On April 2020; The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) has published two rules to expand restrictions on the export, reexport, and in-country transfer of items which may greatly impact global supply chains. Being effective from June 29, 2020; companies are now subject to more strict export controls for sales to military end users, or for military end uses in China, Russia, and Venezuela.
Under the new regulations, not only the list of items covered by military end use licensing has broadened; but also, the definition of military end use to cover broader categories of activity has expanded. While the requirements for end use, and end users are in effect since 2014 for Russia and Venezuela, the restrictions for China for end use have been in effect since 2007. However, under the new regulations, there will be new restrictions on exports to military end users in China as well. The reason behind this restriction is stated to be the difficulty of determining the end use, and end users of items in China since the country has implemented a strategy of military-civil fusion to tap into the civilian economy.
In a broader scale these new regulations implement the following major changes:
Expansion of the Definition of Military End Use
Until June 29, 2020, the definition of military end use included both direct use (such as components for military items), and indirect use (such as items intended for development, production, or use of military items). Under the new regulation, the definition of military end use has expanded to include ancillary applications as well. Therefore, military end use now covers items that support or contribute to the operation, installation, maintenance, repair, overhaul, refurbishing, development, or production of military items as well.
Expansion of End User Restrictions
The new regulations also bring new requirements for military end users. Since identifying military end users can be challenging where an end user is a subsidiary or affiliate; BIS clarifies that there are two types of military end users. The first one is traditional foreign militaries and related organizations, including the national guard and national police, or government intelligence organizations. The second one is the other end users whose activities are intended to support military end users as defined in Section 744.21(f). Furthermore, to determine if an end user is a military end user, BIS published two questions. Firstly, is the end user part of a military organization, as determined by the end user’s relation to the country’s national armed service? Secondly, does the end user developer, produce, maintain, or use military items? These questions are regarded to be crucial in determining the military end user status using military hospitals, military-related universities, and subordinate agencies of defense ministries. Moreover, this test can surely be applied against other entities to determine whether it is a military end user, or not.
Expansion of Items Subject to Restrictions
By adding new items related to electronics, telecommunications, sensors, and lasers; the new regulations also broaden the scope of the items that are subject to licensing requirements. Moreover, sales to distributors that sometimes supply military end-users will be subject to the restrictions if the export has knowledge that the distributor intends to supply your items for a military end use.
Being effective now on, these regulations will have a significant effect on exporters in certain industries. Companies now shall increase end use, and end user due diligence performed for exports of many newly designated items to China, Russia, and Venezuela. Moreover, companies that have relied on Licence Exception CIV before June 29, 2020, shall now alter practices or consider alternative authorizations for anticipated exports of certain items to civilian end users in China, Russia, and Venezuela.