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

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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 14
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. 15
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