US Department of Commerce Publishes Rules that Greatly Expand the Requirement for Obtaining EAR Licenses and Filing EEI for Exports of Products Destined for China, Russia, and Venezuela
By: Keil J. Ritterpusch, Senior Compliance Associate, and Jenny Hahn, President
On April 28, 2020, the U.S. Department of Commerce’s Bureau of Industry & Security (“BIS”) published two new final rules and one proposed rule to the Export Administration Regulations (“EAR”) which substantially affect U.S. exporters of goods to China, Russia, and Venezuela. In general, the rule:
- Broadens license requirements in EAR Section 744.21 to apply to military end users in China and expands the scope of items in the List of Items Subject to the Military End-Use License Requirement of Section 744.21 (Supplement No. 2 to Part 744);
- Adopts a license review presumption of denial in Section 744.21(e);
- Broadens the definition of “military end use” by expanding the definition to include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or [emphasis added] “production” of military items;
- Clarifies the controls on exports of “600 series” .y and 9x515.y Export Control Classification Numbers (“ECCNs”) to China, Russia, or Venezuela by relocating them from Section 744.21 to the License Requirements sections of each ECCN;
- Designates regional stability (“RS”) as the reason for control of these items; and
- Expands Electronic Export Information (“EEI”) filing requirements for exports to China, Russia, and Venezuela.
The regulatory changes that will affect the greatest number of exporters is the requirement to file EEI for all exports to China, Russia, and Venezuela regardless of value (or end use or end user) of products on the EAR’s Commerce Control List (“CCL”) and to provide the correct export classification on such EEI submissions. The EEI filing requirement for EAR99 items, which are by definition not included on the CCL, remains the same: EEI submissions are required for exports of EAR99 items only when the value of the export is $2,500 or more per Harmonized Tariff Schedule (“HTS”) code on the EEI. We believe the consequence of this regulatory revision is even more widespread than the expanded requirements for obtaining export licenses (and the presumption of denial) for exports to military end uses and military end users in China, Russia, and Venezuela.
The following are some of the key points for exporters related to the regulatory changes:
EEI Submissions for ALL Exports to China, Russia, and Venezuela (Except EAR99 Items):
Effective June 29, 2020, exporters will need to file EEI submissions in the Automated Export System (“AES”) portal within the Automated Commerce Environment (“ACE”) website – ace.cbp.dhs.gov – for ALL exports of items listed on the CCL to China, Russia, or Venezuela, regardless of value, end use, or end user. Prior to this final rule being published (82 FR 23459), exports that were designated as No License Required (“NLR”) did not require the filing of EEI unless the value of the export transaction was $2,500 or more per HTS code. Now, only EAR99 items below the $2,500 threshold do not require EEI submissions, per FTR Section 30.37(a).
Correct Export Classification is Required for ALL Exports to China, Russia, and Venezuela:
In addition to requiring EEI submissions for ALL exports of items on the CCL to China, Russia, or Venezuela, the new rule provides that exporters must include the correct Export Control Classification Number (“ECCN”) for each item listed on EEI for exports to China, Russia, and Venezuela. This new requirement underscores the responsibility U.S. exporters have to correctly classify the products they export.
Currently, for exports to China, Russia, and Venezuela, exporters may state on export documents and in the EEI filing (when required by the EAR) that their products are No License Required (“NLR”) – citing license code “C33” on the EEI. These exporters were not required, by either the EAR or the Foreign Trade Regulations (“FTR”), to provide the exact export classification of the items being exported if the products do not require a license.
Going forward, exporters should not assume that their products that were classified as “NLR” are classified as EAR99 items. Over the years we have encountered many instances where exporters have believed that “NLR” means “EAR99”. While all EAR99 products are, in fact, NLR to all worldwide end users, except prohibited end users and sanctioned countries, “”NLR” is not an export classification. “NLR” is a conclusion under the EAR that results from first determining the export classification, then reviewing the reasons for control for export of products under the ECCN, and, then, determining that No License is Required for the export. Only after establishing the proper ECCN can one arrive at a conclusion of “NLR”.
It would be a grave mistake for a U.S. exporter to unilaterally state that its products are EAR99 after June 29, without first revalidating the export classification for any export to China, Russia, or Venezuela, because misstatements of export classification on an EEI and failure to file EEI each subject the exporter to a $10,000 fine per violation under the FTR. Exporters must perform appropriate export classification analysis to avoid substantial risk of misclassification.
Export Licensing is Required for Exports of Most Commodities to China, Russia, or Venezuela Where The End Use is Military or End User is Military … With Presumption of Denial of Said Licenses:
The EAR now requires an export license to be obtained prior to exports to China, Russia, and Venezuela of items that are currently only restricted to terrorism supporting countries under Anti-Terrorism (“AT”) controls of the EAR, when the export is to a military end user or for a military end use. Moreover, there is an express policy of denial for such export license applications.
Products falling under the following ECCNs will require licenses for export to military end users and military end uses in China, Russia, and Venezuela beginning June 29, 2020:
- 8A992, and
Beyond the broad expansion of the products that require a license for export to military end uses and military end users in China, Russia, and Venezuela, the new rules also greatly expand the definition of what is a “military end use”. The new definition is so open-ended that FD Associates would not be surprised to see BIS issue clarifying Frequently Asked Questions (“FAQs”) or narrow the definition before the new rule goes into effect on June 29, 2020. Under the new rule, any product that is exported that “supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or [emphasis added] “production” of any military item is a “military end use”. There is no limitation for products that are for use both for non-military end uses and military uses. So, for example, if software that is controlled under ECCN 5D992 – having encryption built-in, but being available for export on a “mass market” basis – is used in China to aid a Chinese company that manufactures both military aircraft parts and commercial aircraft parts, it is arguable that the software would be for a “military end use” under the revised rule.
Recommendations for Exporters:
Potential concerns for exporters arise in product misclassification and failure to conduct appropriate due diligence when conducting business with China, Russia and Venezuela. While both product classification and transactional due diligence are core tenets of a company compliance program, exporters are on notice that the government is watching and the risks of export violations, government queries, inspections, detentions, seizures, and fines are substantially magnified for transactions involving China, Russia and Venezuela.
In light of the substantial increase in potential liability for exporters, FD Associates, Inc. strongly encourages all exporters who export products to China, Russia and/or Venezuela to evaluate all products that they have self-classified as EAR99 and revalidate the export classification per the Order of Review in the EAR, before exporting to China, Russia and/or Venezuela.
FD Associates, Inc. also recommends that exporters perform added due diligence, including the collection of detailed end use and end user statements and associated research and screening of the end users and end uses of their products in China, Russia, and Venezuela, to validate the actual end users and end uses. This is especially critical, as a significant percentage of US exports to China, in particular, do not go to the end user or directly to the end use, but instead go through a distributor or a re-seller. Since exports of otherwise NLR products that are for end use by military end users (or parties on behalf of them) or are for “military end uses” in these countries now requires a license from BIS, it is imperative that exporters have a sufficient “paper trail” related to the end users and end uses of products they sell to China (as well as Russia and Venezuela).
DDTC ANNOUNCES NEW POLICIES AND CHANGES AFFECTING ITAR REGISTRATIONS, LICENSING, PART 130 REPORTING, AND DDTC MANAGEMENT
COVID 19 has impacted our daily lives. DDTC is no exception. Between the DECCS rollout and COVID 19 telework, DDTC is impacted and has responded with the following policies and changes intended to aid industry and ease the burden on exporters that may be hampered during this period to make filings in accordance with the ITAR timelines or existing export authorizations.
- Effective March 13, 2020, a temporary suspension of the requirement in ITAR Parts 122 and 129 to renew registration as a manufacturer, exporter, and/or broker and pay a fee on an annual basis by extending ITAR registrations expiring on February 29, March 31, April 30, May 31, and June 30, 2020 for two months from the original date of expiration.
- DDTC is also pursuing a one-time temporary reduction in registration fees for certain categories of DDTC registrants. More information on any change will be provided on DDTC's website.
Validity period of export licenses
- Effective March 13, 2020, a temporary suspension, modification, and exception to the limitations on the duration of ITAR licenses contained in ITAR Parts 120-130, including but not necessarily limited to ITAR §§ 123.5(a) (temporary exports), 123.21(a) (duration of licenses), and 129.6(e) (validity of brokering approval), to extend any license that expires between March 13, 2020, and May 31, 2020, for six (6) months from the original date of expiration so long as there is no change to the scope or value of the authorization and no Name/Address changes are required. This six (6) month extension is warranted in light of the unique challenges applicants face in the current environment when attempting to coordinate with U.S. and foreign business partners regarding the scope of applications.
Note: this extension is automatic and requires no action by the license holder
Remote work by company and long term contract employees defined by ITAR 120.39
- To support remote work in this extraordinary period, effective March 13, 2020, a temporary suspension, modification, and exception to the requirement that a regular employee, for purposes of ITAR § 120.39(a)(2), work at the company's facilities, to allow the individual to work at a remote work location, so long as the individual is not located in Russia or a country listed in ITAR § 126.1. This suspension, modification, and exception shall terminate on July 31, 2020, unless otherwise extended in writing.
Remote work by regular employees (ITAR 120.39) of foreign signatories to TAAs/MLAs or ITAR exemptions
- Effective March 13, 2020, authorization for regular employees of licensed entities who are working remotely in a country not currently authorized by a TAA, MLA, or exemption to send, receive, or access any technical data authorized for export, reexport, or retransfer to their employer via a TAA, MLA, or exemption so long as the regular employee is not located in Russia or a country listed in ITAR § 126.1. This suspension, modification, and exception shall terminate on July 31, 2020, unless otherwise extended in writing.
Paper filings with DDTC, adjudication of filing will be emailed to the applicant
- DDTC is implementing new procedures and will send to the contact listed on the application email scans of final action letters for General Correspondence requests submitted in writing. If email information was not provided, final actions will continue to be mailed back to the applicant.
- DDTC is implementing new procedures and will send to the applicant email scans of unclassified final action letters for DSP-85s submitted in writing. If email information was not provided, final actions will continue to be mailed back to the applicant. The Defense Counterintelligence and Security Agency (DCSA) will continue to receive original sealed copies through the mail.
Note: Approvals for DSP-5, DSP-61, DSP-73, and TAAs/MLAs/WDAs in DECCS, DDTC's electronic portal and can be retrieved via DECCS
Expedited requests for licensing in support of U.S Operations
- DDTC is re-issuing guidance for the expedited authorization of requests submitted in support of U.S. Operations (USOP) at DTCL SOP - USOPS Guidance. Refer to the DDTC website
DDTC to file Congressional Notifications electronically
- In coordination with Congress and DOD, DDTC has moved to electronic submissions of Congressional Notifications of proposed Direct Commercial Sales (DCS) and Foreign Military Sales (FMS) to the Congress.
- DDTC is leveraging updated staffing protocols to ensure streamlined interagency licensing reviews.
Part 130 Reporting
Updated information repoints of contact
- To facilitate timely responses to inquiries from the public and regulated industry, DDTC has added additional points of contact on the Key Personnel tab of the About DDTC page on the DDTC website, and additional staffing and IT resources have been added to its Response Team and Help Desk functions.