Parties can continue to do business with designated individuals on the Unverified List, but if items subject to the Export Administration Regulations are involved—including exports, reexports, or transfers—additional compliance steps are necessary.
The US Department of Commerce Bureau of Industry and Security (BIS) added an additional 33 persons to the Unverified List (UVL), including Wuxi Biologics (Shanghai) Co., Ltd. and Wuxi Turbine Blade Co., Ltd. (jointly referred to as Wuxi) on February 8, 2022. While this does not mean that Wuxi is sanctioned—the result of being named to the Entity List managed by the Commerce Department—it does mean that parties that deal with any of the designated persons must exercise additional caution and diligence when transacting with them.
Many companies maintain business necessary diligence processes, but the need to conduct additional diligence may be viewed as an extra step that impedes the flow of business, delays an already exacerbated supply chain situation, or results in more questions than answers. Given this situation, managing such designations becomes essential to the seamless conduct of global business.
The UVL, the Entity List, and the Denied Persons List are administered by BIS and impose additional obligations involving products, technology, software, materials, or equipment governed by the Export Administration Regulations (EAR) on parties that engage with parties on the lists.
The Entity List identifies specific license requirements for the designated entities and individuals, and often prohibits all exports of items subject to the EAR absent specific BIS authorization. Individuals on the Denied Persons List have had their export rights revoked and thus are not able to conduct exports (or in the case of non-US parties, reexports or transfers) from the United States. Parties can continue to do business with individuals on the UVL, but if items subject to the EAR are involved, they will need to take additional compliance steps designed to resolve BIS’s concerns about the fact that the entity remains “unverified.”
BIS adds entities to the UVL when it is unable to verify the bona fides (i.e., legitimacy and reliability relating to the end use and end user of items subject to the EAR) of such entities because an end-use check or post-shipment verification could not be completed satisfactorily for reasons outside of the US government’s control. Although there are some restrictions, they are nowhere near as problematic as the restrictions for parties on the Entity List.
Parties on the UVL are ineligible to receive items subject to the EAR by means of a license exception, and exporters must file an Automated Export System (AES) record of all exports to parties listed on the UVL. Before exporting, reexporting, or transferring any item subject to the EAR (and for which a license has not been granted by BIS) to an entity on the UVL, the exporter must obtain a specific “UVL statement” from the listed entity.
A UVL designation is relevant only for exports, reexports, or transfers of items “subject to the EAR.” “Subject to the EAR” describes those items and activities over which BIS exercises regulatory jurisdiction.
Items subject to the EAR generally include the following:
In addition, specific activities of US persons, wherever located, related to the proliferation of nuclear explosive devices, missiles, chemical or biological weapons, whole plants for chemical weapons precursors, and certain military and intelligence end use and end users are also subject to the EAR. Activities of US or foreign persons prohibited by any order issued under the EAR, including a Denial Order, are also subject to the EAR.
Fundamental research (when properly defined), published patents, and publicly available information (as specifically defined in the EAR) are not subject to the EAR.
Before exporting, reexporting, or transferring items subject to the EAR, the first step is to obtain an executed UVL Statement. The UVL Statement obtained from the customer must be in writing, signed and dated by an individual of sufficient authority to legally bind the UVL party, and include at least all of the following information:
One UVL statement may be used for multiple exports, reexports, and transfers of the same items between the same parties, so long as the party names, the description(s) of the items, and the export control classification numbers (ECCNs) are correct. If one UVL statement is used for multiple exports, reexports, and transfers, the exporter, reexporter, or transferor must maintain a log or other record that identifies each export, reexport, and transfer made pursuant to the EAR and the specific UVL statement that is associated with each. The log or record must be retained in accordance with Part 762 of the EAR.
Not necessarily, but you are required to conduct additional diligence to verify the parties involved in the transaction, the nature of the transaction, and the details of each transaction.
For example, as a practical matter, the following steps reflect a reasonable and prudent approach to satisfying yourself that a UVL-related transaction can occur:
If you need a license, obtain the required license from BIS (attach the executed UVL statement to the export license application) and submit your electronic export information (EEI) through the Automated Export System (AES), and then you may proceed with the sale to the customer without regard to its status on the UVL.
If a license is not required because a license exception generally applies, you are nonetheless obligated to obtain a license for any party that is included on the UVL. Once the license has been approved, prior to export, you need to submit your EEI through AES.
If your item(s) may be exported to the customer as No License Required (NLR) (for example, EAR99 items), then once the UVL party provides you with the executed UVL statement, you would need to submit your EEI through AES in order to proceed with the transaction.
For all of the above instances, recordkeeping is mandatory and important to have available in case the transactions are questioned at a future date.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Heather C. Sears
Katelyn M. Hilferty
Carl A. Valenstein