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BIS Expansion of Certain End-Use and End-User Controls and Controls on Specific Activities of US Persons

January 27, 2021

The US Department of Commerce’s Bureau of Industry and Security (BIS) published an Interim Final Rule on January 15 to implement changes to, and impose new licensing obligations under, the Export Administration Regulations (EAR) relating to the expansion of specific end-use and end-user controls, as well as controls on specific activities of US persons (the Rule).[1]

As an Interim Final Rule, BIS will take comments from the public through March 1, 2021, and the Rule is effective March 16, 2021.[2] The Rule continues the US government’s reorientation of foreign policy to address and confront increased assertiveness by the governments of China, Russia, and Venezuela. Most notably, the Rule expands the licensing obligations for US persons that seek to provide “support” activities related to weapons of mass destruction (WMDs) and missiles, as well as newly-defined “military-intelligence end uses” or “military-intelligence end users,” even when the US person seeks to provide items that are not subject to the EAR.

Practically, the expanded prohibitions under the Rule appear to also enhance the due diligence obligations of US persons (individuals and entities) to confirm that no items or activities (hardware, software, technology, or technical data) are in support of one of the enumerated prohibitions. In addition, the Rule modifies several other sections of the EAR in accordance with BIS’s obligations under the Export Control Reform Act of 2018 (ECRA), including the following:

  1. Attaches heightened licensing obligations for “military-intelligence end uses” and “military-intelligence end users” in China, Russia, Venezuela, Cuba, Iran, North Korea, Sudan, and Syria for all items subject to the EAR while retaining the existing controls on “military end use” and “military end user[s]” located at 15 C.F.R. § 744.21
  2. Expands restrictions on the export of constituent materials to produce certain chemical and biological weapons
  3. Expands the definition of “use” when applied to certain prohibitions under the EAR
  4. Increases controls on activities of US persons, including activities that do not involve US-origin items
  5. Confirms that BIS may inform parties of additional licensing obligations when dealing with certain persons that are not included on the BIS Entity List

These changes, individually and collectively, reflect an acknowledgment that US political and military adversaries continue to use gaps in US export controls to increase their own capabilities.

Based on the scope of the Rule, domestic and foreign companies should consider the following actions to help determine whether they are impacted by the Rule, and to assess potential exposure:

  1. Identify customers that may meet the definition of “military-intelligence end user” or support a “military-intelligence end user” such that they would be considered as supporting a “military-intelligence end use”
  2. Develop procedures that address how relationships with impacted customers will be managed on a go-forward basis
  3. Identify existing contracts with impacted customers to determine whether or to what extent those agreements address a failure to perform if BIS does not grant a required export license
  4. Consider whether to comment on the Rule and its expected effects

A more fulsome analysis of the Rule, as well as its anticipated impact, may be found below.

Restrictions on Specific Activities of US Persons

While the EAR contains existing restrictions regarding specific activities of US persons in connection with nuclear explosive devices, missiles, chemical and biological weapons, and whole plants for chemical weapons precursors, the Rule expands these restrictions to encompass all activities of US persons even when only non-EAR controlled products are involved. Specifically, the rule revises § 744.6 to prohibit US person “support” of five activities, regardless of whether an export, reexport, or transfer (in country) exists, without first obtaining a license from BIS:

  1. The design, ‘‘development,’’ ‘‘production,’’ operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of nuclear explosive devices in or by any country not listed in supplement no. 3 to [part 744 of the EAR]
  2. The design, ‘‘development,’’ ‘‘production,’’ operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of ‘‘missiles’’ in or by a country listed in Country Groups D:4 or E:2
  3. The design, ‘‘development,’’ ‘‘production,’’ operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of chemical or biological weapons in or by any country or destination worldwide
  4. The design, ‘‘development,’’ ‘‘production,’’ operation, installation (including on-site installation), maintenance (checking), repair, overhaul, refurbishing, shipment, or transfer (in-country) of a whole plant to make chemical weapons precursors identified in ECCN 1C350, in or by countries other than those listed in Country Group A:3 (Australia Group)
  5. A “military-intelligence end use” or a “military-intelligence end user,” as defined in § 744.22(f) of the EAR, in China, Russia, or Venezuela; or a country listed in Country Groups E:1 or E:2

A “military-intelligence end use” means the design, ‘‘development,’’ ‘‘production,’’ use, operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of, or incorporation into, items described on the US Munitions List (USML) (22 CFR part 121, International Traffic in Arms Regulations), or classified under ECCNs ending in ‘‘A018’’ or under ‘‘600 series’’ ECCNs, which are intended to support the actions or functions of a military-intelligence end user. A “military-intelligence end user” means “any intelligence or reconnaissance organization of the armed services (army, navy, marine, air force, or coast guard); or national guard...Military-intelligence end users…include, but are not limited to,” the following:

  1. Cuba: Directorate of Military Intelligence (DIM) and Directorate of Military Counterintelligence (CIM)
  2. China, People’s Republic of: Intelligence Bureau of the Joint Staff Department
  3. Iran: Islamic Revolutionary Guard Corps Intelligence Organization (IRGC– IO) and Artesh Directorate for Intelligence (J2)
  4. Korea, North: Reconnaissance General Bureau (RGB)
  5. Russia: Main Intelligence Directorate (GRU)
  6. Syria: Military Intelligence Service
  7. Venezuela: General Directorate of Military Counterintelligence (DGCIM)

This is a subset of, and distinguished from, “military end use” and “military end user” as defined at 15 C.F.R. §744.21(f)-(g). Although similarly constructed to the existing military end use/user provision, the Rule adds specific activities that can trigger the “use” portion of the rule: design, “development,” “production” and use.

In addition, the Rule also incorporates a new definition of “support” to broaden the prohibited conduct by US persons to any of the following activities:

  1. Shipping or transmitting from one foreign country to another foreign country any item not subject to the EAR with knowledge that it will be used in or by any of the end uses or end users described [above], including the sending or taking of such item to or from foreign countries in any manner;
  2. Transferring (in-country) any item not subject to the EAR with knowledge that it will be used in or by any of the end uses or end users described [above];
  3. Facilitating such shipment, transmission, or transfer (in-country); or
  4. Performing any contract, service, or employment with knowledge that it may assist or benefit any of the end uses or end users described [above], including, but not limited to ordering, buying, removing, concealing, storing, using, selling, loaning, disposing, servicing, financing, transporting, freight forwarding, or conducting negotiations in furtherance of any of the end uses or end users described [above].

The Rule further clarifies that no license exception applies for any exports in furtherance of these four prohibitions in § 744.6(b) relating to WMD and missile proliferation activities. The only current exception that may apply for exports to a military-intelligence end use or military-intelligence end user is if the “support” is “provided in the performance of official duties in furtherance of a US government program that is authorized by law and subject to control by the president by other means.” The Rule also notes that any export license in furtherance of one of the first four prohibitions will be denied if “such support would make a material contribution to the end uses and end users.” Finally, the Rule attaches an (arguably) higher standard to any military-intelligence end use or military-intelligence end user with a presumption of denial.

What This Means for Companies or Organizations Moving Forward

This Rule implicates a number of considerations for parties moving forward. First, commentators in the past have identified gaps in the EAR, including the ability for foreign origin items to be excepted from the associated prohibitions through the application of exclusionary analyses, such as the de minimis and “Direct Product” rules.[3] Now, a US person’s “support” of any of the activities identified in 744.6(b) is sufficient to implicate the associated prohibition even when no US-origin items that are controlled under the EAR are involved. While this prohibition on US person activities has been previously applied to certain activities involving WMDs, the Rule expands the prohibition on the shipment or transmittal of foreign origin (rather than only US-origin items) in furtherance of these activities, as well as to military-intelligence end uses and users.

Second, while the US government has initially identified eight entities that are considered “military-intelligence end users” (in addition to any intelligence or reconnaissance organization of the armed forces), this identification does not limit or eliminate a party’s obligation to verify that it is not supporting a military-intelligence end user or use. Parties should still evaluate foreign parties against the factors enumerated in the definition of “foreign-military intelligence use” to determine whether the party is a “foreign-military intelligence user,” as well as evaluate the intended end-use. These currently identified parties can provide guidance on the characteristics that BIS uses, to designate military-intelligence end users moving forward.

Third, the Rule moves away from the compound-requirement of the definition of “use” to a disjunctive test that is satisfied by any one of the following activities: operation, installation (including on-site installation), maintenance (checking), repair, overhaul, and refurbishing. Previously, each of the previous six elements must have been satisfied in order to qualify as “use” under the as-written definition. This interpretation was the subject of an Inspector General Report from March 2004, where the IG raised concerns that a definition of “use” that required all six elements would exclude a range of activities that raise national security concerns.[4] The conclusions from that report appear to have been incorporated into the updated interpretation of the term, “use.” Noting that this conjunctive definition was inconsistent with Section 1754(d)(1)(B) of the Export Control Reform Act of 2018, the Rule separates and notes that each individual activity is sufficient to trigger the prohibition. This broadened definition will subsequently capture more activities since each constituent act is sufficient to trigger the new licensing obligation under the EAR.

Fourth, the addition of the “support” standard in 15 C.F.R. § 744.6(b)(6) means that parties’ may no longer reasonably rely solely on an item’s export classification, or a cursory analysis of the end use of the item, to determine its licensing obligations. Instead, a party’s licensing analysis will likely need to incorporate an assessment of the underlying system’s export classification on which their items will be used. Without this information, it may be difficult to envision how a party could demonstrate to BIS that it is seeking to comply with the terms of the EAR.

Finally, the Rule reconfirms the ability of BIS to use “is-informed” letters to attach additional obligations to entities that, while not included on the BIS Entity List (with an associated additional licensing obligation), nevertheless present an unacceptable risk of use in, or diversion to, specified end uses or end users. While this is a practice that has historically been employed by BIS, it is unclear based on the rule when an “is-informed” letter would be used in place of a designation under the Entity List, thereby informing the public of a specific licensing obligation for the identified party. Practically, parties should ensure that they have effective communication pathways to communicate any restrictions that are passed on by BIS.

Contacts

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:

Washington, DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Heather C. Sears
Patricia Cave
Ivon Guo
Katelyn Hilferty
Christian Kozlowski
Charles Rush



[1]   86 Fed. Reg. 4865 (Jan. 15, 2021).

[2]   On January 20, 2021, President Biden’s chief of staff issued a memorandum directing federal agencies to, inter alia, consider whether to suspend any regulations that have been published in the Federal Register or rules that have been issued not taken effect. It is unclear whether the Biden administration may issue updated regulations that will delay or suspend the implementation of the regulation prior to its effective date. We discuss the details of the regulation in anticipation of the implementation of these regulations.

[3]   See 15 C.F.R. §§ 734.4(c)-(e), 736.2(b)(3).

[4]   See US Department of Commerce Office of Inspector General, IPE-16176, Bureau of Industry and Security: Deemed Export Controls May Not Stop the Transfer of Sensitive Technology to Foreign Nationals in the U.S. 14 (Mar. 2002) (“…some of BIS’ senior licensing officials maintain that for consistency purposed in the EAR, the word ‘and’ in the definition [of ‘use’] infers that all of the activities have to be accomplished to constitute ‘use.’ We disagree.”).