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Commerce Eliminates License Exemption, Restricts Certain Technology Exports

Posted May 04, 2020

The Department of Commerce’s Bureau of Industry and Security (BIS) last week issued two final rules and one proposed rule intended to prevent efforts by entities in China, Russia, and Venezuela to acquire U.S. technology that could be used in the development of weapons, military aircraft or surveillance technology through civilian supply chains or under civilian-use pretenses.
Military-Civil-Fusion (Chinese Military and Office Workers)

The changes to the Export Administration Regulations (EAR) will have significant implications for U.S. technology companies dealing with enterprises in countries subject to national security controls that are deemed as having a “military-civil fusion” doctrine, and present a heightened risk of diversion of civil items for military applications.

“Certain entities in China, Russia, and Venezuela have sought to circumvent America’s export controls, and undermine American interests in general, and so we will remain vigilant to ensure U.S. technology does not get into the wrong hands,” said  Secretary of Commerce Wilbur Ross in a press release

Expansion of Military End-Use/User Controls and Filing Requirements — China, Russia, and Venezuela

A final rule, effective June 29, 2020, expands licensing requirement controls on China, Russia, and Venezuela to cover “military end-users” in all three countries, in addition to “military end-uses.” It also expands the list of items controlled and potentially requiring an export license, including items such as semiconductor equipment, sensors, and other technologies sought for military end-use or by military end-users in these countries.

A key change made by the rule is to broaden the definition of “military end-use” to include “any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, ‘development,’ or ‘production,’ of military items.” BIS notes these expansions “will require increased diligence with respect to the evaluation of end-users in China, particularly in view of China’s widespread civil-military integration.”

The new rule also expands Electronic Export Information (EEI) filing requirements by removing two exemptions when the destination is China, Russia or Venezuela: (i) from filing EEI for any shipments valued under $2,500 and (ii) from reporting the Export Control Classification Number (ECCN) when the only reason for control is anti-terrorism (AT).

Elimination of License Exception Civil End Users (CIV)

Another final rule, effective June 29, 2020, eliminates the longstanding License Exception Civil End Users (CIV) that had allowed exports, reexports, and transfers (in-country) of certain national security-controlled items without prior review by BIS to most civil end-uses in various countries subject to strict export control (China, Russia, and others listed in Category D:1 per EAR Supplement No. 1 to Part 740 i).

According to the U.S. government, a number of countries around the world are currently seeking to “align civil and defense technology development for many reasons – to achieve greater efficiency, innovation, and growth.” A consequence of this “military-civil fusion” doctrine, however, is to make it difficult — often as part of a deliberate strategy, it is alleged — for U.S. exporters to know or determine whether the end-use and end-users of an item will or will not be intended for military uses or military end-users.

In view of this problematic situation, Commerce has decided that in future all transactions involving the national security-controlled items that have been permitted in the past under CIV license exception must now be reviewed prior to export

Amendment of License Exception for Additional Permissive Reexports

Under a rule proposed by Commerce, currently eligible D:1 countries would be removed from the license exception for Additional Permissive Reexports (APR). More specifically, Commerce is seeking to remove the provision in this exception that authorizes the reexport of certain national security-controlled items from a Country Group A:1 country (Wassenaar Arrangement Participating States) or Hong Kong to Country Group D:1.

Commerce says this change is necessary due to the application of different standards resulting in partner countries having approved licenses for the reexport of US-origin items that would have been denied had they been exported directly from the United States.

BIS is requesting comment on how the proposed change would impact those currently using or planning to use the APR license exception. Comments on the proposed rule should be submitted to the federal rulemaking portal under Docket No. BIS–2020–0010 and must be received by the bureau no later than June 29, 2020.

Why It Matters

Expansion of the electronic filing requirements means that additional end-use information will be required for goods that are not usually subject to significant export license considerations. Companies will, therefore, have to reevaluate and enhance screening programs for any transactions involving China.

Similarly, the expanded definition of military end-use, coupled with new restrictions on military end-users in China, will create a new set of compliance issues for many companies, including those that traditionally have not needed to be seriously concerned about export controls.

The policy change also raises questions about the extent of due diligence required to determine whether a customer is a military end-user. For example, does any activity with a military item render the customer a military end-user, even if the customer’s activities with the military are wholly unrelated to the item subject to export controls? What constitutes “support” or “contribution” and how far does it extend beyond activities directly related to an item exported by a U.S. business?

Companies will need to navigate these complex compliance challenges and adapt their due diligence processes and certifications accordingly.

Note: U.S. export controls can apply to re-exports of items subject to the EAR located outside of the United States and destined for countries identified as D:1. Importantly, Canadian companies that may have items covered by these restrictions will need to ensure they have mechanisms in place to determine whether they engage in the re-export of items subject to U.S. export regulations. 

Need More Information?

If you have any questions about potential compliance issues resulting from these changes in U.S. export control policy, don’t hesitate to contact one of our trade experts today. 

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