The US Department of Commerce’s Bureau of Industry and Security (“BIS”) has issued new FAQs on its website addressing the new military end use / military end user rule (“MEU Rule”) and the expansion of the MEU controls for China, Russia, and Venezuela. For a summary of the MEU rule changes, please see our prior blog post detailing the changes to Section 744.21 and other related provisions in the Export Administration Regulations (“EAR”).
There are 32 FAQs, which provide a summary of the new MEU Rule, guidance on specific scenarios, and interpretations of the key terms, including, “military end use” and “military end user.” Below we discuss a few of the key points from the BIS FAQs regarding military end users, military end uses, and due diligence.
Military End User
- Broadened Application: BIS confirms in Question 2 that while the definition of military end user was not revised, its application has been broadened. Besides now applying to military end users in China, it will now effectively include additional end users because the definition of “military end uses” was expanded in Section 744.21(f).
- Types of Military End Users: In Question 3, BIS clarifies that there are two types of military end users: (1) “traditional foreign military and related organizations (defined in the text as ‘national armed services (army, navy, marine, air force, or coast guard), as well as the national guard and national police, government intelligence or reconnaissance organizations’)” (“traditional MEUsers”) and (2) other end users “whose activities are intended to support ‘military end uses’ as defined in Section 744.21(f)” (“other MEUsers”).
- Activities of an End User: Question 10 provides a very broad basis to determine if a company is an MEUser, even when the end use of the item is confirmed as a non-military end use, stating “a license is required if the specific end user is a person or entity that ‘develops, produces, maintains, or uses military items.’ The activities of the specific end user determine whether it meets that test. There is no specific volume level for such activities that would trigger a license requirement.” This could be interpreted as a low threshold of activity that could cause an end user to fall into the definition of a MEUser, i.e., there is no “predominance” test.
- State-owned Enterprises: BIS further explains that other MEUsers include other foreign national governmental organizations, specifically calling out state-owned enterprises (“SOEs”), that “develop, produce, maintain, or use military items.” According to BIS, “SOEs are entities over which their national governments can or do exercise significant direction or control of the SOE’s operations through supervision, financing, subsidization, or ownership, including significant minority ownership.”
- Police: In Question 17, BIS confirms that generally the MEUser definition applies to national police, not provincial or municipal police departments, and provides a warning regarding potential diversion to national police.
- License Requirements: BIS confirms that, if an end user meets the definition of a MEUser, then a license will be required for the export of items listed in Supplement No. 2 of Part 744, even if the item is destined for a non-military end use.
Military End Use
- Scope of Military End Use: BIS clarified that “any item that supports or contributes to,” as used in the definition of military end use, “goes beyond incorporation into a military item to mean direct facilitation, such as installation, inspection, or test equipment and related software and technology, of the operation, installation, maintenance, repair, overhaul, or refurbishing, or the “development” or “production” of military items…”
There are several FAQs that discuss due diligence measures in specific and general scenarios. However, BIS does not provide any new guidance on the extent of due diligence expected or other details regarding its due diligence expectations, aside from referencing its Know Your Customer Guidance.
- Defense Ministry Subsidiaries: Question 5 addresses whether a subsidiary agency of the Ministry of Defense, such as a military hospital, would be considered a MEUser. BIS confirms that due diligence is required to determine whether the hospital would be a MEUser, and provides factors to consider in the due diligence. The factors include the “relation of the ‘military hospital’ to the country’s national armed services and the patient population served by the hospital, or whether it is an entity that develops, produces, maintains, or uses military items.”
- Affiliate Relationships: Question 9 addresses a situation where an exporter knows that an end user has a parent or subordinate involved in “military end uses” and whether the exporter would be selling to a military end user even if the exporter did not have knowledge that the end user was involved in manufacturing items for military end uses. BIS highlights, again, the exercise of “due diligence to determine whether the parent or subordinate entity’s military activities is relevant to the specific end user’s activities and that knowledge should be taken into account along with information regarding the specific end user.”
- Knowledge: BIS also emphasized that the definition of “knowledge” under the EAR “includes not only positive knowledge that the circumstances exist or are substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person’s wilful avoidance of facts.”
- BIS addresses the export of mass market items in Questions 11 and 12, again emphasizing the knowledge definition. The license requirement in Section 744.21 is only triggered if the exporter has knowledge that a distributor or systems integrator of mass market items sold to the general public intends to reexport or transfer (in-country) the items for a “military end use.”
In addition to Questions 26-31, last week BIS issued additional exporter guidance (somewhat buried) on its website that is not included in the MEU FAQs. The guidance essentially states that Electronic Export Information (“EEI”) filings in the Automated Export System (“AES”) are required as of June 29, 2020 for all Export Control Classification Numbers (“ECCNs”) listed in Supplement No. 2 to Part 744 destined for China, Russia, or Venezuela (including where no license is required (“NLR”)), but imposition of this requirement is delayed for other ECCNs that are not identified in Supplement No. 2 to Part 744 and destined to the same jurisdictions until September 27, 2020.
In the FAQs, BIS provides the guidance it promised at the time it issued the MEU Rule, with further information regarding its current interpretation of key definitions in the MEU Rule and some scenarios. However, this guidance does not provide bright line rules or clear guidance for exporters or suppliers to China, Russia, and Venezuela, which will make it difficult to implement the new MEU Rule in practice, especially the modification of due diligence procedures. Specifically, in some instances, exporters may view the guidance as falling short of providing clarity as to when an end user may be a MEUser, as the guidance largely highlights some factors and the language of the definition in the regulations, without going further.
We will continue to monitor BIS’s announcements for further clarifying guidance in the future.