The current climate between the U.S. Government and China related to export-controlled commodities is quite hostile and is not likely to change in the near term, even with a new U.S. President in place. The U.S. Government, concerned with national security threats, human rights abuses, military modernization, theft of U.S. technology, and theft of U.S. personal information by Chinese actors, has gone on the offensive from an export regulatory perspective to attempt to prevent parties supportive of the Chinese Government and Chinese military from acquiring US-origin products, including, in some cases, products that are EAR99.
The U.S. Government, acting through the U.S. Department of Commerce’s Bureau of Industry & Security (“BIS”), has recently added a large number of Chinese companies, including companies that are predominantly involved with commercial enterprises, to the Entity List under the Export Administration Regulations (“EAR”). By being added to the Entity List, any export from the U.S. to a listed party is subject to an export license requirement under the EAR, with a presumption of denial applicable in most cases. Listed parties cannot receive U.S. exports indirectly either, such as by buying through intermediary parties. These intermediary parties know that it is not lawful for U.S. exporters to engage in transactions involving ultimate end use by parties on the Entity List. Thus, in many cases, they disguise the intended end-use, end-users, and parties to the export transactions.
Beyond the expansion of the Entity List, BIS has taken steps to expand the EAR’s Foreign Direct Product Rule at EAR Section 736.2(b)(3) to specifically target Chinese telecommunications giant, Huawei Technologies Group Co. Ltd. (“Huawei”) and affiliates in China and worldwide. The EAR’s Foreign Direct Product Rule was expanded so that foreign origin products built-in plants with U.S.-origin equipment and technology that are exported from abroad or re-exported to Huawei and affiliates are subject to the EAR and prohibited without a license from BIS.
In addition to the broad prohibitions that have been placed on numerous Chinese companies, preventing them from receiving exports of any commodity from the United States, a large number of Chinese companies and organizations have recently been identified under the EAR as Military End Users (“MEUs”). The action to formally identify companies as MEUs, in China, as well as Russia and Venezuela, follows their identification by the U.S. Department of Defense as parties with strong ties to military end-users and military end-uses. By adding entities as MEUs under the EAR, U.S. exporters are officially on notice that any export transaction involving these entities where an item on the EAR’s Commerce Control List (“CCL”) — meaning any item with an Export Control Classification Number (“ECCN”) requires an export license approved by BIS.
Given the extensive expansion of export restrictions involving China (as well as Russia and Venezuela), it is more important than ever for parties exporting from the United States to carefully identify the parties to their export transactions and the export classifications of products being exported. Even items that are EAR99 or are otherwise No License Required (“NLR”) to most worldwide destinations now require licensing for export to certain end-users and for certain end uses in China. Thus, exporters must take formalized steps to document their export due diligence for transactions involving China, as well as Hong Kong and Macau (which are now treated as part of China by the U.S. Government).
BIS has published “Know Your Customer Guidance and Red Flags” as a supplement to the Ten Prohibitions listed in EAR Part 736. The guidance explains the appropriate due diligence required for U.S. export transactions and provides context as to how to sufficiently establish “knowledge” of the particulars of export transactions, including the proper identification of parties, end uses, and end-users. The General Prohibitions cover a gamut of export-related matters but generally prohibit exporters and re-exporters from engaging in export transactions involving prohibited end uses and prohibited end-users. In order to comply with the EAR’s General Prohibitions, exporters and re-exporters must establish “reasonable ” knowledge regarding the parties to their export transactions and the ultimate end-use and end-users of the exports.
The industry standard for validating this information is through the End User Statement (“EUS”)/End User Certification (“EUC”). Without a EUS/EUC, an exporter is arguably self-blinding with respect to compliance with the EAR General Prohibitions, as well as overall export compliance with EAR requirements. Companies that fail to establish sufficient “knowledge” of the details of export transactions can be hit with substantial fines when export transactions result in end uses or end users that are prohibited.
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