the Unverified and Entity Lists may soon be seen.