Commerce Imposes Significant New Controls On Advanced Semiconductors - Export Controls & Trade & Investment Sanctions

On October 17, 2023, the Commerce Department's Bureau of Industry and Security (BIS) released three rules amending the Export Administration Regulations (EAR) that significantly build on the October 7, 2022 semiconductor controls (the "October 7 Rule") and add several parties to the Entity List.

Those rules include the (1) Advanced Computing/Supercomputing Interim Final Rule (AC/S IFR); (2) the Semiconductor Manufacturing Equipment Interim Final Rule (SM IFR); and (3) the Entity List Additions Final Rule (EL FR). In its press release accompanying the rules, BIS explained that the rules are intended to "increase [the] effectiveness of our controls and further shut off pathways to evade our restrictions," particularly "to address, among other concerns, the [People's Republic of China's (PRC)] efforts to obtain semiconductor manufacturing equipment essential to producing advanced integrated circuits needed for the next generation of advanced weapon systems, as well as high-end advanced computing semiconductors necessary to enable the development and production of technologies such as artificial intelligence (AI) used in military applications."

The EL FR was made available for public inspection on the Federal Register's website on October 17, 2023 and was effective on the same day; the AC/S IFR and SM IFR were made available for public inspection on October 18, 2023, and will become effective 30 days thereafter, i.e., on November 17, 2023.

The AC/S IFR and SM IFR introduce major changes to the October 7 Rule. Both rules are published as interim final rules, meaning they are subject to further revision. BIS is accepting comments for both rules until December 18, 2023, allowing the industry an opportunity to provide insight as to how the rules may be further revised. Specifically, BIS seeks guidance on how to define whether a company is "headquartered" in the PRC, Macau or another country subject to an arms embargo (D:5 countries), which is an issue of critical importance for applying the new rules. In addition, BIS is also seeking comments on how to address the provision of infrastructure as a service (IaaS) (e.g., cloud computing services used to train artificial intelligence algorithms), the application of controls on deemed exports and reexports, the development of technical parameter solutions to further narrow the advanced computing items that warrant control under Export Classification Commodity Number (ECCN) 3A090, the development of guidance that could be provided to foundries receiving chips designs, and the foreign availability of semiconductor manufacturing items. However, comments need not be limited to these topics, as additional comments on other topics could be helpful to BIS in further developing the rules. BIS also responded to all 43 responsive comments submitted to BIS (covering 78 topics) regarding the October 7 Rule, in which BIS clarified or attempted to clarify certain issues in the October 7 Rule. Some of those clarifications are reflected in the AC/S IFR and SM IFR.

The new rules are unusually complex and novel. Thus, small changes, evolving BIS interpretations of the new controls and/or application of different fact patterns may result in significantly different conclusions. A high-level summary of the three rules is provided below.

Advanced Computing/Supercomputing Interim Final Rule

The first rule makes major changes to the October 7 Rule with respect to advanced computing items, including:

Increasing the number of countries subject to the restrictions by broadening the country scope for Regional Stability controls on advanced computing items. The list-based Regional Stability controls on certain advanced computing items are broadened to include 24 countries where the Commerce Department has specific concerns with diversion specified in Country Groups D:1 and D:4, and 22 countries subject to an arms embargo listed in country group D:5¹ (collectively, "Country Group D Territories"), i.e., they no longer apply only to the PRC and Macau. Though Israel is a D:4 country and Cyprus is a D:5 country, neither are caught in this expansion because both countries are listed in the favorable A:6 group territory list of countries. Exports, reexports and transfers (in-country) of items subject to the EAR that are controlled for Regional Stability reasons under § 742.6(a)(6)(iii) of the EAR—including advanced computing items described under ECCN 3A090, computers and other electronic assemblies described under ECCN 4A090, and any other items on the Commerce Control List (CCL) that meet or exceed the performance parameters of 3A090 or 4A090—now require a license for these countries. License applications to destinations outside of a Country Group D Territory that are not destined to an entity headquartered in or with an ultimate parent headquartered in Country Group D:5 or Macau (a "Country Group D:5/Macau Entity") will be reviewed under a policy of approval; all other license applications will be reviewed under a presumption of denial. Further, consistent with the October 7 Rule, § 742.6(a)(6)(iv) excludes deemed exports from the license requirements specified under § 742.6(a)(6)(i) through (a)(6)(iii).
Expanding the technical thresholds of ECCN 3A090. ECCN 3A090 was created by the October 7 Rule and was limited to advanced computing integrated circuits (ICs) with at least a 600 gigabyte bidirectional transfer rate. The AC/S IFR removes paragraph (a) of the ECCN entirely, including the transfer rate threshold. It creates a new paragraph (a) that controls ICs with one or more digital processing units having either a 'total processing performance' of 4800 or more, or a 'total processing performance' of 1600 or more and a 'performance density' of 5.92 or more. The rule also creates a new paragraph (b) to control less advanced ICs with one or more digital processing units having either a 'total processing performance' of 2400 or more and less than 4800 and a 'performance density' of 1.6 or more and less than 5.92, or a 'total processing performance' of 1600 or more and a 'performance density' of 3.2 or more and less than 5.92. The rule creates four new technical notes to be used in calculating 'total processing performance' and 'performance density.'

Further, the AC/S IFR introduces a carveout under a new Note 2 to ECCN 3A090 for less advanced computing ICs that do not have a 'total processing performance' of 4800 or more but otherwise meet these other processing performance and 'performance density' criteria, and are not designed or marketed for use in datacenters; such items are not controlled under 3A090.

Effectively, these changes broaden the rule to capture, among other things, high-performing graphic processing unites (GPUs) and other chips that fall below the prior 600 gigabyte bidirectional transfer rate threshold, as well as less advanced GPUs. Items subject to the EAR and classified under ECCN 3A090 are subject to the expanded Regional Stability controls described above.

Positively identifying ECCNs subject to Regional Stability controls. The AC/S IFR replaces the criteria from the October 7 Rule that applied the Regional Stability controls to "any other item on CCL that meet or exceed the performance parameters of 3A090 or 4A090" by positively identifying those items in new .z paragraphs of several ECCNs. These specifically include ECCNs 3A001.z, 3A090, 4A003.z, 4A004.z, 4A005.z, 4A090, 5A002.z, 5A004.z, 5A992.z, 5D002.z and 5D992.z.
Creating a new License Exception Notified Advanced Computing (NAC) for advanced GPUs with non-datacenter use and less advanced GPUs. This license exception authorizes, subject to certain criteria, exports, reexports and transfers (in-country) of ICs controlled by or that meet the performance parameters of ECCN 3A090 (other than items designed or marketed for use in a datacenter and meeting the parameters of 3A090.a) and other ECCNs subject to the advanced computing Regional Stability controls described above. This license exception may be helpful for exporters of less sensitive GPUs and consumer products integrated with these GPUs destined to D:1, D:4 and D:5 countries.

If an item is eligible for License Exception NAC, (i) exports, reexports and transfers to destinations in Country Groups D:1 or D:4, or to entities headquartered in or with an ultimate parent headquartered in Country Group D:5, or (ii) in-country transfers within Macau or Country Group D:5, or to a Country Group D:5/Macau Entity, must meet certain requirements specified in the rule.

Exports and reexports to Macau or Country Group D:5 additionally require notification to BIS via Simplified Network Application Process Redesign (SNAP-R) at least 25 calendar days prior to the export or reexport in order to apply the NAC license exception. Note that there is some ambiguity as to whether the notification requirement applies to exports to a Country Group D:5/Macau Entity when the exports are not destined for Macau or Country Group D:5.

Expanding controls on U.S. Person activities with respect to "advanced node" "facilities." The AC/S IFR broadens the country scope of the U.S. person activities controlled under EAR Section 744.6(c)(2) in connection with items that will be used in the "development" or "production" of ICs at a "facility" of a Country Group D:5/Macau Entity where "production" of "advanced-node integrated circuits" occurs. The AC/S IFR further codifies prior guidance issued by BIS in response to the October 7 Rule to clarify the following points: (i) the scope of activities that are controlled under these rules, (ii) the appropriate due diligence to be conducted to determine whether controls on U.S. person activities may apply, (iii) the exclusion of administrative and clerical activities, and (iv) the exclusion of information and software that are outside the scope of the EAR because they are published or arise from fundamental research.
Expanding existing end-use controls on supercomputing. The AC/S IFR reorganizes the supercomputing rule under EAR Section 744.23(a)(1) and expands the destination/end-use scope to apply not just to Macau and China but also to Country Group D:5 territories.
Creating two new end-use controls at § 744.23 to capture PRC operations outside of China related to advanced computing. The AC/S IFR also creates two new end-use controls on advanced computing items in new EAR Section 744.23(a)(3).

First, advanced computing items controlled under ECCN 3A090 or the other ECCNs subject to the advanced computing Regional Stability controls, now require a license to any destination outside of a Country Group D Territory if there is knowledge that the item is destined to a Country Group D:5/Macau Entity. This end-use control is in addition to the list-based advanced computing Regional Stability controls on these items described above that apply regardless of the end-user. The purpose of the new control is to target companies "setting up cloud or data servers in other countries to allow them to continue to train their AI models in ways that would be contrary to U.S. national security interests."

Second, technology specified in ECCN 3E001 (for items controlled under ECCN 3A090) requires a license when it is (1) developed by a Country Group D:5/Macau Entity; (2) subject to the EAR under the Advanced Computing Foreign Direct Product (FDP) rule (EAR Section 734.9(h)); (3) reexported from or transferred (in-country) within Macau or a Country Group D:5 territory to any destination worldwide; and (4) for the "production" of commodities or software specified in ECCN 3A090 or the ECCNs subject to the advanced computing Regional Stability controls. This expansion may further restrict the development of GPU design capabilities in D:5 countries.

Adding ECCN 3A991.p and 4A994.l as eligible for License Exception Consumer Communications Devices (CCD). The AC/S IFR expands License Exception CCD to add items classified under ECCNs 3A991.p or 4A994.l.
Broadening the country scope for the Advanced Computing FDP rule. The AC/S IFR expands the country scope for the Advanced Computing FDP rule to all Country Group D Territories and Macau. Significantly, the rule is further expanded by subjecting to the EAR any product for a Country Group D:5 (or Macau) Entity regardless of where the entity is located. A note to this rule clarifies that the FDP rule applies when any such companies are a party to the transaction involving the foreign-produced item, e.g., as a "purchaser," "intermediate consignee," "ultimate consignee" or "end-user."
Clarifying that the model certificate published in the October 7 rule may be used for all FDP rules. The AC/S IFR clarifies that the model certification released as part of the October 7 Rule for the Advanced Computing FDP Rule may be used for any of the FDP rules under EAR Section 734.9. This model certificate is intended to help exporters conduct due diligence up and down their respective supply chains.
Identifying five new red flags to assist with compliance. The AC/S IFR adds five new red flags to Supplement No. 3 to EAR Part 732 to assist in compliance with the AC/S IFR and the October 7 Rule, including the Advanced Computing and Supercomputing FDP rules.
Creating a new Temporary General License (TGL). This TGL authorizes the integration, assembly (mounting), inspection, testing, quality assurance, and distribution of certain specified advanced computing items if (1) the recipient is located in a Country Group D Territory but is not a Country Group D:5/Macau Entity (e.g., a subsidiary of a European company in China), and (2) the items are for ultimate end-use outside of Country Group D Territories by end-users who are not Country Group D:5/Macau Entities. The TGL is valid through December 31, 2025.

Export Controls on Semiconductor Manufacturing Items Interim Final Rule

The second rule makes major changes to the October 7 Rule with respect to semiconductor manufacturing items, including:

Removes ECCN 3B090 (which was subject to unilateral controls) while expanding ECCNs 3B001 and 3B002 (both National Security controls). This rule also harmonizes revisions to controls on associated software and technology. The new items controlled under ECCNs 3B001 and 3B002 are, with limited exceptions, only used for fabricating logic ICs with non-planar transistor architecture or with a production technology node of 16/14 nanometers or less. These controls harmonize U.S. controls with Japanese and Dutch controls for such items.
Expands the Regional Stability license requirement to all arms embargoed listed countries in Country Group D:5 territories.
Removes the de minimis threshold for lithography equipment and specially designed items described under ECCN 3B001.f.1.b.2.b. Removal of the de minimis threshold effectively creates a "see-through rule" for these items. However, the de minimis threshold remains in place if the country from which the foreign-made item was originally exported or reexported has the item listed on its export control list.
Creates a TGL for companies headquartered in the United States or a destination specified in Country Group A:5 or A:6. The TGL applies to qualifying entities that send CCL items to manufacturing facilities in a Country Group D:5 country or Macau for the "development" or "production" of certain Category 3B items. The TGL is valid through December 31, 2025.
Clarifies the controls on U.S. person activities in EAR Section 744.6 with respect to semiconductor manufacturing "facilities." The term "fabrication" is now removed from the rule and replaced with "production" so that the controls now apply to "facilities" where "production" may occur that may not be considered "fabrication." According to BIS, the revised control is not intended to capture "a 'facility' where only 'development' activities occur . . . , primarily because this could over-capture 'facilities' engaged exclusively in design or other forms of 'development' of consumer items (e.g., smartphone ICs) that will be 'produced' outside of China or at approved 'facilities' in China and therefore do not necessarily warrant control." These clarifications were also made with respect to revised EAR Section 744.23(a)(2), which now contains the end-use control on items subject to the EAR and destined to semiconductor manufacturing facilities engaged in the "production" (versus "fabrication") of "advanced-node integrated circuits."
Restructures controls on U.S. person activities in EAR Section 744.6 and end-use controls in EAR Section 744.23. These controls cover semiconductor manufacturing equipment. The rule also creates a definition of "advanced-node integrated circuits" in EAR Section 772.1.
Moves and expands the end-use control on items used to develop or produce semiconductor manufacturing equipment. This end-use control, which was previously located in EAR Section 744.23(a)(1)(v) and (a)(2)(v), has been moved to new EAR Section 744.23(a)(4). It has been expanded to include items destined to any Country Group D:5 territory or Macau. However, the revised control narrows both the product scope and the end-use scope. Specifically, the product scope is revised to include only items specified on the CCL that are subject to the EAR (the previous version also included EAR99 items) and to exclude masks, reticles, and other items specified in ECCNs 3B001.g, 3B001.h, 3B001.j and 3B991.b.2. The end-use scope is revised to include only items "for the 'development' or 'production' of 'front-end integrated 'production' equipment.'" This excludes equipment used exclusively in back-end steps or other applications that do not alter the integrated circuit technology level (e.g., assembly, testing, and packaging). In addition, the rule implements a "Presumption of Approval" if an applicant can demonstrate foreign availability that a foreign tool can do the same function as the tool subject to the license requirement.

Entity List Additions

The End-User Committee also added 13 entities, including several GPU designers and manufacturers, to the Entity List:

Beijing Biren Technology Development Co., Ltd.
Guangzhou Biren Integrated Circuit Co., Ltd.
Hangzhou Biren Technology Development Co., Ltd.
Light Cloud (Hangzhou) Technology Co., Ltd.
Moore Thread Intelligent Technology (Beijing) Co., Ltd.
Moore Thread Intelligent Technology (Chengdu) Co., Ltd.
Moore Thread Intelligent Technology (Shanghai) Co., Ltd.
Shanghai Biren Information Technology Co., Ltd.
Shanghai Biren Integrated Circuit Co., Ltd.
Shanghai Biren Intelligent Technology Co., Ltd.
Superburning Semiconductor (Nanjing) Co., Ltd.
Suzhou Xinyan Holdings Co., Ltd.
Zhuhai Biren Integrated Circuit Co., Ltd.

According to the Federal Register notice, these entities were added because they are "involved in the development of advanced computing integrated circuits."

Effective immediately, exports, reexports and transfers (in-country) of any item subject to the EAR to these listed parties now requires a license. License applications will be reviewed under a presumption of denial. Each of these entities is also marked with a "footnote 4" designation, making them subject to the Entity List FDP rule in EAR Section 734.9(e)(2). There is a saving clause for items shipped by the midnight of October 17 if they arrive before November 16, 2023.

Footnote

1. The D:5 countries subject to this rule include Afghanistan, Belarus, Burma, Cambodia, Central Africa Republic, China (PRC), Congo (Democratic Republic of), Cuba, Eritrea, Haiti, Iran, Iraq, Lebanon, Libya, North Korea, Russia, Somalia, South Sudan, Sudan, Syria, Venezuela and Zimbabwe.

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