UPDATE: 6/26/20—The BIS has delayed certain elements of the regulatory changes impacting China, Russia and Venezuela scheduled for June 29, 2020. The requirement for EEI (AES) filings for all shipments, regardless of value or ECCN, destined for the three countries has been updated to require filings for shipments of any value for ECCNs listed in Supplement 2 to Part 744 of the EAR. This is in addition to existing AES filing requirements.
The alert also states that the requirement of EEI filings for all items destined to China, Russia and Venezuela is postponed to September 27, 2020, a three-month extension.
Effective June 29, 2020, changes to the Export Administration Regulations (EAR) will directly impact U.S. exporters and U.S. origin goods transported to and within China, Russia, and Venezuela. The changes have three key elements as defined by the Bureau of Industry and Security (BIS), in two notices—first notice, second notice—both dated April 28 2020.
The most significant impact to exporters, of all sizes, is that any and all exports to China, Russia, and Venezuela will now require an Automated Export System (AES) filing of Electronic Export Information (EEI) data. Prior to June 29, the regulations have called for filings to only be done when a shipment has items with Harmonized Tariff (HTS)/Schedule B numbers over $2,500 in value, or if shipping against a license or certain license exceptions. With the update, not only will all values to the three countries require filings, but the Export Commodity Control Number (ECCN) must be listed for EAR99 shipments; previously, it was acceptable to leave the ECCN field blank, if the commodity was EAR99.
Exporters of low value exports, who will face this new requirement, must use great caution to assure that their ECCN is correct—some commodities may not be EAR99 and may or may not trigger a licensing requirement.
Expansion of Military End User and End User Controls
Also, effective June 29, 2020, the BIS is expanding license requirements on exports, reexports, and transfers (in-country) of items intended for military end use in China, Russia, or Venezuela to align with the objectives of national security strategies. The rule now expands to cover “military end users” in addition to “military end use” in China. This means that U.S. exporters will need to perform intense due diligence on Chinese parties for licensing requirements; not only will they need to review the use of the product but also the possibility of the facility being engaged in activity for direct benefit of the Chinese military. As China has a significantly widespread civil-military integration, this review will need to be cautious and well documented.
The current definition of military end use refers both to direct use and indirect use. This rule broadens the definition of military end use beyond any item for the ‘‘use,’’ ‘‘development,’’ or ‘‘production’’ to include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, ‘‘development,’’ or ‘‘production,’’ of military items. The updated definition is intentionally broad in scope, which forces more opportunities for government review, through the licensing process, prior to distribution into the Chinese market.
The intent of this change is to support the national security and foreign policy objectives of the United States by broadening the United States government’s visibility into and ability to deny or condition exports, reexports, and transfers (in-country) involving certain items on the Commerce Control that are destined to military end users or end uses in China, Russia, or Venezuela.
This rule will also add new ECCNs to Supplement No. 2 to part 744 of the EAR, “List of items subject to the military end-use license requirement of 744.21”. Some of the categories to be added or updated include materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion. The change will add ECCNs 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990 to the currently listing as well as expand the range of items under ECCNs 3A992, 8A992, and 9A991.
Removal of License Exception Code CIV (Civil End Users)
Effective June 29, 2020, license exception CIV will be removed from the EAR and parts 740.5 will be reserved for future use. CIV currently authorizes exports and reexports of items on the Commerce Control List (CCL)—Supplement No. 1 to part 774 of the EAR—to civilian end users that have a license requirement to the ultimate destination pursuant to the Commerce Country Chart—Supplement No. 1 to part 738 of the EAR—for national security reasons only. The applicability of this exception was limited to a group of countries known as D:1 but is primarily utilized for China.
The removal of this code has been discussed in recent years. Leading up to this, the BIS has raised concerns over the due diligence of CIV movements and the red flag of in-country transfers to military parties. In the April 28 Federal Register notice, the BIS explains, “many countries seek to align civil and defense technology development for many reasons—to achieve greater efficiency, innovation, and growth. This can present an economic challenge to nations that export high-tech products, including the United States, as individual country goals could also directly support military modernization goals contrary to U.S. national security or foreign policy interests.” It is the expectation that with the removal of CIV more license applications will be reviewed by the BIS, allowing for a deeper review of possible diversion to military parties in countries working to the contrary of U.S. national security policy.
These changes will pose due diligence and auditing risks to U.S. exporters, as they navigate the ever-changing landscape of export reform. Exporters must be confident in the ECCNs of their product, submit accurate filings on new instances of AES filings and conduct thorough due diligence of Chinese customers to assure compliance with the new definition of military end user.
As fines, penalties and revocation of export privileges can happen, any exporter who is new to these areas should reach out to Mohawk Global Trade Advisors for advice and file for commodity rulings, where necessary.
By Kristen Morneau, Senior Advisor