'END USE' CONTROLS IN THE



From PLI’s Course Handbook

Coping with U.S. Export Controls 2007

#11207

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4

“end-use” controls in the export

administration regulations

Evan R. Berlack

Baker Botts L.L.P.

This paper is a revision and updating of the paper I

published in the Practicing Law Institute's Course

Handbook Coping with U.S. Export Controls 2006.

"END USE" CONTROLS IN THE

EXPORT ADMINISTRATION REGULATIONS

Evan R. Berlack

October 15, 2007

"END USE" CONTROLS IN THE

EXPORT ADMINISTRATION REGULATIONS[1]

This paper will review and analyze the various "end use rules" which are an important part of the Export Administration Regulations.[2]

By "end use rule", I mean the responsibility imposed by the EAR on a "shipper" (i.e., an exporter or reexporter) to apply for a license when he either (a) "knows", or (b) is informed by BIS, that the end use of a shipment will be for unauthorized purposes, even though the shipment would not ordinarily require a license.

The EAR contains a definition of "knowledge" and its variants "know", "reason to know", or "reason to believe" in Part 772.

End Use Rules have acquired significant importance for shippers especially since the number of "items" (i.e., hardware, technology or software) requiring BIS licenses to some or all destinations is relatively small compared to the cold war era. The use of License Exceptions, or basket category EAR 99, are the rule for most shippers, but this "good news" is tempered considerably by the need to take the End Use Rules into full account.

The End Use Rules, as presently contained in the EAR, are found in the following areas:

-- The Proliferation Controls in Part 744, specifically Supplement No. 4 to Part 744 (the Entity List), §744.2 (nuclear end uses), §744.3 (missile end uses), §744.4 (CBW end uses) and §744.6 (activities of U.S. Persons);

-- The civil end use rule under License Exception CIV as set forth in §740.5.

-- The Iraq military end use/end user Rule in § 746.3

-- The new China Military End Uses rule set forth primarily in new § 744.21 and new Supplement No. 2 to Part 744.

I will discuss each of the End Use Rules below.

PLEASE NOTE that "publicly available" technical data and software may always be shipped to any destination under the EAR and is not affected by any of the End Use Rules described below. Such publicly available data, the definition of which is elaborated in §§734.7-11, is not "subject to the EAR" within the meaning of §734.3(b)(3).[3]

The Entity List in Supplement No. 4 to Part 744:

On February 3, 1997, BIS published in the Federal Register[4] the first entry (Ben Gurion University of Israel for computers between 2000 and 7000 MTOPS) in the Entity List contained in the newly established Supplement No. 4 to Part 744. The inauguration of the Entity List provided shippers, for the first time, the names of specific end users to whom specific items, or a broad range of items, could not be shipped without a License even though such items might normally not require a license. For example, computers with MTOPS of 2000-7000, could normally be shipped to Israel without a license under ECCN 4A003. But the word “normally” is quite important. As the following sections of this paper will emphasize, whenever a shipper “knows”, or is otherwise informed by BIS, of an unauthorized end use under Part 744, it must seek a BIS license. Accordingly, the Entity List must be viewed as but one additional, albeit specific, guidepost regarding the need to apply for a license because of the proliferation controls of Part 744.

BIS has added names to the Entity List on numerous occasions February 3, 1997. Care must be taken to ascertain the scope of the restriction applicable to each entity. In some cases, “all items subject to the EAR” are restricted. In other cases, only specific items, and/or specific locations are restricted.

On June 5, 2007, BIS announced a Proposed Rule in the Federal Register [5] that would expand the use of the Entity List through the addition of a new §744.11. Such expansion would enable BIS to add entities to the Entity List which were deemed to pose a risk of being involved in activities which are contrary to the “national security or foreign policy interests of the U.S.” by demonstrating engagement on the basis of “specific and articulable facts”[6] in any of the following activities: (1) supporting terrorists; (2) enhancing the military capability or ability to support terrorism of countries who have been designated as State Supporters of Terrorism by the State Department’ (3) transferring, producing, servicing etc. conventional weapons “contrary to U.S. policy”, (4) deliberately refusing to comply with a BIS or State end use check or other request for information (5) engaging in conduct that “poses a risk of violation of the EAR. “ When making an addition to the Entity List, BIS will indicate in each instance the extent to which this will apply to items Subject to the EAR, the Licensing criteria to be employed and the availability of License Exceptions if any. I note three points regarding this Proposed Rule:

1 This is not a “catch all” mechanism--an exporter would not be required to seek a BIS license only because it “knows” its customer is involved in any of the foregoing activities but is not listed on the Entity List.

2 BIS indicates in the Notice that a principal factor leading it to propose the expansion of the Entity List is to substitute a more transparent and accessible mechanism than General Orders for listing companies such as Mayrow General Trading which is accused of selling components to be used with roadside bombs by insurgent forces in Iraq. Mayrow is currently the subject of General Order No.3 in Supplement No.1 to EAR Part 736.

3 The proposed Rule would add a new §744.16 providing a mechanism whereby an entity on the Entity List for any reason may seek its removal from the List.

Nuclear End Use Controls in §744.2:

Under §309(c) of The Nuclear Non-Proliferation Act of 1978,[7] the Commerce Department, in consultation with the other relevant Cabinet agencies, was directed to control items which, "if used for purposes other than those for which export is intended," had significance for nuclear explosive purposes, but which were not otherwise controlled by the Nuclear Regulatory Commission. This led to the provisions which are now contained at §742.3 of the EAR requiring licenses for specific items which form part of the "Nuclear Referral List", as adopted by the multilateral Nuclear Suppliers Group.

Under §744.2, a license is required for any other item when:

-- it will be exported or reexported to any country except those listed on Supplement No. 3 to Part 744 (Original NATO members plus Australia, Japan, New Zealand, Austria, Finland, Switzerland, Sweden and Ireland);[8]

-- the shipper "knows,"[9] or is informed by BIS, that the item will be used directly or indirectly in the following specific activities:

-- design, manufacture, or use of nuclear explosives, or components or subsystems thereof;

-- design, manufacture or use of nuclear reactors or any facility for the fabrication of nuclear fuels which are not subject to safeguards by the International Atomic Energy Agency or where the end user is failing to meet its obligation to allow such safeguards;[10]

-- specific nuclear fuel cycle facilities whether or not safeguarded by the IAEA such as facilities for the fabrication of nuclear reactor fuel containing plutonium.

Note that §744.2(b) makes clear that an oral notice from BIS must be followed by a written confirmation, within two days, by the Deputy Assistant Secretary for Export Administration. This notice provision is controversial because no provision is made for placing all similarly situated exporters or reexporters on the same footing and there is a danger that one shipper could be singled out to his disadvantage. However, the Entity List in Supplement No. 4 to Part 744 (discussed above) mitigates this problem at least as to the entities on that list.

Naval Nuclear Propulsion End Use Rule in §744.5:

Under §744.5, a license is required before U.S. naval nuclear technology may be disclosed to any destination, including Canada, which the exporter or reexporter knows will be used "in connection with" any "foreign maritime nuclear propulsion project.”

The Rocket Systems and Unmanned Air Vehicles End Use Rule in §744.3:

Specific items on the Commerce Control List (CCL) are controlled to all destinations except Canada because they are related to the design, development, production or use of "Missiles." which are defined in §742.5 to include rocket systems and unmanned air vehicles systems capable of delivering at least 500 kg payload to a range of at least 300km. They are items which have largely been identified by the multilateral Missile Technology Control Regime (MTCR)[11] as being important to control for purposes of stemming the proliferation of missiles and missile technology.

In addition to the specifically controlled items, BIS requires under §744.3 (under revised rules issued on November 8, 2004[12]), a license for the export or reexport of any item when:

-- the shipper "knows [the item] will be used" in the design, development, production or use of rocket systems (defined as including but not limited to ballistic missile systems, space launch vehicles and sounding rockets) or unmanned air vehicles (defined as including but not limited to cruise missile systems, target drones and reconnaissance drones) capable of a range of at least 300 km, in or by a country listed in Country Group D:4 regardless of its payload capability or,

-- the shipper knows that the items will be used anywhere in world in the design development, production or use of rocket systems or unmanned air vehicles regardless of range capabilities for the delivery of chemical biological or nuclear weapons, except when the shipment is to a NATO country which is deemed to be a Nuclear Weapons State under the NPT (meaning only the UK and France), or:

-- the shipper knows that the item will be used in the design development production or use of any rocket systems or unmanned air vehicles in or by a country listed in Country Group D:4 when the shipper is unable (i) to determine the range capabilities of the rocket systems or unmanned air vehicles or (ii) cannot determine whether the rocket systems or unmanned air vehicles, regardless of range capabilities, will be used for the delivery of chemical biological or nuclear weapons, or

-- the shipper is "informed" by BIS that a license is required for a specific export because there is an "unacceptable risk of [the item's] use in or diversion to any of the activities in the first two bullets above.

As discussed above, the Entity List in Supplement No. 4 to Part 744 “informs” shippers regarding the entities, and the scope of restrictions applicable to them, as set forth in that list.

On December 23, 1993, BIS published "Guidance" in the Federal Register which defined the term "will be used" in the equivalent provisions of the former EAR,[13] to mean "will be directly employed in." The Guidance was intended to remove a concept held by some in the business sector that items which have a general function (e.g., video monitoring systems) might be caught by these provisions even though they are not utilized directly for purposes of missile or CBW activity. The "Guidance" was not codified in the Revised EAR in 1995 and its continued validity may be open to some theoretical doubt, although BIS has not said or done anything to suggest that the Guidance has been revoked. In my view, the Guidance remains a useful tool of interpretation.

There are two points to be made about the Rockets and Unmanned Air Vehicles End Use Rule:

1. Delivery systems which do not fall within the range parameters set forth above are not covered by these rules unless they can or might be used for delivery of chemical, biological or nuclear weapons. The language “cannot be determined” appears to mean that any doubt whatsoever regarding the possibility of such end use in the shipper’s mind must be resolved in favor of seeking a license.

2. Except to the extent indicated from time to time in the Entity List in Supplement No. 4 to Part 744, and in situations where chemical, biological or nuclear end use is a possibility, the Rockets and Unmanned Air Vehicles End Use Rule is limited to the specific countries identified in Country Group D:4. Note that these countries and projects were not identified until Supplement No. 6 (the predecessor to Country Group D:4) was published on June 16, 1992,[14] 10 months after the initiation of the EPCI Rules.

The CBW End Use Rule in §744.4:

The U.S. maintains controls on specific chemical precursors, biological agents and associated equipment, software and technology to a range of countries on the basis of lists which are periodically reviewed by the multinational Australia Group. These specific controls are identified in the relevant entities of the CCL and are summarized at EAR §742.2(a).[15]

In addition, under EAR §744.4, the U.S. unilaterally requires validated licenses for any item when:

-- a shipper "knows" it will be used in the design, development, production, stockpiling or use of chemical or biological weapons in or by the countries identified in Country Group D:3 in Supplement No. 1 to Part 740. (See appendix); or,

-- The shipper is informed by BIS that there is "an unacceptable risk of [the item's] use in or diversion to... [the foregoing] activities anywhere in the world" and not just the countries listed in Supplement No. 5.

The presence of an entity on the Entity List in Supplement No. 4 could be another means by which a shipper is “informed” by BIS, depending on the scope of the restrictions stated therein to pertain to an entity.

As in the case of the Rockets and Unmanned Air Vehicles End Use controls discussed above, BIS's December 23, 1993 Guidance[16] interprets the phrase "will be used" to mean "directly employed in."

The unique points concerning CBW End Use controls are as follows:

1. As noted, they are limited to the countries identified on Country Group D:3.

2. "Stockpiling" is a covered activity, which is not included in the Rockets and Unmanned Air Vehicles End Use controls.

3. Unlike the Rockets and Unmanned Air Vehicles End Use Rules, the CBW End Use Rule does not have a legislative foundation inasmuch as §6(m) of the EAA,[17] is silent on any kind of knowledge test for CBW shipments, and is limited to licensing requirements for specifically listed items.

U.S. Person Controls-§744.6:

The End Use controls on U.S. Persons set forth in this section are extensive. U.S. Persons are defined §744.6(c) to mean in any U.S. citizen or permanent resident, wherever located in the world; any individual of any nationality when found in the U.S.; and any entity incorporated in the U.S., or the overseas branch of such entity. The term does not include a foreign incorporated subsidiary of a U.S. firm.

The controls on U.S. Persons are directed at their participation in certain targeted activities in aid of Nuclear, Missile or CBW proliferation, and can involve any item, whether or not of U.S. origin.[18] These targeted U.S. Person activities give rise to a validated license or reexport authorization requirement when:

1. The U.S. Person knows that his shipment will be used in (i.e. will be directly employed in) the design development, production or use of "missiles"[19] in Country Group D:4 projects or countries;[20] the design, development, production, stockpiling or use of CBW in Country Group D:3 countries, or, the design, development, production or use of nuclear explosive devices in countries listed in Country Group D:2 of Supplement No. 1 of Part 740.

2. The U.S. Person intends to perform a contract, service or employment which the U.S. Person knows will assist in the design, development, production, or use of “missiles” in Country Group D:4 countries; or the design development, production, stockpiling or use of CBW in Country Group D:3 countries; or the design, development, production or use of nuclear explosive devices in Country Group D:2 countries.

3. The U.S. Person intends to participate in the design, construction, or export of a whole plant to make any of the chemical weapons precursors identified in ECCN 1C350 in all countries except members of the Australia Group.

4. The U.S. Person, although not the actual exporter or reexporter, intends knowingly to support, by e.g. financing, transporting or freight forwarding, the export, reexport or transfer of an item that lacks a license required by Part 744.

5. BIS informs a U.S. Person that "an activity could involve the types of participation and support" described above "anywhere in the world."

Regarding point 5, above, U.S. Persons would, of course, be well advised to consider that they have been so “informed” as to the end users and items identified on the Entity List in Supplement No. 4 to Part 744.

The U.S. Person rules carry the potential of exposing U.S. based banks and insurance companies, as well as their overseas branches to the U.S. EAR. This is not a customary posture for such entities and ought to be a cause of some concern for them, although no enforcement actions have yet been brought against any of them by BIS. Freight forwarders and transporters, on the other hand, have long been accustomed to dealing with the EAR.

U.S. citizens working abroad as decision making executives of non-U.S. entities are another vulnerable group. Any such individual who has the discretion to decide on the shipment of an item, whether or not of U.S. origin, to, or in support, of a targeted missile, or CBW related, or nuclear explosive related activity, could find himself in violation of the U.S. EAR.

The "Know" Rule in The End Use Provisions:

Aside from the instances where BIS "informs" a shipper or the end user appears on the Entity List, the key to the EAR's End Use Provisions is the extent of knowledge of the forbidden end use possessed by the shipper. The Definitions section in Part 772 of the revised EAR contains the following definition of "Knowledge" that is applicable, as well to variants such as "know," "reason to know" and "reason to believe":

Knowledge of a circumstance...includes 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.

The revised EAR's definition in 1996 remedied a major deficiency of the former EAR's end use controls. The history of the "know" test in the end use controls deserves the following brief summary.

Although the old nuclear end use test in former §778.3 had for many years employed the widely used phrase "know or has reason to know," the missile, CBW and U.S. Person end use tests when they first appeared as a Proposed Rule on March 13, 1991,[21] used the word "know" instead of the phrase, "know or have reason to know." This latter phrase, which remained part of the nuclear end use test, is widely used in Federal administrative law and regulations, and has accumulated a considerable body of judicial interpretation. However, the Commerce Department in the March 13, 1991 Proposed Regulation included the following definition of "know" as a means of aiding the exporter:

Know. [A] person shall be considered to know a circumstance or result when that person:

(a) Is aware that such circumstance exists, or that such result is substantially certain to occur; or

(b) Has a firm belief that such circumstance exists, or that such result is substantially certain to occur.

A person knows of the existence of a particular circumstance if that person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.

Commerce's proposed definition, and indeed the word "know" itself, was derived from the amendments to the Foreign Corrupt Practices Act (FCPA)[22] which had been enacted in Title V of the Omnibus Trade and Competitiveness Act of 1988.[23] These amendments had substituted the word "know" in the FCPA for the concept "know or have reason to know" of circumstances indicating illegal payments to foreign officials. The legislative history of the word "know" included, as its key passage, the same definition of "know" which the Commerce Department reproduced in the March 13 Proposed Regulation. This definition of "know or have reason to know" was similar to several cases defining this phrase which had arisen under the old FCPA and other statutes where the same phrase was important. Accordingly, most practitioners concluded that the switch to "know" from "reason to know" in the FCPA was without practical effect and that prior case law could still be relied upon. Further, with this history, the juxtaposition of "know or have reason to know" in the nuclear end use controls with "know" in the missile, CBW and U.S. Person controls did not seem to pose a problem of interpretation because of the Commerce Department's proposed definition of "know".

However, when Commerce published its final rule on August 15, 1991,[24] the language of the "know" rule in the Missile, CBW and U.S. Person provisions in former §§778.7, 778.8 and 778.9 remained unchanged, but the "background" section of that notice announced that the definition of "know" had been dropped because several commentators found the definition too vague and preferred leaving the term undefined. Commerce followed the lead of these commentators and further stated:

"At this time, the Department believes that existing case law and judicial interpretation provide adequate guidance to exporters."[25]

But this statement left a large open question as to whether Commerce agreed that the legislative history of "know" as used in the amended FCPA was still valid guidance for the EPCI regulations. Moreover, the nuclear end use controls remained unchanged, using "know or having reason to know", raising the possibility of different interpretations of the all important knowledge test in the end use rules.

As could be expected, Commerce's announcement in the August 15, 1991 notice caught the attention of the exporting community and their counsel and caused a reaction. Commerce officials subsequently took the oral position in official Commerce seminars for exporters and other conferences such as PLI's "Coping with U.S. Export Controls" programs, that the Commerce Department would interpret the word "know" the same as the phrase "know or have reason to know."

As noted above, the revised EAR in 1996 addressed the problem. The knowledge test became the same for nuclear as well as missile, CBW and U.S. Person end uses, and the definition of "knowledge" was reasonably, but not entirely, close to the familiar FCPA definition.

There are two differences between the 1996 EAR definition and the FCPA version:

• In the FCPA version, a person must have a "firm belief" that a "circumstance exists," but the "firm belief" words are missing from the EAR's language regarding positive knowledge;

• In the FCPA definition, knowledge will not be inferred where a person "actually believes" that a "circumstance does not exist," even if there is a "high probability" of its existence. The EAR omits the "actual belief" element.

Thus, there are nuanced differences between the EAR and FCPA knowledge definitions, with the EAR giving somewhat less credence to actual perceptions or understandings of the occurrence of a circumstance.[26]

License Exception CIV End Use Rule:

When so indicated in a particular ECCN, and as explained in §740.5, License Exception CIV permits a range of hardware, and some software, items, to be exported or reexported without a License which would otherwise be necessary for the group of several former Warsaw Pact countries and the PRC listed in Country Group D:1 in Supplement No. 1 to Part 740. However, this License Exception is not available if the item is being shipped to "military end users or to known military end uses."[27]

Thus, this License Exception requires shippers to "know" the ultimate end use and end user of an item. The EAR's existing definition of "knowledge" discussed above is applicable to License Exception CIV. Note also that the prohibited Nuclear, Rockets and Unmanned Air Vehicles, CBW and U.S. Person end use rules in Part 744 are considered to be "military" for purposes of §740.5. The Entity List will also control, to the extent of the restrictions set forth therein.

Nevertheless, there will always be practical difficulties with CIV's military end use knowledge test. This will be particularly true in the case of the PRC, where a shipper may know or suspect that an entity, while seemingly engaged solely in commercial activity, is in fact owned by the Chinese Military as such or by individual high ranking military officers. If the entity is actually engaging only in commercial activity, does the military ownership mean that CIV is not available? This is not a hypothetical question inasmuch as the Chinese military seems to be engaging in significant commercial enterprises.

The final rule published by BIS on June 19, 2007 on Chinese Military End Uses[28] will be complementary to License Exception CIV as applied to China. This Rule, as discussed in more detail below, now applies to certain items, as identified in the new Supplement No. 2 to Part 744, which did not theretofore require a BIS license for China under the CCL and the possible use of License Exception CIV. A shipper is now required to obtain a BIS license if it knows the Supplement No. 2 listed item will have military end uses as defined in new § 744.21. There will not also be a military end user test under this new rule.

Iraq Military End Use and End User Rule:

When BIS published its revised regulations on Iraq on July 30, 2004,[29] it included a special military end use /end user rule in § 746.3(a)(4). Under this rule a shipper must seek a BIS license for any item subject to the EAR (whether or not controlled on the CCL) if it knows, or has reason to know, or is informed by BIS, that the item (i) will be, or (ii) is intended to be, used or a “military end use” or by a “military end user” except for shipments to U.S. Government agencies or personnel, or to the Government of Iraq or to the Multinational Force in Iraq. The rule is thus intended to limit shipments which might be used by insurgency forces. The rule also specifically extends to shipments made within Iraq.

“Military End Use” in § 746.3(a)(4)(i) is specially defined to mean incorporation of the shipment into a military item described on the U.S. Munitions List (“USML”)or the Wassenaar Arrangement Munitions List (“WAML”)[30] or the use, development or deployment of military items as described on the USML or WAML. “Military end user” in § 746.3(a)(4) (ii) is defined to mean any persons whose “actions” and “functions” are intended to support these defined “military end uses” and which is not recognized as a “legitimate military organization” by the U.S. Government. While this latter rule clearly is directed at insurgent forces, it is nevertheless quite unclear how a shipper is supposed to know if a particular end user was recognized as “legitimate” by the USG. Also note that the Iraq rule requires seeking a license for any item being shipped to someone who seems to fit the description of “military end user” whether nor not the item fits the “military end use” description.

Also note that § 746.3 makes clear that the end use provisions relating to Nuclear items, Rockets and Unmanned Air Vehicles , CBW and U.S Persons in Part 744, discussed above, will also be applicable for shipments to or within Iraq. However to the extent the Part 744 rules might apply to a ballistic missile with a range of 300 km or more, § 746.3 (a)(5) substitutes a range threshold of 150 km for ballistic missiles destined for, or for transfer within, Iraq.

New BIS China Military End Use “Catch-All” Rule

As indicated above in the discussion of License Exception CIV, BIS published a Final Rule on June 19, 2007 establishing a new requirement for the licensing of items being shipped to China which are not subject to CCL list based controls for that country but which are identified in a new proposed Supplement No. 2 to Part 744.[31] The licensing requirement will be triggered if the shipper “knows,” ( i.e. has knowledge) or is informed by BIS , that such a item is intended, entirely or in part, for a “military end use” as defined in new § 744.21. That the Rule also amends the U.S. Person rule in § 744.6, discussed above, to apply to any action in which a U.S. Person knowingly supports a shipment which does not have a BIS license required by § 744.21 including financing, transportation, freight forwarding, and the “facilitation” of freight forwarding.

Although not stated explicitly in §744.21, BIS indicates that the “knowledge” test in therein will be governed by the definitions in Part 772 as discussed above.[32] However, the Rule contains a detailed definition of “military end use” in § 744.21(f). Building on the military end use definition in the Iraq rule in § 746.3 discussed above, the China rule also looks to items described in the U.S,. Munitions List, the Wassenaar Arrangement’s International Munitions List or any of the EAR’s ECCN’s ending in “A018.” “Military end use” for these items is determined by whether the item being shipped is intended for incorporation into any of the foregoing listed items, or used for their production, design, development ,maintenance, operation, installation or deployment, repair overhaul or refurbishing. The Note to § 244.21 goes on to provide its own special definitions of the terms “production”, “development”, “maintenance,” “operation,” “installation” and “deployment.”

The Rule substantially stiffens the standards to be used by used by BIS not only in reviewing license applications submitted pursuant to proposed § 744.21, but also applications submitted for items specifically controlled on the CCL for China. The Rule amends § 742.4 (b)(7) so that it would no longer provide that licenses may be approved even where they might contribute to Chinese “military development” or the end use or end user is in fact military except in cases where a “ direct and significant contribution” might be made to electronic and anti-submarine warfare, intelligence gathering, power projection and air superiority. Instead, the standard of review for revised §742.4(b)(7), while retaining the “direct and significant” language (as opposed to the “material contribution” language of new 744.21), now specifies that a license will be denied if China’s “military capabilities” are involved as principally defined in a new long list of specific military systems set forth in a new Supplement No.7 to Part 742, which replaces the aforementioned limited list.

There are two other end use-related features of the Final Rule: (1) A new requirement for PRC Ministry of Commerce End Use Certificates and (2) A Validated End-User (“VEU”) Authorization mechanism. Briefly:

1. A PRC End-Use certificate will now be required to support any license application for China exceeding, in most cases, $50, 000 (formerly $5000) in value, not just, as previously, for items controlled for National Security (NS) reasons. This will include license applications submitted under §744.21.

2. The VEU Authorization if issued by BIS, will permit exports and reexports of specifically identified “eligible “U.S. origin items, which would otherwise require a BIS license because listed on the CCL, for use in civil applications by specific PRC end users approved by BIS.[33] The proposed VEU Authorization will not be available for the items listed in Supplement No.2 to Part 744 which fit the definition of military end use and theretofore require a license under §744.21.[34]

I note that on October 2, 2007, BIS announced that India will now be an eligible destination for the VEU Authorization.[35] Similar to the PRC, such authorization will be subject to BIS approval of the specific Indian end user and of specific CCL items to be contained in each authorization. However, the §744.21 procedure for China will not be applicable to India.

I have the following brief comments on the Rule:

1. The need for this Rule --together with the burdens it imposes on exporters--is mysterious. The U.S. origin Items Listed in proposed Supplement No 2 to Part 744 can presently be freely exported and reexported to most of areas of the world (all countries except T5) without a BIS license and their wide availability will continue to be the case. It is simply not tenable to believe that by placing these items under a “catch all” type control that the U.S. will meaningfully arrest the material development of PRC military capabilities. Instead, U.S. exporters will face a compliance challenge if they fail the “catch all” knowledge test and it is utterly impossible to believe that BIS will able effectively to police compliance with this rule by foreign reexporters. And note, the Proposed VEU Authorization will be of no help for any shipments subject to proposed §744.21.

2. On a positive note, BIS has not indicated that the de minimis rules in EAR §734.4 are affected by the Final Rule. This means that non-U.S. end products containing 25% or less controlled U.S. origin content could be shipped to the PRC without a BIS license even if the end product would fail the proposed §744.21 tests had been it been of U.S. origin.

Conclusion

Shippers must view all these end use/end user rules with great caution. If an entity is not found on the Entity List, consideration should always be given to the desirability of discussing a proposed shipment with BIS in an effort to ascertain whether an end use or end user is civilian or military, or whether a project is engaged in prohibited nuclear, rockets and unmanned air vehicles, or CBW activity. The problem with making such enquiries is that the answer may be just as vague as the situation confronting the shipper, because the U.S. intelligence community will prevent Commerce from disclosing the U.S. Government's own knowledge. Thus, in the end, a shipper may have to rely on its own judgment and instincts. The ancient rule that "prudence is the better part of valor" may be the only true guide. Or, in other words, "when in doubt, don't!"

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[1] This paper is a revision and updating of the paper I published in the Practicing Law Institute's Course Handbook Coping with U.S. Export Controls 2006

[2] I have not dealt with legislative proposals in this paper inasmuch as , at the time of writing, there is virtually no legislative movement towards passage of a new Export Administration Act.

[3] See L. Christensen's Article on "Technology and Software Controls" in this volume.

[4] 62 F.R. 4910

[5] 72 F.R. 31005

[6] It is not clear in the Proposed Rule if BIS will publish any or all of such “facts.”

[7] 42 U.S.C. 2139a(c).

[8] Note: At the time of writing, the list of NATO members does not include the more recent members, e.g., Poland.

[9] See discussion of "knows”, infra

[10] It is not always clear that a facility is, in fact, subject to IAEA safeguards. The State Department's Office of Nuclear Energy Affairs (202-647-3310) will supply this information.

[11] See the Appendix for the List of Member Countries.

[12] 69 Fed. Reg. 64657 et seq., November 8, 2004. This notice, inter alia, removed the reference to specific “projects” in § 744.3 and Country Group D:4.

[13] 58 Fed. Reg. 68029 et seq., December 23, 1993.

[14] 57 Fed. Reg. 26773, June 16, 1992. The August 15, 1991 notice stated that the requirements of former §778.7(c)(1) would not be "applicable" until Supplement No. 6 was completed.

[15] CBW Weapons, as such, including the chemicals and biological agents utilized in CBW together with related technology and software are controlled under Category XIV of the U.S. Munitions List of the State Department's International Traffic in Arms Regulations, 22 CFR §121.1.

[16] See footnote 10, above.

[17] 50 U.S.C. App. §2405(m). This provision was added to the EAA by §304(b) of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, P.L. No. 102-182, 105 Stat. 1245, 1246-1247.

[18] BIS interprets 744.6 to apply in this manner because the text is based on the phrase” any item” as opposed to “any item subject to the EAR” or equivalent phrase which is the EAR ‘s way of referring to items of U.S origin.

[19] While the term “missiles” is not defined in § 744.6., there is a definition of this term in the EAR’s general definitions provisions in Part 772 which reflects the 500 kg payload and 300 km range criteria set forth in § 742.5 and the MTCR. Presumably the broader definitions in § 744.3 would not be applicable to § 744.6 but this is not entirely clear. Also note the special definition of “ballistic missiles” in respect of Iraq in § 746.3 discussed below.

[20] This requirement did not become effective until June 16, 1992. See footnote 13 above.

[21] 56 Fed. Reg. 10765, March 13, 1991.

[22] 15 U.S.C. §78.

[23] P.L. 100-418, 100 Stat. 1107.

[24] 56 Fed. Reg. 40494, August 15, 1991.

[25] 56 Fed. Reg. 40494, 40495.

[26] On October 13, 2004, BIS announced a proposed revision to the Knowledge definition, 69 F.R. 60829. Essentially, the proposal would have broadened somewhat the ability of BIS to infer knowledge in a given set of circumstances, The proposal attracted considerable criticism from the exporting community and was withdrawn by BIS effective October 18, 2006 by announcement in the Federal Register. 71 F.R. 61435. I discussed the proposal in some detail in the version of this article contained in the 2005 edition of the Course Handbook. at pp. 179-180

[27] Note that semi-annual reporting of use of CIV is required by EAR Part 743 for certain ECCN’s.

[28] 72 F.R. 33646, June 19, 2007. See the Apprendix.

[29] 69 F.R. 46070, et seq, July 30, 2004

[30] See http://

[31] The Final Rule was originally published as a Proposed Rule on July 6, 2006, 71 F.R. 38313, and received extensive commentary from the exporting community.

[32] See “Q.s & A.s on the BIS China Policy Rule” set forth on the BIS web site.

[33] At the time of writing, BIS has not approved any PRC end users. One criterion for such approval is the PRC end user’s commitment to permit BIS auditing of its sales to ensure they are only for civil uses. On September 13, 2007, the PRC Ministry of Commerce announced that such commitment may only be given with the prior approval of the Ministry. See the Ministry’s web site at policy/200709/20070905091778.html. This announcement was reported by Donald A Weadon and Carol A. Kalinoski in their article “China Adds New hurdle to Verified End User Approval” in the October 2007 edition of the Export Practitioner, Vol.. 21 No.10.

[34] See the BIS Q & A explanation of the VEU Authorization on its web site at bis.

[35] See 72 F.R. 56010, October 2, 2007

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