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On April 28, 2020, the Department of Commerce’s Bureau of Industry and Security (“BIS”) published two new final rules and a proposed rule in the Federal Register amending the Export Administration Regulations (“EAR”) to tighten restrictions on exports of technology to China, Russia, and Venezuela. According to Commerce Secretary Wilbur Ross, these actions are intended to combat efforts by entities in China, Russia, and Venezuela to use certain US technologies obtained through civilian supply chains or under civilian-use pretenses to develop weapons, military aircraft, and surveillance technology contrary to US national security interests.
As a result of these rules, a universe of transactions involving widely commercially available US technologies that require BIS licenses could dramatically increase, particularly for China — with the licensing policy of the presumption of denial making such licenses difficult to obtain. These rules are part of a broader wave of recent regulatory measures aimed to strengthen the US Government’s restrictions on, as well as visibility into, technology transfers to China and other countries of concern to protect US national security and foreign policy interests.
As described further below, the rules:
Expansion of Military End Use/User Controls for China, Russia, and Venezuela
The Commerce Department is broadening the US Government’s visibility into and ability to deny or condition exports, reexports, and transfers (in-country) involving certain items on the CCL destined to military end users or military end uses in China, Russia, or Venezuela. The final rule, which becomes effective on June 29, 2020, provides for the following changes to the EAR:
The licensing requirements for China are strengthened to include exports/reexports of designated items to military end users in China unless License Exception GOV applies. The existing licensing requirements for military end users only apply to Russia and Venezuela. The EAR’s definition of “military end user” is not changing and continues to apply broadly to “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’.” (Emphasis added.) The expansion of the license requirements to exports/reexports destined to “military end users” in China will, however, significantly increase compliance burdens on companies supplying designated items to China. In particular, given China’s integration of its civilian industries with the military sector, vetting Chinese entities for purposes of ensuring compliance with the end user-based license requirements is likely to pose considerable challenges.
Further, given the breath of the definition of “military end user,” along with the just expanded definition of “military end-use” (see below), a universe of transactions triggering license requirements could significantly increase. Supplying designated items to Chinese companies that engage in any (even de minimis) degree of business in support of military end-uses, could trigger licensing requirements. For example, Chinese semiconductor foundries could constitute “military end users” if even a small volume of semiconductor wafers they produce is used for integrated circuits for incorporation into defense articles. The consequence would be that US semiconductor tool manufacturers would have to obtain licenses to sell and supply semiconductor tools classified under ECCN 3B991 to such foundries. Similarly, Chinese aircraft maintenance organizations that furnish maintenance services for both commercial and military aircraft could constitute “military end users, ” resulting in a license requirement for US suppliers of aircraft parts classified under ECCN 9A991, even if those parts could only be used for a commercial aircraft.
In sum, should the US Government adopt a broad interpretation of these terms, US companies supplying non-sensitive, broadly available items to Chinese companies for civilian applications (e.g., items classified under ECCNs 3A991, 3B991, 5A992, or 9A991) may need BIS licenses, which would be difficult to obtain given the licensing policy of denial (see below). This could have a detrimental impact on a broad swath of US industry, in particular in the semiconductor, telecommunications, and aircraft sectors. BIS has indicated that it will be issuing guidance to industry to help clarify the expanded licensing requirements for China.
The definition of “military end use” has been changed from covering items for the “use,” “development,” or “production” of military items (as those terms are defined in the EAR) to also include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production” of military items. By expanding the definition to include items that support or contribute and by making a single element of the definition of “use” trigger the license requirement, the reach of the military end use-based restrictions could be extremely broad, possibly covering any peripheral item that could in any way be linked to a military item.
The list of items subject to the military end use and military end user license requirements in Supplement No. 2 to part 744 is being expanded to include the following Export Control Classification Numbers (“ECCNs”) in the categories of materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion: 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990. Notably, these changes roll out military end use/end user controls to items that are commercially widely available and are not inherently sensitive but rather could be important building blocks or components for products and technologies that China, Russia, and Venezuela may be developing to strengthen their military capabilities. As such, the expansion is significant and will require the suppliers of the designated items to go through a rigorous vetting process to determine whether the items destined to China, Russia, of Venezuela are being sourced for a military end user or a military end use.
Filings of EEI relating to exports of items controlled on the Commerce Control List to China, Russia, or Venezuela will be required regardless of the value of the shipment unless the shipment is eligible for license exception GOV. Further, such filings must identify the ECCN of the items to be exported regardless of the reason for control. Currently, some shipments under $2,500 are exempt from AES filing requirements, and an ECCN does not need to be indicated when the only reason for control is Anti-Terrorism (AT).
These changes will trigger the need for the filing of EEI for a larger universe of exports and will give the US Government a broad window into exports of items to China, Russia, and Venezuela, including increased visibility into the categories of technologies being supplied to China. The EEI records are available to a number of US Government agencies and have historically been an effective tool in the enforcement of US export controls.
License applications for the export, reexport, and (in-country) transfers of items, which are subject to the military end-use and end-user controls, to military end users or for military end uses in China, Russia, or Venezuela will be subject to a presumption of denial. Accordingly, while no export ban is in place per se for such transactions, obtaining a license will become difficult.
Currently, the licensing requirements for such items are described as part of the military end use/end user controls in § 744.21 but will be relocated to the relevant ECCNs and assigned a reason for control of Regional Stability (RS). This is not a substantive change but rather one intended to help companies comply with these requirements.
Modification of License Exception APR
BIS proposes to eliminate the application of License Exception APR to reexports of national security-controlled items to countries in Country Group D:1, which covers countries of national security concern, including China, Russia, and Venezuela. Under the proposed rule, such reexports would become subject to licensing requirements under the EAR, in addition to local licensing requirements, to ensure consistent review of reexports of national security-controlled items. The public comment period for this proposed rule ends on June 29, 2020.
Removal of License Exception CIV
BIS is removing License Exception CIV, which authorizes exports, reexports, and transfers (in-country) of certain national security-controlled items to most civil end users for civil end uses in Country Group D:1. The final rule will become effective on June 29, 2020, and will result in exports of national security-controlled items to Country Group D:1 countries becoming subject to BIS license requirements, thus giving the US Government more visibility into transactions of national security interest. License Exception CIV is one of the more commonly used exceptions to export licensing requirements and BIS has acknowledged that its outright removal may have a disproportionate effect on deemed exports, i.e., releases of national security-controlled technology to foreign nationals in the United States. In this regard, BIS has indicated that it would welcome industry feedback to help frame this issue going forward, notwithstanding that the removal of License Exception CIV was published as a final rule.