BIS Makes Significant EAR Rule Changes Impacting the Military “Catch-All” Controls, License Exception CIV and License Exception APR

On April 28, 2020, the Commerce Department’s Bureau of Industry and Security (“BIS”) published three notices that would amend the Export Administration Regulations (15 C.F.R. Parts 730 – 774) (“EAR”) in order to advance to advance the objectives of the Administration’s National Security Strategy released in 2017, as well as address the challenges discussed in the National Defense Strategy that was published in January 2018. Specifically, the BIS:

• Expanded the military “catch-all” controls on China, Russia and Venezuela;
• Removed License Exception CIV from the EAR; and,
• Proposes to modify License Exception APR.

The following provides a detailed summary of these changes.

1. Expansion of the Military End-Use/Military End-User “Catch-All” Controls

The BIS’s Final Rule will expand the EAR license requirements on exports, reexports and in-country transfers of items destined for military end-use or military end-users in China, Russia or Venezuela as discussed in greater detail below. The rule is slated to take effect on June 29, 2020.

By way of background, the EAR currently imposes license requirements on exports, reexports and in-country transfers of certain items intended for military end-use in China due to a continued lack of transparency regarding products and technologies used by China to strengthen its military activities and capabilities. The EAR also currently imposes license requirements for transfers of certain items to military end-uses and end-users in Russia and Venezuela. The items that are subject to all of these military “catch-all” controls are described in Supplement No. 2 to Part 744 of the EAR.

Under the new Final Rule, for exports to China, Russia and Venezuela, the BIS will:

• Expand the licensing requirements for China to include military end-users in addition to military end-use—currently, Section 744.21 imposes licensing requirements only on military end uses in China;
• Broaden the list of items in Supplement No. 2 to Part 744 to include certain materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion articles in the following ECCNs: 2A290; 2A291; 2B999; 2D290; 3A991; 3A992; 3A999; 3B991; 3B992; 3C992; 3D991; 5B991; 5A992; 5D992; 6A991; 6A996; and, 9B990;
• Expand the range of items in ECCNs 3A992, 8A992 and 9A991 listed in Supplement No. 2 to Part 744 that will trigger license requirements;
• Expand the definition of “military end-use” in Section 744.21(f) to include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, development, or production, of military items described on the United States Munitions List of the International Traffic in Arms Regulations or items classified under ECCNs ending in ‘‘A018’’ or in the ‘‘600 series’’ ECCNs
• Revise Section 758.1 of the EAR to require EEI filings for items destined to China, Russia, or Venezuela regardless of the value of the shipment (unless the shipment is eligible for License Exception GOV)—those EEI filings must also include the correct ECCN regardless of reason for control; and,
• Adopt a license review policy of presumption of denial in Section 744.21(e).

Companies exporting to China, Russia and Venezuela are urged to revisit their policies and procedures for conducting military end-use and end-user due diligence to ensure that they take into account the expanded definitions and license requirements, as well update their internal processes to ensure compliance with the new EEI filing requirements for shipments.

2. Removal of License Exception CIV from the EAR

The BIS removed License Exception CIV (“Civil End Users”) from the EAR thereby requiring licenses to export, reexport or transfer in-country any items on the Commerce Control List (“CCL”) that are subject to national security controls to countries of national security concern. The Final Rule will take effect on June 29, 2020.

License Exception CIV (15 C.F.R. Section 740.5 of the EAR) authorized exports, reexports and in-country transfers of certain national security-controlled items to end-users in Country Group D:1 without prior review or a formal license issued by the BIS provided that the intended end-use of the items was a civilian application and the end-user was civilian.  Countries listed in the EAR’s Country Group D:1 have been determined to pose national security concerns.

The BIS decided to remove License Exception CIV from the EAR in view of the fact that many countries seek to align civil and defense technology development to achieve greater efficiency, innovation and growth. The BIS stated that this integration presents economic challenges to nations, such as the United States, that export high-tech products because individual country goals could also directly support military modernization goals that run contrary to U.S. national security and foreign policy interests. Plus, such integration makes it more difficult for industry to know or be able to confirm whether the end-use or end-users of items proposed for export are destined for military uses or end-users.

As noted above, the Final Rule is slated to take effect on June 29, 2020.  Companies that have been relying on License Exception CIV for the exports, reexports and in-country transactions are urged to assess their new export licensing obligations and begin submitting license applications for future transactions involving national security-controlled commodities, software and technology and end-users located in Country Group D:1.

3. Modification of License Exception APR

The BIS issued a proposed rule to modify License Exception APR (“Additional Permissive Reexports”) under the EAR. Specifically, the BIS is proposing to remove the provision of the exception that authorizes reexports of certain national security-controlled items on the CCL in order to allow the U.S. government to gain better visibility into proposed transactions of national security or foreign policy interest to the United States.  The BIS is soliciting public comments on the proposed modifications no later than June 29, 2020. Comments on this rule may be submitted to the Federal rulemaking portal (www.regulations.gov) using Docket Number BIS–2020–0010.

License Exception APR currently authorizes, among other things, certain reexports between and among certain countries. BIS proposes to remove a portion of this exception due to variations in how the United States and its partners, including partners located in Country Group A:1 of the EAR, perceive the threat caused by the increasing integration of civilian and military technology development in countries of concern. Based on discussions with partner governments and U.S. companies, BIS has observed differences in the licensing review standards for national security-controlled items destined to end-users in Country Group D:1, whereby countries in Country Group A:1 or Hong Kong may approve a license for the reexport of a U.S.-origin item that would have been denied if exported directly from the United States. Currently, paragraph (a) of License Exception APR authorizes the reexport of certain items from a country in Country Group A:1 or Hong Kong to certain destinations, provided that the reexport is consistent with an export authorization from the country of reexport and that the item is not subject to missile technology or nuclear nonproliferation reasons for control described in § 740.16(a)(2). BIS is proposing to remove countries in Country Group D:1 as a category of eligible destinations for national security-controlled items under paragraph (a) of License Exception APR.  Removing that provision and requiring a reexport license for national security-controlled items to Country Group D:1 will allow the U.S. government to review of these reexports to ensure that they are consistent with U.S. policy.

As noted above, BIS is requesting comments on how the proposed change would impact companies who currently use or plan to use License Exception APR. At the present time, BIS does not have a way to readily account for how many items are being authorized for reexport or transfer (in-country) under the provisions of License Exception APR, so it is seeking information as to the volume of transactions affected by this proposed change, how the proposed change would affect the amount of time necessary to complete such transactions in the future, and how the proposed change would otherwise affect current business.

For additional details on all three amendments to the EAR, see: 85 Federal Register 23459 (April 28, 2020); 85 Federal Register 23496 (April 28, 2020); 85 Federal Register 23470 (April 28, 2020).

If you have any questions relating to these recent amendments or other international trade-related issues, please contact us.