In a new rule that took effect on September 15, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) expanded and clarified the scope of the Export Administration Regulations (EAR) in a number of ways, some of which impose significant new compliance challenges related to Russia and Belarus. To stay up with the latest developments, readers are encouraged to monitor and review new guidance in the form of Frequently Asked Questions (FAQs) published by BIS at https://www.bis.doc.gov/index.php/policy-guidance/country-guidance/russia-belarus.
The key changes made by the new rule are summarized below.
Russian Industry Sector Sanctions – Addition of a New List of Controlled Items, New “Catch-All” Controls, and Expansion of Previous List of Controlled Items: BIS has expanded the restrictions in Section 746.5 of the EAR in the following ways:
- First, BIS has created a new Supplement No. 6 to Part 746, which contains a list of advanced manufacturing items relevant to numerous industries, along with chemicals, biologics, fentanyl and its precursors, and related chemical production equipment, as well as quantum computing-related items. These items are subject to a licensing requirement for Russia (and, as explained below, also now Belarus). BIS describes these as “a subset of items designated as EAR99 that may be useful for Russia’s CBW production and development capabilities and therefore may be used in support of its military aggression.” Unlike the items in pre-existing Supplement No. 4, discussed below, the items in Supplement No. 6 are not identified by HTS Codes and Schedule B numbers, which may complicate compliance in some instances. (These new items in Supplement No. 6 are, however, identified by Chemical Abstract Numbers (CAS) where applicable.)
- Second, the new rule expands the pre-existing restrictions in Supplement No. 4 to Part 746, beyond the specifically listed items, to include “any modified or designed” “components,” “parts,” “accessories,” and “attachments” for the listed items, “regardless of the Schedule B, Schedule B Description, HTS Code, or HTS Description.” Consequently, items subject to the EAR need not be enumerated by HTS Code or Schedule B Description to be considered “modified or designed” for covered items in Supplement No. 4 and thus to be themselves controlled by BIS. This potentially ambiguous “catch-all” restriction covering EAR99 items may be quite a compliance challenge for companies still doing business with Russia and Belarus. Although BIS stated that this new restriction excludes certain listed types of “minor” parts, the term “any modified or designed” components remains unclear and is apparently different than the defined term “specially designed.” It is also potentially different from the defined term “designed or modified” that is used in the Missile Technology Control Regime (MTCR) context, referring not only to parts/components but also equipment and software. That MTCR term refers to items that, as a result of development or modification, have specified properties that make them fit for a particular application (though they can be used for other applications). While not made expressly applicable in this context, that definition may be a useful reference nonetheless.
- Third, the new rule adds 57 specific entries to Supplement No. 4, including a variety of types of industrial machinery, equipment, and other items. BIS indicated that the “addition of these items will help better align these controls under the EAR with the controls of U.S. allies on these items” and “further undermine the Russian industrial base and its ability to continue to support the Russian invasion of Ukraine.”
Extension of Industry Sector Sanctions to Belarus: Most of the industry sector sanctions in Section 746.5 that have been imposed on Russia this year, including those described above, have been extended to apply to Belarus as well, i.e., the restricted items in Supplements No. 4 and 6. In addition, the pre-existing restrictions on exports of certain items with “knowledge” that they will be used in Russian deepwater or Arctic offshore oil or gas projects could apply to transactions with Belarus, if such knowledge exists. However, these restrictions also now apply to shale oil or gas projects located in Belarus (along with Russia, as was previously the case). BIS stated that it “recognizes that Belarus has only a limited oil and gas exploration industry and has added controls for Belarus under paragraphs (a)(1)(i) to prevent diversion of the specified items through Belarus to Russia.” But, again, it is important to note that most of these controls now apply to Belarus itself, including the shale oil and gas restrictions.
Expansion of the Russia/Belarus FDP Rule: Having created new Supplement No. 6 to Part 746 of the EAR, as described above, BIS has also incorporated those new controls into the Russia/Belarus foreign direct product (“FDP”) rule. That rule, in Section 734.9(f) of the EAR, previously applied only to non-U.S.-origin items not designated EAR99 (i.e., of a type that would be covered by an ECCN). Now, the Russia/Belarus FDP rule also applies to non-U.S.-origin items of a type that would be designated EAR99, if they are identified in Supplement No. 6. This change may call for certain companies to modify their compliance policies and procedures to account for the possibility that non-U.S.-origin EAR99 items may now be subject to the EAR, if they are identified in Supplement No. 6 (and the other elements of the Russia/Belarus FDP rule are met).
Global Expansion of Military End-User (MEU) and Military-Intelligence End-User (MIEU) Restrictions: The new rule now makes these restrictions global in certain respects, rather than applying only in the targeted countries, such as China and Russia.
- Previously, the MEU restrictions applied to transactions destined “to Burma, Cambodia, the People’s Republic of China (China), or Venezuela,” as well as Russia and Belarus. That language has been deleted. Now the restrictions apply to any transactions subject to the EAR that are intended for a Russian, Belarussian, “Burmese, Cambodian, Chinese, or Venezuelan ‘military end user,’ . . . wherever located.”
- Similarly, the MIEU restrictions now apply to such restricted parties “wherever located,” while they previously only applied to such parties “in” the covered countries.
- BIS asserted that with this new rule it is “expanding . . . the ‘military end user’ controls under § 744.21 to reach Belarusian, Burmese, Cambodian, Chinese, Russian, and Venezuelan ‘military end users’ located anywhere in the world” (and makes an equivalent statement about the military-intelligence end user controls). However, such parties located in third countries are only subject to these restrictions if actually designated on the relevant list, whereas unlisted entities can be subject to these restrictions if located within the targeted countries and they meet the definitions of “military end user” or “military-intelligence end user.” Therefore, the practical effect of this change on compliance practices may be limited. It does, however, clarify the agency’s authority to designate such end users in third countries.
- This regulatory development reflects the U.S. government’s increasing focus on the international cooperation among U.S. adversary countries. BIS stated that this “expansion is in recognition that neither military end users nor international development and production activities are limited to the home countries of designated ‘military end users.’” Following this rule change, for those doing business with third countries where there is a risk that such a restricted military end user may be involved, exporters and reexporters should consider whether it is prudent to implement new or expanded compliance controls around potentially restricted military or military-intelligence end users from the covered countries. Additionally, these restrictions continue to apply to military end uses and military-intelligence end uses in the covered countries.
Designation of Certain Entity List Parties as Russia/Belarus MEUs. The new rule revises six entities under ten entries that were added to the Entity List on June 28, 2022 to designate them as Russian MEUs. As a result, the Russia/Belarus-Military End User FDP rule now applies to them. BIS stated “these entities produce items needed by the Russian and Belarusian military and industrial sectors.”
Addition of New Dollar Thresholds for Luxury Goods. Prior to the issuance of the new rule, there was only one dollar threshold for the luxury goods restrictions applicable to Russia and Belarus, as listed in Supplement No. 5 to Part 746 of the EAR: $1,000 per unit wholesale price for clothing and shoes. The new rule lowers that threshold to $300 and includes additional dollar thresholds for other items, including $50,000 for certain vehicles. Several luxury items remain without threshold values. BIS justified this change “to more closely align with the export controls implemented on both countries by our allies.”
New Luxury Goods “Humanitarian” Licensing Policy: The new rule also updates the licensing policy for luxury goods to allow for case-by-case reviews when the items are intended for humanitarian needs. BIS said, for example, this may be relevant “to applications involving certain ‘luxury goods’ items that may be used in medical devices,” and for contact lens solution and rewetting drops that are captured as cosmetics subject to the luxury goods ban “despite also being classified as a ‘‘medicine’’ under the EAR.”
Additional Changes Relating to Russia and Belarus. The new rule makes a number of other changes, including:
- Adding License Exception CCD eligibility for the industry sector and luxury goods restrictions in Sections 746.5 and 746.10 of the EAR. BIS implemented this change “[i]n order to meet the U.S. Government’s policy objectives of ensuring the free flow of information,” and characterized the previous exclusion of this exception from these provisions as an “anomaly.”
- Excluding transfers within Russia or Belarus from the licensing requirements under Sections 746.8(a)(1) and (2), where such transfers are for reexport (i.e., return) to the United States or a Country Group A:5 or A:6 country, and “provided the owner retains title to and control of the item at all times.” However, BIS clarified that the subsequent reexport may require authorization and is not covered by this exclusion, which only applies to the transfer within Russia or Belarus.
- Clarifying that certain provisions giving preferential treatment to companies with U.S. or Country Group A:5 or A:6 ownership includes branches and sales offices of companies headquartered in those countries, not only their separately incorporated subsidiaries or joint ventures.
- Adding a note to § 746.8(a)(1) to clarify that the exclusion in that paragraph for “deemed” exports and reexports to Russian and Belarussian nationals only applies to the additional licensing requirements set out in § 746.8(a)(1). Consequently, deemed export and reexport restrictions for Russian and Belarussian nationals set out in other provisions of the EAR continue to apply, and it is solely the additional licensing requirements in § 746.8(a)(1) that do not include deemed export or reexport restrictions.
- Adding Russia and Belarus to the news media authorization in License Exception TMP, which BIS described as a “correction” to reflect that this authorization was already listed in § 746.8(c)(1).
Expansion of License Exception CCD: Beyond Russia and Belarus, the new rule updates and expands the list of consumer communications devices eligible for License Exception CCD to include certain tablets and peripherals, including microphones, speakers, and headphones, and also updates other entries listing eligible devices. BIS removed input/output control units that were previously eligible, after having “determined [them] to not be the type of commodities that would typically be used by consumers for communications purposes.” BIS stated it is making these changes “to reflect technology developments since License Exception CCD was first published in 2009.”
Clarification of the EAR’s Recordkeeping Requirements: BIS took the opportunity to make a general change to the EAR’s recordkeeping requirements to make it explicit that these requirements apply to transfers (in-country), and not only to exports and reexports. This change was made in the relevant provisions in Part 762 of the EAR. BIS indicated that this is “in line with BIS’s longstanding interpretation and previous amendments to the EAR to clarify this point.”
Expansion of the “Is-Informed” Provisions: The new rule provides an additional broad authority for BIS to send “is-informed” letters notifying exporters of specific restrictions the agency is imposing pursuant to its broad authorities in Section 744.11 of the EAR, which are also the foundation of the EAR’s Entity List. Previously, BIS could issue such a notice if it determined there was a risk of circumvention of existing Entity List restrictions. Now, BIS also has the explicit authority to issue such a notice regarding a party that meets the criteria for Entity List designation, even if it is not involved in circumventing already existing Entity List restrictions. Essentially, this authority allows BIS to inform exporters of Entity List-like restrictions applicable to an identified party before the full interagency End-User Review Committee (ERC) is able to officially add the party to the Entity List (or if for some reason such a designation by the ERC is not made).
Changes to Entity List Designation Authorities: In Section 744.11(b), BIS has added parties designated under Section 744.8 (parties sanctioned under OFAC’s WMD proliferation authorities) to the list of parties that it will not designate on the Entity List. Additionally, BIS has removed the more general limitation on Entity List designations of parties to which transactions subject to the EAR are already restricted by another U.S. government agency, in order to clarify that only certain enumerated types of OFAC-sanctioned parties, for example, will not be added to the Entity List.
Other Generally Non-Substantive Changes: BIS has used this rulemaking as a vehicle to make numerous other generally non-substantive changes to the language of various provisions of the EAR. In many instances, these changes correct older language to clarify the generally understood meaning of the relevant provisions.