The President Signs Executive Order to Treat Hong Kong as China
By: Carlos Bentancor, Junior Associate & Jenny Hahn, President
Hong Kong Now an Arms Embargoed Destination Announced 7.14.2020 and License Exceptions for EAR Items are Suspended
The President signed an Executive Order (EO) on July 14, 2020, which requires the Special Administrative Region of Hong Kong (Hong Kong) to be treated as the People's Republic of China (PRC). The EO states pursuant to section 202 of the United States - Hong Kong Policy Act of 1992 that the U.S. Government no longer considers Hong Kong to be autonomous from China and no longer warrants treatment as an entity separate from China. The President directed the heads of various agencies to begin eliminating policy exemptions for Hong Kong. As a result, Hong Kong is now an arms embargoed destination included in the entry for China under section 126.1(d)(1) of the ITAR, and thus subject to a policy of denial for all transfers subject to the ITAR. This action includes all end-users in Hong Kong.
The Department of Commerce separately announced on June 30 the suspension of License Exceptions for Hong Kong.
In May 2020, China announced its plans to impose national security legislation unilaterally and arbitrarily on Hong Kong, and on May 27th, 2020 the U.S. Secretary of State declared the PRC had undermined Hong Kong's autonomy and reported this to the U.S. Congress. China has through a series of ongoing actions continued to follow through imposing national security legislation on Hong Kong undermining Hong Kong's autonomy, leading the U.S. government to take action intended to prevent any sensitive U.S. items from illegal diversion to the PRC or North Korea.
Government Agency Actions
The Directorate of Defense Trade Controls (DDTC) has announced two actions in response to the EO. First, there will be an exception made in favor of Hong Kong persons who reside outside Hong Kong or PRC, who have been previously authorized access to defense articles subject to ITAR, in future licensing; and second, any current, valid, non - exhausted ITAR licenses with Hong Kong as the transferred territory are not affected by the EO, DDTC is not revoking or rescinding previously approved licenses for defense articles or services to Hong Kong.
Prior to the publication of the EO, on June 30, 2020, BIS suspended any License Exception for exports, re-exports, or transfers (in-country) to Hong Kong of items subject to the EAR that would provide Hong Kong with differential treatment than those available to the PRC. On July 14, President Trump signed an Executive Order officially revoking the use of EAR License Exceptions for Hong Kong that will provide differential treatment compared to those applicable to exports to China.
The actions listed above under the ITAR and EAR are just two of the approximately twenty actions to be taken by various government agencies with respect to Hong Kong within 15 days of the Executive Order (i.e., by July 29, 2020).
The President's Executive Order on Hong Kong Normalization
Recommendations for Exporters:
FD Associates, Inc. strongly encourages all exporters who export products, provide services, or transmit technical data to foreign nationals or entities from Hong Kong, to evaluate these transactions before making any further exports.
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).