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

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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 6
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. 7
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