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There have been recent significant changes to the Export Administration Regulations (EAR).  Specifically, the Bureau of Industry and Security (BIS) issued two final rules and one proposed rule on April 28, 2020, which enact or propose changes to the ‘Military Catch-All Rule’ in Part § 744.21, the removal of certain license exceptions, and an increase in controls around items classified under Export Control Classification Numbers (ECCNs) controlled for National Security (NS) reasons on the EAR’s Commerce Control List (CCL).  BIS also issued an interim final rule on May 15, 2020, which expands the scope of General Prohibition 3 in Part § 736.2(b)(3).  This rule, also known as the ‘Foreign Direct Product Rule’, further expands the reach of US jurisdiction over items, technology, and software restricted to Huawei, their affiliates, and other entities on the BIS Entity List.

The final rules which take effect on June 29, 2020, and the interim final rule which is effective as of May 15, 2020, will make these regulations more restrictive.  These changes are summarized below.

Summary of Key Regulatory Changes:

Currently, the provisions in Part §744.21 of the EAR implement controls on the export, re-export, or transfer (in-country) of many dual-use products listed in Supplement No. 2 to Part §744, when the exporter has knowledge (as defined in Part §772 of the EAR) or has reason to believe that the products are intended, entirely or in part, for a ‘military end-user’ in Russia or Venezuela, or for a ‘military end-use’ in China, Russia, or Venezuela.  The §744.21 rules for China currently only extend to ‘military end-use’, as defined.  When the final rule takes effect, the §744.21 rules for China will now also extend to ‘military end-users’ (as defined), bringing these restrictions in line with the controls on Russia and Venezuela.  License applications for military end-uses or end-users are subject to a presumption of denial.

  • The definition of ‘military end-use’ has been expanded in scope
    • Currently, the controls on military end-use include (but are not limited to) those for the “development”, “product”, or “use” (operation, installation, maintenance, repair, overhaul, refurbishing) of items on the USML or the Wassenaar Arrangement Munitions List, as well as certain ECCNs.
    • The updated controls on military end-use expand the “use” criteria to include any of the six “use” criteria (operation, installation, maintenance, repair, overhaul, refurbishing), instead of requiring all six
  • The scope of items subject to the ‘Military Catch-All’ Rule, specified in Supplement No. 2 to Part §744, has been expanded
    • Seventeen (17) new ECCNs have been added, which were previously not subject – these include a wide variety of items in catch-all controls.  For example, but not limited to:
      • 3A991 (integrated circuits, semiconductors, and other electronic components)
      • 5A992 (mass market crypto products, potentially including certain integrated circuit components, or end items such as tablets, phones, etc.)
    • Three (3) ECCNs already controlled by the rule have been expanded in scope – specifically, 3A992, 8A992, and 9A991.  For example:
      • Supplement No. 2 to Part §744 will expand the controls on 9A991 from “aircraft”, n.e.s. and gas turbine engines not controlled by 9A001 or 9A101 to now also include “parts” and “components,” n.e.s.
  • The rule also revises the Electronic Export Information (EEI) filing requirements to require filing for certain exports (i.e., non-EAR99 items) to China, Russia and Venezuela regardless of the value of the shipment. It also requires identification of ECCNs in the filings regardless of the reason for control. Previously, exporters did not need to include the ECCN in many EEI filings; however, under the new rule, exporters will need to determine the appropriate export classification for all products exported to these countries.  Apart from very narrow exceptions, these modifications to the filing process have the effect of requiring EEI filing for many physical exports to these countries.

    Update from the original publication of this guidance:

  • List-based license exception CIV (Civilian End-Users) will be removed from part §740.5 of the EAR.  Exports, re-exports, and transfers (in-country) of NS-controlled items previously authorized to group D:1 Countries by license exception CIV will now require a license
    • Group D:1 includes many countries, including but not limited to China, Russia and Venezuela
    • This is due to the increasing integration of the civilian and military sectors in these countries
    • One of the primary applications of CIV, though not the sole use, was for the export of integrated circuits and electronic components controlled in ECCN 3A001 for NS (National Security) reasons
  • BIS has issued a proposed rule to modify license exception APR (Additional Permissive Re-Exports).  This action is related to the removal of license exception CIV, and is intended to address the threat caused by increasing civilian and military sector integration.  The public comment period closes on June 29, 2020.
  • BIS has issued an interim final rule to expand the scope of General Prohibition 3 in Part §736.2(b)(3).  This rule, also known as the ‘Foreign Direct Product Rule’, significantly expands EAR control related to foreign-produced items intended for entities on BIS’ Entity List (i.e., Huawei Technologies Co., Ltd. and dozens of its non-US affiliates (collectively, ‘Huawei’)).  Specifically, it extends control to items that are a direct product of software or technology subject to the EAR and in a specified ECCN and produced or developed by an entity designated on the Entity List; or are the direct product of a plant or major component thereof subject to the EAR (for example, testing equipment) and in a specified ECCN and the direct product of software or technology produced or developed by an entity designated on the Entity List.

Summary of Business and Compliance Considerations:

  • Expansion of the Military Catch-All Rule will create additional, unplanned complexities for many businesses through an increase in the number / types of dual-use products captured, and an expansion of the potential entities subject to the rule.  There will be a significant impact on the electronics and technology sectors, and the risk can impact many companies in different ways – including the sale of not only finished goods, but of excess and obsolete component inventory.  For example, as companies seek buyers of excess or obsolete electronic component materials from manufacturing facilities (i.e., integrated circuits), they should be aware that many of these types of components may be subject to the rule (e.g. ECCNs 3A991, 5A992, 7A994, etc.) even when their finished products are not.  As there is a high volume of production currently in China, this brings an increased risk of conducting business with unfamiliar entities who are either subject to this rule, or potentially acting as an intermediary for another party subject to this rule.  Careful due diligence should be conducted for such proposed non-standard transactions.
  • In the absence of definitive interpretive guidance – the expansion of scope (i.e., new ECCNs, any “use” criteria, etc.) in conjunction with the language in §744.21 (“knowledge”, “intended entirely or in part”) leaves a broad number of potential scenarios that may now require a license.  As an example, exporting Mass Market computing equipment of ECCN 5A992 to a data or facilities management company that is owned by, or even has contracts with a “military end-user”, could be subject to a license requirement as those items may be used “entirely or in part” to support “military end-uses” (installation, design/development, production management, etc. for the products of concern).
  • The removal of license exception CIV (final), and modification of license exception APR (proposed), will have an administrative impact as licensing requirements may be triggered.  This may impact supply chains and production.  For example, the export of “field-programmable logic ICs” in 3A001.a.7 to a contract manufacturer in China for a civil end-use (i.e., incorporation into commercial products) can no longer utilize CIV, and a license will be required if no other exceptions apply.
  • Foreign companies, and US companies with foreign subsidiaries and affiliates, must exercise even greater caution prior to considering any transactions involving Huawei.  Whether an engagement currently authorized (i.e., through the TGL), or a proposal for new business from the entity or affiliate, companies must conduct thorough due diligence on all aspects of the engagement and these regulations.  As an example, these considerations include (but are not limited to) the associated products themselves (i.e., those developed/produced), but also the technology and equipment utilized as part of the process such as computers, software, and components utilized for design, production and testing of the products.  Many transactions previously authorized for foreign entities will now be subject to the EAR and its licensing requirements for Huawei.
  • For the full text of the final rule changes, please refer to the federal register notices below:

The Sandler & Travis Trade Advisory Services, LLC (STTAS), a UPS Company, Export Compliance Consulting (ECC) team would be happy to assist with an analysis of these controls and their impact relative to your company’s unique products and export activities, and by providing guidance to maintain compliance and mitigate risk.

If you are currently engaged with us for export services, please feel free to reach out to our team distribution at Export@sttas.com  if you would like further information.  If you are not currently engaged for export services, please reach out to your UPS or STTAS relationship manager or the STTAS Solutions team at Solutions@sttas.com.

Proprietary and Confidential: This presentation may not be used or disclosed to other than employees or customers, unless expressly authorized by UPS. This document does not constitute legal advice.
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