Proposed BIS rules target end users and uses, and U.S. person activity in specified countries

The Department of Commerce’s Bureau of Industry and Security (BIS) has issued two proposed rules (“End-Use and End-User Based Export Controls, Including US Persons Activities Controls: Military and Intelligence End Uses and End Users” and “Export Administration Regulations: Crime Controls and Expansion/Update of US Persons Controls”) pursuant to the Export Administration Regulations (EAR) that expand the current restrictions on “military end users” and “military end uses” and add additional categories of end users subject to these restrictions – “intelligence end users,” “military support end users,” and “foreign-security end users.” Additionally, the proposed rules impose restrictions on US person “support” to “military end users,” “military production activities,” “intelligence end users,” “military support end users,” and “foreign-security end users.” Finally, the rule also proposes controls on export of facial recognition technology. The two proposed rules will have a broad impact on a variety of industries because the license requirements broadly apply to all items subject to the EAR (for military end users/military end uses Intelligence end users) or items subject to the EAR and listed on the Commerce Control List (CCL) - for military-support end users and foreign-security end users - and will require exporters to make significant updates to their compliance procedures.

Relatedly, the US Department of State’s Directorate of Defense Trade Controls issued a proposed rule pursuant to the International Traffic in Arms Regulations (ITAR) to revise the definition of “defense services” and add two new subcategories of “defense services” controlled on the US Munitions List (USML) to classify military intelligence and intelligence assistance even if no items subject to the ITAR are involved.

"Military end users” and ”military end use”

Implication of proposed “military end user” and “military end use” definitions and license requirements

Currently, license requirements for military end users (MEUs) apply only to covered entities in Belarus, Burma, Cambodia, China, Nicaragua, Russia, or Venezuela, and certain items subject to the EAR that are set forth on Supplement No. 2 to Part 744 (except for Belarus and Russia which require licenses for all items subject to the EAR). The proposed rules would require a license to export, reexport, or transfer (in-country) all items subject to the EAR when there is “knowledge” that the item is intended for (1) a ‘military end use’ that occurs in or is destined to a Country Group D:5 country¹ or Macau, or (2) an MEU wherever located, of a Country Group D:5 country or Macau. The proposed rules would therefore expand the scope of licensing requirements to include EAR99 items, including food and medicine, and would apply to a larger group of countries.

Additionally, BIS currently maintains its Military End User restrictions (15 CFR § 744.21) separately from its Entity List restrictions (though certain MEUs in Russia and Belarus are currently included on the Entity List). One of the proposed rules would move all parties on the Military End User List in Supplement No. 7 to Part 744 of the EAR to the Entity List and would use footnote 3 or 5 to designate entities on the Entity List as MEUs. However, as with the current license requirements for MEUs, exporters still would be required to review the parties to transactions to determine whether they meet the definition of MEU and are “of” Macau or a Country Group D:5 country even if they are not on the Military End User List.

The proposed rule would remove the current limitation that an entity located anywhere in the world must be on the Entity List or the MEU List. The current license requirements applicable to MEUs also apply to Belarussian, Burmese, Cambodian, Chinese, Nicaraguan, or Venezuelan MEUs located anywhere in the world, provided they are set forth on either the Entity List or the MEU List. Conversely, the proposed rule does not appear to require an entity be listed on the Entity List or the MEU List, meaning that parties would still have to assess whether parties to a transaction located outside of Macau or a Country Group D:5 country are MEUs of Macau or a Country Group D:5 country. The proposed rule does not discuss how BIS will determine whether an MEU is “of” a Country Group D:5 country or Macau. For instance, BIS did not address whether “of” will be based on an ownership test or other similar standard.

The proposed definition of MEU would remove “national police, government intelligence or reconnaissance organization, or any person or entity whose actions/functions intended to support ‘military end uses’” because those categories of entities are moved to new types of end users established by the proposed rule: military support end users, intelligence end users, and foreign-security end users.

The proposed definition of MEU would be expanded to include mercenaries, paramilitary, or irregular forces to capture private companies, non-state actors, or parastatal entities engaging in activities akin to those of traditional armed forces.

License requirements

Under the proposed rule, all items subject to the EAR, including items subject to the lowest level of control – EAR99,  would require a license to export, reexport, or transfer (in-country) when there is “knowledge” that the items are destined for a (1) “military end use” that occurs in, or the product of the “military end use” is destined to, Macau or a Country Group D:5 country (e.g., China, Russia, or Belarus); or (2) MEU, wherever located, of Macau or a Country Group D:5 country. BIS licenses would also be required when BIS informs a person individually or through a Federal Register notice that a license is required.

Definitions

“Military end use” is defined to mean

incorporation occurring outside the United States into a defense article described on the US Munitions List (USML) (22 CFR 121.1, ITAR); incorporation into items classified under Export Control Classification Numbers (ECCNs) under “600 series” ECCNs; or any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production,” of defense articles described on the USML, or items classified under “600 series” ECCNs.

MEU is defined to mean the national armed services (army, navy, marine, air force, or coast guard), the national guard, or any person or entity performing the functions of a MEU, including mercenaries, paramilitary, or irregular forces. MEU also includes entities designated with a footnote 3 or 5 on the Entity List in supplement No. 4 to Part 744 of the EAR.

License review policy:

The following license review policy will apply for applications to export, reexport, or transfer items to MEUs:

• Policy of denial for applications in connection with Burma, People’s Republic of China, Cuba, Iran, Macau, North Korea, Syria, and Venezuela. Pursuant to the December 23, 2020 rule, Hong Kong is not a separate destination under the EAR. Applications for Hong Kong are applications for China and subject to the policy of denial.

• Applications involving Russia and Belarus will be reviewed with a policy of denial consistent with section 746.8(b)(1); and

• All other applications, including involving Cambodia, will be reviewed on a case-by-case review basis.

"Military support end user” (MSEU)

Implication of proposed MSEU definition and license requirements

The current definition of MEU includes “any person or entity whose actions or functions are intended to support military end uses.” The proposed rule creates a new category of end user to address support actions or functions. Similar to the proposed MEU license requirements, license requirements for MSEUs would also apply to the designated entities of Macau or a Country Group D:5 country located anywhere in the world. Unlike the proposed MEU license requirements described above, a license is only required for MSEUs located anywhere in the world when those MSEUs are specifically identified on the Entity List.

As discussed above, it is not clear how BIS will define MSEUs “of” Macau or a Country Group D:5 country. BIS has issued guidance in FAQ 135 that the Entity List license requirements do not apply per se to “legally distinct” entities (i.e., subsidiaries, parent companies, and sister companies that are legally distinct from listed entities) unless such “legally distinct” entities are sham companies acting on behalf of the listed entity or otherwise diverting items to the listed entity. BIS FAQ 135 also states that the Entity License requirements apply to branch offices and operating divisions of a party on the Entity List. BIS FAQ 134 clarifies that Entity List license requirements and policies do not apply to separately incorporated subsidiaries, partially owned subsidiaries, or sister companies of a listed entity, but it is not clear how BIS will consider MSEUs of Macau or a Country Group D:5 country located anywhere in the world.

License requirements

All items specified on the CCL (i.e., items enumerated with an ECCN, require a license for export, reexport, or transfer (in-country) when there is knowledge that the item is intended entirely, or in part, for a MSEU in Macau or a D:5 country, or wherever located when identified on the Entity List in Supplement No. 4 to Part 744 of the EAR and identified with a footnote 6 designation.

BIS licenses would also be required when BIS informs a person individually or through a Federal Register notice that a license is required.

Definition

MSEU means “any person or entity whose actions or functions support ‘military end uses,’ as defined in § 744.21(f) of this section. MSEU also includes entities designated with a footnote 6 on the Entity List.”

License review policy

The following license review policy will apply for applications to export, reexport, or transfer items to MSEUs:

• Policy of denial for applications in connection with Burma, People’s Republic of China, Cuba, Iran, Macau, North Korea, Syria, and Venezuela. Pursuant to the December 23, 2020 rule, Hong Kong is not a separate destination under the EAR. Applications for Hong Kong are applications for China and subject to the policy of denial.

• Applications involving Russia and Belarus will be reviewed with a policy of denial consistent with section 746.8(b)(1); and

• All other applications, including involving Cambodia, will be reviewed on a case-by-case review basis.

"Intelligence end user” (IEU)

Implications of proposed IEU definition and license requirements

The term IEU would replace the current “military-intelligence end user (MIEU)” definition that is subject to license requirements under the EAR (see 15 CFR § 744.22). The proposed rules would require a license to export, reexport, or transfer (in-country) all items subject to the EAR, when there is “knowledge” that the item is intended for entirely or in part, for an IEU, wherever located, that is from a country or destination specified in Country Group D or E that is also not listed in A:5 or A:6 Country Groups. The proposed rules would cover a larger group of countries.

Additionally, the proposed rule revises IEU to apply to all IEUs, including civilian intelligence and reconnaissance organizations. IEU includes any foreign government intelligence, surveillance, or reconnaissance organization or other entities performing functions on behalf of such organizations. IEU also includes entities designated with footnote 7 on the Entity List.

Finally, like the proposed definition of MEU, IEUs located anywhere in the world appear to require a license even if those IEUs are not set forth on the Entity List.

License requirements

All items subject to the EAR, including EAR99 items, will require a license to export, reexport, or transfer (in-country) when there is “knowledge” that the items are intended, entirely or in part, for an IEU, wherever located, that is from a country or destination specified in Country Group D or E that is also not listed in A:5 or A:6 Country Groups. These countries are: Afghanistan, Armenia, Azerbaijan, Bahrain, Belarus, Burma, Cambodia, Central African Republic, People's Republic of China (China and Hong Kong), Democratic Republic of Congo, Cuba, Egypt, Eritrea, Georgia, Haiti, Iran, Iraq, Jordan, Kazakhstan, North Korea, Kuwait, Kyrgyzstan, Laos, Lebanon, Libya, Macau, Moldova, Mongolia, Oman, Pakistan, Qatar, Russia, Saudi Arabia, Somalia, South Sudan, Sudan, Syria, Tajikistan, Turkmenistan, United Arab Emirates, Uzbekistan, Venezuela, Vietnam, Yemen, and Zimbabwe.

BIS licenses would also be required when BIS informs a person individually or through a Federal Register notice that a license is required.

Definition

IEU is defined to mean “any foreign government intelligence, surveillance, or reconnaissance organizations or other entities performing functions on behalf of such organizations. IEU includes entities designated with a footnote 7 on the Entity List.”

License review policy

The following license review policy will apply for applications to export, reexport, or transfer items to IEUs:

• Applications for Macau and countries in ITAR § 126.1(d)(1) will be reviewed with a presumption of denial (except Russia and Belarus).

• Applications for Russia and Belarus will be reviewed with a policy of denial consistent with § 748.(b)(1) of the EAR.

• All other applications will be reviewed on a case-by-case basis consistent with policies articulated in ITAR § 126.1.

"Foreign-security end users” (FSEU)

Implications of proposed FSEU definition

While the current definition of MEU includes “national police,” the proposed definition of FSEU is broader because it includes police, security, and paramilitary services at any level of government.

FSEUs would not include civilian emergency medical, firefighting, and search-and-rescue end users. When a country integrates police, emergency medical, firefighting, and search-and-rescue services into a single public safety department, BIS would review applications for items to those end users on a case-by-case basis to ensure items to protect lives are not disrupted. However, when FSEUs are integrated into the military or otherwise meet the definition of MEU, the MEU restrictions would apply (i.e., a license will be required for all items subject to the EAR).

License requirements

All items on the CCL (i.e., items with an ECCN but not EAR99 items) will require a license to export, reexport, or transfer (in-country) when persons know that the item is intended, entirely or in part, for an FSEU (e.g., police and security agencies) of a country listed in Country Group D:5 or E: Afghanistan, Belarus, Burma, Cambodia, Central African Republic, People’s Republic of China (China and Hong Kong), Democratic Republic of Congo, Cuba, Eritrea, Haiti, Iran, Iraq, North Korea, Lebanon, Libya, Nicaragua, Russia, Somalia, Sudan, South Sudan, Syria, Venezuela, and Zimbabwe.

BIS licenses would also be required when BIS informs a person individually or through a Federal Register notice that a license is required.

Definition

FSEU is defined to mean

• Governmental and other entities with the authority to arrest, detain, monitor, search, or use force in furtherance of their official duties, including persons or entities at all levels of the government police and security services from the national headquarters or the Ministry level, down to all subordinate agencies/bureaus (e.g., municipal, provincial, regional),

• Other persons or entities performing functions of a FSEU, such as arrest, detention, monitoring, or search, and may include analytic and data centers (e.g., genomic data centers) forensic laboratories, jails, prisons, other detention facilities, labor camps, and reeducation facilities, or

• Entities designated with a footnote 8 on the Entity List.

License review policy

The following license review policy will apply for applications to export, reexport, or transfer items to FSEUs:

• Case-by-case basis to determine whether there is an unacceptable risk of use in human rights violations or abuses.

Restrictions on “US persons” “support” activities related to MEUs, military-production activities, MSEUs, IEUs, and FSEUs

BIS would also impose restrictions on specific activities of “US persons” related to certain military and intelligence end users and military-production activities.

US persons would not be able to “support” without a license from BIS:

• an MEU;

• a “military-production activity” (meaning incorporation into any of the following types of items or any other activity that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development” or “production” of (i) 600-series items, including foreign-origin items not subject to the EAR; or (ii) any other item described on the CCL other than a 600-series ECCN or EAR99, including foreign-origin items not subject to the EAR that persons know are ultimately destined to or for use by an MEU);

• an IEU;

• an FSEU (if on the Entity List); or

• an MSEU (if on the Entity List).

The proposed definition of “support” is generally consistent with the current definition of “support:”

• Shipping or transmitting from one foreign country to another foreign country any item not subject to the EAR persons know will used in or by any of the end uses or end users described in § 744.6 (restrictions on “US persons”), including the sending or taking of such item to or from foreign countries in any manner;

• Transferring (in-country) any item not subject to the EAR persons know will be used in or by any of the end uses or end users described in § 744.6 (restrictions on “US persons”);

• Facilitating such shipment, transmission, or transfer (in-country); or

• Performing any contract, service, or employment persons know may assist or benefit any of the end uses or end users described in § 744.6 (restrictions on “US persons”), including, but not limited to: ordering, buying, removing, concealing, storing, using, selling, loaning, disposing, servicing, financing, transporting, freight forwarding, or conducting negotiations to facilitate such activities.

Note however the current definition of “support” refers to “in furtherance of” instead of “to facilitate,” which appears to be a broader term as it implies lass direct involvement by the U.S. person.

The proposed rule also adds a new definition of activities that are not considered “support”:

• Activities related to items described in § 734.3(b) of the EAR (items exclusively controlled for export or reexport certain US Government agencies), for example, activities involving publication, release by instruction in a catalogue course or associated teaching laboratory of an academic institution, or software or technology arising during or resulting from fundamental research (§ 734.3(b)(3)) are not intended to be restricted;

• Activities related to items enumerated on the United States Munitions List or on the United States Munitions Import List, to the extent such activities are subject to control under the International Traffic in Arms Regulations;

• Activities limited to administrative services, such as providing or arranging office space and equipment, hospitality, advertising, or clerical, visa, or translation services, collecting product and pricing information to prepare a response to a request for proposal, generally promoting company goodwill at trade shows, or activities by an attorney that are limited to the provision of legal advice;

• Only with respect to the MEU, IEU, and “military production activities,” commercial activities related to the movement of goods by common carriers; or

• Activities conducted for, on behalf of, or in connection with:

• • A US Government department or agency, including any lawfully authorized investigative, protective, or intelligence activity of a law enforcement or intelligence agency of the United States or of a territory, possession, State, or District of the United States, including political subdivisions thereof;

• • Any US Government cooperative program, project, agreement, or arrangement with a foreign government or international organization or agency that is authorized by law and subject to control by the President, as further described in § 740.11(b)(2)(iii)(B) of the EAR;

• • Any US Government foreign assistance or sales program authorized by law and subject to the control of the President as further described in § 740.11(b)(2)(iii)(C) of the EAR; or

• •  An Acquisition and Cross Servicing Agreement (ACSA) that is executed at the direction of the US Department of Defense as further described in § 740.11(b)(2)(iii)(D).

The common carriers exclusion is intended to ensure that “U.S persons” “support” controls do not adversely impact the basic business operations of shipping lines and air carriers, companies that are generally not involved in arranging underlying transactions involving the sale of the items at issue.

Facial recognition technology

BIS is adding two new unilateral controls on facial recognition technology. First, the rule adds “facial recognition systems” to ECCN 3A981. Second, the rule amends ECCN 3D980 to classify: (i) software “specially designed” for the “development,” “production” or “use” of commodities controlled by 3A980 and 3A981 and (ii) software “specially designed” for the analysis and matching of voice, fingerprints, or facial features for facial recognition. This entry does not control software solely for person or object detection or for individual authentication to facilitate individual access to personal devices or facilities.

Next steps

The two proposed rules will likely have a broad impact on a variety of industries because the license requirements would apply to all items subject to the EAR (for military end users/military end uses and intelligence end users) or items subject to the EAR and listed on the CCL (for military-support end users and foreign-security end users). Companies should assess business with any end users that meet the proposed definitions included above in the countries targeted by the proposed rules and any items subject to the EAR that are provided to these end users.

For assistance in assessing the potential impact of the proposed rules on your business, or if you have questions about export compliance generally, please reach out to any of the listed Hogan Lovells contacts.

Authored by Ashley Roberts, Deborah, Wei, and Andrea Fraser-Reid.

Summer Associate David Haines contributed to this report.

References

1 D:5 countries: Afghanistan, Belarus, Burma, Cambodia, Central African Republic, People's Republic of China (China and Hong Kong), Democratic Republic of Congo, Cuba, Eritrea, Haiti, Iran, Iraq, North Korea, Lebanon, Libya, Nicaragua, Russia, Somalia, Sudan, South Sudan, Syria, Venezuela, and Zimbabwe.