Overview of U.S. Export Controls and Sanctions Issues Relating to ...

29 August 2011
V&E China Practice Group
Overview of U.S. Export Controls and Sanctions Issues
Relating to the Design, Development and/or Production of
Electric Vehicles in the People’s Republic of China
Part I of this series focused on various rules governing the investment in electric vehicle projects in the People’s
Republic of China, including the equity participation and qualification requirements, as well as the rules for
establishing the various PRC entities for conducting business in the PRC’s electric vehicle industry. Part II
focused on the various intellectual property-related issues for conducting business in the PRC. Part III will
discuss how various U.S. export controls-related issues impact investment in the PRC electric vehicle industry
(including design, development and/or production of electric vehicles).
Table of Contents
I. Executive Summary ....................................................................................................................................2
II. U.S. Export Controls and Sanctions: Key Concepts ...................................................................................3
1. Export Controls of Commercial and “Dual Use” Items and Technology Under the EAR...............3
(i) Penalties for Violations of the EAR ...................................................................................4
(ii) The Broad Extraterritorial Reach of the EAR ....................................................................4
(iii) Special Considerations for Exports to Foreign Persons Under the EAR..........................5
(iv) Export Restrictions Under the EAR...................................................................................5
(v) Items Not “Subject to the EAR”.........................................................................................9
2. Export Controls of Military Items and Technology Under the ITAR .............................................10
3. Restrictions on Transactions Under the OFAC Sanctions...........................................................11
III.
Current Compliance Considerations Relating to the Design, Development, or Production of Electric
Vehicle Production in the PRC..................................................................................................................12
1. Compliance Considerations in Determining Export License Requirements ................................12
2. Compliance Considerations in Dealing with a Party Ineligible to Receive Exports .....................13
3. Compliance Considerations Resulting from OFAC Sanctions.....................................................14
IV. Future Compliance Considerations Resulting from Possible Export Reform ...........................................14
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I. Executive Summary
The international and competitive nature of business in today’s global economy demands that the export
of products and technology from the U.S. to other parts of the world become an integral part of most
company business plans. This is certainly true of U.S. companies engaged in the design, development,
and production of electric vehicles (EVs). These companies need innovative technical solutions,
cost-effective production capabilities and the ability to market and sell products worldwide. As a result, it
is essential that U.S. export controls and sanctions laws and regulations be considered by companies
upfront as part of their strategic planning. Noncompliance with these laws and regulations can result in
significant civil and criminal penalties as well as the interruption of commercial business activities with
serious financial repercussions.
This overview identifies the main U.S. export controls regulations and sanctions regimes in place today,
with a focus on those areas that likely will be most applicable to EV developers and manufacturers who
are considering the involvement of the People’s Republic of China (the “PRC”) as part of their business
strategy. 1 The most relevant regulations are the Export Administration Regulations (the “EAR”)
administered by the U.S. Department of Commerce’s Bureau of Industry and Security (the “BIS”), as
well as various sanctions regulations administered by the U.S. Department of Treasury’s Office of
Foreign Assets Control (OFAC).
A U.S. company currently will be able to work with PRC companies and individuals in designing,
developing and producing EVs in most cases, assuming it develops an appropriate compliance plan
with the necessary safeguards to guard against violations of U.S. export and sanctions laws. Presently,
the EAR, which covers the export and re-export of most non-military items, does not impose a general
license requirement for the export to the PRC of a completed EV or of some of its major components
(i.e., charger, battery, motor, etc.) or of related technology. To the extent a license requirement would be
applicable, it is more likely to involve lower level assemblies and individual parts and components. Items
as varied as electronics, computer equipment, encryption software, and even certain valves and
bearings, possibly could require a license for export to the PRC. In some cases, specialized
manufacturing equipment or certain raw materials could be subject to an export license requirement.
These items are intended to be illustrative only. Specific license requirements applicable to particular
equipment or technology would have to be reviewed on a case-by-case basis.
Therefore, it is essential that U.S. exporters identify the export controls that are applicable to all of their
equipment and technology, down to the part and component level. This is particularly important for
exports involving the PRC, as China is considered to be a sensitive destination for export purposes and
the U.S. has imposed a “China Rule,” which imposes special restrictions on items that would not
otherwise require a license, except that the U.S. believes these items could contribute to the PRC’s
military capability.
Aside from any export license requirements that might be applicable, another compliance risk that must
be considered is that certain PRC entities have been sanctioned by the U.S. government for national
security or foreign policy reasons and now may be ineligible to receive exports and/or participate in
transactions with U.S. persons. As a result, it is critical that U.S. companies thoroughly screen all parties
to a potential transaction to ensure they are not violating any U.S. export or sanctions law or regulation
by working with a particular PRC entity or person.
1
U.S. export control laws distinguish between the PRC — mainland China — and Hong Kong and Taiwan. As such, conclusions and
assertions relating to the PRC discussed herein apply to mainland China but do not necessarily apply to Hong Kong or Taiwan.
2

Furthermore, while it is unlikely that a U.S. company involved in the development and production of EVs
would want to do business with such a sanctioned entity, a more likely possibility is that a PRC entity
could re-export U.S. origin EV equipment or technology to sanctioned countries or individuals (for
example to broaden their market share by selling EVs in Iran). The PRC routinely does business with
countries (such as Cuba, Iran, and North Korea, etc.) and certain individuals (including those
designated as Specially Designated Nationals, or “SDNs,” by OFAC) with whom U.S. persons are
prohibited from doing business. As such, safeguards need to be built into any contracts with PRC
companies to ensure they agree to abide with applicable U.S. export and sanctions restrictions. For
example, many compliance-minded companies include a “proceeds” provision in their contracts, to
ensure that any payments they make are not ultimately used for a purpose that would violate U.S. law.
Although EVs normally should be subject to the export controls of the EAR, in the event that an EV was
designed or modified for military use (either U.S. military or foreign military), under current U.S. controls,
the resulting vehicle likely would end up being controlled by the more restrictive export controls of the
International Traffic in Arms Regulations (the “ITAR”). Under the ITAR, the PRC is a “proscribed
destination,” meaning that PRC companies and nationals could not be involved in the development of
such vehicles and the vehicles could not be sold in the PRC. As such, U.S. EV companies should
exercise caution when entering into any arrangements with U.S. or foreign militaries which could
possibly subject their end product to ITAR controls.
Notwithstanding these concerns, based on the current state of U.S. export and sanctions laws and
regulations, U.S. companies should be able to engage PRC companies and individuals on EV design,
development, and production issues as long as they implement appropriate compliance plans to
mitigate areas of potential risk.
II.
U.S. Export Controls and Sanctions: Key Concepts
U.S. export control laws and regulations broadly control exports to foreign persons. In addition, OFAC
also broadly controls a range of transactions with embargoed countries and designated individuals and
entities.
An “Export” for the purpose of U.S. export laws and regulations generally includes any shipment of
products or technology outside of the U.S. Any disclosure of technology to foreign persons (located
either inside or outside the U.S.) is also considered an export. Technology can include tangible items of
any kind, such as drawings, specifications, and email correspondence. Technology can also be
disclosed through less tangible means, such as through teleconferences, plant tours, or other methods.
Delivery of products or technology to a foreign embassy located in the U.S. is an export.
A “Foreign Person” for the purpose of U.S. export laws and regulations, generally includes any natural
person who is not a U.S. citizen, or a lawful permanent U.S. resident (or a member of other very limited
protected classes). A foreign person also includes entities, such as foreign corporations, partnerships,
trusts, societies, that are not incorporated or organized to do business in the U.S.
1. Export Controls of Commercial and “Dual Use” Items and Technology Under the EAR
The Department of Commerce, through the BIS, is responsible for administration of the EAR, 15
C.F.R. Part 730 et seq., which governs the export and re-export of commercial and “dual use”
(items with both military and commercial applications) commodities and related technology. As
a practical matter, the scope of the EAR is enormous, controlling items ranging from the most
benign everyday products, such as pens and pencils, to highly sophisticated and sensitive
items, such as machine tools, encryption products, sensors, lasers, computers, and propulsion
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equipment, as well as related software and technology. The export controls prescribed by the
EAR will be applicable to the development and production of EVs, as a general rule.
(i)
Penalties for Violations of the EAR
The penalties for violations of the EAR can be both civil and/or criminal. Criminal
penalties (for willful violations) can reach as high as $1 million and include up to 20
years imprisonment. Civil penalties can reach $250,000 per violation or twice the
amount of the transaction that is the basis of the violation. Penalties may also include a
denial of export privileges or suspension/debarment from government contracting,
which can often prove to be more damaging to a company’s business and reputation
than a monetary fine.
According to published guidelines, the BIS will consider both aggravating and mitigating
factors in each case in deciding the particular penalty. Voluntary disclosure serves as a
primary mitigating factor in deciding penalties. The BIS aggressively enforces
noncompliance with the EAR, often with assistance from other U.S. government
agencies. In recent years, significant enforcement action has been taken against both
U.S. and foreign companies. See, e.g., BUREAU OF INDUSTRY AND SECURITY, U.S. DEP’T
OF COMMERCE, “OTHER RELATED ENFORCEMENT TOPICS,” www.bis.doc.gov/compliancean
denforcment/othereetopics.htm#penalties.
Recently, in March 2011, the BIS fined ArvinMeritor, a Michigan company, $100,000 for
shipping vehicle axles and seal assemblies controlled for national security reasons to
China and some other countries, notwithstanding the fact that ArvinMeritor had
voluntarily disclosed the violation, which significantly mitigated the penalties that
otherwise might have been imposed. BIS enforcement actions relating to the PRC are
not unusual. For example, in a September 2010 bulletin, entitled “Don’t Let This
Happen to You,” which highlighted recent BIS export enforcement actions, of the 103
cases summarized in the bulletin, approximately 23 percent (or 24 cases) involved
exports to China. Id. at www.bis.doc.gov/complianceandenforcement/dontletthishappen
toyou_2010.pdf.
(ii)
The Broad Extraterritorial Reach of the EAR
With limited exceptions, discussed below, all items in the U.S. are subject to the EAR,
as are most items of U.S. origin, wherever they are located. This includes U.S. origin
parts, components and materials integrated into foreign made products, commingled
U.S. origin software, commingled U.S. origin technology and in some cases foreign
products developed from U.S. technology. The only exception to this broad
extraterritorial reach is that the U.S. relinquishes control of EAR-controlled items and
technology (for most, but not all items), if they are considered “de minimis” to the
foreign product. To be considered de minimis, U.S. content must comprise no more
than 25 percent of the total value of the item, except if the item will be re-exported to an
embargoed country (i.e., Cuba, Iran, North Korea, Sudan or Syria), in which case the
value of U.S. content must be 10 percent or less than the total value of the item.
The EAR outlines a complicated formula that must be used to correctly determine the
valuation. 15 C.F.R. (hereinafter “EAR”) at § 734.4.
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(iii)
Special Considerations for Exports to Foreign Persons Under the EAR
In cases where a foreign person has more than one foreign nationality, under the EAR,
the BIS looks to the “last” nationality (unless there are unique circumstances which
would suggest that methodology should not apply). As an example, if a person was
born in the PRC and then became either a permanent resident of or citizen of Canada,
under the EAR the individual would normally be considered a national of Canada. 2
An export to a foreign person who is located in the U.S. is “deemed” to be an export to
the person’s home country. Accordingly, under the EAR, an export of technology
subject to the EAR to a PRC national employed by a U.S. company or institution of
higher learning would be deemed to be an export back to the PRC whether or not the
individual ever would (or realistically could) disclose the information to the PRC.
(iv)
Export Restrictions Under the EAR
(a)
Restrictions Are Based on Item, End User and End Use
Given the enormous scope of items controlled by the EAR, it would neither be
realistic nor practical for the BIS to require an export license to export each and
every type of product, software or technology to every destination. Rather,
items are restricted for export purposes based on the item, end user and end
use. This requires a careful review of the EAR to determine what particular
controls might apply. Under the Commerce Control List (the “CCL”) of the EAR,
found at 15 C.F.R. Part 774, items are grouped under ten broad product
categories (numbered 0-9):
(0) Nuclear materials, facilities and equipment [and miscellaneous items]
(1) Materials, chemicals and toxins
(2) Materials processing
(3) Electronics
(4) Computers
(5) Telecommunications and Information Security
(6) Sensors and lasers
(7) Navigation and avionics
(8) Marine
(9) Propulsion systems, space vehicles and related equipment
Within each of these general categories, items are further broken down into
subcategories. For each product category, Subcategory (A) controls
Equipment, Assemblies and Components; Subcategory (B) controls Production
2
BUREAU OF INDUSTRY AND SECURITY, U.S. DEP’T OF COMMERCE, “DEEMED EXPORT” FAQS, www.bis.doc.gov/deemedexports/
deemedexportsfaqs.html#11.
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and Test Equipment; Subcategory (C) controls Materials; Subcategory (D)
controls Software; and Subcategory (E) controls Technology.
Within each of the ten product categories, individual products, materials,
software and technology are all controlled by their functionality under specific
Export Control Classification Numbers (ECCNs). Items that are not specifically
identified under ECCNs are subject to the least restrictive controls and have the
default export control classification of “EAR99.” If the designation “EAR99”
applies, such exports will require an export license from the BIS only if they are
(1) sent to an embargoed country or to a person or entity considered ineligible
by the U.S. government to receive exports or (2) exported under a
circumstance which would violate a “General Prohibition” of the EAR. These
circumstances are described in Section II.1(iv)(c)-(d) below.
It is often difficult to determine whether a particular ECCN applies. In some
cases, it may be necessary to make a formal “classification request” to the BIS
to confirm the control status of an item. One challenge in classifying items
under the EAR is that the controls that apply to an end item often do not apply
to its individual parts or components. In many cases, an end item may have
more restrictive export controls than its individual minor parts and components
of the item, although in some cases the opposite is true, particularly when
dealing with unique embedded electronics, sensors or encryption items. For
that reason, it is sometimes the case that an end item can be shipped to a final
destination without a license, although a spare part or component shipped
separately at a later date could require a license.
Once the correct ECCN for the particular item to be exported is identified, the
ECCN will list the applicable “reasons for control” for the item. Possible
“reasons for control” under the EAR are restrictions based on one or more
national security and foreign policy concerns. The most common reasons for
control include: Chemical & Biological Weapons [CB], Nuclear Non-Proliferation
[NP], National Security [NS], Missile Technology [MT], Regional Stability [RS],
Firearms Convention [FC], Crime Control [CC], Encryption Item [EI] and
Anti-Terrorism [AT] concerns. See EAR, at § 738.2(d)(2)(i)(A)(2010).
Once the reasons for control for a particular ECCN have been identified, the
Commerce Country Chart (Supplement No. 1 to Part 738) must then be
consulted to identify the particular controls that apply for exports to a particular
country. For example, a particular item or technology that is controlled for CC
(Crime Control) reasons generally would require an export license for shipment
to the PRC, while the same item would not require a license if it were shipped
to the United Kingdom. In the case of the PRC, all of the “reasons for control”
identified above generally apply, except for AT controls. This means that
exports of many items will require a license for the PRC, unless a license
exception applies.
The EAR contains at least 17 major license exceptions under which the
exporter may not need a license to export even if the analysis set forth above
indicates that an item requires a license for shipment to a particular destination.
All license exceptions are subject to strict conditions, which means that
exporters must read the “fine print” in the EAR to determine whether a license
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exception does, in fact, apply to a particular transaction. Some license
exceptions are value based, meaning that they can only be used for limited
quantities of certain items. Other license exceptions are ECCN based, meaning
they are available for the export of some items controlled under some ECCNs
and not others. Finally, certain license exceptions are destination based,
meaning that they are available depending on the country of intended export
and/or recipient. Although an exception may indeed be available for a particular
export to the PRC, it should be noted that in many cases, a license will be
required, because the PRC is considered to be a sensitive destination.
(b)
Exports to the PRC Subject to Additional Restrictions Under “China Rule”
With respect to items controlled for NS (National Security) reasons, the BIS
maintains a general policy of approval for exports to the PRC for civil end-uses
and a presumption of denial for license applications to export, re-export, or
transfer items to the PRC that would make “a direct and significant contribution
to the PRC’s military capabilities.” See EAR, at § 742.4(b)(7). This policy was
established under EAR provisions implemented in 2007 that specifically
addressed exports to the PRC (i.e., the “China Rule”). 72 Fed. Reg. 33,646
(June 19, 2007). The EAR does not define when an export is considered to
make such a “direct and significant contribution,” though the BIS comments in
publishing the China Rule indicates that this is a narrower standard than the
“material contribution” standard applicable to exports of items destined for
military end-use (see below). Id. at 33,647.
A more prohibitive license review policy applies to exports of items to the PRC
for a “military end-use.” For purposes of this policy, “military end-use” includes
incorporation into, use in, development of, or production of 1) military items
described in the U.S. Munitions List of the ITAR; 2) military items described in
the Munitions List of the Wassenaar Arrangement; and 3) any item listed under
an ECCN ending in A018. EAR, at § 744.21(f).
Applications to export or otherwise transfer items for a “military end-use” in the
PRC are reviewed on a case-by-case basis, to determine whether transfer
“would make a material contribution to the military capabilities of the PRC and
would result in advancing the country’s military activities contrary to the national
security interests of the United States.” Id. If the BIS determines that such a
contribution will result, the license is denied. The China Rule also established a
Validated End-User program for the PRC which is most useful to companies
seeking repeated, large volume exports to one particular customer. Id. at
§ 748.15. It also imposed a PRC End-User Statement requirement for license
applications for exports of products (as opposed to license applications for
software or technology exports). Id. at § 748.9(a)(6)-(7).
(c)
EAR-Controlled Exports Subject to Catch-All “General Prohibitions”
In addition to controlling exports to foreign persons, the EAR also prohibits
certain activities that can go beyond the scope of a mere export, and may
prohibit engaging in actions prohibited by a BIS denial order; engaging in
certain proliferation activities (i.e., nuclear, missile, chemical/biological) or
proceeding with “knowledge” that a violation has occurred or is about to occur.
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Under the EAR, “knowledge” includes not only positive knowledge that a
circumstance exists or is substantially certain to occur, but also an awareness
of a high probability of its existence or future occurrence. Awareness may be
inferred from a conscious disregard or willful avoidance of facts. In other words,
exporters may not “self blind” when considering a potential export transaction.
In order to help identify situations where a violation of a General Prohibition
may occur, the EAR includes a list of warning signals, known as “Red Flags.”
See EAR Part 732, Supp. 3. If no red flags reasonably are or should be
apparent, there is no affirmative duty on exporters to perform additional due
diligence related to the transaction. However, if any red flags are triggered in
relation to a particular customer or transaction, the exporter has a duty to
inquire further and investigate any suspicious circumstances. Circumstances
that should trigger further investigation include (but are not limited to):
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
Customer is reluctant to offer information about end use of the product;
Product’s capabilities do not fit customer’s line of business;
Product is incompatible with the technical level of receiving country;
Customer has little or no business background;
Customer is willing to pay cash for expensive items when terms of sale
call for financing;
Customer is unfamiliar with product’s performance characteristics;
Customer declines routine installation, training or maintenance
services;
Vague delivery dates and delivery to out-of-the-way destinations;
Freight forwarder is listed as the product’s final destination;
Abnormal shipping route;
Packaging is inconsistent with the stated method of shipment or
destination; and
Customer is evasive about whether product is for domestic use, export
or re-export.
(d)
Restrictions on Exports to Embargoed Destinations and Other Ineligible Parties
The EAR broadly restricts exports to certain “embargoed” countries, which
currently include Cuba, Iran, North Korea, Sudan and Syria. The prohibitions in
the EAR are designed to be consistent with and operate in conjunction with
various OFAC sanctions relating to these countries, discussed in Section II.3
below.
In certain situations, the U.S. government also denies export privileges to
particular U.S. or foreign entities based on national security or foreign policy
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concerns. Entities may appear on one or more of the following U.S. government
lists:
• Denied Persons List;
• Entity List;
• Specially Designated Nationals List (compiled by OFAC); 3
• Nonproliferation Sanctions (several lists compiled by the State Department of
parties that have been sanctioned under various statutes; some of these
sanctioned parties are subject to the BIS’s license application denial policy);
and
• Unverified List (includes names and countries of foreign persons who were
parties to a transaction in which the BIS could not conduct a pre-license check
or post-shipment verification for reasons outside the U.S. Government’s control.
The BIS has instructed that the involvement of any person or entity on the
Unverified List in a transaction automatically presents a “Red Flag”).
To access a consolidated list of embargoed/ineligible parties, exporters should
access the government’s consolidated list at www.Export.gov. Review of each
of these lists is important on a case-by-case basis as various PRC entities
and/or citizens have been or currently are listed on such list(s). For more
information, please see Section III.2 below.
(v)
Items Not “Subject to the EAR”
There are cases when the EAR does not control exports of particular products, software
or technology. For example, the EAR does not apply to the export or re-export of items
exclusively controlled for export by another government agency. An example would
include military items controlled under the ITAR, discussed at Section II.2 below. The
EAR also does not control information that would otherwise be subject to the EAR, but
for the fact that it has been made “publicly available.” See EAR, at § 734.3(b)(3). This
includes educational materials that appear in university textbooks and are conveyed to
students in catalog courses and associated teaching laboratories of academic
institutions. Id. at § 734.9. It includes items in patent applications. Id. at § 734.10.
Publicly available information also includes material that has been “published,” as that
term is defined under the EAR. Id. at § 734.7. Information is deemed to be published
when it is generally accessible to the public in any form, including:
• Publication in periodicals, books, and electronic or any other media that is (a) available
to any member of the public or community of persons interested in the matter; and (b)
free or at a price not exceeding the cost of reproduction and distribution;
• Readily available at libraries open to the public or at university libraries;
• Contained in patents and open (published) applications; and
3
See OFFICE OF FOREIGN ASSETS CONTROL, U.S. DEP’T OF THE TREASURY, SPECIALLY DESIGNATED NATIONALS AND BLOCKED PERSONS LIST
(2011), available at www.treasury.gov/ofac/downloads/t11sdn.pdf.
9

• Available at open conferences, seminars or other gatherings, where (a) all technically
qualified members of the public may attend and take notes; and (b) entrance fees are
reasonably related to the cost and reflect an intention that all qualified persons may
attend.
Information also is publicly available and not subject to the EAR if it arises during or
results from fundamental research. Id. at § 734.8. In such cases the information is
limited to basic and applied research in science and engineering, the results of which
are ordinarily published and shared broadly within the scientific community; not
proprietary; and not restricted by U.S. government access controls. Note that a project
is not considered fundamental research when researchers accept restrictions on the
publication of results and where research is funded by the U.S. government and access
and dissemination controls are applicable. Id. at § 734.11. The locus of the fundamental
research is not the limiting factor, but rather the intent and freedom to publish. Under
the EAR, fundamental research may be performed in industry, federal laboratories and
other institutions. See EAR Part 734, Supp. 1(d)(8). A prepublication review does not
affect fundamental research status under the EAR if the purpose is to ensure that no
proprietary information has been inadvertently disclosed and that no patent rights have
been compromised.
Corporate research is considered to be fundamental research under the EAR to the
extent that researchers are free to make scientific and technical information resulting
from the research publicly available without the restriction or delay based on proprietary
concerns or specific national security concerns. Likewise, a prepublication review of
such corporate research does not affect fundamental research status under the EAR if
the purpose is to ensure that no proprietary information has been inadvertently
disclosed and that no patent rights have been compromised.
Finally, it should be noted that the “publicly available” designation is only applicable to
software and technology exports. Hardware cannot be made publicly available under
the EAR.
2. Export Controls of Military Items and Technology Under the ITAR
The State Department, through the Directorate of Defense Trade Controls (the “DDTC”),
administers controls relating to products, software, and technical data specially designed,
developed or modified for military or intelligence end use, through the ITAR, 22 CFR Part
120-130.
Penalties for violations of the ITAR can be both civil and/or criminal. Civil fines can be as high
as $500,000 per violation, while criminal penalties may include fines of up to $1,000,000 per
violation and ten years imprisonment. Moreover, the DDTC has traditionally imposed additional
draconian measures on certain companies, including debarment, imposition of a policy of denial
for export authorizations, and required implementation of various compliance measures,
including but not limited to, a Special Compliance Officer to oversee the company’s compliance
and the establishment of a computer-based export compliance system.
Although EVs normally should be controlled under the EAR, in the event a company were to
develop or modify any electric vehicle products or technologies specifically for a military use
(either U.S. military or foreign military), the products and related technology could end up being
controlled under the ITAR. The PRC is considered to be a “proscribed destination” under the
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ITAR meaning that, as a practical matter, it would not be possible to obtain U.S. government
authorization for any ITAR controlled projects involving the PRC. See 22 C.F.R. (hereinafter
“ITAR”) at § 126.1. As a result, PRC nationals and PRC companies could not be used to
support the development or production of any electric vehicle products or technologies that are
ITAR controlled. Additionally, no ITAR controlled EV products could be sold for end use in
the PRC.
As a result, U.S. companies should carefully consider the implications of entering into
any contracts with U.S. or foreign military entities, to ensure that products or technologies do
not become “tainted” as ITAR controlled. The ITAR does not impose export licensing
requirements on information that is in the “Public Domain” (a defined term in the regulations). Id.
at § 120.11. However, the ITAR “Public Domain” definition is narrower than the “publicly
available” designation under the EAR. Therefore, as a practical matter, its application tends to
be limited to situations where the U.S. government has officially approved the public release of
certain information or situations where institutions of higher learning are engaged in
fundamental research.
3. Restrictions on Transactions Under the OFAC Sanctions
OFAC is charged with the administration and enforcement of economic sanctions against
embargoed countries (restricted countries) and against certain identified groups of individuals
with respect to certain “regulated activities” (e.g., diamond trading, narcotics, terrorism and
proliferation). The most comprehensive sanctions are imposed against Cuba, Iran, Sudan (with
exceptions granted for areas in Southern Sudan), and most recently Libya and Syria. Other
countries, such as Burma (Myanmar) and North Korea are also subject to certain restrictions.
OFAC maintains a list of SDNs (Specially Designated Nationals) which contains the names of
individuals and organizations known to be involved in regulated activities, or to support
restricted countries.
As a general matter, the sanctions apply to U.S. persons (U.S. citizens or lawful permanent
residents) and, in some cases, other persons subject to U.S. jurisdiction which include foreign
persons located in the U.S. Several of the sanctions programs explicitly restrict the activities of
non-U.S. persons. For example, under the Cuban sanctions, foreign companies owned or
controlled by U.S. companies are treated as “U.S. persons” for the purpose of the sanctions.
Under the Iran sanctions, non-U.S. persons are prohibited from re-exporting any U.S. origin
goods that they know or have reason to know will be provided to Iran or to an Iranian national
and have an export classification under the EAR other than EAR99.
The OFAC sanctions restrict a variety of business activities (in addition to exports and imports),
although the extent of such restrictions vary depending on the scope of the sanctions program.
Restrictions may include the blocking of assets, restrictions on dealing in a property interest
(which may include entering into contracts or other financial transactions), and travel
prohibitions.
Although voluntary self-disclosure is taken into consideration by OFAC as a mitigating factor for
non-compliance, violations of the OFAC sanctions can result in criminal penalties (including
fines ranging from $50,000 - $1,000,000 and imprisonment from 10 – 30 years) and civil
penalties (which range from $11,000 - $1,000,000 per offence, depending on the regulatory
scheme under which a particular sanctions program is promulgated). OFAC has an extremely
aggressive enforcement scheme and has imposed stiff penalties on both U.S. and foreign
companies in the last several years. See, e.g., OFFICE OF FOREIGN ASSETS CONTROL, “CIVIL
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PENALTIES AND ENFORCEMENT INFORMATION,” www.treasury.gov/resource-center/sanctions/Civ
Pen/Pages/civpen-index2.apx.
III.
Current Compliance Considerations Relating to the Design, Development, or Production of
Electric Vehicle Production in the PRC
1. Compliance Considerations in Determining Export License Requirements
Based on the current regulations, there do not appear to be any insurmountable impediments
from an export or sanctions compliance perspective in developing and producing EVs with PRC
involvement (either through the use of a PRC company or the use of a PRC national working in
the U.S.).
Currently the EAR does not contain an ECCN that would cover the EV as a whole or cover any
software or technology relating to the EV generally. Category 9 of the CCL of the EAR, which
covers Propulsion Equipment, includes a number of different vehicles, including certain rockets,
launch vehicles, non-military UAVs (unmanned aerial vehicles), certain non-combat military
vehicles and various engines for particularly sensitive applications. However, EVs are not
included, which means that the vehicle, as a whole, would be considered “EAR99,” the lowest
level of control. Similarly, other major components of an EV, including the EV charger, battery,
and motor are not currently listed under a particular ECCN.
As a result, to the extent that an export licensing requirement arises, it would most likely occur
in connection with the export of products and related software and technology at the subsystem
or part or component level. A review of the EAR reveals various types products, software and
technology that sometimes require export authorization and potentially could be used as part of
the development or production of EVs. Such items could include (but not be limited to)
electronics (e.g., frequency extenders, integrated circuits, receivers, semiconductors, etc.); high
performance computer equipment; encryption/information security products and software;
navigational/directional equipment; sensors/lasers; and even certain lower level parts and
components such as valves and bearings.
In some cases, various materials could require a license for export. Such materials could
include certain high grade plastics; composites; and various cooling or lubricating fluids. In
limited cases even certain raw materials, such as particular metals, aluminum, steel, and
titanium alloys could require a license. Similarly, certain specialized test equipment (e.g.,
accelerometers, magnetometers, oscillators, calibration and alignment equipment, equipment to
monitor vibration, etc.) could result in a license requirement. Finally, many manufacturers are
unaware that certain underlying machine tools used to produce an item could require a license
to export. Such machine tools could include items such as dimensional inspection machines,
cutting machines, numerically controlled machines, and drilling machines.
Note that this description of various products, software and technology is neither intended to be
exhaustive nor is it intended to conclusively identify all items that might require a license to ship
to the PRC or to otherwise export to PRC nationals. For one thing, not all of the general types of
items mentioned above necessarily would require a license. As an example, while certain
valves with particular functionality or lined with particular materials might require a license, most
valves would not have the same functionality or be made with the same sensitive materials and
an export license likely would not be required. In addition, it is unclear at this time what
products, software and technology actually would need to be transferred to a PRC national so it
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is not possible to develop a reliable list of controlled products, software and technology. The
items identified above are simply intended to be illustrative, to identify some potential areas for
further review and inquiry prior to export. Any company will need to perform a thorough review
for export controls purposes of all products, software and technology proposed for transfer to
PRC entities, to ensure that it is aware of the export jurisdiction (i.e., the ITAR or the EAR),
classification (i.e., applicable ECCN, if any) and export license requirements of all items to be
exported.
If a license is required from the BIS, advance planning of at least six months or more is
advisable. All license applications must be submitted electronically and a company must be
registered with the BIS’s online application system in order to submit a license application.
Additionally, license applications involving the PRC tend to be considered more sensitive and
involve a longer review period by the U.S. government. In addition to a review by Department of
Commerce and Department of Defense personnel, it is not uncommon for license applications
involving the PRC to also be staffed to the Department of State for further review of potential
national security and foreign policy considerations. While it is not likely that the export of any
products, software or technology would trigger the application of the “China Rule” described
above, exporters would need to be prepared to show why the rule does not apply, as the U.S.
government will consider the rule as part of the review of the license application.
It is certainly possible that the development of EV technology could involve “publicly available”
information that is not subject to the EAR or its licensing controls. However, as mentioned
above, the publicly available designation is available in only limited situations. Moreover, by
making information “publicly available,” exporters lose all proprietary protections, which is why,
in most cases, exporters choose not to make information publicly available even if there is no
regulatory prohibition from doing so.
Finally, it is possible that as part of initial EV development, companies will want to make use of
U.S. government funding, which could include funding made available by the U.S. Army, the
Defense Advanced Research Projects Agency or other military entities. Companies should
review such arrangements extremely carefully, to ensure they are not subjecting their products
and technology to ITAR controls (which would, among other things, preclude the involvement of
the PRC and could severely restrict future sales opportunities).
2. Compliance Considerations in Dealing with a Party Ineligible to Receive Exports
As mentioned above, the U.S. restricts exports and re-exports to certain foreign and U.S.
entities for national security and foreign policy reasons. Individuals and entities can end up
being placed on the Denied Persons List, Unverified List, Entity List, Debarred List, or
Nonproliferation Sanctions List. There are PRC entities included on the Entity List, SDN List,
and Nonproliferation Sanctions List. These entities tend to be research organizations associated
with the Chinese government, technology companies, and scientists. As a result, any EV
developer or producer looking to engage in research and development activities involving the
PRC should be especially careful that it does not end up doing business with an ineligible party,
which will require screening all parties to the transaction against U.S. government lists of
ineligible parties. There is a particular risk when dealing with the PRC. Unlike European Union
countries or other strong U.S. allies who are part of various multilateral regimes, and often
impose similar export and re-export restrictions, the PRC does not recognize most export
restrictions imposed by the U.S. As a result, a violation of U.S. export regulations would occur if
a U.S. EV developer provided certain export controlled technology to a PRC company and the
PRC company, in turn, provided the information to a research institution included on the Entity
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List or sold the resulting product to North Korea. Therefore, a U.S. EV developer needs to
ensure that it is aware of all parties to a transaction when dealing with the PRC and includes
contractual safeguards to avoid a potentially unauthorized re-export to an ineligible party. It
should be noted that PRC entities, like other foreign companies, resent the extraterritoriality of
U.S. export controls and are not likely to readily agree to prohibitions that will restrict their
business activities unless they understand that the transaction cannot move forward without
including such contractual safeguards.
3. Compliance Considerations Resulting from OFAC Sanctions
A U.S. EV developer or producer needs to ensure that its transactions involving the PRC do not
violate one of the OFAC sanctions, for the same reasons described in Section III.2 above. The
PRC routinely deals with entities from sanctioned countries, most notably Cuba, Iran and North
Korea, and also deals on occasion with entities that are known to be SDNs. Therefore, prior to
entering into an arrangement with a PRC company, the EV developer/producer needs to be
aware of (1) the entities the PRC company plans to involve in the transaction and (2) the
territory/individuals that might receive any resulting technology or products. The PRC’s plans for
future use of any U.S. origin EV technology or products could violate one or more of the
sanctions regulations. Additionally, it is advisable for U.S. companies to include a “proceeds”
restriction in their contracts with PRC companies, to ensure that the companies do not use any
payments received from a U.S. company for a purpose that would violate the U.S. sanctions.
IV.
Future Compliance Considerations Resulting from Possible Export Reform
The U.S. government is currently implementing an Export Control Reform Initiative, which seeks to
improve and streamline the current system by ultimately centralizing export licensing, administration,
and enforcement, primarily in one government agency. This would necessitate dismantling the current
system, under which the Department of State controls exports of military items under the ITAR, which
contains the USML, and the Department of Commerce controls exports of commercial and dual use
items under the EAR, which contains the CCL. The U.S. government eventually hopes to replace the
USML and CCL with one control list, a structure already implemented by most of the major U.S. allies.
The government’s first step in accomplishing these changes is to restructure the CCL and the USML to
ensure that the lists are more “positive” and objectively defined, to clearly identify what is and what is
not controlled for export and to reduce the level of control on products and related technology, where
appropriate. Both the CCL and the USML (and the ultimate single list) will be structured by tiers, to
identify the level of export control and commensurate licensing requirement. The three tier structure will
focus on the extent to which an item provides a military or intelligence advantage to the U.S. and the
extent to which items are available outside the U.S. Tier 1 will include the most sensitive items, such as
Weapons of Mass Destruction, that are almost exclusively available in the U.S. and provide the most
critical military/intelligence advantage. Tier 2 will include items that are almost exclusively available from
the U.S. or from its major allies and provide a substantial military/intelligence advantage. Tier 3 will
include items that provide significant military/intelligence advantage but are more widely available, as
well as items that must continue to be controlled to satisfy certain foreign policy or statutory
requirements or multilateral commitments.
In addition to reform initiatives relating to the CCL and USML, the Obama administration also developed
a new export-related website, located at www.export.gov. Most notably, the website includes a
consolidated screening list to simplify screening procedures for exporters. Prior to the launch of this
consolidated list, exporters who did not have access to private screening software had to check multiple
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U.S. government websites to search various lists of denied/ineligible parties. As part of its export reform
initiatives, on June 16, 2011, the BIS implemented a new license exception (Strategic Trade
Authorization, or “STA”) which would authorize the export of lower level, less sensitive items to stronger
U.S. allies without a license. The PRC is not included in the list of countries for which the use of STA
may be available. Therefore, License Exception STA would not affect exports to the PRC.
These reforms collectively show that the U.S. is attempting to decontrol and reduce the burden on
government and industry with respect to older, widely available products and technologies so that it can
focus on controlling and enforcing export laws with respect to the most sensitive items and destinations
(including the PRC). Because EV technology is new and important and can provide the U.S. with a
technological and commercial edge, at this point we do not anticipate that the reform effort will
substantially lessen export requirements with respect to EV activities with the PRC. However, as
mentioned in Section III.1 above, at the same time, top level EV equipment and related technology do
not appear to be covered under particular ECCNs that would result in license requirements and we do
not envision a tightening of controls with respect to these items.
* * *
It is critical that U.S. companies engaged in the design, development, and/or production of EVs with PRC
entities and individuals learn to work within U.S. export and sanctions laws and regulations and develop the
appropriate compliance plans. This will help them comply with U.S. law and avoid civil and criminal penalties
and related commercial repercussions. Moreover, developing a workable, tailored compliance program will help
EV developers and producers improve their competitive position in relation to other companies who have not
developed the same sensitivity to export and sanctions requirements and therefore experience the serious
problems that result from noncompliance.
For more information, please contact Vinson & Elkins lawyers Boyd Carano and Margaret
Sampson in Palo Alto, Xiao Yong in Hong Kong, Jason Wu and Lili Shen in Houston, Wang
Qianqian and Richard Berberian in Beijing, Suzanne Reifman in Washington, DC, or Claire
Wilby in Abu Dhabi. Visit our website to learn more about V&E's China practice, or e-mail one
of the practice contacts.
This memorandum is provided by Vinson & Elkins LLP as a general guide only, and may not be appropriate in relation to a particular
transaction or situation or under a particular governing law. This memorandum is not legal advice; specialist legal advice should be sought in
all circumstances before using this memorandum or the information contained herein in any particular transaction or situation. Vinson &
Elkins LLP and their respective partners and employees disclaim any and all warranties or representations, express or implied, as to the
applicability, contents, or accuracy of this memorandum, including any use of this memorandum without proper legal advice, and the user
assumes all risk from using this memorandum.
© 2011 Vinson & Elkins LLP (Unpublished Work). All rights reserved.
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