The Situation: On April 28, 2020, the U.S. Department of Commerce's Bureau of Industry and Security ("BIS") published two final rules as well as one proposed rule amending the Export Administration Regulations ("EAR") to expand restrictions on the export, reexport, and in-country transfer of items that will significantly affect global supply chains.
The Result: Effective June 29, 2020, companies will be subject to more stringent export controls for sales to military end users and for military end uses in China, Russia, and Venezuela. Companies also will no longer be able to export items under License Exception Civil End Users ("CIV"), and will likely be forced to adjust to restrictions on License Exception Additional Permissive Reexports ("APR") in the near future.
Looking Ahead: Once effective, the final rules will require companies to engage in additional diligence regarding counterparties, end users, and end uses related to many exported items, and to adjust export compliance procedures. Companies may also submit comments on the proposed rule's modifications to License Exception APR until June 29, 2020.
At the end of April, BIS published two final rules and one proposed rule designed to address concerns regarding the increasing integration of civilian and military technology in certain countries that pose national security concerns, including China, Russia, and Venezuela. The changes presented by these rules will present unique challenges for companies across numerous industries, complicating existing arrangements and supply chains.
Final Rule: Removal of CIV License Exception
As a result of the final rule issued on April 28, 2020, License Exception CIV will be removed from the EAR on June 29, 2020. Presently, License Exception CIV authorizes the export, reexport, or transfer (in-country) of certain national security controlled items without prior review by BIS to most civil end users for civil end uses in the "countries of national security concern" set out in Country Group D:1. This Country Group includes prominent international suppliers and consumers, such as China, Russia, Venezuela, Ukraine, and Vietnam (which has become a growing destination of U.S. goods and, increasingly, a key component of international supply chains).
Removing License Exception CIV will, at least in the short term, result in delays to or closure of long-standing supply chains for electronics, telecommunications, and high-technology products involving China and other Country Group D:1 countries, such as Vietnam, Russia, and nations throughout Eastern Europe and Central Asia.
Final Rule: Expanded Controls Targeting Military End Uses and End Users in China, Russia, and Venezuela
BIS has issued a final rule that will, as of June 29, 2020, significantly expand the restrictions-and procedural requirements-for exporting, reexporting, and transferring (in-country) items intended for military end users or military end uses in China, Russia, and Venezuela. Of note, the final rule implements the following significant changes:
- Expansion of Military End Uses Subject to Export Controls. The final rule expands the definition of "military end use" to include ancillary applications. At present, the definition of "military end use" includes both "direct" use (i.e., components for military items) and "indirect" use (i.e., items intended for development, production, or use of military items). Under the final rule, military end use will also cover items that"support or contribute" to the operation, installation, maintenance, repair, overhaul, refurbishing, development, or production, of military items.
- Expansion of Export Controls to Military End Users in China. The final rule also expands the licensing requirement for specified items-set out in Supplement No. 2 to part 744-destined for "military end users" in China. Previously, it only applied to such users in Russia and Venezuela. Pursuant to the EAR, a "military end user" encompasses national armed services (e.g., army, navy, marine, air force, or coast guard), the national guard and national police, government intelligence or reconnaissance organizations, and any person or entity whose actions or functions are intended to support military end uses. Given the integration of civil and military functions in Chinese entities, the term, as applied to Chinese end users, could apply to a wide array of counterparties, complicating existing supply chains and commercial relationships.
- Expansion of Items Subject to Restrictions. The final rule broadens the scope of the items subject to licensing requirements by adding new items related to electronics, telecommunications, sensors, lasers, and propulsion to Supplement No. 2, including, notably, items classified under Export Control Classification Numbers ("ECCNs") 5A992 and 5D992 (which, due to the growing prevalence of mass market encryption, impose low-level controls on a wide array of items) and ECCN 3A991 (which covers many common electronic components).
·Procedural Changes to License Applications and Reporting Requirements. Finally, the final rule implements several procedural changes for shipments to China, Russia, and Venezuela, including (i) imposing a presumption of denial for all license requests with respect to exports intended for military end users or for military end uses; (ii) eliminating, unless using License Exception GOV, existing exemptions to Electronic Export Information ("EEI") filing requirements for shipments valued under $2,500; and (iii) requiring EEI filings to include ECCNs, regardless of the reason of control or whether a license is required.
In combination with the removal of License Exception CIV, this final rule will have substantial implications for existing commercial relationships and supply chains, including, in particular, relationships with Chinese counterparties. As a result, exporters should carefully review their existing relationships-as well as their shipping procedures-in order to comply with all requirements before the end of June.
Proposed Rule: Modification of License Exception APR
BIS also issued a proposed rule that would modify License Exception APR to eliminate its use for reexports to Country Group D:1 destinations, including, notably, China, Russia and Venezuela.
Subject to certain limitations, License Exception APR currently allows Country Group A:1 countries-all of which are members of the Wassenaar Arrangement-and Hong Kong to reexport items without the need for a license where the reexport is authorized under the export controls of the third country. BIS has, however, become concerned that this license exception may result in reexports that would not be in line with the foreign policy of the United States. BIS noted that this is due to variations in how the United States and its partners perceive the threat presented by these reexports.
To address that disparity, the proposed rule would amend License Exception APR to remove countries in Country Group D:1 from the category of eligible destinations countries. The newly restricted destinations would include not only China, Russia and Venezuela, but also other trading partners, such as Ukraine and Vietnam.
While the consequences of the proposed rule as constructed depend in part on the extent to which companies rely on License Exception APR, the rule will likely have significant consequences for international supply chains.
The proposed rule remains open to public comments until June 29, 2020. Companies that rely on this license exception are encouraged to submit comments.
Three Key Takeaways:
- Effective June 29, 2020, companies that have relied on License Exception CIV must alter practices or consider alternative authorizations for anticipated exports of certain items to civilian end users in China and other countries in Country Group D:1.
- Moving forward, companies should increase end use and end user diligence performed for exports of many newly designated items to China, Russia, and Venezuela.
- Companies have until June 29, 2020, to comment on the proposed rule concerning modifications to the APR license exception.
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.