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Cyprus, Missiles, Human Rights, and CFIUS – Export Compliance Updates

Waiver May Permit Non-Lethal Exports to Cyprus

On September 28, 2020, the Department of State, Directorate of Defense Trade Controls (DDTC), published an amendment (85 FR 60698) to the International Traffic in Arms Regulations (ITAR) updating the defense trade policy towards the Republic of Cyprus. Cyprus is listed as a prohibited destination, with certain exceptions, at ITAR §126.1(r).

The effect of the amendment is to potentially authorize non-lethal defense articles and defense services for the Government of the Republic of Cyprus.

The §126.1 entry for Cyprus now reads (new text in bold):

(r) Cyprus. It is the policy of the United States to deny licenses or other approvals for exports or imports of defense articles and defense services destined for or originating in Cyprus, except that a license or other approval may be issued, on a case-by-case basis, for the United Nations Forces in Cyprus (UNFICYP) or for civilian end-users. This policy of denial does not apply to exports, reexports, retransfers, and temporary imports of non-lethal defense articles and defense services destined for or originating in Cyprus if:

(1) The request is made by or on behalf of the Government of the Republic of Cyprus;

(2) The end-user of such defense articles or defense services is the Government of the Republic of Cyprus; and

(3) There are no credible human rights concerns.

This change implements a one-year waiver authorized under the National Defense Authorization Act for Fiscal Year 2020 and the Eastern Mediterranean Security and Energy Act. The amendment was effective on October 1, 2020 and expires on September 30, 2021 if not subsequently extended. DDTC has previously stated on their website that authorizations issued during this time will not automatically be revoked if the waiver is not extended.

Cyprus was originally listed in §126.1 out of concern that arms exports to Cyprus could contribute to an arms race and hinder efforts to reach a permanent settlement on the island, the northern portion of which has been occupied by Turkey since 1974. In the absence of a resolution, the Republic of Cyprus entered the European Union in May 2004 and is the only EU member in §126.1.

North Korea Ballistic Missile Procurement Advisory

On September 1, 2020, the U.S. Department of State’s Bureau of International Security and Nonproliferation (ISN), the Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the Department of Commerce’s Bureau of Industry and Security (BIS) released a North Korea Ballistic Missile Procurement Advisory.

This guidance provides background to North Korean ballistic missile procurement efforts as well as various laws and regulations that affect U.S. exporters. The advisory notes that:

North Korea relies on foreign-sourced ballistic missile-related components that it cannot produce domestically. To obtain these components, North Korea uses an extensive overseas network of procurement agents, including officials who operate from North Korean diplomatic missions or trade offices, as well as third country nationals and foreign companies.

In particular, the guidance notes that North Korea seeks to acquire the following types of products:

Multi-axle heavy vehicles, such as 8 or 9-axle forestry vehicles, used as Transporter Erector Launchers (TELs) for ballistic missiles.
Steels, aluminum, and specialty materials containing titanium.
Filament winders and winding equipment.
Carbon fiber for composite motor cases.
Solid propellant, including aluminum powder and ammonium perchlorate, to the scale of 100 tons over the next 10 years.

The guidance emphasizes that exporters of all products, but especially those listed above should have strong export compliance programs including know your customer policies, denied party screening, and consideration of red flags and due diligence.

State Department Releases Surveillance and Human Rights Guidance

On September 30, 2020, the Department of State, Bureau of Democracy, Human Rights, and Labor (DRL) released “Guidance on Implementing the UN Guiding Principles for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities.” Click here for the 22-page pdf file. DRL previously published draft guidance on the issue in September 2019.

While this document does not impose any new requirements under U.S. export control laws or regulations, it could be the foundation of future regulation. It is similar to DRL’s current review process for export license applications and may help companies to predict potential issues with license applications prior to submission.

This “voluntary guidance” is meant to support companies’ ability to evaluate the human rights impacts of exports that do not currently require an export license. Products and services of concern include, but are not limited to:

Sensors (e.g., specialized computer vision chips, thermal imaging systems, electronic emissions detection systems, products designed to clandestinely intercept live communications)
Biometric identification (e.g., facial recognition software, automated biometric systems, rapid DNA testing, gait analysis software)
Data analytics (e.g., social media analytics software, predictive policing systems)
Internet surveillance tools (e.g., “spyware,” products with certain deep packet inspection functions, penetration-testing tools, products designed to defeat cryptographic mechanisms in order to derive confidential variables or sensitive data including clear text, passwords, or cryptographic keys)
Non-cooperative location tracking (e.g., products that can be used for ongoing tracking of individuals’ locations without their knowledge and consent, cell site simulators, automatic license plate readers)
Recording devices (e.g., body-worn or drone-based, network protocol surveillance systems, devices that record audio and video and can remotely transmit or can be remotely accessed)

The document identifies due diligence considerations, red flags, and other resources that may be taken into consideration in evaluating the human rights impact of a transaction. To compliment this, the State Department plans to include information on surveillance issues for each country in its 2021 human rights reports.

CFIUS Review Now Based on Export Controls

On September 15, 2020, Department of the Treasury, Office of Foreign Assets Control (OFAC) published a rule (85 FR 57124) which, among other changes, modifies the mandatory declaration provision for foreign investment transactions in U.S. businesses. This rule is based on a rule originally proposed on May 21, 2020. The new rule is effective on October 15, 2020.

As revised, CFIUS review is required when a “U.S. regulatory authorization” would be required to transfer the U.S. business’s critical technologies to the foreign persons involved in the transaction or ownership chain. U.S. regulatory authorizations include:

(a) A license or other approval issued by the Department of State under the ITAR;

(b) A license from the Department of Commerce under the EAR;

(c) A specific or general authorization from the Department of Energy under the regulations governing assistance to foreign atomic energy activities at 10 CFR part 810 other than the general authorization described in 10 CFR 810.6(a); or

(d) A specific license from the Nuclear Regulatory Commission under the regulations governing the export or import of nuclear equipment and material at 10 CFR part 110.

This determination is generally made without reference to license exceptions or exemptions, except three EAR license exceptions cited in the rule.

Mandatory declarations were previously required based on specific industries identified by North American Industry Classification System (NAICS) codes. This change highlights the importance of thoroughly determining export classifications for a company’s products, even if they are not being exported, when foreign investment is involved that could be subject to CFIUS review.

Tough on China: The Entity List Expands, More Communist Chinese Military Companies Identified

Huawei Restrictions Expanded

On August 20, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (85 FR 51596) which added thirty-eight non-U.S. Huawei affiliates to the Entity List, removed a temporary general license for Huawei, and amended the Direct Product Rule.

The listing of thirty-eight Huawei affiliates is in addition to 114 listed in 2019 and includes companies in Europe, Asia, Africa, South America, and North America.

A Temporary General License, which authorized activities “including those necessary for the continued operations of existing networks and equipment as well as the support of existing mobile services, including cybersecurity research critical to maintaining the integrity and reliability of existing and fully operational networks and equipment,” was allowed to expire on August 13, 2020. A new footnote was added to the Entity List to permit cybersecurity research and vulnerability disclosure involving Huawei and its non-U.S. affiliates.

General Prohibition Three also known as the Foreign Produced Direct Product Rule, was amended to control certain foreign-produced items that are a direct product of U.S. technology when there is knowledge the items will be used to support a member of the Entity List (with a “footnote 1” designation) or if such an entity is a party to the transaction. This is a follow-on to an interim final rule published in May 2020, with expanded criteria for controlling transactions. For additional detail, see the revised §736.2(b)(3) of the Export Administration Regulations (EAR).

BIS also issued a press release with additional background on the additional thirty-eight Huawei affiliates and the Department of State issued a statement of support.

An additional rule (85 FR 51335) was also published by BIS on August 20 revising EAR §744.11(a) “to specify that supplemental license requirements for entities included on the Entity List apply regardless of the role that the listed entity has in the transaction (i.e., purchaser, intermediate consignee, ultimate consignee or end-user).”

BIS Adds Sixty to Entity List

On August 27, 2020 (85 FR 52898), BIS added 60 entities to the Entity List and revised five existing entries for various reasons including proliferation and diversion concerns as well as involvement in South China Sea territorial disputes. The new and revised entries are listed under People’s Republic of China (China), France, Hong Kong, Indonesia, Malaysia, Oman, Pakistan, Russia, Switzerland, the United Arab Emirates (U.A.E.), Canada, Germany, and Iran.

Twenty-four of these entries were based on activities which have enabled China to construct and militarize disputed outposts in the South China Sea. BIS also issued a press release providing additional background on the topic of disputed and artificial islands.

Additional List of Communist Chinese Military Companies Released

August 28, 2020, the Department of Defense released the following list of “Communist Chinese military companies”:

China Communications Construction Company (CCCC)
China Academy of Launch Vehicle Technology (CALT)
China Spacesat
China United Network Communications Group Co Ltd
China Electronics Corporation (CEC)
China National Chemical Engineering Group Co., Ltd. (CNCEC)
China National Chemical Corporation (ChemChina)
Sinochem Group Co Ltd
China State Construction Group Co., Ltd.
China Three Gorges Corporation Limited
China Nuclear Engineering & Construction Corporation (CNECC)

This list, required by section 1237 of the National Defense Authorization Act for FY 1999, is a follow-on to the list of Communist Chinese military companies issued in June and does not immediately affect export controls. The listed companies, however, could potentially be the subject of future sanctions and inclusion on the list should be considered a “red flag” under the expanded restrictions on Chinese military end-users. Some companies are already sanctioned under other authorities.

Screening Matters

With these significant expansions of the Entity List and the Direct Product Rule, the importance of denied party screening throughout supply chain networks takes on added significance. Customers, as well as intermediate parties and end users must be screened before an export can take place. With lists like the Entity List being updated on a nearly daily basis, continuous screening of those parties is the best way to keep up to date with changes.

Comment Now on Foundational Technologies – New Controls Under Consideration

On August 27, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) released an advance notice of proposed rulemaking (ANPRM) (85 FR 52934) requesting public comments on potential controls for “foundational technologies.” This inquiry is based on the Export Control Reform Act of 2018 (ECRA) which requires the Department of Commerce to establish controls on emerging and foundational technologies. The related inquiry for emerging technologies was published in November 2018.

As explained by the notice, “Foundational technologies essential to the national security are those that may warrant stricter controls if a present or potential application or capability of that technology poses a national security threat to the United States.” This is distinct from “critical technologies” and includes commodities and software, not merely “technology.” The inquiry does not seek to expand controls over “fundamental research” which is not subject to the Export Administration Regulations (EAR) under §734.8.

In particular, BIS is looking at “items controlled only for anti-terrorism (AT), crime control (CC), or short supply (SS) reasons, subject to United Nations (UN) embargoes, or designated as EAR99.”

While the notice did not include a representative list for potential controls, it does raise several areas of concern:

Items restricted for military end-users in China, Russia, or Venezuela under EAR Supplement No. 2. to part 744 “including semiconductor manufacturing equipment and associated software tools, lasers, sensors, and underwater systems… tied to indigenous military innovation efforts in China, Russia or Venezuela.”
Items “being utilized or required for innovation in developing conventional weapons, enabling foreign intelligence collection activities, or weapons of mass destruction applications.”
“Technologies that have been the subject of illicit procurement attempts which may demonstrate some level of dependency on U.S. technologies to further foreign military or intelligence capabilities in countries of concern or development of weapons of mass destruction”

The notice also presents eight questions about foundational technologies:

How to further define foundational technology to assist in identification of such items;
sources to identify such items;
criteria to determine whether controlled items identified in AT level Export Control Classification Numbers (ECCNs), in whole or in part, or covered by EAR99 categories, for which a license is not required to countries subject to a U.S. arms embargo, are essential to U.S. national security;
the status of development of foundational technologies in the United States and other countries;
the impact specific foundational technology controls may have on the development of such technologies in the U.S.;
examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology based controls;
any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and
any other approaches to the issue of identifying foundational technologies important to U.S. national security, including the stage of development or maturity level of an foundational technology that would warrant consideration for export control.

Overall, items currently subject to the EAR, whether EAR99 or with controls that rarely require licenses, may be subject to additional restrictions as “foundational technologies.” This may be accomplished through country-specific controls on new and existing ECCNs as well as an expansion of or new rules in the style of the §744.21 restrictions on military end-users.

Comments will be accepted through October 26, 2020. Please refer to the Federal Register Notice for more information and how to submit comments.

Commerce Requests Comments on Promoting Human Rights Controls for Crime Control

On July 17, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a request for comments (85 FR 43532) on Commerce Control List (CCL) items controlled for crime control and detection (CC) reasons. CC controls are intended to promote human rights throughout the world by restricting the export of products that can be used to facilitate the abuse of human rights.

The notice is a part of periodic review of CCL controls and may be used to add or remove CC licensing requirements for CCL items.

Specifically, BIS requests comments on the following items, both CCL-controlled and EAR99:

Facial recognition software and other biometric systems
Non-lethal visual disruption lasers (“dazzlers”)
Long-range acoustic devices and related components, software, and technologies for the above items.
Police helmets—0A979
Fingerprint readers—3A981, and components—(3A981, 4A980), software (3D980, 4D980), and technology (3E980, 4A980) thereof
Fingerprint powders, dyes, and inks (1A985)
Voice print identification systems (3A980) and components (3A980), software (3D980), and technology (3E980) thereof
Polygraphs and psychological stress analysis equipment (3A981) and components (3A981), software (3D980), and technology (3E980) thereof
Nonmilitary mobile crime science laboratories (9A980)
Miscellaneous CC controls in ECCNs and sub-paragraphs of ECCNs 4A003, 4A980, 4D001, 4D980, 4E001, 4E980, 6A002, 6E001, and 6E002.

Additional information on these items is included in the notice. Helpful comments would address the following:

Information (including performance criteria) that may distinguish purely or predominantly consumer or commercial applications from applications purely or predominantly for use by law enforcement or security services and/or used in mass surveillance, censorship, privacy violations or otherwise useful in committing human rights abuses;
The impact of adding to, modifying, or removing items from the CCL on U.S. support of human rights throughout the world; and
The impact that changes of controls would have upon the competitiveness of U.S. business and industry.

Country-specific licensing requirements are determined by the Commerce Country Chart. Items controlled under CC Column 1 or 3 require licenses for most countries, while items controlled under CC Column 2 require licenses for much of the former Soviet Union and a handful of other countries.

Please refer to the Federal Register Notice for more information and submit your comments by September 15, 2020.

Export Policy Updates from State and Commerce Departments

It may be summer and COVID-19 is still impacting everyone, but it is not a time to stop paying attention to export compliance! The U.S. Government is working away updating policies, expanding services and asking for your comments on export controls.

Unmanned Aerial Systems Policy Adjustment

On July 24, 2020, the White House announced a revision in the standards for exporting Unmanned Aerial Systems (UAS) under the Missile Technology Control Regime (MTCR). U.S. export policy will now consider “a carefully selected subset of MTCR Category I UAS, which cannot travel faster than 800 kilometers per hour, as Category I.” Higher speed UAS such as such as cruise missiles and hypersonic aerial vehicles remain subject to the Category I presumption of denial, while exportability will improve for larger, lower speed systems that already face competition from countries such as China and Israel. Fortunately complex interagency review will still be required for any such export licenses.

For additional detail on the changes and rationale, a video event has been recorded with Assistant Secretary Assistant Secretary of State Christopher Ford on the topic of “U.S. Policy and the Missile Technology Control Regime.” You can access the video on the website of the Hudson Institute.

DDTC Policy and Process Notices

The U.S. Department of State, Directorate of Defense Trade Controls (DDTC) has made a series of announcements on their website, including:

International Traffic in Arms Regulations: Notification of Temporary Suspension, Modification, or Exception to Regulations due to SARS-COV2 (85 FR 45513, July 29, 2020) for the continued telework of employees.

Electronic Submissions of 60-Day Advance Notifications of Mergers, Acquisitions, and Divestitures (MAD).

Use of DECCS form DS-6004 DS-6004 “Reexport/Retransfer Application – ITAR Part 123.9” to submit General Correspondence (GC) requests related to Mergers and Acquisitions, U.S. and Foreign Entity Name/Address Changes or Registration Code Changes, U.S. Persons providing defense services abroad, End-Use/End-User Change Requests, and Amendments to existing General Correspondence approvals.

Rescission of its firearms sound suppressor policy, potentially allowing the export of sound suppressors for civilian end-use (e.g., for use by individuals at gun ranges):

Effective immediately, the Department of State has rescinded its April 18, 2002, firearms sound suppressor policy. This policy provided for enhanced guidelines for the approval and issuance of export licenses for sound suppressors and restricted their export to only official end users such as government or military entities. Henceforth, DDTC will handle suppressor exports in a manner consistent with other USML-controlled technologies. This requires that applicants must identify a specific end user. Applications for the permanent export of hardware must include purchase documentation, a DSP-83 non-transfer and end use certificate (as suppressors are considered Significant Military Equipment under the USML), an end-user statement, and an import permit (if required by the destination country). Consistent with current licensing practices, all licenses will be reviewed and adjudicated on a case-by-case basis, and any pre-license checks or post shipment verifications will be conducted as deemed necessary and appropriate based on the totality of the circumstances of the transaction. Standard staffing protocols within the Department and interagency will be applied as required.

Central African Republic 126.1 Entry Revised

On July 22, 2020, DDTC published a final rule (85 FR 44188), revising the International Traffic in Arms Regulations (ITAR) §126.1 entry for the Central African Republic. The Central African Republic remains a prohibited destination under ITAR §126.1(u), subject to revised exceptions under United Nations Security Council resolutions. UN notification and/or approval is required for the case-by-case issuance of licenses or other approvals. DDTC approval is still required for brokering proposals to the Central African Republic.

Russian Pipelines Subject to CAATSA Sanctions

On July 23, 2020, the Department of State published an “Update to the Public Guidance for Section 232 of the Countering America’s Adversaries Through Sanctions Act of 2017 (CAATSA) (85 FR 44561) effective July 15, 2020. The notice does not impose any new sanctions, but clarifies that CAATSA sanctions may apply to “Russian energy export pipelines such as Nord Stream 2 and the second line of TurkStream.”

Commerce Publishes EAR Amendment for Hong Kong

Finally, on July 31, 2020, BIS published a rule (85 FR 45998) suspending “the availability of all License Exceptions for Hong Kong that provide differential treatment as compared to those available to the People’s Republic of China (PRC).” This rule implements the previously announced end to Hong Kong’s special status under the Export Administration Regulations (EAR).

New Season, New Controls, New Sanctions: New CCL Chem/Bio Controls, Firearms FAQs & Treasury Implements Caesar Act Sanctions Against Syria

In our last post, we covered a series of breaking developments in export compliance towards China and Hong Kong. While those developments have received a lot of attention, summer has brought us even more export compliance updates.

New CCL Chem/Bio Controls

On June 17, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a final rule (85 FR 36483) to amend Commerce Control List (CCL) Export Control Classification Numbers (ECCNs) 1C350, 1C351 and 2B352. These changes implement decisions by the Australia Group by adding a list of precursor chemicals and mixtures to 1C350, Middle East respiratory syndrome-related coronavirus (MERS-related coronavirus) to 1C351, and a technical note to 2B352 (Equipment capable of use in handling biological materials) that indicates 2B352.b.2.b includes single-use cultivation chambers with rigid walls. Related technology would be controlled in the relevant ECCNs.

The Australia Group is a forum of 43 countries which seek to harmonize export controls related to chemical and biological weapons.

BIS Issues Firearms FAQs

BIS recently posted a series of FAQs on firearms and related items moved from the United States Munitions List (USML) to the CCL in March. The document, dated January 23, 2020 was published on the BIS website on July 7, 2020 and contains 62 pages of FAQs and other guidance on the transition.

Treasury Implements Caesar Act Sanctions

Also on June 17, 2020, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) sanctioned the first set of individuals and entities under the Caesar Syria Civilian Protection Act of 2019 (the Caesar Act). Named for a Syrian photographer who documented torture in the regime of Syrian President Bashar al-Assad, the Caesar Act targets “foreign persons who facilitate the Assad regime’s acquisition of goods, services, or technologies that support the regime’s military activities as well as its aviation and oil and gas production industries.”

Executive Order Establishes ICC Sanctions

On June 11, 2020, the President issued Executive Order 13928, “Blocking Property of Certain Persons Associated with the International Criminal Court.” This executive order is a response to assertions of jurisdiction over U.S. and allied personnel by the International Criminal Court (ICC), countries which are “are not parties to the Rome Statute or have not otherwise consented to ICC jurisdiction.” This is the latest stage of a conflict that dates back the establishment of the ICC and 2002’s American Service-Members’ Protection Act. The Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General may sanction ICC personnel under this executive order, who would then be included on the Specially Designated Nationals and Blocked Persons List (SDN List) and subject to a series of financial sanctions. No individuals or entities have yet been sanctioned under this order.

CFIUS Proposes Export License Requirement as Filing Threshold

On May 21, 2020, the Department of Treasury published a proposed rule (85 FR 30893) which would notably revise the category of business acquisitions subject to mandatory Committee on Foreign Investment in the United States (CFIUS) review. The proposed revision establish mandatory review of acquisitions and some non-controlling investments when an export license would be required to release a company’s technology to the relevant foreign parties. Relevant export licenses are defined under “U.S. regulatory authorization” to include:

(a) A license or other approval issued by the Department of State under the ITAR;

(b) A license from the Department of Commerce under the EAR;

(d) A specific license from the Nuclear Regulatory Commission under the regulations governing the export or import of nuclear equipment and material at 10 CFR part 110.

Previously, CFIUS had published a list of North American Industry Classification System (NAICS) codes identifying businesses subject to this requirement. The proposed revision would replace that list with the export licensing threshold. Comments were accepted through June 22, 2020 and a final rule has not yet been published.

IMPORTANT–Breaking Developments in Export Policies Towards China and Hong Kong. DOD Releases List of Communist Chinese Military Companies which should be of significant interest to your company!

On June 24, 2020, the Department of Defense released the following list of “Communist Chinese military companies”:

Aviation Industry Corporation of China (AVIC)
China Aerospace Science and Technology Corporation (CASC)
China Aerospace Science and Industry Corporation (CASIC)
China Electronics Technology Group Corporation (CETC)
China South Industries Group Corporation (CSGC)
China Shipbuilding Industry Corporation (CSIC)
China State Shipbuilding Corporation (CSSC)
China North Industries Group Corporation (Norinco Group)
Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
Huawei
Inspur Group
Aero Engine Corporation of China
China Railway Construction Corporation (CRCC)
CRRC Corp.
Panda Electronics Group
Dawning Information Industry Co (Sugon)
China Mobile Communications Group
China General Nuclear Power Corp.
China National Nuclear Corp.
China Telecommunications Corp.

This list, required by section 1237 of the National Defense Authorization Act for FY 1999, has not previously been released and does not immediately affect export controls. The listed companies, however, could potentially be the subject of future sanctions and inclusion on the list should be considered a “red flags” under the expanded restrictions on Chinese military end-users. Some companies, such as Huawei, are already sanctioned under other authorities.

Commerce Issues Military End User FAQs

The revised rule on Chinese Military End Users (MEUs) in the Export Administration Regulations (EAR) came into effect on June 29, 2020. The Department of Commerce, Bureau of Industry and Security (BIS) released a series of FAQs on those changes.

The FAQs refer frequently to the revised definitions and the importance of due diligence, but do not provide a list of known military end users. The answer to Q21 does state that a request for an Advisory Opinion may be submitted if there is a question about whether a specific end user or end use is restricted under the new rule. We expect BIS to be swamped with these requests as companies begin to deal with exports under the new rules.

It is worth noting that BIS’s existing know your customer guidance states: “You can rely upon representations from your customer and repeat them in the documents you file unless ‘Red Flags’ oblige you to take verification steps.” This does not allow conscious disregard or willful avoidance of facts, however, and an appropriate effort must be made to ascertain the true end user and end use. As noted above, inclusion on the list of Communist Chinese military companies is a definite red flag, but there will be many others.

EEI Filing Requirement Partially Delayed

The requirement for Electronic Export Information (EEI) filings for any items destined China, Russia, or Venezuela regardless of value, unless shipped under License Exception GOV took effect on June 29^th for ECCNs listed in Supplement No. 2 to Part 744. According to the FAQs, the requirement for EEI filings for all other CCL items has been delayed for 90 days until September 27, 2020. The new rule does not require EEI filings for EAR99 items or intangible exports.

Hong Kong’s Special Status Ending

On June 29, 2020, the Department of State and Department of Commerce released statements on the revocation of Hong Kong’s special status under U.S. export controls. This follows the “G7 Foreign Ministers’ Statement on Hong Kong” from June 17^th which expressed concern with China’s imposition of a new “national security law” that reduces Hong Kong’s preexisting autonomy.

Both departments previously distinguished between Hong Kong and the People’s Republic of China for export control purposes.

The Department of State, Directorate of Defense Trade Controls (DDTC) previously approved licenses for Hong Kong on a case by case basis. China was already listed as a prohibited destination under the International Traffic in Arms Regulations (ITAR) §126.1.

BIS listed Hong Kong separately in its country chart and country groups. While BIS licensing requirements were largely the same as China (minus CB column 3), Hong Kong’s listing in Country Group A:6 and Country Group B made it eligible for some license exceptions, including Shipments to Country Group B (GBS), Shipments of Limited Value (LVS), some use of the Strategic Trade Authorization (STA). These exceptions will no longer be available for exports to Hong Kong.

Huawei Cleared for Standards Organizations

On June 18, 2020, the BIS released an interim final rule (85 FR 36719) which authorizes the release of certain technology to Huawei in support of international standards organizations. The rule replaces a previous advisory opinion and a Temporary General License, by amending the Huawei Entity List entries to include the following under “License requirement”:

For all items subject to the EAR, see §§ 736.2(b)(3)(vi), and 744.11 of the EAR, EXCEPT for technology subject to the EAR that is designated as EAR99, or controlled on the Commerce Control List for anti-terrorism reasons only, when released to members of a “standards organization” (see § 772.1) for the purpose of contributing to the revision or development of a “standard” (see § 772.1).

This is intended to prevent regulatory roadblocks to U.S. participation in international standards setting in areas such as 5G and autonomous vehicles.

The rule was effective upon publication and comments will be accepted through August 17, 2020. BIS also issued a press release on this topic.

Xinjiang Supply Chain Business Advisory

On July 1, 2020, the Department of State issued a supply chain business advisory related to forced labor human rights abuses in the Xinjiang Uyghur Autonomous Region (Xinjiang) of the People’s Republic of China:

Businesses, individuals, and other persons, including but not limited to academic institutions, research service providers, and investors… that choose to operate in Xinjiang or engage with entities that use labor from Xinjiang elsewhere in China should be aware of reputational, economic, and, in certain instances, legal, risks associated with certain types of involvement with entities that engage in human rights abuses, which could include Withhold Release Orders (WROs), civil or criminal investigations, and export controls.

The advisory provides substantial background to the situation in Xinjiang, red flags, and due diligence advice. The document relates both to activities known to be occurring in Xinjiang and facilities in other regions using labor or goods from Xinjiang. Page 15 of the advisory includes a map identifying 19 developed cities and provinces that have established satellite factories in Xinjiang.

Industries of concern include:

Agriculture (including such products as hami melons, korla pears, tomato products, and garlic)
Cell Phones
Cleaning Supplies
Construction
Cotton Yarn, Cotton Fabric, Ginning, Spinning Mills, and Cotton Products
Electronics Assembly
Extractives (including coal, copper, hydrocarbons, oil, uranium, and zinc)
Fake Hair and Human Hair Wigs, Hair Accessories
Food Processing Factories
Hospitality Services
Noodles
Printing Products
Footwear
Stevia
Sugar
Textiles (including such products as apparel, bedding, carpets, wool)
Toys

The advisory does not create any new export compliance obligations, but is intended to assist with the due diligence needed to avoid problems ranging from reputational risk to export compliance violations.

OFAC Issues “Syria-Related” Sanctions Regulations, Targeting Turkey

On June 5, 2020, the Department of Treasury, Office of Foreign Assets Control (OFAC), published a final rule (85 FR 34510) establishing the Syria-Related Sanctions Regulations (31 CFR Part 569), which implement Executive Order 13894. The new regulations are in addition to OFAC’s existing Syria Sanctions Regulations (31 CFR Part 542).

Although titled “Syria-Related Sanctions,” the sanctions regulations are targeted at Turkish entities involved in the Turkish military offensive in northern Syria. The criteria for listing includes (among others) Turkish government officials and agencies and persons operating in targeted sectors of the Turkish economy determined by the Secretary of the Treasury to be contributing to various destabilizing activities or human rights abuses in relation to Syria.

The current notice does not create any newly sanctioned parties, but implements Executive Order 13894 and provides the criteria for the Secretary of Treasury, in consultation with the Secretary of State, to make these designations. Sanctions include blocked property and other related financial sanctions.

OFAC’s Syria-Related Sanctions page includes additional information on the new rule, including information previously published regarding Executive Order 13894 (October 14, 2019). Executive Order 13894 was used to briefly add the Turkish Ministry of National Defence, the Turkish Ministry of Energy and Natural Resources, and three senior Turkish government officials to OFAC’s Specially Designated Nationals List (SDN List).

The issuance of the Syria-Related Sanctions Regulations provide a valuable reminder that sanctions programs affect transactions beyond the obvious countries of concern. Raising similar issues a few days earlier, three companies and vessels from the Marshall Islands and one company and vessel from Greece were listed under OFAC’s Venezuela-Related sanctions program. Denied party screening for all countries is a must-do to prevent serious compliance problems.

Commerce Expands Direct Product Rule to Target Huawei

On May 19, 2020, the Department of Commerce, Bureau of Industry and Security (BIS), published an interim final rule (85 FR 29849) amending the Export Administration Regulations (EAR) to expand the Direct Product Rule to apply to specific members of the Entity List—at this time China’s Huawei Technologies and 114 non-U.S. affiliates. The rule was effective May 15, 2020, the date on which it was made available for public inspection.

Huawei Technologies and 114 of its overseas affiliates were added to the Entity List in 2019. However, Huawei has continued to use U.S. software and technology to design semiconductors, undermining the national security and foreign policy purposes of the Entity List by commissioning their production in overseas foundries using U.S. equipment.

The rule amends the Direct Product Rule (General Prohibition Three) at EAR §736.2(b)(3) to bar the transfer of items specified in a footnote to the Entity List

(vi) Criteria for prohibition relating to parties on Entity List. You may not reexport, export from abroad, or transfer (in-country) without a license or license exception any foreign-produced item controlled under footnote 1 of Supplement No. 4 to part 744 (“Entity List”) when there is “knowledge” that the foreign-produced item is destined to any entity with a footnote 1 designation in the license requirement column of the Entity List.

The interim rule is intended to block global chip supplies to Huawei by specifying direct products of U.S. origin technology in Export Control Classification Numbers (ECCNs) 3E001, 3E002, 3E003, 3E991, 4E001, 4E992, 4E993, 5E001, or 5E991 as well as U.S. origin software specified in ECCNs 3D001, 3D991, 4D001, 4D993, 4D994, 5D001 or 5D991.

U.S. manufacturers must comply with the interim rule by:

Due diligence “denied parties screening” of all parties to an overseas transaction.

Obtaining signed End User Statements acknowledging that the goods (technology, software and articles) are controlled by the U.S. Department of Commerce, Export Administration Regulations, and any in-country retransfer or reexport of these goods to another party requires prior authorization by the U.S. Department of Commerce, Bureau of Industry Security.

Comments on the interim final rule may be submitted through July 14, 2020. Review the Federal Register Notice for the full rule and how to submit comments. The Commerce Department also issued a press release on this action.

Related Actions Related to China and Huawei

This action follow three notices published in April expanding restrictions on exports to military end-users, the elimination of the License Exception Civil End Users (CIV), and modification of the License Exception Additional permissive Reexports (APR).

BIS also extended the Temporary General License for Huawei and its listed affiliates on March 18, 2020 (85 FR 29610). The General License, which authorizes activities “including those necessary for the continued operations of existing networks and equipment as well as the support of existing mobile services, including cybersecurity research critical to maintaining the integrity and reliability of existing and fully operational networks and equipment,” is now valid through August 13, 2020.

Commerce Targets Chinese Military with Expanded Export Restrictions

On April 28, 2020, the Department of Commerce, Bureau of Industry and Security (BIS), published three notices revising the Export Administration Regulations (EAR). These changes are intended to increase restrictions on exports to China, but will affect transactions involving other countries as well:

85 FR 23459 – Expansion of Export, Reexport, and Transfer (in-Country) Controls for Military End Use or Military End Users in the People’s Republic of China, Russia, or Venezuela

85 FR 23470 – Elimination of License Exception Civil End Users (CIV)

85 FR 23496 – Modification of License Exception Additional Permissive Reexports (APR)

This rule comes after much delay as these changes have been anticipated since 2018 and we now have two final rules and one proposed rule from BIS.

Chinese Military End Use

Effective June 29, 2020 (85 FR 23459), EAR Part 744 will be amended to further restrict exports and reexports to China, as well as to Russia and Venezuela, when destined for a military end user or end use.

744.21 previously restricted exports to China for military end use, as well as exports to Russia or Venezuela for military end use or end users. By adding military end users in China, the new rule will apply the same limitations to all three countries. The new rule also broadens the definition of military end use to include additional items.

Items subject to the military end use or end user restrictions are identified by Export Control Classification Number (ECCN) in Supplement No. 2 to Part 744. The following ECCNs will be added to the supplement or their controls expanded: 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, 8A992, 9A991 and 9B990.

Items restricted under the revised §744.21 will require a BIS license and be subject to a policy of denial. Previously, such applications were reviewed on a case-by-case basis, considering whether an export would make a material contribution to military capabilities and result in advancing military activities contrary to U.S. national security interests.

The rule also establishes a Regional Stability (RS) license requirement for any 9×515 or 600 series paragraph .y items destined for China, Russia, or Venezuela. There is an exception for the export or reexport of items to Russia for the International Space Station (ISS).

Finally, the rule amends the EAR to require Electronic Export Information (EEI) filings for any items destined China, Russia, or Venezuela regardless of value, unless shipped under License Exception GOV.”

Between the expanded definitions and “China’s widespread civil-military integration,” these revisions will require increased due diligence when evaluating end users in China.

For additional detail, refer to the Federal Register Notice.

Removal of License Exception CIV

Also effective June 29, 2020 (85 FR 23470), the §740.5 License Exception Civil End Users (CIV) will be removed from the EAR.

License Exception CIV currently allows exports and reexports of specifically identified CCL items controlled for National Security reasons to twenty three countries of national security concern when “destined to civil end-users for civil end-uses.”

License Exception CIV is not generally available—the license exception must be positively identified in the ECCN entry for the item in question. License Exception CIV is generally a counterpart to the Shipments to Country Group B Countries (GBS) or Technology and Software Under Restriction (TSR) exceptions, which allow similar exports to the EAR’s Country Group B.

In removing License Exception CIV, BIS is primarily concerned by “the increasing integration of civilian and military technology development in these countries of concern.” The removal of the license exception means that BIS licenses will be required for such transactions for all D:1 countries.

The rule also makes conforming changes to the EAR, largely removing the “CIV: Yes” or “CIV: No” indications from ECCNs.

The Commerce Country Groups are listed in Supplement No. 1 to Part 740.

For additional detail, refer to the Federal Register Notice.

Modification of License Exception APR

Finally, BIS issued a proposed rule (85 FR 23496) to modify the §740.16 License Exception Additional Permissive Reexports (APR).

License Exception APR currently allows the reexport of some controlled items from Country Group A:1 or Hong Kong, given certain conditions including an export authorization from the reexporting country. Because of concerns about these countries’ licensing review standards, APR may allow the reexports that would have been denied for export directly from the U.S.

The BIS proposal removes Country Group D:1 as eligible destinations under License Exception APR so that the U.S. government approval would be required for reexports to these countries of national security concern.

Comments may be submitted through June 29, 2020. In particular, BIS requests comments on how the proposal would impact current use of License Exception APR and the volume of transactions affected. Review the Federal Register Notice for the full proposed rule and how to submit comments.