US Expands Military License Review Factors for National Security Controlled Items to PRC, Venezuela, and Russia

The amendment to the Export Administration Regulations (EAR) Section 742.4(b)(7) is effective October 29, 2020. The EAR already specifically called out the PRC and Russia in Section 742.4(b)(7), but the new language:

• Expands the provision to include Venezuela;
• Triggers a presumption of denial in a more expansive way; and
• Specifies new and expansive factors BIS will use in its case-by-case license application assessment.

Background

Perhaps we should not have been surprised by this amendment to the EAR, given what has been a series of new restrictions related to the PRC, Venezuela, and Russia. As explained in our previous alert, BIS issued a final rule in April 2020 imposing stricter license requirements on a wide range of exports, reexports, and transfers to PRC, Russia, or Venezuela for “military end uses” or to “military end users.”

What Does This Mean for Future License Applications?

All license applications for NS-controlled items to PRC, Venezuela, and Russia will be reviewed to determine the risk of diversion to a military end user or military end use. BIS will maintain a general policy of approval for license applications to export, reexport, or transfer (in-country) items for civil end users or civil end uses. However, it will assess on a case-by-case basis whether the transaction “would make a material contribution to the ‘development,’ ‘production,’ maintenance, repair, or operation of weapons systems, subsystems, and assemblies, such as but not limited to, those described in supplement no. 7 to part 742 of the EAR”. If BIS concludes that the transaction will make a material contribution, BIS’s licensing review policy is a presumption of denial. We note the previous language stated the presumption of denial kicked in when the transaction “would make a direct and significant contribution to the PRC’s or Russia’s military capabilities such as, but not limited to, the major weapons systems” such as those listed in EAR Part 742, Supp. No. 7.

The amendment adds the following factors that BIS will consider in reviewing license applications for NS-controlled items to the PRC, Venezuela, and Russia. Any party seeking a license to export, reexport, or transfer (in-country) NS-controlled items should attempt to address these concerns in its license application.

1. The appropriateness of the export, reexport, or transfer for the stated end use;
2. The significance of the item for the weapons systems capabilities of the importing country;
3. Whether any party is a “military end user” as defined in § 744.21(g) of the EAR;
4. The reliability of the parties[1] to the transaction, including whether:
   1. An export or reexport license application has previously been denied;
   2. Any parties are or have been engaged in unlawful procurement or diversion activities;
   3. The parties are capable of securely handling and storing the items; and
   4. End-use checks have been and may be conducted by BIS or another U.S. government agency on parties to the transaction;
5. The involvement of any party to the transaction in military activities, including activities involving the “development,” “production,” maintenance, repair, or operation of weapons systems, subsystems, and assemblies;
6. Government strategies and policies that support the diversion of exports from their stated civil end use and redirection towards military end use; and
7. The scope and effectiveness of the export control system in the importing country.

Of course, most exporters will not have ready access to some of this information, but they should provide as much background as possible in a license application regarding the parties to the transaction and the civil end-use. We anticipate that these criteria may also result in a proliferation of additional non-standard license conditions. Exporters should ensure that any proposed conditions are actually feasible and if not, work with BIS to see if alternative conditions can be agreed to among the reviewing agencies.

The review will also include an assessment of the impact of the proposed export of an item on the United States defense industrial base and the denial of an application for a license that would have a significant negative impact, on such defense industrial base. Consistent with 50 USC 4815(d)(3), BIS will examine the following criteria to determine whether there is a significant negative impact:

1. a reduction in the availability of an item produced in the US that is likely to be acquired by the Department of Defense or other agency for the advancement of national security of the U.S., or for the production of an item in the US for DoD or other agencies;
2. a reduction in the production in the US of an item that is the result of research and development carried out, or funded by, the DOD or other Federal department or agency to advance the national security of the United States;
3. a reduction in the employment of US persons whose knowledge and skills are necessary for the continued production in the US of an item that is likely to be acquired by the DoD or other Federal department or agency for the advancement of the national security of the US.

Therefore, in addition to addressing the factors listed in the amended EAR Section 742.4(b)(7), parties should also address the criteria to examine whether a proposed export of an item will have a significant negative impact on the defense industrial base.

[1] One wonders whether the reference in 4 as to the “reliability of the parties to the transaction” was a “back at you” reference to China’s creation of an “Unreliable Entity List” and the listing of some US companies on that list. We hope this will not devolve into a tit-for-tat series of amendments to the export control laws, which historically have not been used for political name-calling.