On April 27, 2020, the US Department of Commerce, Bureau of Industry and Security (BIS) announced three separate rules under the Export Administration Regulations (EAR) that will make it harder to export, reexport, and transfer goods, software, and technology that are subject to the EAR to and within certain countries, including China. Specifically, BIS announced two final rules that (1) expand restrictions on the export and reexport of certain items for "military end uses" and "military end users" in China, Russia or Venezuela (China, Russia and Venezuela Military End Use/End User Rule) and (2) eliminate License Exception Civil End-User (CIV), which allows exports without a license of certain items intended for civilian use to China and other countries1 where a license would otherwise be required. These two rules are effective June 29, 2020.
In addition, BIS issued a proposed rule that would remove a group of countries, including China, Vietnam, Armenia, Yemen, and others, from the License Exception Additional Permissive Reexports (APR) eligible destination. License Exception APR allows the reexport of certain items from specified countries without a license provided that certain conditions are met, including authorization from the reexporting country's government. Interested parties may submit their comments on the proposed rule until June 29, 2020.
The two final rules (and the proposed rule, if implemented) would likely have a significant impact on exports, reexports, and transfers of items subject to the EAR to certain countries, including China. Below we provide an overview of the changes contained in the two final rules and the proposed changes in the proposed rule.
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
BIS announced a significant expansion of the current restrictions on exports, reexports, and transfers of certain items to "military end uses" or "military end users" in China, Russia and Venezuela.2
Expansion of Licensing Requirements for China. Under the current rule, the licensing requirements for China only restrict exports, reexports, and transfers to "military end uses," and not "military end users," while both "military end uses" and "military end users" are included for Russia and Venezuela.3 The final rule expands the licensing requirements for China to restrict exports, reexports, and transfers to "military end users" in addition to "military end use."4 As a result, exports, reexports, and transfer (collectively referred to herein as "exports") of specified items would require a license if the exporter or reexporter has "knowledge" (including any reason to know) that the item is intended for a military end use or military end user in China, Russia or Venezuela.5
This is a significant change because it may be more difficult for exporters or reexporters to distinguish between military and non-military recipients in China, given that the definition of "military end user" is very broad. The term "military end user" is 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.'"6 There is also significant integration between the Chinese government, Chinese military, and many non-government organizations in China. Therefore, exporters and reexporters could soon be in violation of the EAR for exporting relatively simple technology from the United States if the recipient in China is related to the broadly defined category of "military end users."
The resulting increased due diligence burdens on exporters, reexporters and those that intend to transfer goods, software and technology subject to the EAR within a foreign country to confirm there is not a military end user in China at the other end of an export appears to be by design. BIS notes in the rule that "[t]his 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."7
Substantial Broadening of List of Items Subject to the New License Requirements. The final rule also adds to the list of items subject to the military end use and end user license requirements in Supplement No. 2 to part 744 many items in the categories of materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion to the supplement, including many commercially available electronics items and software that are otherwise controlled at a level restricted only for countries subject to an embargo for supporting terrorism, such as Cuba, Iran, North Korea, Sudan, and Syria.8 As a result, a larger category of exports to China that exporters or reexporters know or have reason to know are for military end use and/or military end users are now subject to the same restrictions that are imposed on embargoed destinations.9
For example, the new rule restricts exports of relatively common electronic components and a vast array of commercial items that use encryption, including many standard consumer mobile devices, modems, and routers, and many "apps" used on these devices. These items are extremely prevalent in the global supply chain and otherwise subject to very low controls.
Expansion of Definition of "Military End Use." The EAR's current definition of "military end use" is defined, among others, in terms of "use," "development," or "production" of certain military items.10 The final rule will expand the definition beyond "use," "development," or "production" to include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, development, or production, of military items described on the US Munitions List or items classified under ECCNs ending in "A018" or under "600 series" ECCNs.11
License Review Policy of Presumption of Denial. The final rule adopts "presumption of denial" as a license review policy for items subject to the China, Russia and Venezuela Military End Use/End User Rule.12
Regional Stability Control. The final rule also clarifies existing controls on certain items related to spacecraft or military systems that have been determined to be of extremely low sensitivity. (These items are described in a .y paragraph of a 9x515 or "600 series" control.) This change does not affect the scope of the license requirements but makes the requirements more apparent under the EAR. Therefore, all such ".y items" destined to China, Russia or Venezuela remain subject to the license requirements (except for exports or reexports to Russia for use in, with, or for the International Space Station (ISS), including launch to the ISS).
License applications for these items destined to China, Russia or Venezuela will be reviewed on a case-by-case basis.13 When destined to China, items classified under any 9x515 (spacecraft) .y control will be subject to a policy of denial.14
Removal of Certain Export Filing Exemptions. Finally, the rule adds Electronic Export Information (EEI) filing requirements in the Automated Export System for exports to China, Russia and Venezuela. Under the current provisions, exporters are exempt from both filing EEI for many shipments valued under $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).15 The new rule would remove such exemptions and require EEI filings for items destined to China, Russia or Venezuela regardless of the value of the shipment, unless the shipment is eligible for License Exception GOV and the inclusion of the relevant ECCNs regardless of reason for control and even if license is not required.16
Elimination of License Exception Civil End-User (CIV)
In addition, BIS announced that it is eliminating License Exception CIV.17 Currently, License Exception CIV authorizes exports and reexports of certain items that are controlled for national security reasons to civil end users for civil end uses in certain countries (including China and the others noted above).18 The final rule would remove License Exception CIV and require licenses for exports of national security controlled items to all such countries, unless another license exception applies. BIS noted that it is removing License Exception CIV because of concerns over "the increasing integration of civilian and military technology development in these countries of concern."19
Modification of License Exception Additional Permissive Reexports (APR)
Lastly, BIS issued a proposed rule to modify License Exception APR.20 Currently, License Exception APR allows reexports from certain countries, such as many NATO and other close allies of the United States (including Hong Kong) of certain national security controlled items to the same group of countries noted above, including China, provided that the reexporter complies with the conditions of export authorization from the government of the reexporting country.21
BIS is proposing to remove several countries (including China) as a category of eligible destination for national security-controlled items under this license exception.22 In so doing, BIS noted that "there may be variations of national security or foreign policy concerns between other countries and the United States" and that "[e]ven Wassenaar participating states . . . may have export authorization policies that do not align with the national security or foreign policy interests of the US government."23
Unlike the other two final rules discussed above, the rule on Modification of License Exception APR is a proposed rule. BIS is requesting comments on how the proposed rule would affect those who are currently using or planning to use the License Exception APR, including the rule's effect on the volume of transactions and the amount of time to complete the transactions.24 Interested parties may submit their comments until June 29, 2020.
* * *
Taken together, these rules would likely have a significant impact on companies exporting and reexporting items subject to the EAR to China, Russia and Venezuela, and any exporter that previously relied on the CIV license exception. Reexporters that rely on the APR license exception to certain destinations including China may also be affected in a future Commerce Department determination. Companies potentially affected by these changes, including those that currently utilize License Exceptions CIV and APR, should evaluate their current and anticipated exports of items that are subject to the EAR to determine whether the changes would impose restrictions on their ability to export such items and whether they would need to obtain a license from the US government before exporting. Moreover, given the new rule's restriction on exports to Chinese military end users, companies exporting items subject to the EAR to China should ensure that they have robust due diligence procedures to determine whether the end user for the exported item is or is not a Chinese military end user.
1 These countries are identified as Country Group D:1 under the EAR and include: Armenia, Azerbaijan, Belarus, Cambodia, China, Georgia, Iraq, Kazakhstan, Kyrgyzstan, Laos, Libya, Macau, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Vietnam, and Yemen. Although Country Group D:1 also includes North Korea, North Korea is excluded from License Exceptions CIV and APR.
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 (Apr. 28, 2020) ("Expansion of China, Russia and Venezuela Military End Use/End User Rule").
5 The EAR defines "knowledge" broadly to include "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," which may be "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.
9 Id. at 23460, 23464 (to be codified at 15 C.F.R. App. Supp. No. 2 to Part 744). The rule adds the following ECCNs to the rule 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990. In addition, the rule expands the range of items under ECCNs 3A992, 8A992, and 9A991 included in Supplement No. 2 to part 744.
11 Specifically, the new rule defines the term "military end use" to mean: "incorporation into a military item described on the U.S. Munitions List (USML) (22 CFR part 121, International Traffic in Arms Regulations); incorporation into items classified under ECCNs ending in 'A018' or under '600 series' ECCNs; or any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, 'development,' or 'production,' of military items described on the USML, or items classified under ECCNs ending in 'A018' or under '600 series' ECCNs." Expansion of China, Russia and Venezuela Military End Use/End User Rule, 85 Fed. Reg. at 23464 (to be codified at 15 C.F.R. § 744.21(f)).
Originally published by Arnold & Porter Kaye Scholer, April 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.