BIS Final Rule Revises Export/Reexport Controls/Policy for China, Etc. (Full Summary)

This Full Summary combines into one document BP summaries Parts I-IV which highlight the final rule. (See ITT's Online Archives or 06/19/07, 06/21/07, 06/28/07 and 07/26/07 news, 07061925, 07062115, 07062815, and 07072620, for Parts I-IV, respectively.)

New Military End-Use Controls Imposed on China

BIS' final rule implements new military end-use¹ controls (i.e., license requirements) by adding a new 15 CFR 744.21 which states that in addition to the license requirements for items specified on the Commerce Control List (CCL), any item listed in new Supplement No. 2 to 15 CFR Part 744 (i.e., items subject to the new military end-use control for exports to China) may not be exported, reexported, or transferred to China without a license if, at the time of the export, reexport, or transfer, either:

1. the exporter has knowledge², that the item is intended, entirely or in part, for a military end-use in China; or
2. the exporter has been informed by BIS that the item is or may be intended, entirely or in part, for a military end-use in China.

(BIS may inform an exporter either individually by specific notice, through amendment to the EAR published in the Federal Register, or through a separate notice published in the Federal Register, that a license is required for specific exports, reexports, or transfers of any item because there is an unacceptable risk of use in or diversion to military end-use activities in China.)

BIS cautions that the absence of BIS notification does not excuse the exporter from compliance with the license requirements of 15 CFR 744.21(a).

License Exception GOV still available. Despite these new controls, BIS states that items may be exported subject to the EAR under the provisions of License Exception GOV set forth in 15 CFR 740.11(b)(2)(i) and (ii).

(License Exception GOV authorizes exports and reexports for international nuclear safeguards; U.S. government agencies or personnel, and agencies of cooperating governments; and international inspections under the Chemical Weapons Convention (CWC).)

New export license application procedures. BIS' final rule also imposes new procedures for submitting export license applications for products subject to the new military end-use controls for China. These procedures state that:

When submitting a license application pursuant to 15 CFR 744.21, the applicant must state in the "additional information" section of the BIS-748P (Multipurpose Application) or its electronic equivalent that "this application is submitted because of the license requirement in 15 CFR 744.21 (Restrictions on Certain Military End-uses in the People's Republic of China)."

Either in the additional information section of the application or in an attachment to the application, the applicant must also include all known information concerning the military end-use of the item(s). If the applicant submits an attachment with the license application, the attachment must be referenced in the "additional information" section of the application.

License review standards. New 15 CFR 744.21 outlines the following related license review standards:

Applications to export, reexport, or transfer items subject to the new military end-use license requirements for exports to China will be reviewed on a case-by-case basis to determine whether the export, reexport, or transfer would make a material contribution to the military capabilities of China and would result in advancing the country's military activities contrary to the national security interests of the U.S. When it is determined that an export, reexport, or transfer would make such a contribution, the license will be denied.

(Applications for items requiring a license for other reasons that are destined to China for a military end-use also will be subject to the review policy stated above.)

Applications may be reviewed under chemical and biological weapons, nuclear nonproliferation, or missile technology review policies, as set forth in 15 CFR 742.2(b)(4), 742.3(b)(4) and 742.5(b)(4), if the end-use may involve certain proliferation activities.

List of products subject to the new military end-use license requirements for exports to China. According to a BIS fact sheet and this final rule, the following products and associated technologies are subject to the new military end-use license requirements for exports to China. These products are listed in more detail in new Supplement 2 to 15 CFR Part 744.

Validated End User (VEU) Program

To facilitate legitimate exports to civilian end-users, BIS has added new 15 CFR 748.15 to establish a new authorization VEU. The authorization will allow the export, reexport, and transfer of eligible items to specified end-users in an eligible country, initially China.

(Though the new VEU program will initially only apply to China, it may be extended to India³ at some future point in time.)

VEU Authorization Allows Export, Reexport, Transfer Without Individual License

According to a BIS fact sheet, under the VEU program, certain "trusted customers" with a track record of responsible civilian use of U.S.-controlled technology will be able to receive certain items without individual export licenses.

(BIS notes that if a request for VEU authorization for a particular end-user is not granted, no new license requirement is triggered. In addition, such a result does not render the end-user ineligible for license approvals from BIS.)

Eligibility for Authorization VEU

To be eligible for authorization VEU, exporters, reexporters, and potential VEUs must adhere to the conditions and restrictions outlined below:

VEUs to be approved by end-user committee, listed in Supplement. The only end-users to whom eligible items may be exported, reexported, or transferred under the VEU program are those VEUs to be identified in Supplement No. 7 to 15 CFR Part 748 according to the provisions set forth below, that have been granted VEU status by the End-User Review Committee (ERC).

Requests must be submitted as advisory opinion request, etc. Requests for authorization as a VEU must be submitted in the form of an advisory opinion request, as described in 15 CFR 748.3(c)(2), and should include a list of items (i.e., commodities, software and technology, except as excluded by 15 CFR 748.15(c)), identified by export control classification number (ECCN), that exporters or reexporters intend to export, reexport or transfer to an eligible VEU once approved.

Requests for VEU authorization will be accepted from exporters, reexporters or end-users and should be submitted to BIS (see final rule for addresses). BIS notes that the package should be marked "Request for Authorization Validated End-User."

(VEU authorization requests must include the following information: (1) names of proposed VEU candidates; (2) an overview of the structure, ownership and business of the prospective VEU; (3) a list of items proposed for VEU authorization approval and their intended end-uses; (4) physical address(es) of the location(s) where the item(s) will be used; (5) the destination to which the items will be reexported or transferred, if the prospective VEU plans to reexport or transfer the item; (6) how the prospective VEU's record keeping system will allow compliance with the recordkeeping requirements; and (7) an original statement on letterhead of the prospective VEU, signed and dated by a person who has authority to legally bind the prospective VEU, certifying that the end-user will comply with all VEU requirements.)

Restrictions Under Authorization VEU

New 15 CFR 748.15(c) and (d) set forth the following restrictions for authorized VEUs:

Items controlled under the EAR for missile technology (MT) and crime control (CC) reasons may not be exported or reexported under authorization VEU.

Items obtained under authorization VEU may be used only for civil end-uses. Eligible end-users who obtain items under VEU may only: (1) use such items at the end-user's own facility located in an eligible destination or at a facility located in an eligible destination over which the end-user demonstrates effective control; (2) consume such items during use; or (3) transfer or reexport such items only as authorized by BIS.

Certifications Must be Obtained from VEU Prior to Initial Export/Reexport

Prior to an initial export or reexport to a VEU under authorization VEU, exporters or reexporters must obtain certifications from the VEU regarding end-use and compliance with VEU requirements. Certifications and all records relating to VEU must be retained by exporters or reexporters in accordance with the recordkeeping requirements set forth in 15 CFR Part 762.

Annual Reports, Periodic Record Reviews

New 15 CFR 748.15(f) sets forth the following reporting and review requirements:

Annual reports. Exporters and reexporters who make use of authorization VEU are required to submit annual reports to BIS. Reports are due by February 15 of each year, and must cover the period of January 1 through December 31 of the prior year. Reports must be sent to BIS (see final rule for addresses) and marked on the package as "Authorization Validated End-User Reports."

Periodic record reviews. In addition, records related to activities covered by authorization VEU that are maintained by exporters, reexporters, and VEUs who make use of authorization VEU will be reviewed on a periodic basis. Upon request by BIS, exporters, reexporters, and VEUs must allow reviews of records, including on-site reviews.

End-User Review Committee Procedures for Authorization VEU

New Supplement No. 9 to 15 CFR Part 748 states that the ERC, composed of representatives of the Departments of State, Defense, Energy, and Commerce, and other agencies as appropriate, is responsible for determining whether to add to, to remove from, or otherwise amend the list of VEUs and associated eligible items. The Department of Commerce chairs the ERC.

The ERC will consider a range of information for evaluating VEU authorization, including such factors as the entity's record of exclusive engagement in civil end-use activities; compliance with U.S. export controls; the need for an on-site review prior to approval; capability of complying with the requirements of authorization VEU; agreement to on-site reviews by representatives of the U.S. government; and relationships with U.S. and foreign companies; etc.

Among other things, ERC procedures require a unanimous vote for authorizing a VEU. In addition to VEU requests submitted pursuant to 15 CFR 748.15, the ERC will also consider candidates for VEU authorization that are identified by the U.S. government. End-users are not obligated to accept the government's nomination.

The ERC will make determinations whether to grant VEU authorization to each VEU candidate no later than 30 calendar days after the candidate's complete application is circulated to all ERC agencies. (The period during which the ERC is waiting for additional information from an applicant or potential VEU is not included in the 30 day deadline.)

(BIS states that the VEU authorization is subject to revision, suspension or revocation entirely or in part.)

Requirements for End-User Statements, Import Certificates, Support Documents

The following are highlights of the amendments made in BIS' final rule to 15 CFR 748.10 and 748.9 regarding end-user statements, import certificates and support documents (see final rule for complete details):

Terminology change from "end-user certificate" to "end-user statement," etc. BIS' final rule amends 15 CFR 748.10 and 748.9 to change references to "end-user certificate" to "end-user statement."

Requirements apply to all China transactions requiring license, etc. The final rule amends 15 CFR 748.10(a) to add that in the case of China, 15 CFR 748.10 applies to transactions involving all items that require a license to China for any reason (subject to the higher threshold discussed below).

Threshold for import certificate/end-user statement for China and/or certain other countries raised to $50,000, etc. BIS' final rule amends 15 CFR 748.10(b)(4) in order to raise to $50,000 (from $5,000) the threshold for which an import certificate or end-user statement is required if the license application involves the export of commodities and software classified in a single entry on the CCL, the ultimate consignee is in any destination listed in 15 CFR 748.9(b)(2), and the total value of the transaction exceeds $50,000⁴ (see footnote for certain China exceptions).

License applications may list several separate CCL entries. If any individual entry including an item that is controlled for national security reasons exceeds $50,000, then an import certificate must be obtained covering all items controlled for national security reasons on the license application.

If the total value of entries on a license application that require a license to China for any reason listed on the CCL exceeds $50,000, then an end-user statement covering all such controlled items that require a license to China on the license application must be obtained.

If the license application involves a lesser transaction that is part of a larger order for items controlled for national security reasons (or, for China, for any reason) in a single export control classification number (ECCN) exceeding $50,000, an import certificate, or an end-user statement, as appropriate, must be obtained.

BIS may also specifically request that the applicant obtain an import certificate or an end-user statement for a transaction valued under $50,000, or for a transaction that requires a license to China for reasons in the EAR other than those listed on the CCL.

With respect to China, BIS' fact sheet states that although the updated regulations expand the requirement for end-user statements to a broader range of items, the higher dollar threshold means that there should be no net increase in the number of end-user statements issued by China's Ministry of Commerce as a result of this final rule.

For China, license applicants must request that importer obtain the end-user statement. BIS is also amending 15 CFR 748.10(c) to state that in the case of China, applicants must request that the importer obtain an end-user statement for all items on a license application that require a license to China for any reason listed on the Commerce Control List (CCL). (Applicants must obtain original import certificates or end-user statements from importers.)

China end-user statements no longer required to be submitted with the license application. BIS has amended 15 CFR 748.10(g) to state that import certificates and end-user statements must be retained on file by the applicant and should not be submitted with the license application. (The regulations had previously required China end-user statements to be submitted with the license application.) However, 15 CFR 748.10(g) is also amended to state that BIS will require applicants, on a random basis, to submit specific original import certificates and end-user statements to assist in license reviews.

Added consideration of China for determining support documentation. BIS also amends 15 CFR 748.9(b), which states that license applications not exempt under 15 CFR 748.9(a) generally must be supported by documents designed to elicit information concerning the disposition of the items intended for export or reexport. In determining the type of support documentation that may be required, the final rule adds the consideration of whether a transaction involves items destined for China and/or whether a transaction involves items that require a license to China for any reason.

Name change for branch of Chinese government issuing end-user statements. BIS is also amending Supplement No. 4 to 15 CFR Part 748 to provide the correct name of the branch of the Government of China that issues end user statements.

Savings Clause

Shipments of items removed from eligibility for a License Exception or for export or reexport without a license (NLR) as a result of this regulatory action that were on dock for loading, on lighter, laden aboard an exporting or reexporting carrier, or en route aboard a carrier to a port of export or reexport on June 19, 2007, pursuant to actual orders for export or reexport to a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or export or reexport without a license so long as they are exported or reexported before July 19, 2007. Any such items not actually exported or reexported before midnight on July 19, 2007 require a license in accordance with this final rule.

BIS Q&A on Changes From the Proposed Rule

According to a BIS Q & A document, the final rule is different from the July 6, 2006 proposed rule in that it:

reduces the list Export Control Classification Numbers (ECCNs) subject to military end-use control from 47 to 31, based on military applicability, foreign availability, and commercial impact.

clarifies the VEU program by establishing simpler procedures for applying for VEU authorization and creating an inter-agency committee to decide on requests.

broadens the scope of items that may be denied for making a "direct and significant" contribution to China's military capabilities. Specifically, it revises the license application review policy for items controlled for national security reasons to provide a presumption of denial for license applications to export, reexport, or transfer items that would make a direct and significant contribution to China's military capabilities. The final rule also allows BIS to review license applications involving items controlled for chemical/biological, missile technology, and nuclear nonproliferation reasons to determine if they make such a contribution.

revises the definition of "military end-use" to be similar to one already used in regulations and understood by exporters.

raises the dollar threshold for U.S. exporters to obtain Ministry of Commerce (MOFCOM) End-User Statements from $5,000 to $50,000.

¹New 15 CFR 744.21(f) defines "military end-use" as: incorporation into a military item described on the U.S. Munitions List (USML) at 22 CFR Part 121; incorporation into a military item described on the International Munitions List (IML) as set out in the Wassenaar Arrangement; incorporation into items listed under ECCNs ending in "A018" on the CCL; or for the "use," "development," or "production" of military items described on the USML or the IML, or items listed under ECCNs ending in "A018" on the CCL. "Military end-use" also means "deployment" of items classified under ECCN 9A991 as set forth in Supplement No. 2 to 15 CFR Part 744.

²15 CFR 772.1 defines "knowledge" as knowledge of a circumstance (the term may be a variant, such as "know," "reason to know," or "reason to believe") as including not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts. This definition does not apply to 15 CFR Part 760 (Restrictive Trade Practices or Boycotts).

³During a June 20, 2007 webinar, BIS sources noted that the authorization may be extended to specified end-users in India at some point in the future.

⁴The $50,000 threshold does not apply to exports to China of computers subject to the provisions of 15 CFR 748.10(b)(3) or items classified under ECCN 6A003 (cameras).

(See ITT's Online Archives or 07/18/06 news, 06071820, for the final part of BP summary of the July 6, 2006 proposed rule, with links to the other parts. See ITT's Online Archives or 11/08/06 news, 06110805, for BP summary of BIS' supplemental guidance on the proposed rule.)

BIS contact - Bernard Kritzer (202) 482-0092

BIS press release (dated 06/15/07) available at http://www.bis.doc.gov/News/2007/06-15-07%20Export%20Rule%20Press%20Release%20-%20FINAL.pdf

Q&A document on the final rule available at http://www.bis.doc.gov/News/2007/Website%20QAs%20FINAL.pdf

BIS Fact Sheet available at http://www.bis.doc.gov/News/2007/06-15-07%20Export%20Rule%20Fact%20Sheet%20-%20FINAL.pdf

BIS final rule (D/N 061205125-7125-01, FR Pub 06/19/07) available at http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-11588.pdf