Yesterday, the US Department of Commerce Bureau of Industry and Security (BIS) promulgated two new rules and issued a new proposed rule:
- A new final rule that will restrict previously permissible exports to China, Russia and Venezuela. In particular, the Final Rule amends Part 744 of the Export Administration Regulations (EAR), which imposes export licensing restrictions based on the exported item’s end use and end user. Among other changes, it significantly expands the licensing requirements under Part 744.21 of the EAR for exports, reexports and transfers of certain goods, equipment, materials and software to Chinese, Russian and/or Venezuelan military end users, and it broadens the definition of military end uses.
- A second new final rule that amends the EAR to remove License Exception Civil End Users and to require licensing for national security-controlled items to countries of national security concern, including Russia and China, even if intended for exclusively civil end use.
- A proposed rule that would modify License Exception Additional Permissible Reexports by removing provisions that authorize reexports of certain national security-controlled items. Comments are due June 26, 2020.
Each of these three developments can be seen within the context of the Trump Administration’s broader confrontation with China on trade and national security issues, and its overall focus—as reflected in the 2017 National Security Strategy of the United States (NSS)—on challenges to national security and geopolitical challenges to American power, influence and interests. This week’s developments may have significant practical implications for companies exporting, reexporting or transferring affected goods, equipment, materials or software to countries subject to export controls for national security reasons, especially China, Russia and Venezuela.
I. 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
In the final rule on “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 aims to support US national security and foreign policy objectives reflected in the NSS, which asserted that “China and Russia challenge American power, influence, and interests, attempting to erode American security,” and that each country “support[s] the dictatorship in Venezuela and [is] seeking to expand military linkages and arms sales across the region.”
In an effort to address these threats, the new rule (“744 Rule”)—which will take effect on June 26, 2020—expands export licensing requirements for exports, reexports and transfers of certain goods, equipment, materials and software when an exporter has knowledge or has reason to know the items will be for Chinese, Russian and/or Venezuelan military end users or military end uses.
- New Requirements for Exports to Chinese Military End Users. The 744 Rule will extend licensing requirements for exports, reexports and transfers of certain items for Chinese military end uses—as is currently required—to also include Chinese military end users. BIS notes in the 744 Rule that this amendment “will require increased diligence with respect to the evaluation of end users in China, particularly in view of China’s widespread civil-military integration.” Notably, a military end user includes not only the national armed services but also the national guard, national police, government intelligence and “any person or entity whose actions or functions are intended to support” military end uses. Thus, Chinese companies with diverse commercial and military businesses may be “military end users” subject to increased export licensing requirements. Since it may be difficult to discern whether a company is a "military end user," exporters may need to reassess their customer diligence measures and their tolerance for regulatory risk.
- Expanded Scope of Items Subject to Review. The 744 Rule will also broaden the scope of items subject to licensing for military end uses and military end users. The 744 Rule will expand the enhanced licensing requirements to additional categories of commodities, equipment, materials and software under Export Control Classification Numbers (ECCNs) 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996 and 9B990, and additional items classified under ECCNs 3A992, 8A992 and 9A991.
This expanded list of covered items is notable because it includes categories of common electronics, telecommunications equipment, navigational equipment, certain aircraft and aircraft parts, and information security products that are not otherwise subject to stringent export controls.
- Expanded Definition of “Military End Use.” The 744 Rule will broaden the definition of the term “military end use” in China, Russia and Venezuela so that it includes not only items for the use, development or production of a military item, but also the operation, installation, maintenance, repair, overhaul or refurbishing of such an item. This change is notable because under the existing rule, the term “use” was defined narrowly to mean all of “[o]peration, installation (including on-site installation), maintenance (checking), repair, overhaul and refurbishing” (emphasis added). The broadened definition “identif[ies] each element of the definition of ‘use’ so that any one of the six elements, standing alone, is sufficient.”
- Licensing Standard: Presumption of Denial. The 744 Rule will heighten the license review standard that BIS applies, from the current “case-by-case” review to presumption of denial.
To improve navigation within the regulations, the 744 Rule relocates the licensing provisions for 9x515 and “600” series export classifications so that the licensing requirements for military end users and military end uses in China, Russia and Venezuela appear directly in the entry for the affected ECCNs. The 744 Rule also expands the Electronic Export Information (EEI) filing requirement for exports to China, Russia and Venezuela so that all exports to those destinations—regardless of the value of the shipment—must generally be accompanied by a mandatory EEI filing.
II. Final Rule Removing the License Exception Civil End Users (CIV)
In another final rule also effective on June 26, BIS is amending the EAR to eliminate License Exception CIV, which authorized exports and reexports of certain items controlled for national security reasons to “D:1” countries such as China, Russia and Venezuela if they were “destined to civil end-users for civil end-uses.” BIS stated that “the increasing integration of civilian and military technology development in these countries of concern” made it infeasible to retain such a clear distinction between military and civil end users and end uses. BIS acknowledged the rationale for countries to align their civil and defense technology development, but identified the “difficult[y] for industry to know or determine whether the end use and end users of items proposed for export, reexport or transfer (in-country) will not be or are not intended for military uses or military end users.” Without License Exception CIV, exporters of items controlled for national security reasons will face increased licensing requirements for items that could previously be exported pursuant to the exception.
III. Proposed Rule to Modify License Exception Additional Permissible Reexports (APR)
Finally, BIS issued a proposed rule that, if adopted, would modify License Exception APR by removing provisions that authorize reexports of certain national security-controlled items. License Exception APR currently authorizes the reexport of certain items from low-risk countries or Hong Kong to certain destinations, provided the reexport is consistent with the export rules of the reexporting country. The current rule allows friendly, low-risk countries to apply their own export laws for eligible reexports of US-controlled items. The proposed rule would eliminate that provision because the export policies of the US and its allies are no longer consistent enough to ensure that the foreign export rules will implement US export control policies.
BIS justified the the proposed rule, in part, by noting that “[b]ased on discussions with partner governments and U.S. companies, BIS has evidence of differences in licensing review standards ….” If these partner governments become less willing to adopt export control standards sought by the United States, then they may implement changes to their own export control regulations that further diverge from the U.S. rules.
BIS is requesting comment on the proposed change, which would make more reexports subject to US regulations in addition to locally applicable export control requirements. BIS seeks comments on “the volume of transactions affected by this proposed change” and how the change would impact business, acknowledging that it “does not have a way to readily account for how many items are being authorized” pursuant to the current License Exception APR. Comments on this proposal are due on June 26, 2020. The changes would take effect only after BIS issues a final rule in a future publication.
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Each of the measures taken this week can be understood within the context of the Trump Administration’s broader confrontation with China on trade policy, technology competition and, in particular, China’s “military-civil fusion” that the State Department has recently described as “an attempt to deliberately erase the line” between the country’s military and civilian sectors, as well as a broader focus on national security and related geopolitical threats posed by countries around the world. These actions also highlight a breakdown of the export control policy consensus in which the US and allied countries implemented consistent export policies in furtherance of common objectives. These new and proposed rules illustrate the importance of compliance with evolving regulatory requirements by exporters, financial institutions and others involved in global trade, especially in transactions involving controlled goods and technologies destined for China, Russia and Venezuela.
WilmerHale is advising a broad range of clients on these and related issues.