On April 27, 2020, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce published three rules that will significantly expand export control restrictions on China and other countries subject to national security-related controls and designated in Country Group D:1 under the Export Administration Regulations (EAR). These new rules implement changes to the EAR in furtherance of the Trump Administration’s 2017 National Security Strategy and 2018 National Defense Strategy which expressed concern over the integration of military and civil activities in countries such as China and Russia. This integration has been referred to by U.S. officials as the “military-civil fusion” doctrine and characterized by them as largely erasing the line between civilian and military activity, potentially resulting in the diversion of U.S. equipment and technology into military programs. Remarks by high level U.S. officials underscore the view there is a presumption within the U.S. Government of widespread military-civil integration and that such integration is a direct and leading policy objective of the PRC Government.1
The new restrictions aim to safeguard U.S. national security interests by expanding licensing requirements on hardware, software, and technology (collectively, “items”) subject to the EAR in order to prevent their use in advancing the military and national security objectives of D:1 countries. These restrictions will likely have far reaching implications for exports, reexports, and in-country transfers of items subject to that EAR, particularly given uncertainties surrounding whether such items may be for military end uses and end users. In countries such as China that openly adopt the military-civil fusion doctrine, the question becomes whether there is a presumption that exports and reexports of dual-use items subject to the EAR are intended for military end use or end users; and if so, what type of due diligence and certifications can companies obtain to overcome this presumption.
Currently, Section 744.21 of the EAR prohibits the export, reexport, or transfer of certain items subject to the EAR to China, Russia, or Venezuela without a license if a party has “knowledge,”2 or is informed by BIS, that the item in question will be exported, reexported, or transferred for a “military end use” in China or for a “military end user” or “military end use” in Russia or Venezuela. The ECCNs of the items subject to these restrictions are listed in Supplement No. 2 to Part 744.
Section 744.21 currently defines the term “military end use” to mean the incorporation into a military item; the “use,” “development,” or “production” of military items; or the deployment of items classified under ECCN 9A991 in Supplement No. 2 to Part 744. The term “military end user” is currently defined to mean 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.”
Notably, Section 744.21 restrictions currently apply to both military end users and end uses in Russia and Venezuela. However, current restrictions on China only apply to military end uses. The omission of restrictions on Chinese military end users was a deliberate decision by the Bush Administration when Section 744.21 controls were first introduced in 2007 given the challenges in determining whether a Chinese company could be deemed to be engaging in actions or functions intended to support “military end uses.”3
On June 29, 2020, the following changes to Section 744.21 will go into effect:
Taken together, these changes to Section 744.21, particularly the expanded definition of military end use, coupled with new restrictions on military end users in China will create complex compliance challenges for companies. The questions for companies are: what type of due diligence is required to determine whether a customer is a military end user? Does any activity with a military item render the customer a military end user, even if the customer’s activities with the military are wholly unrelated to the item subject to the EAR? Companies will need to navigate these complex compliance challenges and adapt their due diligence processes and certifications accordingly.
License Exception CIV is an exception to the license requirements of the EAR which authorizes the unlicensed export and reexport of items controlled only for National Security (NS) reasons as long as such items are destined to civil end users or for civil end uses in a country that falls under Country Group D:1 (except North Korea) and are identified as CIV-eligible in the Commerce Control List (CCL). Countries eligible for this license exception include the following D:1 countries: Armenia, Azerbaijan, Belarus, Cambodia, China, Georgia, Iraq, Kazakhstan, Kyrgyzstan, Laos, Libya, Macau, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Vietnam, and Yemen.
The scope of License Exception CIV covers items that fall under eight of the nine categories of the CCL, including those with the following ECCNs: electronics (e.g., 3A001), telecommunications systems and equipment (e.g., 5A001), radar systems (e.g., 6A008), and test, inspection, and production equipment for gas turbines (e.g., 9B001), among others. The exception also authorizes the release to Chinese and other foreign nationals of a small number of technologies and software related to these items.
Effective June 29, 2020, BIS will eliminate License Exception CIV, resulting in a need for a BIS-issued specific license for exports, reexports, and in-country transfers of items that were previously covered by this exception.8 As a matter of policy, NS controls in the EAR apply to items that the U.S. government has determined could make a significant contribution to the military potential of any other country that would prove detrimental to the national security of the United States. For this reason, the EAR licensing policy for NS controls is that of a “presumption of denial” for applications involving items that could make a direct and significant contribution to the military capabilities of D:1 countries like China or Russia.
This presumption of denial, combined with the U.S. State Department’s views on “military-civil fusion” in China, could mean that the U.S. government would be unwilling to grant specific licenses for exports and reexports of NS-controlled items to China, absent exceptional circumstances. Accordingly, companies that rely on this license exception to engage in exports, reexports, and in-country transfers of NS-controlled items involving D:1 countries will need to identify alternative license exceptions or begin gathering the necessary information for specific license applications to BIS. Companies should also be prepared to provide evidence in these license applications that such items will not be diverted to military end users or for military end uses, particularly with respect to China.
License Exception APR was developed, in part, to address a tension between the extraterritorial nature of the U.S. export controls and the export regimes of member states of the Wassenaar Arrangement—an intergovernmental forum that facilitates export control standards setting and information sharing among member states, with a focus on conventional arms and dual-use goods and technologies. The United States is the only member of the Wassenaar Arrangement that applies extraterritorial jurisdiction to controlled items once those items are in another country. Specifically, the EAR controls “reexports,” which is defined in relevant part as shipments of items subject to the EAR (e.g., U.S.-origin items) from one non-U.S. country to another non-U.S. country. Thus, a shipment of an item subject to the EAR from a Wassenaar Arrangement member to a third country could potentially require two authorizations: a reexport authorization from the United States and an export authorization from the non-U.S. country of export.
Paragraph (a)(3)(ii) of License Exception APR authorizes reexports of certain items subject to the EAR from Hong Kong and Wassenaar Arrangement participating states to D:1 group countries (except for North Korea), provided that the reexport is authorized by the non-U.S. country of export. This provision applies to items that are controlled for NS reasons but not for items controlled for reasons relating to Non-Proliferation (NP), Chemical and Biological Weapons (CW), Missile Technology (MT), Significant items (SI), or Crime Controls and Detection (CC) reasons. This authorization in paragraph (a)(3)(ii) of License Exception APR is also not available for items described in several ECCNs, namely: 0A919,9 3A001.b.2 and b.3,10 6A002,11 6A003,12 and 0x5zz.13
BIS has proposed to remove paragraph (a)(3)(ii) from License Exception APR on the basis that licensing standards in Wassenaar Arrangement member states and Hong Kong for exports to D:1 countries differed from the United States, resulting in permitted reexports that would have been denied if exported directly from the United States.14 This may be indicative of the Trump Administration’s increasing willingness to pursue unilateral national security policies, even in the absence of support from traditional global partners. BIS is seeking comments on the proposed rule, with a deadline of June 29, 2020.
These rules raise a number of questions for industry. For example, in view of the statement in the new 744.21 rule regarding increased diligence on end users in China, and statements that suggest a presumption on the part of U.S. government officials regarding military-civil fusion in that country, what type of due diligence and certifications will be sufficient? If a Chinese company has dealings with the Chinese military, completely unrelated to the U.S. item at issue, is that company still considered a military end user for purposes of the restrictions in Section 744.21? What constitutes “support” or “contribution” and how far does it extend beyond activities directly related to an item exported by a U.S. company? Companies will have to navigate these challenges in the coming weeks and prepare license applications or advisory opinion requests, and/or seek additional clarification from BIS.
The scope of the affected AT-only ECCNs means that these questions will need to be asked in transactions for items that are not usually subject to significant export license considerations. Whether a company deals with commercial semiconductors, civil aircraft components, or consumer electronics and telecommunications equipment, screening programs will have to be reevaluated and enhanced for transactions involving China, whether as part of your supply chain or for sales to vendors and end-users. This applies to website and catalog orders as well, including downloadable apps and software programs that include encryption, which are largely controlled under ECCN 5D992, which will fall within the scope of the new 744.21 restrictions.
It is also important to consider the extraterritorial effects of these restrictions, particularly given that U.S. export controls can apply to reexports of items subject to the EAR located outside of the U.S. and destined for D:1 countries. Non-U.S. companies that may have items covered by these restrictions should ensure they have mechanisms in place to determine whether they engage in the reexports of items subject to the EAR, including by conducting requisite jurisdictional analyses under the EAR de minimis and foreign direct product rules.
1 See, e.g., Remarks by Dr. Christopher Ashley Ford, Assistant Secretary, Bureau of International Security and Nonproliferation, Huawei and its Siblings, the Chinese Tech Giants: National Security and Foreign Policy Implications (Sept. 11, 2019) available at https://www.state.gov/huawei-and-its-siblings-the-chinese-tech-giants-national-security-and-foreign-policy-implications/.
2 Under the EAR, “knowledge” of a circumstance (the term may be a variant, such as “know,” “reason to know,” or “reason to believe”) includes not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts. 15 C.F.R. § 772.1.
3 See 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, 23460 (April 28, 2020).
4 See Id. (“Further, this rule broadens the definition of ‘military end use’ by identifying each element of the definition of ‘use’ so that any one of the six elements, standing alone, is sufficient.”)
5 See Id.
6 See Id.
7 These ECCNs include 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990. Id.
8 See Elimination of License Exception Civil End Users (CIV), 85 Fed. Reg. 23470 (April 28, 2020).
9 “Military commodities” located and produced outside the United States.
10 MMIC amplifiers and discrete microwave transistors meeting certain parameters.
11 Optical sensors and equipment, and related components.
12 Cameras, systems or equipment, and related components.
13 Certain firearms, ammunition, and related items.
14 See Modification of License Exception Additional Permissive Reexports (APR), 85 Fed. Reg. 23496 (April 28, 2020). The agency has asserted that “[e]ven Wassenaar participating states in Country Group A:1 may have export authorization policies that do not align with the national security or foreign policy interests of the U.S. government.” Id.