On May 1, 2022, the amendment to the Ministerial Ordinance for Exporter Standards and relevant administrative notices (the “Amendment”) came into force. Upon enforcement of the Amendments, so-called “Deemed Exports” will be interpreted in a more restrictive manner than previously. Although export licenses were not required for the provision of technology information between Japan residents, pursuant to the Amendment, if certain conditions are met, such provision may be regarded as a “Deemed Export” and subject to an export license under the Foreign Exchange and Foreign Trade Act (“FX Act”).
Where a company handles any information that may be subject to export control under the FX Act, it is required to take additional measures such as collection of a written statement from relevant person, including its new employees. Given the ramifications of the Amendment, it is essential for all companies operating in Japan to understand what is required under the Amendment and then promptly implement export control in response to the Amendment.
1. What is a ”Deemed Export”
FX Act controls exports of both “goods” and “technology.” Unlike the export of goods, the export of technology does not require a physical movement of “technology”. Due to this nature of technology exports, information subject to export control may be transferred abroad if an individual receives technology information within Japan and then moves to abroad.
As individuals with no domicile in Japan (“Non-resident”) are more likely to move abroad, even if technology information is provided in Japan from an individual having its domicile in Japan ( “Resident”) to a Non-resident, this is regarded as a “Deemed Export” of technological information, which is subject to an export license under the FX Act. Prior to the Amendment, the provision of technology information subject to export control from a Resident to another Resident in Japan had never been construed as a “Deemed Export” and it had therefore been understood that Resident-to-Resident information transfer is not subject to export control.
In this regard, natural persons who have their own addresses or domiciles in Japan are generally regarded as “Residents.” Notably, foreigners may also be classified as “Resident” if they: (a) work at an office in Japan; or (b) continue to stay in Japan for six months or more.
2. Changes in interpretation as to “Deemed Exports”
As addressed above, the provision of technology information between Residents in Japan was neither regarded as “Deemed Export” nor subject to export control. However, the Amendment identifies certain types of information transfer (“Designated Types”) that are substantially the same as the provision of technology information to a Non-resident and therefore subject to the requirement for an export license:
Type 1: Provision to an individual who: (a) is employed by a foreign government or foreign entity under an employment contract; and (b) is subject to instruction of such foreign government/entity or has duty of care of good manager in relation to the government/entity.
Type 2: Provision to an individual who is substantially under the control of a foreign government due to economic interests.
Type 3: Provision to an individual who acts under instruction of a foreign government in Japan.
3. Applicable Case
Type 1 mentioned above is most likely applicable to private companies with their business base in Japan. Relatedly, the following are examples that may be regarded as a Type 1 Deemed Export:
- An employee or officer of a Japanese company who also has their position in a non-Japanese group company.
- A Japanese company accepting a secondment from a foreign company for a certain project and certain subject information being shared with the secondee.[1]
- A company generally allowing its employees to engage in a secondary job and an employee also working for a foreign entity under an employment or service contract with a foreign entity.[2]
4. Practical Steps
As mentioned above, certain transfers of information made in the ordinary course of business may fall within the range of “Deemed Exports” that now require an export license. Consequently, we recommend a review of internal practice for export regulatory compliance, including:
1. Confirming whether any information handled could constitute a “Deemed Export”:
- Identify technology information subject to export control owned by a Japanese entity.
- If a Japanese entity handles technology information subject to export control, confirm to what extent the subject information is shared.
- Confirm status of secondary job/position of its employees at foreign entities (including group companies).
- If an employee/officer has a secondary job/position, check whether or not the secondary employer falls under the definition of “Foreign Entity” under the FX Act.
- Confirm the place where the employee/office provides its workforce to the secondary employer and the secondary employer’s purpose of use of technology information (i.e., check the possibility that the so-called catch-all restriction applies).
2. Setting up an internal system including internal rules:
- Establish an internal process to check applicability of any of the Designated Types to information internal sharing.
- Clarify whether a secondary job is allowed or not and, if allowed, add a clause in the Work Rules that requires employees to make a prior disclosure and seek approval for secondary jobs.
- Add a clause in the Work Rules that requires employees to disclose if an employee falls, or could fall, under any of the Designated Types.
- Collect a written statement from new employees/officers, which represents no relationship with any foreign entity or foreign government subject to any Designated Type.
3. Measures to prevent “Deemed Exports” without an export license and license application:
- Identify the scope of technology information subject to export control can be shared and implement physical and technical measures to prevent information leakage outside a “wall.”
- Remove access of employees/officers who do not need to know technology information subject to export control from the scope of information sharing.
- Where technology information subject to export control needs to be shared with the employee/officer, seek termination of relationships between employees/officers and subject foreign entities in a manner that could falls under any of the Designated Types.
- Where a relationship with a subject foreign entity cannot be terminated, apply for export license to share a certain technology information with the employee/office in question. A general export license is also available if the technology information can be shared with the employee/office on multiple occasions.
We presume many companies have never checked their internal information management in the context of export control. However, due to the Amendment and the ramifications thereof, internal information sharing now may be subject to the requirement for an export license as it is regarded as a “Deemed Export.” Consequently, we recommend reconfirming information management practices with respect to technology information and taking necessary measures for export compliance.
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If you would like to discuss any of the issues raised in this alert, please contact us.
[1]In the event that a Japanese company and a foreign company agree the Japanese company’s priority of control, provision of information to the subject individual would not constitute “Deemed Export.”
[2] Same as above.
