United States: BIS Amends the EAR to Enhance Certain End-Use and End-User Controls as well as Controls on Certain Activities of US Persons

On January 15, 2021, the Commerce Department’s Bureau of Industry and Security (“BIS”) published an interim final rule (“Rule”) amending various provisions of the Export Administration Regulations (“EAR”) to implement certain provisions of the Export Control Reform Act of 2018 (“ECRA”).  Among other things further outlined below, the Rule imposes new restrictions on specific activities of US persons.  By way of brief background, the EAR generally controls transactions involving US origin items (i.e., goods, software, technology) regardless of whether US or non-US persons are involved. One narrow exception to this has existed prohibiting certain nuclear  activities by US persons regardless of whether they involve items subject to the EAR.  This Rule expands such controls on the activities of US persons.

Though the Rule was set to take effect on March 16, 2021, reports indicate that its implementation could be delayed due to a regulatory freeze put in place by the Biden Administration, as announced on January 20, 2021, by the White House.  We therefore anticipate further guidance as to whether the current administration will implement the Rule and, if so, when prior to its effective date.

      I.          Expanding Restrictions on Specific Activities of US Persons

The current EAR § 744.6 already imposes license requirements on US persons’ specific activities in connection with nuclear explosive devices, missiles, chemical or biological weapons, and whole plants for chemical weapons precursors. The Rule expands these existing restrictions by

• broadening the scope of activities restricted as to US persons in EAR §§ 730.5, 734.5, and 736.2(b)(7) to include not only activities in connection with nuclear explosive devices, missiles, chemical and biological weapons, and whole plants for chemical weapons precursors, but also activities supporting military intelligence end-uses and end-users absent a license from BIS;

• expanding the destinations with respect to which US persons’ activities are restricted (i) in connection with nuclear explosive devices to include any country not included in the list of “Countries Not Subject to Certain Nuclear End-Use Restrictions (contained in Supplement No. 3 to Part 744) and (ii) in connection with certain “missile” end uses to include Cuba; and

• making several changes to EAR § 744.6, including,
  • broadening the scope of prohibited activities of US persons to include not only exports and reexports, but any acts of shipping or transmitting, which serves to emphasize that the restrictions on US persons’ activities apply to foreign-origin items not subject to the EAR;
  • providing a list of examples of types of activities that are licensable as to US persons;
  • imposing licensing requirements for those US persons that “support” the end-uses and end-users enumerated in EAR § 744.6, with the term “support” broadly defined; and
  • adding a new restriction on the activities of US persons that support certain “military-intelligence end uses” and “military-intelligence end-users,” as these terms are defined in the newly added EAR § 744.22(f) (see below).

BIS clarifies in the Rule that the scope of US person activities controlled under EAR § 744.6 does not include activities that are subject to regulatory controls (i.e., a license requirement or general prohibition) administered by a federal agency other than the Department of Commerce (such as the Department of Energy, the Department of State, and the Department of the Treasury).

    II.          Broadening Restrictions on Military-Intelligence End-Uses and End-Users

In April 2020, BIS amended the EAR § 744.21 to tighten military end-use and end-user controls against China, Russia, and Venezuela. As amended at that time, EAR § 744.21 imposed a license requirement on the export, reexport, and transfer (in-country) of items listed in Supplement No. 2 to Part 744 of the EAR to military end-uses or military end-users in China, Russia, or Venezuela.  Please see our prior blog post for details about the amendments.

This Rule adds a new EAR § 744.22, which imposes supplemental license requirements on the export, reexport, or transfer (in-country) of all items subject to the EAR when the items are intended for “military-intelligence end-uses” or “military-intelligence end-users” in China, Russia, Venezuela, or a country in Country Groups E:1 and E:2 (currently including Cuba, Iran, North Korea, and Syria).  Conforming changes were also made to military end-use/end-user controls in EAR § 744.21 so as to avoid licensing overlap between the provisions.  According to the Commerce Department’s press release, the foreign military-intelligence organizations impacted by the amendments are:

• Cuba’s Directorate of Military Intelligence (DIM) and Directorate of Military Counterintelligence (CIM)
• China’s Intelligence Bureau of the Joint Staff Department
• Iran’s Islamic Revolutionary Guard Corps Intelligence Organization (IRGC-IO) and Artesh Directorate for Intelligence (J2)
• North Korea’s Reconnaissance General Bureau (RGB)
• Russia’s Main Intelligence Directorate (GRU)
• Syria’s Military Intelligence Service
• Venezuela’s General Directorate of Military Counterintelligence (DGCIM).

  III.          Expanding Restrictions on Certain Chemical and Biological Weapons End-Uses

The existing EAR § 744.4 imposes license requirements on exporting, reexporting, or transferring (in-country) an item subject to the EAR if the item is intended for certain end-uses in connection with chemical or biological weapons in or by any country or destination. To advance US weapons of mass destruction (“WMD”) nonproliferation policy as set forth in ECRA, BIS amends EAR § 744.4 by expanding the scope of restricted end-uses by adopting a broader definition of “use”, as well as broadens the scope of restricted items. Below please find a chart illustrating the amendments.

  IV.          Activities Associated with “Use”

Sections 744.3 and 744.4 of the EAR, respectively, impose licenses requirements on the exports, reexports, or transfers (in-country) of all items subject to the EAR for specified end-uses (including “use”) in connection with certain rocket systems, unmanned aerial vehicles (UAVs), or chemical or biological weapons. Likewise, EAR 774.6 imposes a license requirement on specific US person activities in support of certain end uses in connection with nuclear explosive devices, rocket systems, UAVs, or chemical or biological weapons.  BIS is expanding the definition of “use” in each of EAR §§ 744.3, 744.4, or 744.6 to make clear that any one of the following activities (and not all activities together) would trigger a license requirement: operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing).

    V.          Establishing Restrictions on Transactions Intended to Circumvent Entity List-Based License Requirements

EAR § 744.11 imposes license requirements on a transaction to which an entity on the Entity List (Supplement No. 4 to Part 744 of the EAR) is a “party”. The Entity List-based license requirements generally only apply to listed entities and not to parties that are not on the Entity List but are affiliated with listed entities (e.g., parties that co-located with, or that are subsidiaries, parent companies, or sister companies, of the listed entity). However, transactions involving affiliated parties give rise to risks that an affiliated entity is acting as an agent, front, or a shell company for the listed entity to circumvent the license requirement, or that the items in the transaction may ultimately be diverted to the listed entity.

This addition is consistent with other provisions of Part 744 (i.e., EAR §§ 744.2(b), 744.3(b), 744.4(b), 744.9(b), 744.17(b), 744.21(b), and 744.22(b)) that authorize BIS to inform exporters, reexporters, or transferors of a license requirement based on an unacceptable risk of use in, or diversion to, specified end-uses or end-users.