As previously discussed, on April 28, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced significant changes to the Export Administration Regulations (EAR) to further restrict transactions with military end users and end uses in China, Russia and Venezuela. These new rules went into effect on June 29, 2020. Immediately prior to their entry into force, on June 26, 2020, the BIS published Frequently Asked Questions (FAQs) and guidance on the scope and extent of these new rules — particularly as they apply to entities in China. The FAQs also address the presumption of denial for license applications for military end uses and end users, as well as the new mandatory Electronic Export Information (EEI) filing requirements for controlled items destined to China, Russia and Venezuela.
Overview of the BIS FAQs
BIS’ newly released FAQs provide guidance on this new rule. The export community has been eagerly awaiting this formal guidance. In particular, U.S. universities, pharmaceutical companies, and medical device companies sought clarification for transactions with Chinese universities and hospitals that may be affiliated with the Chinese military.
In the FAQs, BIS clarifies that the definition of “military end user” remains unchanged, even if its application is being extended to China. Specifically, the definition includes “traditional foreign military and related organizations, ... the national guard and national police, government intelligence or reconnaissance organizations” and “any other end user whose activities are intended to support ‘military end uses.’” The definition of “military end use” has been expanded, however, to include “any item that supports or contributes to the operation, installation, refurbishing, development, or production of military items” that are controlled under the U.S. Munitions List or under certain classifications under the Commerce Control List. These changes also apply to the existing rules on military end users and military end uses in Russia and Venezuela.
The FAQs also address the definition of “knowledge” and common scenarios that arise with regard to exports, reexports, or transfers of goods, technology, or software to end users in China, Russia and Venezuela. Among other things, these scenarios provide additional guidance on how companies should undertake due diligence with regard to hospitals or universities in these countries.
When the rule changes were first announced in April 2020, many companies raised concerns with BIS about how to investigate overseas companies given sometimes opaque ownership structures which can make it difficult to assess whether business dealings with a particular company would implicate military end user or end use restrictions. The latest BIS FAQs are a response to these concerns.
Notably, the BIS FAQs were released the same week that the U.S. Department of Defense provided a list to Senator Tom Cotton of Chinese companies that it has determined have ties to the Chinese military pursuant to Section 1237 of the National Defense Authorization Act for Fiscal Year 1999. These designations can serve as further guidance to companies seeking to apply the new BIS military end use and end user rules. The involvement in a proposed transaction of any of the Chinese companies thus designated should be viewed as a “red flag” that may warrant closer scrutiny and due diligence. These companies are:
- Aviation Industry Corporation of China (AVIC)
- China Aerospace Science and Technology Corporation (CASC)
- China Aerospace Science and Industry Corporation (CASIC)
- China Electronics Technology Group Corporation (CETC)
- China South Industries Group Corporation (CSGC)
- China Shipbuilding Industry Corporation (CSIC)
- China State Shipbuilding Corporation (CSSC)
- China North Industries Group Corporation (Norinco Group)
- Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
- Inspur Group
- Aero Engine Corporation of China
- China Railway Construction Corporation (CRCC)
- CRRC Corp.
- Panda Electronics Group
- Dawning Information Industry Co. (Sugon)
- China Mobile Communications Group
- China General Nuclear Power Corp.
- China National Nuclear Corp.
- China Telecommunications Corp.
At the same time, Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 authorizes the President to impose certain economic sanctions under the International Emergency Economic Powers Act (IEEPA). IEEPA is the same statute that authorizes most U.S. trade embargoes and sanctions on countries like Iran and North Korea, and the release of the list could be a signal that the Administration may be contemplating placing comprehensive sanctions on these Chinese companies in the near future.
BIS Postpones and Clarifies New EEI Filing Requirements for Exports to China, Russia and Venezuela
As part of the new military end user rule, BIS also announced that it would be imposing an EEI filing requirement for all exports of commodities listed on the Commerce Control List (CCL) to China, Russia, and Venezuela, regardless of value. Initially, this was to take effect on June 29, 2020. However, on June 25, 2020, BIS announced that it would be instituting the new EEI filing requirement beginning June 29, 2020 only as to the commodities listed on the revised Supplement No. 2 to Part 744 of the EAR. These include exports of Export Control Classification Numbers 1A290, 1C990, 1C996, 1D993, 1D999, 1E994, 2A290, 2A291, 2A991, 2B991, 2B992, 2B996, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 3E991, 4A994, 4D993, 4D994, 5A991, 5A992, 5B991, 5D991, 5D992, 5E991, 6A991, 6A993, 6A995, 6A996, 6C992, 7A994, 7B994, 7D994, 7E994, 8A992, 8D992, 8E992, 9A991, 9B990, D991 and 9E991 commodities.
For all other commodities listed on the CCL valued less than $2,500 per Schedule B number, the new EEI filing requirement will take effect on September 27, 2020. Importantly, the latest BIS FAQs clarify that EEI filings will not be required when the $2,500 threshold is not met and the commodities are EAR99 or subject to License Exception GOV.
The latest BIS FAQs and newly released designations of Chinese companies linked to the Chinese military underscore the critical importance of conducting thorough “know your customer” due diligence with regard to all transactions subject to the U.S. export control and sanctions laws, and particularly those transactions involving China, Russia and Venezuela. Additionally, with sanctions and export controls changing rapidly, it is important to keep up to date so that your company’s internal controls do not fall behind.