US Commerce Department issues “Military End User” List

White & Case LLPOn December 23, 2020, the US Department of Commerce's Bureau of Industry and Security ("BIS") issued a final rule creating a "Military End User List" ("MEU List") under the Export Administration Regulations ("EAR"). The final rule also adopted the "first tranche" of entities added to the MEU List, identifying more than 100 Chinese and Russian entities as "Military End Users" ("MEUs").1 A BIS license is required for certain exports, reexports, and transfers when a party has knowledge that an MEU is a party to the transaction (e.g., as purchaser, intermediate consignee, ultimate consignee, or end user). In a separate action, BIS also removed Hong Kong as a separate destination under the EAR, largely subjecting Hong Kong to the same requirements and restrictions as China.

The MEU List appears at new Supplement Number 7 to Part 744 of the EAR. Under BIS' export licensing requirements for exports, reexports, and transfers (in-country) of certain goods, software, or technology ("items") to MEUs located in China (including Hong Kong), Russia, and Venezuela (the "MEU Rule"), BIS has the authority to inform a person that a party is an MEU. BIS has previously issued such notices on a case-by-case basis, or in response to the denial of a license request. However, such case-by-case decisions have historically only been provided to the informed person or person requesting a license. By publishing this initial tranche of the MEU List, and any subsequent additions to the MEU List, BIS is ensuring that "all potential exporters, reexporters, or tranferors are informed simultaneously" of listed parties' MEU status.2 The 102 entities added to the MEU List are entities concerning which BIS has already denied export license requests, informed exporters via letter regarding those entities' MEU status, or otherwise determined through the Export Review Committee that such entities are MEUs.

BIS notes that the listed entities were "already subject to the ‘military end use' and ‘military end user' requirements" prior to issuance of the MEU List, and parties were responsible for identifying their MEU status.3

The MEU Rule

The rule does not change the scope of the EAR's MEU Rule related to China, Russia, and Venezuela.4 A BIS license is required to export, reexport, or transfer items subject to the EAR that are listed in Supplement No. 2 to Part 744 of the EAR if a party knows or has reason to know that the item is intended, entirely or in part, for an MEU or for a military end use.5  The introductory text to new Supplement No. 7 clarifies that "intended entirely or in part" includes that a license is required for exports, reexports, or transfer (in-country) for any item subject to the EAR listed in Supplement No. 2 whenever "an entity listed on the MEU List is a party to the transaction,"6 which includes a transaction's purchaser, intermediate consignee, ultimate consignee, and end-user.

As with exports, reexports, and transfers to unlisted persons meeting the MEU Rule's definition of "MEU" or for "military end uses," no license exceptions are available for transactions to which an entity on the MEU List is a party except for License Exception GOV. BIS will review license applications with a presumption of denial.7

A savings clause permits items removed from eligibility for a License Exception or for export/reexport without a license as a result of the rule that were en route aboard a carrier to a port of export or reexport on December 23, 2020, pursuant to actual orders for export or reexport to a foreign destination, to proceed to that destination under the previous eligibility.8

The MEU List is not exhaustive

Importantly, the MEU List "is not exhaustive, and exporters, reexporters, and transferors must still conduct [MEU- and military end use-related] due diligence for parties not on the list."9  The purpose of this MEU List is to make clear that BIS definitively considers the listed parties to be MEUs, which relieves exporters and reexporters of the need to perform due diligence to confirm that point. Under the EAR's MEU Rule related to China, Russia, and Venezuela, non-listed parties could still be "military end users" or require a license for items that are restricted for "military end uses" under Supplement No. 2.10  Commerce provides as an example of non-listed parties who would merit due diligence to confirm whether they are MEUs the parties listed by the US Department of Defense as Communist Chinese Military Companies under Section 1237 of the Fiscal Year 1999 National Defense Authorization Act.11

MEU List Process

The December 23 rule amends the MEU Rule to specify the process BIS will use for addition to, removal from, and modification of the MEU List. MEU List additions are made by majority vote of the Export Review Committee ("ERC"), which is composed of the US Departments of Commerce, State, Defense, and Energy, along with the Department of the Treasury in some cases. The process for decision-making by the ERC is set out in SupplementNo. 5 to Part 744, and is the same process currently used for the Entity List. Removal from or modification of the MEU List requires a unanimous vote of the ERC.12

Removal of Hong Kong as a distinct EAR destination

Further, through a separate publication in the Federal Register that also took effect on December 23, 2020, BIS has amended the EAR to remove provisions that provide differential and preferential treatment to exports, reexports, and transfers to the People's Republic of China Special Administrative Region of Hong Kong when compared to the treatment of transactions to or within China.13 "As a result of this rule, Hong Kong will now be treated the same as China under the EAR except in certain circumstances that do not provide preferential treatment," recognizing that Hong Kong maintains separate customs and export control systems.14 Hong Kong no longer appears as a separate destination entry in the EAR's Commerce Country Chart among other conforming revisions, and Hong Kong will now be governed by the licensing requirements and license exceptions for China.

Key Points regarding Hong Kong's changed status:

  • Significantly, BIS clarifies in a new note to the People's Republic of China (PRC) End-User Statement rule that the PRC-issued End User Statement is not required for license applications for export or reexport to Hong Kong.15  BIS reserves authority to request end-user statements or other support documents for license applications involving Hong Kong on a case-by-case basis.
  • Hong Kong will now fall in Country Group D under China.
    • This affects the license exceptions available for exports, reexports, and transfers to Hong Kong.
    • This Country Group change triggers restrictions on the export, reexport, and transfer of certain microprocessors and their associated software/technology to MEUs and military end uses in Hong Kong under EAR Part 744.17.
  • The MEU Rule discussed above also applies to Hong Kong "as [Hong Kong] is no longer distinguished as a separate destination from China under the EAR."16  
  • The Electronic Export Information ("EEI") filing requirement for China now applies for exports to Hong Kong, even if the Automated Export System requirements state that the destination filed in the EEI is to be listed as Hong Kong.17 
  • Hong Kong is subject to the US Arms Embargo restrictions applicable to countries in Group D:5, "consistent with the State Department's interpretation that Hong Kong is now considered to be included in the entry for China for purposes of the International Traffic in Arms Regulations (ITAR) § 126.1."18

A savings clause in the rule permits shipments of items that were previously eligible for shipment with No License Required that were on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or reexport on December 23, 2020, pursuant to actual orders for export to Hong Kong, reexport to Hong Kong, or transfer within Hong Kong to proceed to their destination under No License Required until January 22, 2021.19

Conclusion

Persons exporting, reexporting, or transferring an item subject to the EAR that is listed on Supplement No. 2 to Part 744 to a party in China, Russia, or Venezuela must "conduct due diligence" to determine whether a license is required under the MEU Rule. If an entity on the MEU List is a party to the transaction, whether as a purchaser, intermediate consignee, ultimate consignee, or end-user, then a license is required under the MEU Rule unless license exception GOV applies. For all other parties, the exporter, reexporter, or transferor must conduct diligence to determine if the MEU Rule's license requirements apply. Whether or not a party appears on the MEU List, exporters, reexporters, and transferors are also responsible for determining if any other provisions of the Export Administration Regulations apply to the item, parties, and end use in question. Persons exporting, reexporting, or transferring items subject to the EAR to or through Hong Kong should carefully review the EAR's recent changes to ensure compliance with the updated requirements.

1 Supplement No. 7 to 15 C.F.R. § 744, (last accessed Dec. 23, 2020) available here; BIS, Addition of ‘Military End User’ List to the Export Administration Regulations and Addition of Entities to the Military End User List, 85 FR 83793 (Dec. 23, 2020), available here
2  Id at 83794.
3  Id at 83793.
4  Id at 83783.
5  See 15 C.F.R. § 744.21.
6  Id at 83799.
7  Id at 83794. See also Id at 83795 ("Unlike the Entity List, the license requirements and review policy are the same for all MEU entities, so there is no need to include [columns listing separate requirements] in the MEU List. Instead, that information is specified the introductory text of supplement no. 7 and in [15 C.F.R.] 744.21.").
8  Id at 83796 – 83797.
9  Id at 83794.
10  Id at 83793.
11  See the current lists of Communist Chinese Military Companies as of December 22, 2020, available here
12  Id at 83795.
13  BIS, Removal of Hong Kong as a Separate Destination Under the Export Administration Regulations, 85 FR 83765 (December 23, 2020) available here.
14  Id. at 83766.
15  15 C.F.R. 748.10(a) Note 5.
16  Id. at 83767.
17  15 C.F.R. 758.1(b)(10) Note 1.
18  BIS, Removal of Hong Kong as a Separate Destination Under the Export Administration Regulations, 85 FR 83765 (December 23, 2020), at 83767.
19  Id. at 83768.

See also: 
International Sanctions

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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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