Ahoy, Exporters to China, Russia, and Venezuela! Massive Military End Use/User Controls & Reporting Icebergs Lie Ahead!

A link to the final rule is here.

In a Nutshell

To achieve this goal, BIS is making several changes to the Export Administration Regulations (EAR):

1. expanding the definition of “military end use” which also expands the definition of “military end user;”
2. imposing a licensing requirement on certain exports to “military end users” in China;
3. adding Export Control Classification Numbers (ECCNs) subject to military end use/user license requirements;
4. establishing a presumption of denial for license requests related to military end use/users in China;
5. requiring Electronic Export Information (EEI) filings for shipments of items on the Commerce Control List of any value to China, Russia, or Venezuela; and
6. reconfiguring the existing license requirement on 500/600 Series .y to China, Russia, or Venezuela into a regional stability control noted with the ECCNs as opposed to separately buried in end user/end use controls.

What Does This Mean

Any company that exports, re-exports, or transfers (in-country) items subject to US export controls that fall into one of now 49 ECCNs to China, Russia or Venezuela needs to revamp their end use/end user controls to account for this new rule. Suggested steps:

1. Assess if the company exports, reexports or transfers (in country) items subject to the EAR and that fall into any of the 49 relevant ECCNs to China, Venezuela or Russia.
2. If so:
   1. Assess current due diligence procedures and scope of existing end use certificates given the expanded definition of military end use and restriction on military end users in China;
   2. Assess if there are any current third parties (e.g., customers) that now may require a BIS license, determine the associated licensing policy, and apply for a BIS license; and
   3. Address any upcoming exports in accordance with the Savings Clause.
3. Revise EEI filing procedures to ensure that EEI on exports valued under $2500 to China, Russia and Venezuela are included. If using a third party to do EEI filings, confirm they understand and will implement this change.

When

The final rule goes into effect 60 days after publication in the Federal Register, June 29, 2020, and does include a 90-day savings clause.

In the weeds

A summary of each change follows.

1) Expanding the definition of military end use, which also impacts the definition of military end user.

BIS has changed the definition of “military end use” to include an expansion of “use” and adding items that “support or contribute” to certain activities related to military items described on the US Munitions List (USML) or Wassenaar Arrangement Munitions List (WAML). The current and new definition follow.

This definition has been expanded in two ways:

• First, BIS has significantly broadened “use.” Per the EAR, “use” means “operation, installation (including on-site installation), maintenance (checking), repair, overhaul and refurbishing” (emphasis added), meaning all six verbs have to happen to trigger “use.” By listing the six verbs and switching the and to an or, the new definition breaks apart all the activities in “use” as separate triggers for a military end use. As a result of this change, an item exported for the purpose of operation or repair of a military item in China, Russia or Venezuela, that export is now a “military end use,” even if it is not installed in the military item. So if you send diagnostic equipment that is classified under an ECCN on the list, and it is going to be used to test military items to repair them, that’s now a military end use.
• Second, BIS has added on the phrase “any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, ‘‘development,’’ or ‘‘production,’’ of military items. A laptop computer is ECCN 4A994, an ECCN that is controlled for military end use. If you sell a laptop computer and that laptop computer “supports or contributes to” a Chinese company in operating, maintaining, or repairing military items, based on the current broad language,  BIS could take the position that is a military end use.

In short, the revised definition of military end use in 744.21 is vastly expanded and its limits are both vague and broad. When a US company sends very basic ECCN 5A991 telecommunication equipment to China, how can it be sure that it will not be used in a way that supports or contributes to operation, installation, maintenance, repair, overhaul, refurbishing, ‘‘development,’’ or ‘‘production,’’ of military items?

The definition does eliminate the following phrase: “’Military end use’ also means deployment of items classified under ECCN 9A991 as set forth in Supplement No. 2 to Part 744.” But given the breadth of the rest of the definition and the addition of military end user for China (see below), this elimination likely makes no difference in practice.

The expanded definition of “military end use” also expands the definition of who is a “military end user.” Military end user “means 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, or any person or entity whose actions or functions are intended to support ‘military end uses’ as defined in [this section].” Playing out the examples from above, diagnostic equipment under a relevant ECCN exported to support a Russian company that repairs military items falls under the definition of military end use. That makes the Russian repair company a “military end user,” meaning that exporting a covered ECCN to that Russian repair company – as a military end user – requires a license even if the item in question is NOT being used for a military end use. In other words, if you have reason to believe that a Russian company repairs military devices, the export of covered ECCNs to that company arguably requires a license.

2) Adding a prohibition on military end users in China.

This change seems simple in principle but is the practical equivalent of hiking in a minefield: Section 744.21(a) is amended to prohibit the export of certain items subject to the EAR for military end users in China – previously only exports for military end use was prohibited without a license. But as difficult as it is to identify military end users in Venezuela and Russia, it is even harder to identify them in China. Just who is a Chinese company whose actions or functions are intended to support or contribute to operation, installation, maintenance, repair, overhaul, refurbishing, ‘‘development,’’ or ‘‘production,’’ of military items? And what sort of due diligence is sufficient to conclude that the Chinese company is doing no military maintenance or repair work on the side?

3) Adding 16 ECCNs to the list of items subject to military end use/user license requirements.

In addition to license requirements on the CCL, certain items are subject to additional review, and now in some cases a presumption of denial, if they will be exported, reexported, or transferred to China, Russia, or Venezuela if the exporter has knowledge that the item is intended, entirely or in part, for military end use or a military end user. These items are listed in Part 744, Supp. No. 2. Currently, there are 33 ECCNs listed, and this action will add another 16 ECCNs.

Of note? ECCNs 3A991 and 3A992 – widely available electronic equipment, ECCNs 5A992 and 5D992, “mass market” encryption hardware and software (think your phone and many of your apps), a wide range of test equipment (ECCNs 3B991, 3B992, 5B991) and civil aircraft parts and components (ECCN 9A991). Many of these items are widely available and frequently manufactured in China. The full list:

• ECCNs added: 2A290, 2A291, 2B999, 2D290, 3A991, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990.
• Changes to existing ECCNs 3A992 (was just 3A992.g, now includes all of the ECCN), 8A992 (adds marine boilers and their parts, components, accessories, and attachments), and 9A991 (now includes parts and components).

4) Licensing policy of presumption of denial for China.

Currently, applications to export, reexport, or transfer items in Part 744, Supp No. 2 to China, Russia or Venezuela are reviewed on a case-by-case basis. The final rule changes the licensing policy towards China to a presumption of denial.

5) Requiring EEI filings for most CCL-listed exports to China, Russia, or Venezuela.

Non-licensed shipments under $2,500 typically do not require an EEI filing in the Automated Commercial Environment (ACE). However, BIS’s change to §758.1, specifically adding (b)(10), requires EEI filings for all exports of items on the CCL, regardless of value if being exported to China, Russia, or Venezuela. Also, exporters will need to enter the ECCN on EEI filings for these types of shipments, even if only controlled for anti-terrorism reasons.

One exception is shipments made under License Exception Governments, international organizations, international inspections under the Chemical Weapons Convention, and the International Space Station (GOV), which do not require EEI.

The US Census Bureau (Census) and US Customs and Border Protection (CBP) may need to update the AES Direct portal for filing EEIs in order to revise the ECCN field for license type codes that are currently not mandatory due to the above EEI filing revisions for exports to China, Russia, or Venezuela. The new ECCN reporting requirements may lead to enforcement actions and penalties from one or all of the involved agencies: BIS, Census and CBP.

6) A series of changes that have no practical impact but do make it easier to find the authority that 500/600 Series .y items require a license to China, Russia and Venezuela.

Many of us were aware of the 500/600 Series .y licensing requirement, but every time it comes up, we spend valuable time asking ourselves “where did BIS hide that .y licensing requirement again?”

Currently, 500/600 Series .y items on the Commerce Control List are controlled for anti-terrorism reasons only but required a license for export to China, Russia, and Venezuela separately under 744.21(a). In this final rule, BIS added a specific regional stability (RS) control to the ECCNs that indicates the limited RS license requirement (as opposed to the existing RS control that imposes a license requirement for all countries except Canada).  This triggered an extensive series of changes to correct the references throughout the EAR. Thank you BIS for saving us that aggravation even if it vastly expanded the length of the regulation.  Brevity may be to soul of wit, but clarity is important in an export control regulation!