On June 26, 2020, the US Commerce Department’s Bureau of Industry and Security (“BIS”) issued 32 Frequently Asked Questions (“FAQs”) to clarify the military end use/user (“MEU”) rules that were published on April 28, 2020 and took effect on June 29, 2020. These rules are intended to combat efforts by entities in China, Russia, and Venezuela to use certain US technologies obtained through civilian supply chains to develop weapons, military aircraft, and surveillance technology contrary to US national security interests.
As described in more detail in our blog post of April 30, 2020, the MEU rules significantly expand and strengthen the existing military end use/user restrictions set out in Part 744.21 of the Export Administration Regulations (“EAR”) by, inter alia:
- adding a license requirement for exports, reexports, and (in-country) transfers of certain designated items to military end users in China (in addition to military end users in Russia and Venezuela);
- expanding the definition of “military end use” to also include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production” (as those terms are defined in the EAR) of military items;
- broadening the list of items covered by military end use/user licensing requirements (i.e., designated items);
- changing the licensing policy to a presumption of denial for military end-use/user exports to China, Russia, or Venezuela; and
- expanding the requirement to file Electronic Export Information in the Automated Export System to all exports of items controlled on the Commerce Control List to China, Russia, or Venezuela regardless of the value of the shipment unless the shipment is eligible for license exception GOV.
The vetting of end users for purposes of determining whether they would constitute “military end users” is likely to pose considerable challenges and significantly increase the compliance burden on companies supplying designated items to China, Russia, and Venezuela. This is particularly the case with respect to Chinese end users given China’s “Military-Civil Fusion.” Further, if BIS were to interpret these rules broadly, the universe of transactions involving widely commercially available US technologies that require BIS licenses is bound to dramatically increase. Since their publication in late April, industry has been awaiting guidance from BIS regarding the application of some of the key aspects of the MEU rules.
BIS has now issued 32 FAQs ranging from summary descriptions of the new MEU rules to guidance on BIS’ application thereof to certain select fact scenarios. We provide below a summary of the–in our view–key take aways from the FAQs. Importantly, BIS appears to have adopted a broad interpretation of the definition of “military end user.” Based on the guidance provided in the FAQs, it seems that a license requirement would be triggered for the supply of designated items to a company in China, Russia, or Venezuela that engages in any degree of business in support of military end uses. Further, we note that BIS has not provided any guidance on the due diligence steps that it expects an exporter to take to ensure compliance with the military end use/user rules — i.e., to satisfy itself that an intended end user is not a “military end user.”
Military End User – FAQs 2 to 17
- The definition of “military end user” covers two categories of end users: (1) national armed services (army, navy, marine, air force, or coast guard) as well as the national guard and national police, government intelligence or reconnaissance organizations (hereinafter referred to as “traditional MEUsers”); and (2) any other end user whose activities are intended to support or contribute to “military end uses” (as defined in Section 744.21(f)) (hereinafter referred to as “other MEUsers”).
- In FAQ 3, BIS clarifies that “other MEUsers” covers other foreign national governmental organizations, as well as state-owned enterprises, or other specific entities that develop, produce, maintain, or use military items (i.e., items described on the US Munitions List or items classified on the Commerce Control List in an ECCN ending in “A018” or a “600 series” ECCN).
- Further, BIS confirms in FAQ 17 that the definition of “military end user” applies to national police only and not to provincial or municipal police departments.
- With respect to agencies and entities of the Ministry of Defense of China, Russia, or Venezuela, BIS notes in FAQs 5-7 that an exporter would have to conduct due diligence to determine whether the agency/entity in question (1) is part of the national armed services or (2) develops, produces, maintains, or uses military items.
- For example, prior to shipment of designated items to a military hospital in China, Russia, or Venezuela, BIS advises that due diligence would be required to determine if the hospital (1) is part of the national armed services, which “would depend on a number of factors, such as the actual relation of the ‘military hospital’ to the country’s national armed services and the patient population served by the hospital,” or (2) whether it is an entity that develops, produces, maintains, or uses military items.
- In applying this two-prong test, BIS has narrowed the definition of “military end user,” at least to the extent that military ownership/control would not appear to automatically result in the entity being a “military end user” for purposes of the MEU rules. This two-prong test would presumably be applicable to any entity that is owned or controlled by the Chinese, Russian, or Venezuelan ministries of defense. That could be helpful with respect to Chinese companies, such as some large prominent conglomerates that engage in both defense and civilian sectors across various industries and are known to be owned, controlled, or otherwise affiliated with the Chinese military. For example, on June 24, 2020, the US Department of Defense (“DOD”) issued a list of 20 Chinese companies operating in the United States that it determined were “Communist Chinese military companies” as defined in Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 (the definition includes entities owned or controlled by the Chinese People’s Liberation Army). While inclusion on the DOD list (which includes a number of entities designated on the BIS Entity List)) could be an indication that the entity may be a “military end user,” such entities would not, at least in principle, need to be treated automatically as “military end users” for purposes of the MEU rules but rather made subject to the above-referenced two-prong test.
- In FAQs 11 and 12, BIS clarifies that exports of designated items to distributors or system integrators in China, Russia, or Venezuela would not generally trigger a military end user licensing requirement simply because the distributor/system integrator provides mass-market products to military end users and non-military end users. Sale of mass-market items to the general market, which may include “military end users,” does not in itself make the seller a “military end user” absent some other facts indicating that the seller is a traditional MEUser or other MEUser. That said, if a designated item will be exported with knowledge that the distributor/system integrator intends to reexport or transfer that item for a military end use, a license would be required. We note that the FAQs only address exports with knowledge that the item is intended for reexport or transfer for a military end use. However, we would also see the same principle as applying to exports with knowledge that the item is intended for reexport or transfer to a military end user.
- For purposes of determining whether an intended end user’s actions or functions are intended to support “military end uses”, and is thus a “military end user,” BIS instructs in FAQs 8 and 10 that the exporter “must ascertain the activities of the specific end users” and expressly notes that “[t]here is no specific volume level for such activities that would trigger a license requirement … [I]f the specific end user to receive the item is engaged exclusively [emphasis added] in civilian work, it would not be a ‘military end user.'” Notably, this suggests that an end user that engages in any degree of activities in support of military end uses, however minimal and sporadic, will be considered a military end user.
- As indicated above, BIS does not provide much guidance on the nature and scope of the due diligence expected of exports of designated items to China, Russia, or Venezuela other than noting in FAQ 15 that BIS’s Know Your Customer Guidance should be taken into account when assessing prospective customers. BIS also notes that exporters can seek additional guidance from BIS although the specific parameters for such inquiries are not clear.
Military end use – FAQs 18 to 21
- In FAQ 20, BIS clarifies that the addition to the definition of “military end use” of “any item that supports or contributes to operation, installation, refurbishing, ‘development,’ or ‘production,’ of military items” goes beyond incorporation into a military item to mean “direct facilitation, such as installation, inspection, or test equipment and related software and technology, of the operation, installation, maintenance, repair, overhaul, or refurbishing, or the ‘development’ or ‘production’ of military items.”
License Review Policy – FAQs 22 to 23
- BIS confirms that licenses for the export of designated items to “military end users” may be issued, notwithstanding the license review policy of presumption of denial, if the application demonstrates exclusive civil end use that is consistent with US national security interests.