The STA license exception authorizes a broad array of export activity that would otherwise require an export license, if certain notice and recordkeeping procedures are followed. However, historically, exporters have frequently sought an export license rather than relying on the STA exception. To increase usage of STA and decrease export license requests when STA is available, the proposed rule seeks to:

• Clarify that STA is a transaction-based license exception and exporters do not need to review the Commerce Control List to determine if STA is available for a particular Export Control Classification Number (“ECCN”).
• Add text to make it more explicit that STA is eligible for deemed exports and deemed reexports.
• Exclude deemed exports and deemed reexports from the requirement to have been listed on an approved license or other approval for “600 series” technology.
• Adopt a simpler and consistent approach to identify ECCNs eligible for STA.
• Remove the limitation on the use of License Exception Additional Permissive Reexports for reexports between and among certain partner and ally countries to reflect their close coordination with the United States on export controls.

In addition to the proposed STA changes, BIS published two final rules also designed to ease certain categories of export licensing requirements and expand the availability of export license exceptions for key allied and partner countries.

The first rule changes licensing requirements for certain Australia Group (AG)-controlled pathogens and toxins (and their related technologies) so that no license is required to AG countries, unless the item is also subject to Chemical Weapons Convention controls. The rule also loosens licensing requirements on crime controls for certain countries.

The second rule expands license exception eligibility to additional countries for certain missile technology items excluding any countries of concern for missile technology reasons or that are subject to a U.S. arms embargo (i.e., countries specified in Country Groups D:4 or D:5). The rule also updates list-based controls to align with recent Missile Technology Control Regime control list changes.

Please contact our sanctions and export controls team if you require any assistance navigating these changes

The Report and its findings herald a notable shift away from a “free trade” oriented U.S. export policy toward more hardline oversight and regulation of U.S. exports to the PRC and adversaries. According to the House Committee, the Chinese Communist Party’s (CCP) Military-Civil fusion strategy blurs the line between commercial and military items in such a way that requires the United States to abandon the “post-Cold War” distinction between economic and national security. In doing so, the Report calls on licensing officials to act less as the “voice of business” and more as U.S. regulators that are more “willing to deny licenses to export technology” to U.S. adversaries. It remains to be seen whether Congress or BIS will implement any of the recommendations, but it is clear the House Committee has serious concerns about the current state of play.

The Report makes several recommendations to address key areas of weakness in the United States’ approach to U.S. export controls, including the following:

1. Implement a majority vote system for the BIS’s Operating Committee, especially for exports to China. For the fiscal years of 2017–2019, there has been a 60 percent increase in non-consensus decisions of the Operating Committee, which adjudicates escalations from licensing decisions where reviewing agencies are not in agreement. According to the House Committee, these statistics raise concerns that the Operating Committee too often overrides the objections of other agencies by abusing Commerce’s role as both a Chair and a member. Implementation of this recommendation from the House Committee would likely make it more difficult for U.S. industry to obtain favorable licensing decisions through the escalation process.
2. BIS should impose a policy of denial for all exports of national security-controlled items to China to reduce the rate of approval. In 2020, nearly all exports to China of items listed on the Commerce Control List (CCL) were unlicensed. Even where required, BIS granted an overwhelming majority of requests to export or release U.S. software or technology to the PRC. The House Committee concluded that denying the value of these exports, which in 2021 reflected around 1 percent of U.S. exports to China, would hardly effect U.S.-China trade relations, while blunting CCP military ambitions. If implemented, U.S.-regulated firms involved in dual-use transactions with China would face stronger headwinds in obtaining licenses that historically have been granted.
3. BIS (or Congress) should apply a “presumption of denial” for all items subject to the EAR for companies on the Entity List and clearly define the term to mean that a license, no matter the item, will be denied in essentially every instance. BIS’s licensing regime is not strict enough in preventing the proliferation of U.S. technology to prohibited end users and end uses, according to the Report. The Report submits that too many license applications for companies appearing on the Entity List are approved despite being subject to a “presumption of denial,” with BIS approving $60 billion worth of licenses to Huawei during a six-month period between November 2020 and April 2021. Defining the term to limit BIS’s discretion, while also expanding the scope of items subject to the “presumption of denial” standard, would make it much more difficult if not impossible to engage in controlled transactions with Entity Listed PRC companies.
4. BIS should broaden the scope of Entity List requirements to subsidiaries and affiliates, and invest in enhanced, commercially-available mapping tools. The Report cites the effectiveness of the “50 percent rule,” a mechanism that the Treasury Department’s Office of Foreign Assets Control employs when administering economic sanctions against Specially Designated Nationals (SDNs) to “flow-down” U.S. sanctions requirements to certain entities majority owned by SDNs. The Report recommends that BIS similarly adopt, at the very least, a mechanism that would automatically apply Entity List licensing requirements to related PRC-entities in order to mitigate circumvention of U.S. export controls. In addition, the House Committee calls for investment in enhanced tools for screening and identifying linkages of PRC companies to CCP military. This measure, if implemented, could result in more entities being subject to Entity List restrictions, cutting off sales to unlisted subsidiaries.
5. The Department of Commerce must renegotiate its end-use agreement with the PRC or impose greater restrictions on exports to China considering the inability to conduct meaningful end-use checks. Unlike other countries, where U.S. export control officers have a good deal of discretion to conduct end-use checks for up to 5 years after shipment, end-use checks involving PRC shipments must occur within 180 days. Moreover, end-use checks on PRC shipments require PRC approval. According to the Report, this severely hinders BIS’s ability to monitor and ensure compliance with license terms. Should the Department of Commerce successfully re-negotiate these terms, U.S. exporters can expect greater and longer lasting U.S. official involvement in commercial relationships with PRC firms overseas, including more auditing of end users and end uses.

In addition to the above, the Report makes numerous other recommendations, including limitations on standard-setting loopholes, fees for certain export licensing requests, requirements to refer certain licensing decisions or CCL determinations to interested U.S. agencies, intensive review and transfer of EAR99 technologies to the CCL, and a continued push for bilateral and plurilateral export control agreements covering, at a minimum, AI, quantum, and biotechnology.

Key Takeaways:

In the run up to the election, neither Party will want to be regarded as “weak on China” or U.S. national security issues. And it is unlikely that the Commerce Department and BIS will push back against these recommendations in any public way.

So, while the administration and BIS may not implement every recommendation, the Report marks for the new year a movement toward a stricter policy position with respect to China, if not additional “tough on China” measures and rulemaking. As pressure on U.S. regulatory bodies continues to mount, U.S. industry should anticipate increased regulation and greater difficulty in obtaining licenses for export transactions involving China, even where those transactions involve EAR99 designated items.

Please contact our sanctions and export controls team if you require any assistance navigating this development.

The amendment reflects new multilateral controls agreed upon by the United States and other members of the Wassenaar Arrangement at the 2021 Plenary.

Semiconductor Substrates: BIS’s interim rule amends the Export Administration Regulations (EAR) by imposing licensing requirements on exports of certain Gallium Oxide and diamond semiconductor substrates used in the production of sophisticated devices capable of operating under severe conditions, such as under higher voltages and temperatures. Because of the significant potential for military application of these technologies, the new rule controls the substrates under ECCNs 3C001.d-.f, 3C005.a-.b, and 3C006.

ECAD Software Specially Designed for GAAFET Structure: BIS imposed licensing requirements on certain ECAD software that are particularly suited to the efficient design of GAAFET circuits by controlling ECAD Software “specially designed” for the “development” of integrated circuits having any GAAFET structure that meets parameters set forth under the newly established ECCN 3D006. BIS has delayed the implementation of the new controls on ECAD software for 60 days to allow time for industry to provide comments on the new proposed controls. Industry comments are due no later than September 14, 2022.

Gas Turbine Technologies: While BIS has not identified any engines currently in production that utilize PGC technology, the interim rule notes that PGC technology’s novel use of techniques likeresonant pulsed combustion, constant volume combustion, and denotation to increase the efficiency of gas turbine engines provides military advantages in a variety of applications. The new interim rule adds paragraph 9E003.a.2.e.to the EAR to control the production and development of combustors that use PGC technology. Saving Clause: The new rule contains a saving clause that allows for certain exports that are on dock for loading, laden aboard an exporting carrier, or en route aboard a carrier to a port of export on August 30, 2022 pursuant to actual orders to a foreign destination so long as they have been exported, reexported, or transferred before midnight on September 14, 2022. The saving clause does not apply to export transactions controlled under 3D006, which is subject to a delayed effective date. For shipments subject to 3D006 controls, the interim rule establishes a saving clause for orders that are similarly in-transit on October 14, 2022, so long as the export, reexport, or transfer is completed before midnight on November 14, 2022.

Please contact our export control and sanctions compliance team if you have any questions about these developments.

BIS indicates that most requests for extensions will be reviewed and approved on an expedited basis within two to three business days, depending on the volume of requests received. Extension requests can be submitted via email to [email protected].

Acting Under Secretary for Industry and Security, Cordell Hull, said “The streamlined process will help ensure that exporters with licenses due to expire on or before the end of 2020, who may not have been able to ship orders due to resource constraints during the pandemic, have the opportunity to benefit fully from the authorizations granted on their licenses.

This action is the most recent in a series of confrontational U.S. trade control measures targeting China. An unnamed senior U.S. official described CCCC as “the Huawei of infrastructure.”

BIS added 36 other companies to the list, including parties in France, Hong Kong, Indonesia, Malaysia, Oman, Pakistan, Switzerland, and the UAE for activities deemed contrary to U.S. national security or foreign policy interests.

At a high level, the new rule prohibits the export, re-export, or transfer of certain items produced outside the United States if you know that the foreign-made item will be incorporated into or used in the “production” or “development” of an item intended for a designated Huawei entity or if the foreign-made item will be provided to a designated Huawei entity. The rule also applies to shipments involving certain foreign-made items where Huawei plays any role, including as a purchaser, intermediate consignee, ultimate consignee, or end-user.

The following foreign-made items are subject to the new rule:

• Foreign-made items that are direct products of technology or software subject to the EAR and that are classified under Export Control Classification Numbers (ECCNs) 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991; or
• Foreign-made items that are produced by a non-U.S. plant or major component of a non-U.S. plant if that plant or major component is itself a direct product of U.S.-origin technology or software classified under those ECCNs.[1]

The August 20 rule also adds 38 additional Huawei companies to the Entity List and replaces a temporary general license with an authorization that allows parties to provide limited security cybersecurity research to designated Huawei entities. Other transactions involving Huawei that are subject to the new rule require a license from BIS. Such license requests will generally be reviewed pursuant to a “policy of denial,” unless the transaction involves items that are only capable of supporting equipment at below the 5G level (e.g., 4G and 3G technology).

[1] The new rule contains a savings clause excluding from control certain foreign-made items that were in production prior to August 17, 2020 until September 14, 2020. The savings clause is narrow in scope and should be reviewed carefully.

Prohibited party screening programs should screen every party to a transaction to properly identify shipments that implicate the Entity List’s restrictive controls.

In this post, we highlight some key risks that companies should consider when doing business in the region against the backdrop of rising U.S.-China tensions.

1. Hong Kong

a. The HKAA: Reports, Blocking Sanctions, and Foreign Financial Institution Secondary Sanctions

The first report must identify foreign persons who have materially contributed to the “failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law” within 90 days.* Once identified in the first report, the President may impose sanctions on the listed parties. Within a year, however, the President must impose sanctions on the listed parties, which may include blocking sanctions and visa restrictions. Blocking sanctions essentially prohibit a sanctioned party from conducting business dealings or financial transactions that involve the United States, cutting the sanctioned party off from the United States and much of the global financial system.

The first HKAA report must be followed up within 60 days with a second report identifying foreign financial institutions that knowingly conduct a “significant transaction” with a person identified in the first report. The HKAA then requires the president to impose at least five “secondary sanctions” on the offending financial institution within a year of the report and impose the full menu of ten secondary sanctions within two years of the report.**

Sanctions under the HKAA can be waived if the actions of the listed parties or foreign financial institutions did not have a significant and lasting effect on Hong Kong, the actions are not likely to be repeated in the future, and the party or foreign financial institution has reversed or otherwise mitigated its sanctionable conduct.

b. E.O. 13936 Blocking Sanctions

c. Export Controls & Trade “Normalization” with Hong Kong

Companies that export or import goods to or from Hong Kong need to review these changes and ensure their trade compliance programs account for the updated rules. Companies relying on license exceptions in the past must ensure they have processes in place to obtain individual licenses from U.S. authorities before exporting, re-exporting, or transferring items subject to U.S. export control laws to Hong Kong.

2. Xinjiang Sanctions & Supply Chain Risks

Taken together, these measures amount to significant new trade compliance risks for companies that operate in or deal with companies in Xinjiang. To address these risks, companies should adopt robust due diligence procedures to screen for the involvement of sanctioned parties or supply chain risks that could result in financial or reputational damage to the company.

a. Blocking Sanctions

Even with the general license, the designation of the XPCC could have far-reaching effects for U.S. and global companies that do business in or related to Xinjiang. According to media reports, the XPCC has broad reach in Xinjiang and elsewhere, employing a significant percentage of the population and controlling up to 20 percent of the economy of the region. Companies doing business in the region must adopt rigorous due diligence procedures to identify business partners that may be ultimately owned by the XPCC to prevent violations of the new U.S. sanctions.

b. Entity List Restrictions

As with the designation of the XPCC, the only way to comply with the new Entity List restrictions is to screen transactions for the involvement of sanctioned parties.

c. Supply Chain Risks

• The provision of surveillance goods, services, or technology (e.g., cameras, tracking technology, biometric devices, among others) that may be deployed in Xinjiang;
• Relying on labor or goods sourced in Xinjiang or from factories in China that may utilize forced labor from Xinjiang; and
• Assisting with the construction of internment facilities used to detain Muslim minority groups, and/or manufacturing facilities that are located nearby these internment camps.

The Advisory also identifies the following industries as having a heightened risk of involving forced labor sourced from Xinjiang: Agriculture; 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); and Toys.

Companies involved in these sectors in China, or that may otherwise have supply chain exposure to Xinjiang, should review the Advisory in detail and consider their exposure to Xinjiang-related risks with respect to existing relationships and future transactions.

* * * * *

* In the past, the U.S. government has issued similar sanctions reports well after the statutorily imposed deadline.

** Secondary sanctions on foreign financial institutions (FFIs) authorized under the HKAA include prohibitions on: loans from U.S. financial institutions; designation as a primary dealer in U.S. government debt instruments; as service as a repository of government funds; foreign exchange transactions subject to U.S. jurisdiction involving the FFI; transfers of credit or payments between financial institutions or by, through, or to any financial institution where such transfers/payments are subject to U.S. jurisdiction and involve the FFI; conducting transactions involving property interests of the FFI; exports, reexports, and transfers (in-country) of commodities, software, and technology involving the FFI; and investments by U.S. persons in significant amounts of equity or debt of the FFI. The penalties also include the exclusion from the United States of corporate officers and sanctions on principal executives.

The new rule is effective today, but there is a savings clause that authorizes the use of license exceptions for shipments that were on the dock for loading, already loaded, or already en route by today. Certain deemed exports and deemed re-exports are also authorized under existing license exceptions until August 28, 2020.

This rule did not change the Export Administration Regulations’ (EAR) Country Chart, which means that all items that could be exported, re-exported, or transferred to Hong Kong without a license or the use of a license exception may still be shipped. However, it is likely that further restrictions on exports to Hong Kong are coming, given recent statements from the Commerce and the State Departments and proposed legislation under consideration in the Senate. Continued monitoring of these issues will be necessary to ensure compliance in this rapidly changing landscape.

Bureau of Industry and Security Issues Guidance on Rule

The new rule creates additional due diligence burdens on manufacturers and exporters in the materials processing, technology, electronics, telecommunications, information security, sensors and lasers, and propulsion sectors. Under the new rule, exporters are prohibited from knowingly exporting, reexporting, or transferring enumerated items to the armed forces, certain state-owned enterprises, defense contractors, and other companies that develop, produce, maintain, or use military items in China, Russia, or Venezuela.

Although the rule is effective today, it includes a savings clause that provides that any item on the dock for loading or already en route as of today may be shipped until July 27, 2020. In addition, certain aspects of the newly expanded Electronic Export Information (“EEI”) filing requirements are delayed until September 27, 2020.

Late Friday, BIS published a series of Frequently Asked Questions (FAQs) regarding the new restrictions. Based on the FAQs, BIS expects exporters to perform robust due diligence to determine whether the rule applies. Exports should consider developing and documenting internal processes and procedures to ensure compliance with this rule. Given the administration’s focus on enforcing export controls rules with these countries, especially China, caution is warranted. Below are key aspects of the BIS guidance:

• The restrictions apply to several types of entities. The rule not only applies to traditional foreign military and related organizations, but also to governmental organizations, state-owned enterprises (“SOEs”), and other private companies that support “military end-uses.”
• The restrictions can apply to items that are not intended for a military end-use if those items are for export to a military end-user. An end-use statement that a product will not be used for a military end-use is therefore a necessary, but not a sufficient, part of the due diligence required by this rule.
• Subsidiary agencies or authorities of military end-users may be, but are not necessarily, also military end-users. To determine whether such an agency or authority also qualifies, the exporter must analyze its nexus and relationship to the military end-user, what role the agency or authority serves to the public, and whether it develops or uses military items. The FAQs specifically identify military hospitals as an example of an entity that must be analyzed on a case-by-case basis.
• Affiliated companies are not necessarily subject to the same restrictions as their related entities. Exporters must perform due diligence to determine the relationship between the affiliates. If the parent or subsidiary is directly involved in military end-uses, and the specific end-user’s activities are “relevant” to those end-uses, then it is a factor that the exporter must consider in making its determination. If a direct nexus exists between the two entities, it is very likely that the end-user will be subject to the restrictions in the rule.
• Sales to distributors that sometimes supply military end-users will be subject to the restrictions if the exporter has knowledge that the distributor intends to supply your items for a military end-use. Therefore, sales to distributors that supply military end-users are not necessarily subject to the restrictions. However, it is now necessary to educate your distributors on these restrictions and to gain assurance that your items will not be re-exported or transferred to such end-users.

The first round of sanctions, which are expected to come into force on or around August 22, will prohibit many exports and reexports of goods, software, or technology to Russia controlled for national security reasons under the dual use Export Administration Regulations. Such items include gas turbine engines, encryption items, electronics components, optical equipment, lasers, sensors, electronic components, materials, and certain unmanned systems, among many others. National security controlled items currently require a license to be exported to Russia, but the new rules will require the Commerce Department to apply a ‘presumption of denial’ to future license requests in many instances. In a briefing announcing the new sanctions, the State Department indicated that certain exceptions will be made, including those related to joint space activities, aviation safety, and the activities of U.S. and other foreign companies in Russia. While the scope of the sanctions has yet to finalized, the State Department suggested that up to half of all licensed exports to Russia are controlled for national security reasons. If the sanctions are fully enforced, the impact could be substantial – based on 2016 figures over $1 billion in trade could be impacted.

The first round of sanctions will also include limitations on U.S. foreign aid, arms sales, and U.S. government credit and financial assistance.

A second round of much broader sanctions is also possible if Russia is unable to provide certain assurances within three months. If the President does not certify to Russia’s compliance, the CBW Act requires the application of at least three of the following sanctions:

• A bar on financial assistance to Russia by international financial institutions;
• A bar on U.S. banks making any loans or providing credit to the Russian government, with limited exceptions;
• An export embargo, prohibiting the export of all other goods and technology to Russia;
• An import ban on Russian origin articles;
• A downgrade in diplomatic relations; and/or
• Limitations on air travel between Russia and the United States.

Companies doing business in Russia should carefully monitor developments in this area and consider their exposure under the first and second rounds of sanctions.

The encryption controls remain one of the more confusing parts of the dual use export controls. If you export software from the U.S., or hardware with encryption capabilities, it is important to get classifications right, and to understand and properly apply license exceptions. One classification error can lead to multiple export violations.