US Commerce Department Increases Scrutiny and Restrictions on Exports with Particular Focus on China, Russia and Venezuela

White & Case LLPOn April 28, 2020, the US Commerce Department's Bureau of Industry and Security (BIS) published two new final rules amending the Export Administration Regulations (EAR). One of the final rules removes license exception Civil End Users (CIV) and imposes a license requirement for national security-controlled items on the Commerce Control List (CCL) to countries of national security concern.1 The other final rule expands export license requirements on an expanded scope of items when intended for "military end use" or to "military end users" in China, Russia and Venezuela, which "will require increased diligence with respect to the evaluation of end users in China."2 Additionally, BIS published a proposed rule to amend the EAR by modifying License Exception Additional Permissive Reexports (APR) by removing provisions that currently authorize reexports of certain national security-controlled items on the CCL.3

According to the Federal Register notices that published these actions, these changes reflect concern about increasing integration of civilian and military technology development in "countries of concern." The two final rules will go into effect on June 29, 2020. For the proposed rule, which is not effective yet, BIS will accept public comments until June 29, 2020.

A press release by the Commerce Department regarding these rules describes these actions as "export control actions to prevent efforts by entities in China, Russia and Venezuela to acquire US technology that could be used in development of weapons, military aircraft, or surveillance technology through civilian supply chains, or under civilian-use pretenses, for military end uses and military end-users."4

Removal of License Exception Civil End Users (CIV)

At present, License Exception Civil End Users (CIV) authorizes the export, reexport or transfer (in-country) of certain national security (NS)-controlled items, without prior review by BIS, to most civil end users for civil end uses in Country Group D:1, which includes China, Russia, and Venezuela.5

In a final rule that will go into effect on June 29, 2020 BIS is amending the EAR by removing this exception, and will require a license for NS-controlled items on the CCL to "countries of national security concern" (i.e., Country Group D:1). The reason given by BIS for this action is "the increasing integration of civilian and military technology development in these countries of concern."

As a result, NS-controlled items starting on June 29, 2020, will require BIS review prior to export, reexport or transfer (in-country) for civil end uses and to civil end users in Country Group D:1.

Expansion of Military End Use/User Controls (MEU)

In a final rule that will go into effect on June 29, 2020, BIS is amending the EAR to expand license requirements on exports, reexports and transfers (in-country) of items intended for military end use or military end users (MEU) in China, Russia or Venezuela, including "items such as semiconductor equipment, sensors, and other technologies sought for military end use or by military end-users in these countries." Specifically, this rule:

Expands Military End Use and End User Controls.

The rule:

  • Broadens the scope of items for which the licensing requirements in EAR Part 744.21 apply by adding items to the list of items subject to the military end use and end user license requirements in Supplement No. 2 to part 744. Specifically, this rule adds Export Control Classification Numbers (ECCNs) in the categories of materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion to the supplement.6
  • Expands the definition of "military end use." The EAR's current definition of military end use refers both to direct use (incorporation into military items, i.e. for parts, components or subsystems of weapons and other defense articles) and indirect use (development, production or use of military items, e.g. weapon design and development, testing, repair and maintenance). This amendment broadens the definition of "military end use" to include the broader concept of any item that "supports or contributes" to the operation, installation, maintenance, repair, overhaul, refurbishing, "development," or "production," of military items. The new references to "supports or contributes" and the replacement of the term "use" with the longer list of "operation," "installation," "maintenance," "repair," "overhaul," or "refurbishing" of military items (each of which alone could now arguably trigger a military end use) will expand the scope of exports that could be considered by BIS to be for military use. For example, the export or reexport to China of items subject to the EAR covered by the Expanded Supplement 2 to an entity that uses such items to engage in the maintenance or repair of military items could be considered by BIS to be for military end use based on the addition of the concepts of "supports or contributes."
  • Expands the licensing requirements for China under EAR Part 744.21 to require an export license for exports, reexports or transfers of items listed in EAR Part 744, Supplement No. 2 to "military end users" in addition to "military end use." China was not previously subject to the "military end user" licensing requirement. According to BIS, 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."
  • Does not change the definition of "military end users" which remains, "the national armed services (army, navy, marine, air force, or coast guard), as well as the national guard and national police, government intelligence or reconnaissance organizations, or any person or entity whose actions or functions are intended to support 'military end uses'" (emphasis added). That said, the already potentially broad scope of "actions or functions intended to support military end uses" – coupled with the expanded definition of "military end uses" – could result in a significantly expanded concept of "military end user" as applied by BIS. For example, the export/reexport of items in Supplement 2 that are subject to the EAR to an entity in China that is not one of the enumerated army, navy, marine, etc. entities but that happens to engage in the repair of military items could arguably, under a broad interpretation, be considered by BIS to be an export/reexport to a military end user.
  • Adopts a license review policy of presumption of denial. Any single element of this new definition of "use," standing alone, will be sufficient for license denial.

Expands Electronic Export Information Filing Requirements. The rule adds Electronic Export Information (EEI) filing requirements in the Automated Export System for exports to China, Russia, and Venezuela. Existing provisions exempt exporters from both filing EEI for many shipments valued under US$2,500 (unless an export license is required) and from entering the ECCN in the EEI when the reason for control is only anti- terrorism (AT). The revised rule requires filing for items destined to China, Russia or Venezuela regardless of the value of the shipment, unless the shipment is eligible for License Exception GOV.

Clarifies Controls on "600 series" .y and 9x515.y Items. The rule relocates the existing license requirement for items described in a .y paragraph of a 9x515 or "600 series" ECCN to China, Russia or Venezuela from § 744.21 to the License Requirements sections of the relevant ECCNs on the CCL.7 BIS notes that the reason for control for such items is regional stability (RS). Please note that this appears to be an organizational revision.

Elimination of License Exception Additional Permissive Reexports (APR) Provisions

In a proposed rule, BIS proposes to amend the EAR by modifying License Exception Additional Permissive Reexports (APR). Currently, paragraph (a) of License Exception APR authorizes the reexport of certain items from a country in Country Group A:1 or Hong Kong to certain destinations, provided that (1) the reexport is consistent with an export authorization from the country of reexport, and (2) the item is not subject to certain reasons for control, such as missile technology and nuclear nonproliferation controls.

The proposed rule would remove provisions that authorize reexports of certain national security-controlled items on the CCL by removing countries in Country Group D:1 (which includes China, Russia and Venezuela)8 as a category of eligible destination for national security-controlled items under paragraph (a) of License Exception APR.

There is a 60-day comment period for this proposed rule. BIS is requesting comments on the volume of transactions affected by this proposed change, how it would affect the amount of time necessary to complete such transactions in the future, and how the proposed change would otherwise affect current business. The proposed rule is not in effect yet.
Comments must be received by BIS no later than June 29, 2020.

Conclusion

Companies engaging in exporting or reexporting items to countries impacted by these actions by BIS – China, Russia and Venezuela in particular – should monitor the implementation and any determinations under this rule very closely. They may also wish to review and, as needed, adapt their diligence regarding military end use/users in these countries. Interested companies may provide comments on the proposed rule as BIS encourages before June 29, 2020.

1 Elimination of License Exception Civil End Users (CIV), 85 Fed. Reg. 23470 (April 28, 2020), available here.
2 Expansion of Export, Reexport, and Transfer (in-Country) Controls for Military End Use or Military End Users in the People's Republic of China, Russia, or Venezuela, 85 Fed. Reg. 23459 (April 28, 2020), available here.
3 Modification of License Exception Additional Permissive Reexports (APR), 85 Fed. Reg. 23496 (April 28, 2020), available here.
4 Commerce Tightens Restrictions on Technology Exports to Combat Chinese, Russian and Venezuelan Military Circumvention Efforts (April 27, 2020), available here.
5 As of May 1, 2020, the Country Group D:1 includes the following countries: Armenia, Azerbaijan, Belarus, Cambodia, China, Georgia, Iraq, Kazakhstan, North Korea, Kyrgyzstan, Laos, Libya, Macau, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Vietnam, and Yemen.
6 The following ECCNs are added to the supplement: 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990. Additionally, this rule expands the range of items under ECCNs 3A992, 8A992, and 9A991 included in Supplement No. 2 to part 744.
7 Items controlled under the "600 series" were previously controlled on the United States Munitions List (USML) or are covered by the Wassenaar Arrangement Munitions List (WAML) and include certain items formerly classified under ECCNs ending in -018.
8 See Footnote 5 above for the Country Group D:1 list.

Alana Toabe (White & Case, Law Clerk, Washington DC) contributed to the development of this publication.

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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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