While export controls related to weapons proliferation are not new, recently their scope was significantly broadened by the U.S. Department of Commerce Bureau of Industry and Security's new controls regarding military-intelligence end users and end uses, and its expansion of end-use controls related to nuclear, biological, and chemical weapons and missiles, say Kirkland attorneys Mario Mancuso, Anthony Rapa and Carrie Schroll in this article for Law360.
On Jan. 15, the U.S. Department of Commerce's Bureau of Industry and Security published an interim final rule amending the Export Administration Regulations, expanding existing end-use and end-user controls and prohibitions on U.S. person activities.
Continuing BIS' recent focus on diversion of items subject to the EAR to bolster U.S. adversaries' military capability, the interim final rule restricts exports to and other support for "military-intelligence" end users and end uses in China, Russia, Cuba, Iran, Syria and Venezuela. In addition, the interim final rule broadens other existing end-user and end-use controls, which will impact a larger set of transactions.
The interim final rule will go into effect March 16, 2021 (subject to any change in approach by the Biden administration), and the public is invited to submit comments until March 1.
Also on Jan. 15, BIS issued a final rule adding China National Offshore Oil Corporation Ltd., or CNOOC, to the Entity List, thereby establishing a licensing requirement for export to CNOOC of any item subject to the EAR, subject to certain exceptions set out below. In the same action, BIS added Beijing Skyrizon Aviation Industry Investment Co. Ltd. to the Military End User List, giving rise to a licensing requirement for export to Skyrizon of a broad range of items listed on the Commerce Control List.
The rule designating CNOOC and Skyrizon was effective immediately.
The View From Washington
The interim final rule, part of the outgoing Trump administration's final push to impose significant trade restrictions directed at China and other identified U.S. "adversaries," implements certain provisions of the Export Control Reform Act. Through this action, BIS is establishing broad new controls regarding military-intelligence end users and end uses, while significantly expanding end-use controls related to nuclear, biological, and chemical weapons and missiles.
Furthermore, the designation of CNOOC, China's third-largest oil company, is particularly notable, in that it cuts off CNOOC from all U.S. hardware, software and technology, except for certain items identified below.
Following the inauguration of President Joe Biden on Jan. 20, it remains to be seen whether the Biden administration will change course at all with respect to the rules described above, such as by taking action regarding the interim final rule before its effective date of March 16 or delisting CNOOC and/or Skyrizon. No such actions are immediately anticipated, and the Biden administration has not commented on the rules.
Scope of the Rule
Military-Intelligence End Users and End Uses
The interim final rule imposes new restrictions related to military-intelligence end users and end uses in China (including Hong Kong), Russia, Venezuela, Cuba, Iran, Syria and North Korea. Specifically, with respect to such end users and end uses in those countries, the interim final rule imposes license requirements on (1) the export, reexport or transfer of any items subject to the EAR, including EAR99 items; and (2) U.S. person "support."
The interim final rule defines key terms as follows:
- "Military-intelligence end user" is defined as any intelligence or reconnaissance organization of the armed services (army, navy, marine, air force, or coast guard) or the national guard.
- "Military-intelligence end use" is defined as the design, development, production, use, operation, installation, maintenance, repair, overhaul or refurbishing of, or incorporation into, items described on the U.S. Munitions List (Title 22 of the Code of Federal Regulations, part 121, International Traffic in Arms Regulations), or classified under Export Control Classification Numbers ending in "A018" or under the "600 series" on the Commerce Control List, which are intended to support the actions or functions of a "military-intelligence end user."
- "Support" is defined broadly to target a range of actions U.S. persons may take regarding items not subject to the EAR in relation to military-intelligence end uses or end users, including shipping, transmitting, or transferring such items; facilitating such shipments, transmissions, and transfers; and performing any contract, service, or employment with knowledge that such activities will assist military-intelligence end uses or end users.
Other End-Use Controls
The interim final rule also expands existing controls regarding exports and U.S. person support related to missile-related and nuclear, biological, and chemical weapons-related end-uses.
First, while the existing controls prohibit U.S. person activities that "directly assist" the listed weapons proliferation end uses, the interim final rule replaces the term "directly assist" with the term "support" which, as noted above, covers a much broader array of actions. BIS also clarified, as noted above, that restrictions on U.S. person activities extend to dealings in items not subject to the EAR. To that end, the rule replaces existing restrictions on U.S. person "export" and "reexport" of items with the broader activities of "shipping" and "transmitting" items.
Furthermore, within each end-use control, the interim final rule replaces the defined term "use" with all of its defined constituent parts in the disjunctive. Under the new rule, any one of operation, installation, maintenance, repair, overhaul, or refurbishing will trigger the restrictions. Parties can no longer avoid the restrictions by determining that one of the components of "use" is missing from their activities.
The interim final rule also provides BIS with the authority to inform parties that a license is required for transactions where there is an "unacceptable risk" of diversion to parties designated on the Entity List. Companies should be aware that dealings with nondesignated parties could still be subject to licensing requirements where BIS has determined that a party is acting as "an agent, front, or shell company" for a party on the Entity List.
CNOOC Entity List Designation; Skyrizon Military End User List Designation
BIS designated CNOOC on the Entity List based on its involvement in China's "efforts to assert its unlawful maritime claims in the South China Sea, as well as efforts to intimidate and coerce other South China Sea coastal states from accessing and developing offshore marine resources."
Pursuant to this, effective immediately, a license will be required to export, reexport or transfer (in country) to CNOOC all items subject to the EAR, including EAR99 items. Specifically, this includes (1) items located in the United States; (2) U.S.-origin items, wherever located; (3) non-U.S.-origin items that incorporate more than 25% "controlled" U.S. content; and (4) certain non-U.S. items that are the "direct product" of certain U.S. technology.
Notably, the restrictions do not apply to the following hydrocarbons as described in specified Harmonized System codes set out in the BIS rule: crude oil, condensates, aromatics, natural gas liquids, hydrocarbon gas liquids, natural gas plant liquids, refined petroleum products, liquefied natural gas, natural gas, synthetic natural gas and compressed natural gas.
Additionally, in the same action, BIS added Skyrizon to the Military End User List, establishing a licensing requirement for the export, reexport and transfer (in country) to Skyrizon of certain CCL-listed items set out at Supplement No. 2 to Part 744 of the EAR.
- Along with other actions by the outgoing Trump administration during the presidential transition period, the interim final rule adds more risk to dealings with China, and highlights the prior administration's focus on controlling exports of sensitive items to China and restricting U.S. dealings with Chinese military-affiliated entities, an effort expected to continue in the Biden administration.
- Companies will need to refine their know-your-customer diligence designed to identify any military nexus when dealing with customers in China, Russia and Venezuela, and in particular will need to find methods for pinpointing any nexus to military-intelligence end uses and end users.
- Beyond the focus on China, the interim final rule represents another step by Commerce to continue implementing the Export Control Reform Act of 2018 by revising existing controls, including by expanding the scope of controls to cover additional activity that Commerce believes could threaten U.S. national security.
- While export controls related to weapons proliferation are not new, the interim final rule significantly expands their scope, meaning that diligence into a customer's anticipated end uses will be critical to assessing licensing requirements, and that transactions that historically did not require a license may need authorization going forward.
- Companies supplying products that could be used for weapons proliferation may want to consider requiring customers to provide written assurances regarding end uses, as the interim final rule may sweep in activity with a less direct nexus to weapons proliferation end uses than before.
- The designation of CNOOC is particularly notable, as it cuts off China's third-largest oil company from all items subject to the EAR.
- It remains to be seen whether the Biden administration will seek to modify the approach described herein, in particular with respect to the interim final rule slated to go into effect on March 16, or take any related actions.
Mario Mancuso and Anthony Rapa are partners, and Carrie Schroll is an associate, at Kirkland & Ellis LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.