The United States continues to tighten controls on the People’s Republic of China. In this article we address three regulatory changes that highlight the need for enhanced due diligence when dealing with China: 1) restrictions on recent additions to the Entity List; 2) controls on military end-uses and military end-users; and 3) elimination of Hong Kong as a separate destination under the Export Administration Regulations (EAR).
On December 22, 2020, the Bureau of Industry and Security (BIS) added 59 Chinese entities to the Entity List, thereby expanding the licensing requirements on export transactions with these entities. See Notice at 85 Fed. Reg. 83416. The additions to the Entity List are the result of the collective determination by the Departments of Commerce, State, Defense, Energy, and where appropriate, the Treasury (collectively, the “End-User Review Committee”) that these entities are engaging in or enabling activities contrary to U.S. national security and foreign policy interests.
The Notice imposes a licensing requirement on all items “subject to the Export Administration Regulations (EAR) when they are to be exported, reexported, or transferred (in-country) to any of these entities.” Furthermore, no license exceptions are available for these transactions and none of the designated entities may be a “party” to the transaction as defined in EAR Part 744. Therefore, one must file a license application to export from the United States any item destined for these entities, or to reexport any item of U.S. origin or otherwise “subject to the EAR” to these entities or where any such entity is a party to the transaction.
The Notice groups the Chinese entities by designation reasoning and defines the applicable license application presumptions for each entity. These groupings are discussed further, below:
The changes outlined above build on tightening of controls on China’s MCF. On April 28, 2020, 85 Fed. Reg. 23459, BIS expanded the export, reexport and transfer (in-country) controls applicable to military end-uses and military end-users in China, Russia and Venezuela. This rule required the exercise of enhanced due diligence for the sale of certain items to China. BIS has now published a Military End-User (“MEU”) List of 103 entities (58 Chinese, and 45 Russian) which the U.S. Government has determined to be military end-users. While this MEU List is helpful, BIS emphasizes that:
this is a non-exhaustive list, and does not imply that other parties not included on the list are exempt from regulatory prohibitions. For example, parties not listed on the MEU List but included on the Department of Defense’s Section 1237 list of the National Defense Authorization Act would raise a Red Flag under the EAR and require additional due diligence by exporters, reexporters, or transferors.
For example, the Department of Defense recently listed SMIC as a Communist Chinese military company. Given the fact that BIS included SMIC on the Entity List, it is surprising that SMIC was not listed on the MEU List. Our view is that one should take little solace in this omission and that one must do enhanced due diligence regarding all exports to SMIC and other similarly situated companies.
On December 23, 2020, BIS posted an amendment to the EAR removing Hong Kong from the list of destinations under the EAR. This change is in response to new security measures that have been imposed on Hong Kong by China. As a result of this change, Hong Kong will, in almost all circumstances, be treated the same as China for purposes of the EAR. This change took immediate effect on December 23, 2020.
Business with China has become increasingly complicated over the last several years. Rather than waiting to be served with notice of a violation, companies would better off taking a proactive approach: understand the risks in the export marketplace, many of which are new, and take the time to assess how these risks may (or may not) threaten present and future business.