On April 28, 2020, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) published two final rules that will eliminate the license exception for civil end users (CIV) in the People’s Republic of China, Russia, and Venezuela and expand military end use and end user restrictions on these countries. These rules confront the national security risks presented by the increasing integration of civilian and military technology development, particularly in China, by requiring U.S. Government review of a broader range of exports including electronics and telecommunications items only controlled for antiterrorism (AT) reasons (with licenses subject to a presumption of denial) when shipped for military end uses or to military end users. These final rules will go into effect on June 29, 2020.
BIS also published a proposed rule that would modify License Exception Additional Permissive Reexports (APR) by restricting the destinations that will be eligible for the license exception. Comments on the proposed rule are also due June 29, 2020.
Expansion of Controls Related to Military End Use or Military End Users in China, Russia, or Venezuela
The first final rule expands license requirements for exports, reexports, and transfers (in-country) of items intended for military end uses and military end users in China, Russia, and Venezuela, pursuant to § 744.21 of the EAR. Effective June 29, 2020, the final rule:
- Imposes a restriction on exports to military end users in China, similar to current requirements for Venezuela and Russia. Currently, for specified items, EAR Section 744.21 requires a license where the exporter has knowledge that (i) an item destined for China, Russia, or Venezuela will be used for a military end use, or (ii) an item destined for Russia or Venezuela (but not China) will be for a military end user.
- The term “military end user,” includes not only “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,” but also “any person or entity whose actions or functions are intended to support ‘military end uses.’”
- Many large commercial manufacturers and other companies, particularly in China (as well as Russia and to a lesser extent Venezuela) may conduct some activities in support of a military end use. Under the new rule, it appears that a license may be required to export the covered categories of items (e.g., 3A991 integrated circuits) to such companies, even if the item itself will be used exclusively in connection with commercial applications. If interpreted in this way, the rule could have a broad impact; it will be important to monitor further guidance from BIS. Under any interpretation, exporters will need to focus their due diligence on whether any aspect of their counterparties’ business supports military end uses particularly in China, given what BIS refers to in the rule as “China’s widespread civil-military integration.”
- Significantly expands the list of items subject to the military end use and end user license requirements in Supplement No. 2 to Part 744 of the EAR for exports to China, Russia, and Venezuela. The list will now also include certain materials processing, electronics, telecommunications, mass market encryption items, sensors and lasers, propulsion, electronics, maritime equipment, and aircraft items on the Commerce Control List (CCL). For example, sending a 3A991 chip, a 5A992 iPhone, or a copy of 5D992 Microsoft Windows to a military end user in China would be subject to this restriction.
- Broadens the “military end use” definition. “Military end use” currently is defined as:
- Incorporation into a military item described on the U.S. Munitions List (USML);
- Incorporation into a military item described on the Wassenaar Arrangement Munitions List (as set out on the Wassenaar Arrangement Web site at http://www.wassenaar.org);
- Incorporation into items classified under ECCNs ending in “A018” or under “600 series” ECCNs; or
- For the “use,” “development,” or “production” of military items described above.
“Use” normally has a conjunctive definition with six elements – meaning all the elements need to be satisfied to constitute “use.” In this case, the final rule expands the “military end use” definition to also include any item that supports or contributes to any one of the elements of “use,” i.e., the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production,” of military items.
- Adopts a policy of presumption of denial of licenses for exports to China, Russia, and Venezuela for military end uses and end users, rather than the existing case-by-case license review standard. Accordingly, license applications pursuant to EAR § 744.21 will be denied in most cases.
- Expands Electronic Export Information (EEI) requirements for all items listed on the CCL that are destined for China, Russia, and Venezuela – independent of end use or value. Per the Foreign Trade Regulations, many less sensitive AT-controlled items generally do not require EEI reporting at all if their value is less than $2,500, and even if reported, the EEI would generally not need to specify an ECCN. The final rule requires EEI reporting to identify specific ECCNs for tangible exports of all items listed on the CCL to China, Russia, and Venezuela, with very few exceptions. As a result, even if a company does business with these countries entirely in the commercial realm, its export reporting obligations may change.
Elimination of License Exception Civil End Users (CIV)
The second final rule eliminates License Exception CIV. License Exception CIV currently authorizes the export of certain items that are controlled for national security (NS) reasons provided that the items are destined to civil end users for civil uses in Country Group D:1, which includes, among others, China, Russia, Venezuela, Ukraine, and Iraq. A number of items currently may be exported under License Exception CIV, including certain telecommunication equipment and computers. Accordingly, as of June 29, 2020 companies will no longer be able to utilize License Exception CIV.
Modification of License Exception Additional Permissive Reexports (APR)
The third rule is a proposed rule that would modify License Exception APR, which currently authorizes the reexport of certain items from Country Group A:1 or Hong Kong to destinations in Country Group B (so long as the destination is not also in Country Groups D:2, D:3, or D:4) and Country Group D:1. The rule proposes removing destinations in Country Group D:1, including China, as eligible recipients of national security-controlled items reexported under License Exception APR.