On April 28, 2020, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) published two final rules and one proposed rule1 that will result in tighter restrictions on exports, reexports, and in-country transfers of dual-use items subject to the Export Administration Regulations (EAR) and controlled for national security reasons to China, Russia, Venezuela, and a number of other countries. Companies involved in exports and reexports of controlled items to these countries should carefully review the changes.

The two final rules, both of which will become effective on June 29, 2020: (i) remove a license exception available for exports of items controlled for national security reasons to China, Russia, Venezuela, and other countries subject to national security controls so long as the items are destined to civil end users for civil end uses (license exception CIV); and (ii) expand existing restrictions on exports, reexports, and transfers of certain items subject to the EAR to cover military end users as well as military end uses in China (i.e., nominally civilian uses by military entities). The stated reason for these changes is to ensure case-by-case review of exports of national-security controlled items to countries of national security concern, even where purportedly destined for civil use, noting that integration of civil and defense technology development increases the risk that high-tech exports may undermine U.S. interests and makes it increasingly difficult for private exporters to reliably determine whether an export may have a military end use.

Beginning on June 29, 2020:

  • parties will now need a license from BIS for exports, reexports, or in-country transfers of certain national-security controlled items used in a broad range of industries to civilian end users in a range of countries; and
  • license requests for exports, re-exports, or in country transfers to any Chinese military end user of any item on the newly expanded list of items subject to military end use/end user license requirements will require a license and face a policy of denial.

Additionally, BIS has requested comments on a proposal to amend license exception Additional Permissive Reexports (APR) to remove provisions authorizing unlicensed reexports of certain national-security controlled items subject to the EAR to China, Russia, Venezuela, and other countries subject to national security controls if approved by other Wassenaar Arrangement authorities.

We briefly summarize the new rules below.

Elimination of License Exception CIV

Effective June 29, 2020, license exception CIV, which authorizes unlicensed exports, reexports, or in-country transfers of certain national security-controlled items to civilian end users in countries listed in Country Group D:12 (countries subject to national security controls, including China, Russia, Venezuela, and others), will be removed from the EAR. Items previously eligible for export under license exception CIV include a wide range of products and technologies, including bearings, semiconductors, semiconductor production equipment, telecommunication equipment, radar systems, marine equipment, and aircraft engine production equipment.

According to BIS, license exception CIV was being used for unlicensed exports of items that could support military modernization in countries with aligned civil and defense technology development (a rationale that appears particularly aimed at China). By removing license exception CIV from the EAR, exports and reexports of those items to civil end users located in Country Group D:1 countries will now require a license from BIS. Although there is a general policy of approval for license applications to export, reexport, or transfer national-security controlled items for civil end uses to those countries, there is a presumption of denial for license applications to export, reexport, or transfer items that would make a direct and significant contribution to the military capabilities of China or Russia.

Expansion of Controls on Military End Users in China

Effective June 29, 2020, exports and reexports of certain sensitive items to military end users in China will require a license.3 Previously, the military-specific restrictions on China under the EAR were limited to military end uses. The new restriction, like that for Russia and Venezuela, applies to a) national military, police, reconnaissance, and intelligence agencies (regardless of the function) and b) "any person or entity whose actions or functions are intended to support 'military end uses'," which may be quite difficult for private parties to determine. As a practical matter, this change will require increased diligence with respect to the evaluation of end users in China, particularly given China's widespread civil-military integration, and may counsel license applications in cases of doubt. The final rule also expands the ECCNs that are subject to the military end use/end user restrictions in Russia, China, and Venezuela under the EAR.4

The rule also broadens the definition of military end use beyond items for the use, development, or production of military items to now include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, development, or production of military items.

According to BIS, these changes are intended to provide the U.S. government with greater visibility into and ability to prohibit exports and reexports involving items subject to the military end use/end user license requirements to China, Russia, and Venezuela. Further, the rule adopts a license review policy of presumption of denial for applications seeking a license for such exports and reexports.

Modification of License Exception Additional Permissive Reexports (APR)

BIS is proposing to modify license exception APR to no longer allow unlicensed reexports of certain national-security controlled items that are subject to the EAR from countries in Country Group A:1 (the countries participating in the Wassenaar Arrangement, other than Russia, Ukraine, and Malta) and Hong Kong to countries in Country Group D:1 (which, as noted above, includes China, Russia, Venezuela, and others) if they were approved by the export control authorities of the re-exporting countries. In the proposed rule, BIS expressed concern over differences in licensing review standards among Country Group A:1 countries (and Hong Kong) for exports to Country Group D:1, which BIS believes result from different perceptions of the security threat posed by the increasing integration of civil and military technology development in those countries. If the final revisions mirror the proposed rule, all such reexports will require a license from BIS.

The proposed rule is open for comment until June 29, 2020.

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If you have any questions about the above or U.S. export controls compliance generally, please do not hesitate to contact the listed authors or any of your regular Firm contacts.

Footnotes

1. 85 Fed. Reg. 23459 (Apr. 28, 2020), available at: https://www.govinfo.gov/content/pkg/FR-2020-04-28/pdf/2020-07241.pdf; 85 Fed. Reg. 23470 (Apr. 28, 2020), available at: https://www.govinfo.gov/content/pkg/FR-2020-04-28/pdf/2020-07240.pdf; 85 Fed. Reg. 23496 (Apr. 28, 2020), available at: https://www.govinfo.gov/content/pkg/FR-2020-04-28/pdf/2020-07239.pdf.

2. See 15 C.F.R. Supplement No. 1 to Part 740.

3. This restriction applies to specified items within the following Export Control Classification Numbers (ECCNs) (subject to the expansion described below): 1A290, 1C990, 1C996, 1D993, 1D999, 1E994, 2A991, 2B991, 2B992, 2B996, 3A992, 3A999, 3E991, 4A994, 4D993, 4D994, 5A991, 5D991, 5E991, 6A995, 6C992, 6A993, 7A994, 7B994, 7D994, 7E994, 8A992, 8D992, 8E992, 9A991, 9D991, and 9E991.

4. Specifically, the rule adds specified items controlled under the following ECCNs to the restrictions: 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990. Additionally, the rule expands the range of items subject to the restrictions under ECCNs 3A992, 8A992, and 9A991.

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Article orignally published on 29 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.