On June 29, 2020, revisions to the Export Administration Regulations (“EAR”) that will impact many exporters and reexporters – particularly those doing business with the People’s Republic of China – became effective.

The changes date to April 28, 2020, when the Department of Commerce Bureau of Industry and Security (“BIS”) published a final rule (“Final Rule”) that, among other changes, revises the 15 C.F.R. § 744.21 provision related to Military End Uses and Military End Users in China, Russia, and Venezuela.[1] Prior to publication of the Final Rule, § 744.21 required a license for exports of certain enumerated items (organized by Export Control Classification Number (“ECCN”) in Supplement 2 to EAR Part 744) for military end uses in China and both military end uses and military end users in Russia and Venezuela.

Under the Final Rule, exports to Chinese military end users will now be subject to a license requirement for a greater number of items. While this may not seem like a major development, along with other revisions in the Final Rule, it will greatly increase the number of exports and reexports to China impacted by § 744.21.

The definition of “military end user” remains unchanged by the Final Rule and is found at 15 C.F.R. § 744.21(g):

            ‘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 paragraph (f) of this section.

On the other hand, the Final Rule does revise and expand the definition of “military end use.” Whereas the previous definition only included “use,” “development,” or “production” of military items, the Final Rule adds “any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, and refurbishing” of military items in addition to “development” or “production.”  This new definition of “military end use” at 744.21(f) reads:

            Incorporation into a military item described on the U.S. Munitions List (USML) (22 CFR part 121, International Traffic in Arms Regulations); incorporation into items classified under ECCNs ending in ‘‘A018’’ or under ‘‘600 series’’ ECCNs; or any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production,” of military items described on the USML, or items classified under ECCNs ending in “A018” or under “600 series” ECCNs.

 It is critical to note that the “military end user” definition incorporates the “military end use” definition. This subtle but significant change in the “military end use” definition adds a licensing requirement for certain exports and reexports to a broad range of companies. For example, based on the revisions in the Final Rule, a U.S. company would require an export license for export of an item listed in Supplement No. 2 to Part 744 to a Chinese company that primarily services commercial items but occasionally performs maintenance on military items. This is the case because the Chinese company would qualify as a military end user by virtue of being an entity that supports a military end use. Importantly, the Final Rule also changes the licensing review policy for all exports and reexports subject to § 744.21 to a presumption of denial.

In the text of the Final Rule, BIS specifically acknowledged the particular difficulty the revisions create for exporters and reexporters to China by stating, “This expansion will require increased diligence with respect to the evaluation of end users in China, particularly in view of China’s widespread civil-military integration.”

In an unrelated but potentially helpful development, on June 24 the Department of Defense released a list (“DoD List”) of Chinese companies operating in the United States that are owned or controlled by China’s People’s Liberation Army. The publication of the DoD List is required by Section 1237 of the National Defense Authorization Act for Fiscal Year 1999.

Although the context of the DoD List is operations in the United States, the companies on the list may be considered military end users for exports or reexports under the revisions to the Final Rule due to ownership or control by Chinese military end users. The list of 20 companies mostly includes companies with nothing in their names that would denote military involvement, like Aviation Industry Corporation of China, China Railway Construction Corporation, and China Telecommunications Corporation, among others. At the very least, exporters and reexporters that conduct business with these Chinese companies should give extra scrutiny to any transactions that may be covered by § 744.21.

Addition of Subject ECCNs and Items

The Final Rule also expands the list of items subject to the licensing requirement under Supplement 2 to EAR Part 744. Important ECCN additions include:

• Materials Processing: 2A290, 2A291, 2B999, 2D290,
• Electronics: 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991,
• Telecommunications and Information Security: 5B991, 5A992, 5D992,
• Sensors and Lasers: 6A991, 6A996, and
• Propulsion: 9B990.

The Final Rule also expands the range of items under ECCNs 3A992, 8A992, and 9A991 in Supplement 2 to EAR Part 744 to include all items controlled under these ECCNs.

EEI Filing Expansion

Finally, the Final Rule also expands the Electronic Export Information (“EEI”) filing requirements for exports to China, Russia, or Venezuela. Exporters are now required to file EEI for all exports and reexports of items subject to Supplement No. 2 to Part 744 to China, Russia, or Venezuela, regardless of the value of the shipment, unless the shipment qualifies for license exception GOV. Additionally, exporters will be required to provide the ECCN of all exports to China, Russia, and Venezuela in the EEI for the export, regardless of the reason for control.

Note that BIS later clarified that EEI filing for exports to China, Russia or Venezuela of items controlled by ECCNs not listed in Supplement No. 2 to Part 744 will not be required until September 27, 2020.[2]

BIS Guidance

On June 26, BIS published Frequently Asked Questions (“FAQs”) related to the changes made by the Final Rule. Below, we include a few excerpts from the FAQs that are particularly helpful:

• Q: Do I need to know that a “military end user” intends to use an item listed in Supplement No. 2 of Part 744 of the EAR for a “military end use” to trigger a license requirement?
  • A: No. If the end user meets the definition of a “military end user” under paragraph (g) of Section 744.21, the export, reexport, or transfer (in-country) of any ECCN listed in Supplement No. 2 of Part 744 of the EAR requires a license, even if the item is destined for a non-military end use.

 

• Q: How much of a company’s activity in support of incorporating items into military items will constitute “knowledge” that the entire company is a “military end user,” such that a license would be required even when that item has been unambiguously determined by the exporter’s due diligence that it will not be for a “military end use?”
  • A: Irrespective of whether the item is for a “military end use,” a license is required if the specific end user is a person or entity that “develops, produces, maintains, or uses military items.” The activities of the specific end user determine whether it meets that test. There is no specific volume level for such activities that would trigger a license requirement.

 

• Q: What does “any item that supports or contributes to” mean in this rule?
  • A: In this rule, “any item that supports or contributes to” goes beyond incorporation into a military item to mean direct facilitation, such as installation, inspection, or test equipment and related software and technology, of the operation, installation, maintenance, repair, overhaul, or refurbishing, or the “development” or “production” of military items described on the USML, Wassenaar Arrangement Munitions List, or items classified in an ECCN ending in “A018” or a “600 series” ECCN.

The FAQs answer 32 questions, including specific questions related to exports to military hospitals, universities, and police departments in Russia, China, and Venezuela. The FAQs also address questions related to the new licensing policy, the EEI filing changes, and other pertinent issues. Any exporter or reexporter affected by the revisions in the Final Rule should review the FAQs to obtain a better understanding of the multiple changes brought about by the revisions.

Concurrent Changes to License Exceptions

Briefly, BIS published two other rules on April 28 that have implications for business activity with Country Group D:1 countries, which include China, Russia, and Venezuela.

First, BIS published a final rule effective June 29, 2020, eliminating License Exception Civil End Users (CIV) and requiring a license for exports and reexports of national security-controlled items to countries of national security concern.[3] License Exception CIV authorized exports, reexports, and transfers (in country) of certain national security-controlled items without prior review by BIS, provided the exception’s criteria were met, to most civil end users for civil end uses in Country Group D:1.

Second, BIS issued a proposed rule to modify License Exception Additional Permissive Reexports (APR) to remove provisions which authorize reexports of certain national security-controlled items.[4] Specifically, the rule proposes to remove the countries in Country Group D:1 as a category of eligible destinations for national security-controlled items under paragraph (a) of License Exception APR.

If you have any questions about the new revisions to the EAR, or the impact of these any of these revisions on your operations, please feel free to contact the attorneys at Torres Law.