Managing the Significant Expansion of Export Controls to China, - PowerPoint PPT Presentation

WEBINAR Managing the Significant Expansion of Export Controls to China, Russia and Venezuela

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela Speakers La Larry E. Christensen Ke Kevin J. . Wolf Al Alexandra Turner Law offices of Larry E. Christensen, Partner, Akin Gump Strauss Head of Export Control at PLLC Hauer & Feld LLP Customs Connect larrychristensen@larryechristensenpllc.com kwolf@akingump.com alexandra.turner@customsconnect.co.uk

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela “Certain entities in China, Russia, and Venezuela have sought to circumvent America’s export controls, and undermine American interests in general, and so we will remain vigilant to ensure U.S. technology does not get into the wrong hands.”

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela What has happened? "It is important to consider the ramifications of doing business with count countries that have histories of diverting goods purchased from U.S. companies for military applications," said Department of Commerce Secretary Wilbur Ross. The new restrictions seek to counteract these countries’[China, Russia, Venezuela] suspected efforts to obtain sensitive U.S. technology for their militaries "through civilian supply chains, or under civilian-use pretenses“ especially technology that could be used in the development of "weapons, military aircraft, and surveillance technology."

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela What are the new rules? Ex Expansion of of Military End nd Use and nd Military End nd User rul ules – ef effec ective e 29 29 June e 20 2020 20 Military End Use in China Military End Use or End User in Russia and Venezuela EAR Section 744.21, Supp. 2 to Part 744 Re Remov oval of of Lice cens nse Exce cept ption on Civil End nd Users for or eligi gibl ble D:1 count countries The elimination of License Exception CIV for exports and reexports to Country Group D:1 of NS-controlled items will leave license requirements for China, Russia, and Venezuela that will be subject to a policy of denial Pr Propos oposed d Modification of License Exception Ad Additional Permissive Reexports (AP APR) BIS proposes to eliminate License Exception APR reexports to Country Group D:1 because certain third countries have authorized reexports to China, for example, that BIS would not have approved. The BIS deadline for comments was June 29, 2020 (look for the final rule on APR)

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela What does this mean? 1. 1. Expan ansion of Mi Militar ary End Us Use e an and Mi Militar ary End Us User er rules es – ef effec ective e 29 29 June e 20 2020 20 - Note the EAR’s General Prohibitions (closing potential loopholes) - Part 744 – End Use and End User Controls - Part 744.21(g) Military End User: “[T]he term ‘military end user’ means the 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, or any person or entity whose actions or functions are intended to su support [or contribute] to ‘military end uses’ as defined in paragraph (f) of this section.”

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela What does this mean? You may not export, reexport, or transfer (in-country) any item subject to the EAR listed in Supplement No. 2 to Part 744 and certain other classifications to China, Russia, or Venezuela without a license (application will be reviewed under a presumption of denial), if at the time you have “k “knowledge” or re reason to know the export, reexport or retransfer is with a restricted military end use or military end user. Expands the types of licensable end uses to six, including “support” or incorporation into an item described in any one of six categories of military item such as the Wassenaar Arrangement Munitions List. An example would be a Chinese fighter bomber, such as the J-20 “Mighty Dragon” Stealth Fighter. This illustrates key point. It is not an F-35 fighter bomber which must receive a license under other EAR clauses, but J-20 is a Chinese Fighter Bomber the supply chain may not provide to China for incorporation of the exported and reexported items called out in the Rule, such as the entries on Supplement No. 2.

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela Who does this change affect? Which industries, sectors and products are most immediately affected by the new regulations? Are there products not touched by the new rules? What is the extra-territorial jurisdictional reach of the new regulations?

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela Effective classification: the critical component 2A290 2A291 2B999 2D290 3A991 3A992 3A999 3B991 3B992 3C992 3D991 5B991 5A992 5D992 6A991 6A996 9B990 3A992 8A992 9A991

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela So what do I do? “This expansion will require increased diligence with respect to the evaluation of end users in China, particularly in view of China's widespread civil-military integration….” What is “knowledge”? ● How do you gain knowledge? ● Do I actually need to boil the ocean? ●

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela How will I know? License obligation only applies if there is “knowledge” of a “military end use” or “military end user.” The EAR define “knowledge” more broadly than just “positive knowledge that a circumstance exists or is substantially certain to occur” e.g ., that an exporter, in fact, knew that a covered item was destined to a military end user in China. The term also includes “an awareness of a high probability of its existence or future occurrence.” The EAR’s definition goes on to state that “[s]uch awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts.” Note: “Knowledge” does not include awareness that a theoretical possibility could occur.

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela What steps should I take? 1. Assess need for retraining and amendment of due diligence processes 2. Review scope of current business partner screening – is it enough? Are you using the necessary tools (i.e. including ownership information)? BIS stated that this Part 744.21 expansion, " wi will require increased diligence wi with respect to the eva valuation of end of nd us users in in China hina , particularly in view of China's widespread civil-military integration“ You will now be required to do due diligence to assess information about an end user’s state-owned enterprise information, press accounts of government contracts, information from government filings, direct and indirect ownership by military end users or end uses 3. Ask the right questions & Watch out for “Red Flags” (“abnormal circumstances in a transaction that indicate that the export may be destined for an in appropriate end use, end user, or destination.” ) 4. Seek revised End User Statements

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela What steps should I take? 5. Classify items under 744.21 Supplement 2 and evaluate exclusion under de minimis rule and publicly available treatment 6. Analyze risks along supply chain (up and down) for mitigation plans (including extra-territorial impact) 7. Analyze risks of re-export activities conducted outside the US 8. Communicate changes with your banks (banks wish to be aware of their depositors’ compliance intentions) 9. Document everything!

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela What about previous shipments? Sa Savings Clause e Shipments on the dock for loading or laden aboard an export carrier on June 29, 2020 and earlier may continue so long as exported, reexported, or transferred item is delivered before midnight July 27, 2020. This is probably Eastern time Do I need Do eed to ret etriev eve e prev evious shipmen ents? Retrieval of items shipped in violation of the EAR may mitigate the risk of imposition of charges or the size of penalties

Managing the Significant Expansion of Export Controls to China, Russia and Venezuela Complex business scenario examples 1. What happens if I use a contract manufacturer in China that also has contracts with the Chinese military? Keep in mind parts, software, and technology that your contract manufacturer could retransfer to MEU contrary to the Rule. Do you have knowledge or reason to know? 2. What about primarily civilian Chinese companies, laboratories, and universities that also engage in even a small amount of military work? Incorporation in whole or in part requires a license. If your reexporter or a retransferring entity does only a small amount of military contracts, that is no defense. See discussion of FAQs 3. I do not know the ultimate end use for some of the immediate buyers in my multi-tier supply chain, is that ok? It may not be ok unless you have not done enough due diligence to avoid the knowledge or reason to know standard. Consider an Advisory request to overcome presumption of denial.