Introduction

In an interim rule published on 15 January 2020, the Department of Commerce, Bureau of Industry and Security (BIS) introduced expansive changes to General Prohibition 7 of the Export Administration Regulations (EARs) by including new controls on military-intelligence end uses and users, making the already tricky process of conducting business with foreign entities that much more complicated.

After minor corrections, a rule that many missed or ignored took effect on 16 March 2021. The rule will affect US companies and persons as it affects the activities of US persons – even if the US person is not dealing with an item that is not subject to US export control laws.

Companies should be prepared to conduct additional due diligence for any transactions involving entities in the countries enumerated in this rule.

What does the rule do?

General Prohibition 7 of the EARs covers the restrictions on activities by US persons(1) relating to the proliferation of weapons of mass destruction (WMDs). Notably, these activities need not involve an item subject to the EARs – critically, this is the only part of the EARs that applies to activities of US persons rather than commodities, software or technology.

The interim final rule substantially expands on those service areas that could violate General Prohibition 7 – for services in or rendered to entities in China, Russia, Venezuela and other embargoed countries. The rule:

  • expands the destinations for existing end use controls on US person activities involving the specific WMDs end uses already included in Part 744.6 of the EARs;
  • expands the range of 'supporting' activities that are prohibited;
  • adds new restrictions on the activities of US persons in support of certain military-intelligence end uses and users in China, Russia, Venezuela or other embargoed countries to the scope of General Prohibition 7; and
  • establishes a broad base of items subject to restrictions relating to military-intelligence end uses and users to include all items subject to the EARs, including EAR99 items.

What types of activity by US persons are now restricted?

The new rule states that a licence is now required for any US person which knowingly 'supports' any one of the following (new activities are bolded and changes in country coverage are noted in brackets):

  • Provision 1 – the design, "development", "production", operation, installation (including on-site installation), maintenance (checking), repair, overhaul or refurbishing of nuclear explosive devices in or by any country not listed in Supplement 3 to this part.
    • This rule previously applied to the nine countries listed in D:2. Supplement 3 has 22 countries, so this is equivalent to adding most of the world to the nuclear explosive device list.
  • Provision 2 – the design, "development", "production", operation, installation (including on-site installation), maintenance (checking), repair, overhaul or refurbishing of "missiles" in or by a country listed in Country Groups D:4 or E:2.
    • This rule previously applied to countries listed in D:4; this change only adds Cuba.
  • Provision 3 – the design, "development", "production", operation, installation (including on-site installation), maintenance (checking), repair, overhaul or refurbishing of chemical or biological weapons in or by any country or destination worldwide.
    • The geographical scope of this rule remains unchanged.
  • Provision 4 – the design, "development", "production", operation, installation (including on-site installation), maintenance (checking), repair, overhaul, refurbishing, shipment or transfer (in-country) of a whole plant to make chemical weapons precursors identified in Export Control Classification Number 1C350, in or by countries other than those listed in Country Group A:3 (Australia Group).
    • The geographical scope of this rule remains unchanged.
  • Provision 5 – a 'military-intelligence end use' or a 'military-intelligence end user', as defined in Section 744.22(f) of the EARs, in China, Russia, Venezuela or a country listed in Country Groups E:1 or E:2.
    • This is a new rule.

The rule introduces three main changes:

  • expanded geographical scope for nuclear explosive and missile end uses – Provisions 1 and 2 expand the destinations to which activities by US persons relating to WMDs are restricted;
  • expanded activities prohibited – the rule expands the kinds of supporting activity that are prohibited. As noted, the revised rule added the verbs highlighted in bold above;(2) and
  • military intelligence end user/use prohibition added – perhaps most importantly, Provision 5 adds a new restriction on activities of US persons in support of certain military-intelligence end uses and users, a rule that was expanded in 2020.

What does the term 'support' include?

According to the new rule, any one of the following activities may be considered 'support' for one of the restricted activities or end users:

  • shipping or transmitting from one foreign country to another foreign country any item not subject to the EARs that the shipper knows will be used in or by any of the end uses or end users described in Paragraphs (b)(1) to (5) of this section, 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 EARs that the transferrer knows will be used in or by any of the end uses or end users described in Paragraphs (b)(1) to (5) of this section;
  • facilitating such shipment, transmission, or transfer (in-country); or
  • performing any contract, service, or employment that it is known may assist or benefit any of the end uses or end users described in Paragraphs (b)(1) to (5) of this section, including ordering, buying, removing, concealing, storing, using, selling, loaning, disposing, servicing, financing, transporting, freight forwarding or conducting negotiations in furtherance of.

As can be seen, the definition of 'support' in the rule is broad and encompasses a range of activities with the potential to significantly affect the ability of parties to conduct business with foreign entities. Specifically, the provision stating that the performance of "any contract, service, or employment", including activities such as "ordering, buying, removing, concealing, storing, using, selling, loaning, disposing, servicing, financing, transporting, freight forwarding, or conducting negotiations in furtherance of" a restricted end use or end user opens the door for BIS to find previously safe business dealings with foreign entities to now represent 'support' of a military-intelligence end user.

Moreover, where the prior regulation prohibited US persons from performing contracts, services or employment that the US person knew "[would] directly assist" in the design, development, production or use of missiles and chemical and biological weapons, this new regulation prohibits US persons from performing contracts, services or employment that the US person knows "may assist or benefit any of the end uses or end users described in paragraphs (b)(1) through (5)". In short, the new rule goes from "will directly assist" in two prohibited end uses to "may assist or benefit" five prohibited end uses.

The language is very broad and it is hoped that the Office of Export Enforcement does not interpret it widely.

What is a military-intelligence end use or user?

In addition to the broad definition above, the new rule imposes a significant expansion of the types of item subject to the restrictions on military-intelligence end uses and users. The rule states that a licence from BIS is required for "the export, reexport, or transfer of all items subject to the EAR to military-intelligence end uses and end users in China, Russia, or Venezuela; and countries listed in Country Groups E:1 and E:2" if an entity has "'knowledge' – which includes reason to know – that the item is intended, entirely or in part, for a 'military-intelligence end use' or a 'military-intelligence end user'" in the enumerated countries.

As such, even EAR99 items will require a licence if the transaction includes an entity that meets the definition of 'military-intelligence end user' and there is some element of knowledge to the transaction.

In addition, as explained above, even absent anything subject to the EARs, US persons are prohibited by Section 744.6 from 'supporting' a 'military-intelligence end use' or a 'military-intelligence end user', as defined in Section 744.22(f) of the EARs, in China, Russia, Venezuela or a country listed in Country Groups E:1 or E:2.

The new rules define 'military-intelligence end use' as:

the design, 'development,' 'production,' use, operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of, or incorporation into, items described on the US Munitions List (USML) (22 CFR part 121, International Traffic in Arms Regulations), or classified under ECCNs ending in 'A018' or under '600 series' ECCNs, which are intended to support the actions or functions of a 'military-intelligence end user'.

"Military-intelligence end user" is defined as "any intelligence or reconnaissance organization of the armed services (army, navy, marine, air force, or coast guard); or national guard". The rule includes a list of military-intelligence end users that may be instructive; however, the list is not exhaustive and other entities in the subject countries may be found to fit this definition:

  • Cuba – Directorate of Military Intelligence and Directorate of Military Counterintelligence;
  • China – Intelligence Bureau of the Joint Staff Department;
  • Iran – Islamic Revolutionary Guard Corps Intelligence Organisation and Artesh Directorate for Intelligence;
  • North Korea – Reconnaissance General Bureau;
  • Russia – Main Intelligence Directorate;
  • Syria – Military Intelligence Service; and
  • Venezuela – General Directorate of Military Counterintelligence.

These definitions are quite broad, particularly that of a 'military-intelligence end user', which includes intelligence or reconnaissance organisations of the armed services. Therefore, parties should proceed with caution when engaging with entities from the subject countries, especially in regard to China, Russia and Venezuela (because the other countries are embargoed and therefore off limits for US companies in the first place, there is less of a diligence issue related to them). The increasingly symbiotic relationship between Chinese military entities and the Chinese private sector means that support provided to any number of private Chinese entities may now be considered to assist or benefit – and therefore support – Chinese military intelligence end users or end uses. What sort of due diligence will BIS now expect US companies to put in place to reduce such risk?

Are there any licence exceptions to these new restrictions?

No, not for providing 'support' to the WMD activities listed above. However, the rule does provide that:

US persons who are employees of a department or agency of the US Government may 'support' a 'military-intelligence end use' or a 'military-intelligence end user,'… if the 'support' is provided in the performance of official duties in furtherance of a US Government program that is authorized by law and subject to control by the President by other means.

"Contractor support personnel" or "those persons who provide administrative, managerial, scientific or technical support under contract to a US Government department or agency" are also eligible for this exception.

How is the Department of Commerce likely to review licence applications for these activities?

Applications by a US person seeking to support an end use or user related to WMD proliferation activities will be denied "if such support would make a material contribution to the end uses and end users described" in those provisions. Applications by a US person to support a military-intelligence end use or user "will be reviewed with a presumption of denial".

When did this rule take effect?

Although there were question marks over whether the rule would be subject to the Biden administration's recently issued regulatory freeze, BIS released a correction to the rule on 15 March 2021, removing any doubt that the rule went into effect on 16 March 2021. The correction also revises language in the original rule that would have resulted in the deletion of Parts 744.3(a)(3)(i) and (ii) of the EARs, which contain the licence requirements for exporters, re-exporters and transferors which cannot determine the range capabilities of a rocket system or unmanned aerial vehicle (UAV) in those countries listed in Country Group D:4 of the EARs or whether such a rocket system or UAV will be used in connection with the delivery of certain WMDs.

Thus, as of now, US persons should be prepared to conduct additional due diligence for any transactions involving entities in the countries enumerated in this rule.

Endnotes

(1) A 'US person' is:

  • any individual who is a citizen of the United States, a permanent resident alien of the United States or a protected individual as defined by 8 US Code 1324b(a)(3);
  • any juridical person organised under the laws of the United States or any jurisdiction within the United States, including foreign branches; and
  • any person in the United States.

(2) The reason provided in the preamble (at 86 Federal Regulation 4868) to the rule, which stated that the prior language was limited by the word 'use' (and additional words such as 'development' and 'production') in Parts 744.3, 744.4 and 744.6, is incorrect. None of the sections identified by the preamble as limiting the scope to 'use' put quotation marks around 'use'. Therefore, the terms in Parts 744.3, 744.4 and 744.6 were not the defined terms. To put it differently, the verb used in Part 744.6 was not the verb 'use' as defined in Part 772.1, so BIS was incorrect as a matter of law for these verb changes.