Author Archives: Export Compliance Solutions

A Flurry of Activity – State, Commerce, and Treasury Rules Issued Ahead of Change in Administration

January saw a number of updates to export compliance regulations and policies to close out a number of Trump administration initiatives.  On January 20, 2021, the Biden administration announced a regulatory freeze.  How do these relate?  Read on.

Regulatory Freeze

Let’s start with the regulatory freeze, since what everyone wants to know is whether new rules are really going into effect or not.  The White House announcement requested executive agencies to (1) refrain in most cases from sending new rules to the Federal Register before review by new political appointees, (2) withdraw pending rules not yet published, and (3) postpone the effective dates of published but pending rules.  This is typical for changes in administrations.  Rules already published and effective may be revised in the future through normal administrative processes and we will report on notable changes.  Most of the changes below were effective before January 20th, with a few notable exceptions.

Commerce Updates Chemical Weapons Lists

On January 7, 2021, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (86 FR 936), also effective January 7th, amending the Chemical Weapons Convention Regulations (CWCR) and the Export Administration Regulations (EAR).  This amendment adds three chemical families and one chemical now controlled under the Chemical Weapons Convention (CWC) and revises the definition of “production” of CWC chemicals.

The Chemical Weapons Convention is an international arms control treaty that seeks to eliminate chemical weapons by the parties to the treaty.  The parties have agreed to a number of restrictions for listed chemicals.  The new changes reflect decisions adopted at the November 2019 CWC Conference of the States Parties.

The specific chemicals are identified in the Federal Register Notice and the full list is in Part 745 of the EAR.  The revised definition of “production” applies to the CWCR only, not the EAR.

Commerce Clarifies Vaccine Controls

Also on and effective January 7, 2021, BIS published a rule (86 FR 944) clarifying controls on vaccines under Export Control Classification Number (ECCN) 1C991.

The new rule amends 1C991 to:

  1. Include vaccines containing or designed for use against pathogens and organisms listed under ECCNs 1C351, 1C353 or 1C354.  According to BIS:
    Prior to the effective date of this final rule, ECCN 1C991 indicated that it controlled vaccines “against” such items, but was not specific about whether all vaccines “containing” such items were controlled, irrespective of whether the vaccines were designed for use “against” such items.
  2. Control medical products containing genetically modified organisms and genetic elements described in ECCN 1C353.a.3 and adjust definitions.
  3. Renumber 1C991.c and .d based on level of export control.

These changes are based on a decision of the Australia Group June 2019 Plenary meeting.  The Australia Group is a multilateral forum for the harmonization of export controls related to chemical and biological weapons.

Commerce Unmanned Aerial Systems Licensing Policy Amended

On January 12, 2021, BIS published a final rule (86 FR 2252), also effective January 12th, which amends the Unmanned Aerial Systems (UAS) licensing policy in the EAR.

The amended policy replaces a presumption of denial with case-by-case review for systems with “a range and payload capability equal to or greater than 300 km/500 kg but a maximum true airspeed of less than 800 km/hr.”

A corresponding proposal was made to the Missile Technology Control Regime (MTCR), a multilateral export control group, but has not been adopted within the MTCR by the required consensus.  The change in U.S. review policy was announced in July 2020.

The Missile Technology licensing policy is located in the EAR at §742.5.

Commerce Removes Anti-Terrorism Controls on Sudan

As anticipated, on January 19, 2021, BIS issued a rule (86 FR 4929), effective January 14th, removing Anti-Terrorism (AT) controls for items destined for Sudan and removing Sudan from Country Group E:1.

Sudan’s removal is based on an agreement reached between the U.S. and Sudan in 2020 resolving claims related to victims of terrorism.  Sudan is now listed in Country Group B and is newly eligible for a number of license exceptions and the 25% de minimis level for U.S. content.  Notably, Sudan joins Ukraine as the only members of Country Group B not eligible for License Exception GBS (Shipments to Country Group B Countries, EAR §740.4).

Sudan remains subject to an arms embargo, as listed under ITAR §126.1(v) and EAR Country Group D:5.

As revised, there are currently no countries subject to AT controls except to the extent that Cuba, Iran, North Korea, and Syria are subject to comprehensive sanctions.

U.S. Person Activities and ICTS Supply Chain Rules Issued, But Not Yet Effective

On January 15, 2021, BIS issued an interim final rule (86 FR 4865) imposing license requirements on specified U.S. person activities related to “nuclear explosive devices, missiles, chemical or biological weapons, whole plants for chemical weapons precursors, foreign maritime nuclear projects, and foreign military intelligence services.”  This rule is effective March 16, 2021 and may be subject to the regulatory freeze described above.  It would amend the EAR to control activities by U.S. persons wherever located regardless of whether the items involved are subject to the EAR.  Comments have been requested through March 1, 2021.

On January 19, 2021, BIS issued an interim final rule (86 FR 4909) that establishes regulations and requests comments on “Securing the Information and Communications Technology and Services Supply Chain.”  This rule is effective March 22, 2021 and may be subject to the regulatory freeze described above.  It is intended to provide a process to review information and communications technology and services (ICTS) supply chain transactions, “similar to the process by which entities may inform the Committee on Foreign Investment in the United States (CFIUS) of investments in U.S. businesses.”  A related proposal was published in November 2019.  Comments have been requested through March 22, 2021.

State Department Precision-Guided Munitions Policy Announced

On January 19, 2021, the Department of State, Directorate of Defense Trade Controls (DDTC) announced a policy for the review of direct commercial sale (DCS) precision-guided munitions (PGMs).  Notably, DDTC stated:

“…before authorizing DCS exports, reexports, or retransfer of U.S.-origin PGMs, their critical components, and/or related technical data or defense services, as enumerated below, the U.S. government will confirm the foreign end-user government possesses or is in the process of procuring sufficient U.S., indigenous, or third-party [advanced target development] capabilities…

No action will be required on the part of the U.S. applicant. A valid ATD solution is current for five years, after which the technical support and data need to be refreshed.  Within the five-year period of currency, in-scope licenses will be adjudicated as normal.”

This process is intended to ensure that U.S.-origin PGMs are used “consistent with U.S. intent when approving the transfer” including the ability to mitigate the risk of civilian casualties.

Civil Monetary Penalties Adjusted for Inflation

Inflationary adjustments to civil monetary penalties were issued by both the Department of Commerce (86 FR 1764) and the Department of State (86 FR 7804).  Maximum penalties depend on the specific kind of violation and both notices also update a number of additional regulatory penalties.

The ITAR §127.10 civil penalties were amended as follows:

  • § 127.10(a)(1)(i) increased from $1,183,736 to $1,197,728.
  • § 127.10(a)(1)(ii) increased from $860,683 to $870,856 (or five times the amount of the prohibited incentive payment, whichever is greater).
  • § 127.10(a)(1)(iii) increased from $1,024,457 to $1,036,566.

The Department of Commerce increased the maximum penalty for a violation of the Export Control Reform Act of 2018 from $305,292 to $308,901.

OFAC Issues Hong Kong-Related Sanctions Regulations

On January 15, 2021, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a rule (86 FR 3793), also effective January 15th, creating the Hong Kong-Related Sanctions Regulations.  This is the latest step in a series of actions following Hong Kong’s loss of autonomy in 2020.  OFAC typically issues separate, but similar, sanctions regulations to implement country-specific sanctions.

ECS will continue to monitor changes to export control regulations and policies, particularly for DDTC, BIS, and OFAC.  Watch this space for updates!

Recent Updates to Commerce Country Policies

In a flurry of activity in December, the Department of Commerce, Bureau of Industry and Security (BIS), updated licensing policies for countries near and far.  The updates will have notable impacts on license exemption availability as described below.

Hong Kong no Longer a Separate Destination

On December 23, 2020, BIS issued a final rule (85 FR 83765) removing Hong Kong as a separate destination under the Export Administration Regulations (EAR).  This follows the July suspension “all License Exceptions for Hong Kong that provide differential treatment as compared to those available to the People’s Republic of China (PRC).”  The PRC imposed a new “national security law” in 2020 which reduced Hong Kong’s preexisting autonomy and increased the risk of diversion U.S. technology and hardware.

Changes to Country Groups for Ukraine-Removes an Exception
Mexico, and Cyprus Adds STA as an Exception but Cyprus still a D:5 Country

On December 28, 2020, BIS issued a final rule (85 FR 84211) which moves Ukraine from Country Group D to Country Group B and adds Mexico and Cyprus to Country Group A:6.

No changes were made to license requirements in the Commerce Country Chart.  Under the EAR, Country Groups are used to determine eligibility for many license exceptions.

Ukraine’s addition to Country Group A:6 is unique, as it specifically excludes eligibility for License Exception GBS (§740.4 Shipments to Group B Countries) and License Exception TSR (§740.6 Technology and Software under Restriction), but other license exceptions available to Group B countries do become available.  Under this change, General Prohibition Three (the Foreign-Produced Direct Product Rule) no longer applies to Ukraine.  EAR §746.6 continues to restrict exports to the Crimea Region of Ukraine.

The addition of Mexico and Cyprus to Country Group A:6 authorizes the use of License Exception Strategic Trade Authorization (STA) §740.20(c)(2) (controls of lesser sensitivity).

Cyprus remains an ITAR §126.1 country (with a recently updated licensing policy) and is still included in Country Group D:5.  Under EAR §740.2(a)(12) and (13), license exceptions are limited for 9×515 and 600 series items for Cyprus (and other D:5 countries)

These updates are based on: “(1) The Government of Ukraine’s continuing engagement with regional and international export control authorities; (2) Mexico’s multilateral export control regime memberships and national security approaches and interests compatible with the United States; and (3) Cyprus’ European Union membership and like-minded export controls.”

Sudan

On December 18, 2020, the Department of State published a notice rescinding Sudan’s designation as a State Sponsor of Terrorism.  This change was previously announced in October, subject to a 45-day Congressional notification window.  Sudan is currently the only country designated as requiring export licenses for Anti-Terrorism (AT) purposes on the Commerce Country Chart that is not subject to comprehensive restrictions.  This requirement has not yet been removed.

After the re-designation of Cuba as a State Sponsor of Terrorism, the list now includes Cuba, Iran, North Korea, and Syria.  All four are already subject to comprehensive export restrictions.

New Commerce and OFAC Sanctions Lists Include Communist Chinese Military Companies, Entity List Expanded

In separate, but related, December actions, the Department of Commerce’s Bureau of Industry and Security (BIS) and the Department of the Treasury’s Office of Foreign Assets Control (OFAC) published new sanctions lists largely aimed at companies tied to the Chinese military.

The new lists build on the 2020 releases of the Department of Defense list of Communist Chinese military companies.  When first released, the presence of a company on that list was a “red flag,” but not a direct export restriction.  The use of the list by the Departments of Commerce and Treasury changes that.

Commerce Military End User List – NEW ADDITION UNDER SUPPLEMENT #7 OF EAR!

On December 23, 2020, BIS published a rule (85 FR 83793) adding the Military End User (MEU) List to the Export Administration Regulations (EAR).  The list identifies 102 entities, fifty-seven in China and forty-five in Russia, that have been identified by the U.S. government as “military end users” subject to EAR §744.21.  §744.21 restricts the export, reexport, or transfer (in country) of items identified in Supplement No. 2 to part 744 to military end users in China, Russia, and Venezuela.  The restriction takes the form of a license requirement with a presumption of denial.  License exceptions other than GOV may not be used for those entities.

While long-awaited and very helpful for exporters, the MEU List is not an exclusive list of parties subject to the restrictions of §744.21.  Careful evaluation of potential exports to China, Russia, and Venezuela is advised as even business entities may be considered “military end users” which are defined broadly to include “any person or entity whose actions or functions are intended to support ‘military end uses.’”  In the event that a member of the Department of Defense list of Communist Chinese military companies is not included on the MEU list, it should be considered a “red flag” for export compliance review.

The new list is located at Supplement No. 7 to Part 744 of the EAR.

OFAC Chinese Military Companies Investment Ban

On November 12, 2020, the President issued Executive Order 13959 (85 FR 73185) titled “Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies,” prohibits trading in securities of any “Communist Chinese military company” effective January 11, 2021.

The order includes an annex listing Communist Chinese military companies based on the Department of Defense list and provides for expanding the list in the future.  As of January 8, 2021, the list reflects the three 2020 releases of the Department of Defense list.

To implement the order, OFAC has established the Non-SDN Communist Chinese Military Companies List (NS-CCMC) and has been regularly issuing FAQs on the topic.

Seventy-Seven MORE Added to Entity List

In another notable update, on December 22, 2020, BIS published a rule (85 FR 83416) which added seventy-seven entities to the EAR’s Entity List.  The new entries are located in the People’s Republic of China (China), Bulgaria, France, Germany, Hong Kong, Italy, Malta, Pakistan, Russia, and the United Arab Emirates (U.A.E.).  The bulk of the new entries (60) are located in China.  The rule also removed four entities in Israel and the U.A.E. and revised two entries.  The Federal Register Notice contains the rationale for the additions, typically activity that is considered “contrary to the national security interests of the United States.”

BIS also issued a press release and a statement from Secretary Ross with additional background on the new Chinese entries.

Continuous Screening Recommended ACT NOW!

With the new Military End User List and the continued expansion of the Entity List, denied party screening requires the ongoing attention of export compliance personnel and programs.  Customers, as well as intermediate parties and end users must be screened before an export can take place.  With sanctions lists being updated on a nearly daily basis, continuous screening of those parties is the best way to keep up to date with changes.

BIS Updates: Wassenaar, Human Rights, and License Extensions!

We have a handful of developments out of the Commerce Department, with revisions to controlled items, human rights review, and license extensions.  At the end, there are two developments out of Middle East

Commerce Implements 2018 & 2019 Wassenaar Revisions

On September 11, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (85 FR 56294) implementing changes to the Wassenaar Arrangement List of Dual-Use Goods and Technologies made at the December 2018 Plenary meeting.

The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies is a global multilateral export control regime, covering both conventional weapons and sensitive dual-use goods and technologies.  Participants agree to control exports and retransfers of items on a control list of dual-use goods and technologies and munitions.  Its Plenary meeting normally occurs once a year in December in Vienna, Austria.  CCL revisions take effect when officially amended through a Federal Register notice

BIS previously issued a rule in May 2019 that added and revised five ECCNs based on the December 2018 Plenary meeting.  The new rule reflects the changes that were remaining:

Revisions to 28 ECCNs:

  • 0A617
  • 1C001
  • 2A001, 2B003, 2B006
  • 3A001, 3A002, 3B001, 3E003
  • 5E001, 5A002, 5D002, 5E002, 5E992
  • 6A003, 6A005,
  • 7A002, 7A003, 7A005, 7D003, 7D005,
  • 8A001, 8A002
  • 8B001, 9A010, 9A610, 9B001, & 9E003.

License Exception Revisions to ECCNs:

  • 1C004 (GBS)
  • 8A001 (LVS & STA)
  • 8D001 (TSR, STA)
  • 8E001 (TSR, STA)

New ECCN:

  • 6B002 (masks and reticles for optical sensors specified in 6A002.a.1.b or 6A002.a.1.d).

Conforming Changes to Eight ECCNs:

  • 0A606
  • 1A008
  • 3A991
  • 6A002, 6E001, 6E002
  • 8D001 & 8E001.

A series of corrections to the September ECCN revisions were published on December 4, 2020 (85 FR 78684), affecting some technical specifications and revising technical notes.

On October 5, 2020, BIS published a rule (85 FR 62583) implementing changes to the Wassenaar Arrangement List of Dual-Use Goods and Technologies made at the December 2019 Plenary meeting.  The changes harmonize the Commerce Control List (CCL) with the multilateral Wassenaar Arrangement by adding six emerging technologies:

  1. Hybrid additive manufacturing/computer numerically controlled tools
  2. Computational lithography software designed for the fabrication of extreme ultraviolet masks
  3. Technology for finishing wafers for 5 nanometer integrated circuit production
  4. Digital forensics tools that circumvent authentication or authorization controls on a computer and extract raw data
  5. Software for monitoring and analysis of communications and metadata acquired from a telecommunications service provider via a handover interface
  6. Sub-orbital spacecraft

The specific Export Control Classification Numbers (ECCNs) affected are as follows:

Revised: 2B001, 3D003, 5E001, 5A004, 9A004
Revised: 5D002, 5E002, 9A012, 9A515
Corrected: 5D001
Added: 3E004

Eligibility to use the License Exception ENC was also revised to include digital forensics items (investigative tools).

For complete details on the revisions, refer to the Federal Register Notice.  BIS also published a press release on these and related changes to the CCL.

Proposed Controls on Nucleic Acid Assembler and Synthesizer Software

On November 6, 2020, BIS published a proposed rule (85 FR 71012) which would control software related to nucleic acid assemblers and synthesizers.  The proposed rule would create a new ECCN 2D352 related to existing ECCN 2B352.j.  Both ECCNs would be controlled under CB (chemical and biological weapons) column 2 and AT (anti-terrorism) column 1.  This proposal is in addition to current Wassenaar or Australia Group controls.  Comments may be submitted through December 21, 2020.

Commerce Announces Human Rights Reviews & Controls on Water Cannons

On October 6, 2020, BIS published a rule (85 FR 63007) amending the Export Administration Regulations (EAR) to provide for human rights review for items controlled for CC (crime control) purposes, as well as all license applications (“except for items controlled for short supply reasons”).  In the Federal Register Notice, BIS notes that:

BIS will generally consider license applications favorably on a case-by-case basis unless there is civil disorder in the country or region of destination or unless there is evidence that the government of the importing country may have violated internationally recognized human rights.

This follows on the September release of surveillance and human rights guidance by the Department of State, Bureau of Democracy, Human Rights, and Labor (DRL).

Also on October 6, 2020, BIS published a rule (85 FR 63009) which creates a license requirement for “water cannon systems for riot or crowd control and parts and components specially designed therefor.”  The new rule creates ECCNs 0A977, 0D977 and 0E977 which will require licenses for export to countries designated under CC (crime control) Column 1 of the Commerce Country Chart.

This action was directed by Public Law 116-77 “to prohibit the commercial export of covered munitions items to the Hong Kong Police Force,” but also affects exports to other countries.  The license requirement will apply to most countries except for NATO allies and some other military allies and subjects water cannons to human rights review.

Revised National Security Review for China, Venezuela, and Russia

On October 29, 2020, BIS published a rule (85 FR 68448) “to revise the license review policy for items controlled for national security reasons destined to the People’s Republic of China (PRC), Venezuela, or the Russian Federation (Russia).”  The focus of the policy will be whether the National Security (NS) controlled items “make a material contribution” to those countries’ weapons systems subject to a presumption of denial.

Commerce Offers License Extensions

On October 16, 2020, BIS announced that exporters may request a six-month extension for licenses due to expire on or before December 31, 2020.

Requests should be sent by email to LicenseExtensionRequest@bis.doc.gov and BIS expects to review and approve extensions within two to three business days.

Antiboycott & Anti-Terrorism Updates for UAE & Sudan?

Two developing stories that we are watching, but that have not yet been reflected in regulations are based on diplomatic agreements with the United Arab Emirates (UAE) and Sudan.

The Department of the Treasury released its current list of “countries which require or may require participation in, or cooperation with, an international boycott” (85 FR 64615).  The list includes:

  • Iraq
  • Kuwait
  • Lebanon
  • Libya
  • Qatar
  • Saudi Arabia
  • Syria
  • United Arab Emirates
  • Yemen

There are no changes compared to last year’s release (84 FR 54730, October 10, 2019), but the notice does state that “Treasury is monitoring the situation of the United Arab Emirates, which has announced the issuance of a decree repealing its boycott law.”  The UAE and Israel recently agreed to normalization of relations.  A similar agreement was reached between Israel and Bahrain, but Bahrain was not included on the Treasury list.

On October 23, 2020, the White House announced the President’s intention to “formally rescind Sudan’s designation as a State Sponsor of Terrorism.”  This action is based on an agreement reached with Sudan resolving “certain claims of United States victims of terror and their families.”  Following a 45-day Congressional notification window, the designation may be rescinded.  Sudan is currently the only country designated as requiring export licenses for Anti-Terrorism (AT) purposes on the Commerce Country Chart that is not subject to comprehensive restrictions.  This requirement should be revised following the formal rescission.

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:

  1. 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.”
  2. Items “being utilized or required for innovation in developing conventional weapons, enabling foreign intelligence collection activities, or weapons of mass destruction applications.”
  3. “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:

  1. How to further define foundational technology to assist in identification of such items;
  2. sources to identify such items;
  3. 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;
  4. the status of development of foundational technologies in the United States and other countries;
  5. the impact specific foundational technology controls may have on the development of such technologies in the U.S.;
  6. examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology based controls;
  7. any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and
  8. 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:

  1. Facial recognition software and other biometric systems
  2. Non-lethal visual disruption lasers (“dazzlers”)
  3. Long-range acoustic devices and related components, software, and technologies for the above items.
  4. Police helmets—0A979
  5. Fingerprint readers—3A981, and components—(3A981, 4A980), software (3D980, 4D980), and technology (3E980, 4A980) thereof
  6. Fingerprint powders, dyes, and inks (1A985)
  7. Voice print identification systems (3A980) and components (3A980), software (3D980), and technology (3E980) thereof
  8. Polygraphs and psychological stress analysis equipment (3A981) and components (3A981), software (3D980), and technology (3E980) thereof
  9. Nonmilitary mobile crime science laboratories (9A980)
  10. 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:

  1. 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;
  2. The impact of adding to, modifying, or removing items from the CCL on U.S. support of human rights throughout the world; and
  3. 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;

(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.

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.