The Directorate of Defense Trade Controls (DDTC) announced this week that it will post test versions of its new Registration and Advisory Opinion (AO) applications on the cloud-based Defense Export Control and Compliance System (DECCS) for industry testing and feedback starting October 16th through mid-November 2018.

If a company is interested in participating in this testing, DDTC asks to please contact the DDTC Test Support Team at the number or email below to sign up and receive further guidance.

Each individual tester will be required to sign a DECCS UAT Terms of Use document to ensure users understand the testing process and guidelines.

DDTC is encouraging companies to begin the testing process as early in the test period as possible. Additional applications will be available for testing in the coming weeks and will require a test account and a complete test registration in order to access them.

DDTC Test Support Team:

Email: PM-DDTC-DECCS@state.gov

Phone: (202) 663-1282 / (202) 663-2838

The DDTC Test Support Team will be available during the week from 10am to 4pm EST

The Export Control Reform Act of 2018, included within the National Defense Authorization Act (NDAA) for Fiscal Year 2019, became law on August 13, 2018, and provides “modern” and permanent statutory authority for the U.S. Export Administration regulations (EAR), which control the export, re-export, and transfer of U.S. origin “dual-use” items.

As a result of the effort to strengthen control over foreign investment in the United States (contained in a companion statute within the NDAA), the law directs the Commerce Department to establish an inter-agency process, subject to a public notice and comment period, for the identification of “emerging and foundational technologies” that are essential to the national security of the United States, and requires the imposition of licensing requirements (even if unilateral) at least for transfers of such technologies to U.S. arms embargoed countries, which includes China.

With respect to potential technologies likely to incur heightened scrutiny, a Commerce Department industry event in May of this year highlighted U.S. advancements vis-a-vis Europe and China in the areas of artificial intelligence (particularly autonomy, and human-AI interaction), 5G technology, and robotics, among others.

 

 

In a July 13, 2018 press release, the Commerce Department announced it had lifted the denial order on Zhongxing Telecommunications Equipment Corporation, of Shenzhen, China (ZTE Corporation) and ZTE Kangxun Telecommunications Ltd. of Hi-New Shenzhen, China (ZTE Kangxun) (collectively, ZTE). Commerce took this action shortly after ZTE deposited $400 million in escrow at a U.S. bank to provide a form of security that ZTE will comply with its continuing obligations under the June 2018 superseding settlement agreement. The funds in escrow are in addition to the $1 billion paid to the U.S. Treasury last month.

According to the press release, the $1.4 billion paid under the 2018 settlement agreement is in addition to the $892 million in penalties ZTE paid to the U.S government under the original March 2017 settlement agreement. That agreement included a suspended denial order against the company, which the Bureau of Industry and Security (BIS) had activated on April 15, 2018.

The 2018 settlement agreement requires ZTE to retain a team of special compliance coordinators selected by and answerable to BIS for a period of 10 years. The June 2018 agreement again imposed a denial order that is suspended, this time for 10 years, and BIS can activate it in the event of additional violations during the ten-year probationary period. Pursuant to the 2018 agreement, ZTE has also replaced the entire board of directors and senior leadership for both entities.

 

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs

On April 2, the Bureau of Industry and Security (BIS) published a final rule in the Federal Register amending the Export Administration Regulations (EAR) to implement the recommendations presented at the February 2017 Australia Group (AG) Intersessional Implementation Meeting, and later adopted pursuant to the AG silent approval procedure, and the recommendations made at the June 2017 AG Plenary Implementation Meeting and adopted by the AG Plenary.

The Australia Group (AG) is “an informal forum of countries which, through the harmonization of export controls, seeks to ensure that exports do not contribute to the development of chemical or biological weapons. Coordination of national export control measures assists Australia Group participants to fulfil their obligations under the Chemical Weapons Convention and the Biological and Toxin Weapons Convention to the fullest extent possible.”

The following Export Control Classification Numbers (ECCNs) on the Commerce Control List (CCL) have been updated to reflect the February 2017 Intersessional Implementation Meeting recommendations that were adopted by the AG:

  • ECCN 2B350 (by adding certain prefabricated repair assemblies, and specially designed components therefor, that are designed for attachment to glass-lined reaction vessels, reactors, storage tanks, containers or receivers controlled by this entry);
  • ECCN 2B351 (by clarifying that toxic gas monitoring equipment includes toxic gas monitors and monitoring systems, as well as their dedicated detecting components); and
  • ECCN 2B352 (by adding certain nucleic acid assemblers and synthesizers to this entry and clarifying how the capacity of certain fermenters should be measured for purposes of determining whether they are controlled under this entry).

Consistent with the June 2017 AG Plenary Implementation Meeting recommendations that were adopted by the AG, this rule amends the following ECCNs on the CCL:

  • ECCN 1C350 (by addingN,N-Diisopropylamino­ethanethiol hydrochloride).
  • ECCN 1C353 (to clarify that genetically modified organisms include organisms in which the nucleic acid sequences have been created or altered by deliberate molecular manipulation and that inactivated organisms containing recoverable nucleic acids are considered to be genetic elements).
  • This rule also corrects several typographical errors in a note to ECCN 1C351 and updates the advance notification requirements in the EAR that apply to certain exports of saxitoxin.

Finally, the EAR has been amended to reflect the addition of India as a participating country in the AG.

Because of this, this rule makes “conforming amendments to the EAR to reflect the addition of India to the AG, as of January 19, 2018. Specifically, this rule amends the entry for India in the Commerce Country Chart (Supplement No. 1 to part 738 of the EAR) by removing the ‘‘X’’ from this entry under the column CB 2. In addition, this rule amends the Country Groups chart (Supplement No. 1 to part 740 of the EAR) by adding an ‘‘X’’ to the entry for India under column A:3, Australia Group.”

On March 22, the Bureau of Industry and Security (BIS) issued a final rule (“March Rule”) that (1) added 23 persons to its Entity List, (2) removed one person from the Entity List, and (3) corrected a licensing requirement inaccurately described in a previous rule related to twelve previously designated Russian entities.

(1) New Designees: The March Rule also adds twenty-three persons to the Entity List. These include: (a) 15 persons added in South Sudan for being government, parastatal, or private entities acting contrary to U.S. foreign policy interests; (b) two persons in Singapore and Pakistan added for seeking to procure U.S.-origin items for nuclear-related entities in Pakistan; and (c) five entities in Pakistan for being involved in the proliferation of unsafeguarded nuclear activities and/or assisting others in evading Entity List restrictions. For all 23 persons, BIS imposed a licensing requirement for all items subject to the Export Administration Regulations (“EAR”) with a presumption of denial.

(2) Removed Designees: BIS also chose to remove one designee in the UAE and one in Ecuador based on “information received by BIS” from those entities and a review undertaken by the End-User Review Committee (“ERC”).

(3) Correction of Licensing Requirement: Finally, BIS corrected an error in a final rule published on February 16 (“February Rule”), which had added 21 entities to the Entity List.

Specifically, the February Rule had added 12 entities to the Entity List to support a parallel designation of these entities by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) pursuant to Executive Order 13662 on its Sectoral Sanctions Identification (“SSI”) list. The February Rule had, however, inconsistently described the licensing requirements applicable to these 12 entities (the other 9 entities were designated by OFAC as Specially Designated Nationals (“SDN”) and the BIS Entity List licensing requirement was correctly described).

Specifically, the preamble to the February Rule correctly stated that a “license is required for exports, re-exports, or transfers (in-country) of all items subject to the [Export Administration Regulations] EAR, when the exporter, re-exporter or transferor knows that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deep water (greater than 500 feet) or Arctic offshore locations or shale formations in Russia, or is unable to determine whether the item will be used in such projects.” That tailored requirement is consistent with the tailored licensing requirements BIS had previously imposed on entities designated by OFAC as subject to its sectoral sanctions program.

However, the February Rule also included a more general, and conflicting, entry for each of the 12 entities. Specifically, BIS had stated in its conclusion that a license was required for all items subject to the EAR for all end uses for all entities identified in the February Rule; this was a correct description of the requirements applicable to the nine designees who had been designated by OFAC as SDNs, but was too broad of a statement for the 12 designees designated by OFAC as SSIs.

The March Rule clarifies the February Rule and removes the conflict. Specifically, the March Rule confirms that the 12 entities subject to OFAC’s sectoral sanctions program (i.e., designated as SSIs) are subject only to the more limited licensing requirements related to all items subject to the EAR when used in projects specified in § 746.5 of the EAR. The broader restriction on the nine SDNs remains in place and was not modified in the March Rule.

On February 15, 2018, Representative Ed Royce, Chairman of the House Foreign Affairs Committee, introduced new legislation intended to “modernize U.S. export control regulations of dual-use items.”

In spite of its title, the Export Control Reform Act of 2018 (H.R. 5040) does little to further the original goals of the Export Control Reform initiative and appears more squarely focused on using the Export Administration Regulations to prevent U.S. adversaries — principally the PRC — from gaining access to U.S. “emerging critical technologies,” whether dual-use or solely commercial. The bill is the newest in a series that have been introduced without success since the Export Administration Act lapsed in 2001. Its fate appears tied to the ongoing CFIUS reform efforts, which this bill seeks to complement by enhancing regulatory controls on technology transfers of concern.

Much of the legislation would codify the current practices of the Department of Commerce and other U.S. export control regulatory agencies, and so do not appear to present significant changes. Notably, however, the bill diverges sharply with respect to its proposed definition of “U.S. Persons,” which excludes entities organized under U.S. law unless U.S. individuals “own, directly or indirectly, more than 50 percent of the outstanding capital stock or other beneficial interest in such legal entity.” The definition appears unworkable; publicly traded companies would have difficulty certifying that they meet a 50 percent U.S. ownership requirement, and, absent a comprehensive licensing mechanism or a broad exemption scheme, foreign-owned U.S. companies would be effectively unable to manufacture and export CCL-controlled items.

Other sections of the legislation appear focused on expanding congressional oversight of the Departments of State and Commerce’s ability to license or otherwise authorize activities with the U.S. embargoed countries or nationals thereof. The provisions reflect a congressional desire to curtail the Executive branch from unilaterally relaxing such export controls, seemingly in reaction to the previous administration’s approach toward Cuba.

Earlier this month, BIS’ Office of Boycott Compliance announced a Settlement Agreement with Mitsui Plastics, Inc., a domestic concern doing business in New York, to settle its potential civil liability for nine alleged violations of the Export Administration Regulations (EAR).

Charges Details Summary Enforcement Action
§ 760.2(d) Furnishing Information about Business Relationships with Boycotted Countries or Blacklisted Persons In connection with the sale and/or transfer of goods from the U.S. to Bahrain, Mitsui, on two occasions “furnished information concerning another person’s business relationships with another person who is known or believed to be restricted from having any business relationship with or in a boycotting country.” Civil Monetary Penalty of $28,600
§ 760.5 Failing to Report the Receipt of a Request to Engage in a Restrictive Trade Practice or Foreign Boycott Against a Country Friendly to the United States Also in connection with the sale and/or transfer of goods from the U.S. to Bahrain, Mitsui, on seven occasions “received a request to take an action which would have the effect of furthering or supporting a restrictive trade practice or unsanctioned foreign boycott. Mitsui failed to report its receipt of these requests to the Department…”

On February 12, the State Department’s Directorate of Defense Trade Controls (DDTC) published a Federal Register Notice seeking comments to inform its review of controls implemented in recent revisions to the following United States Munitions List (USML) Categories:

V – Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their Constituents;

X – Personal Protective Equipment; and

XI – Military Electronics

Commerce’s Bureau of Industry and Security (BIS) also published a notice on February 12. The agency is seeking public comments to perform a complementary review of items on the Commerce Control List (CCL) concurrent with DDTC’s review to ensure that the descriptions of these items on the CCL are clear, items for normal commercial use are not inadvertently controlled as military items on the USML, technological developments are accounted for on the control lists, and controls properly implement the national security and foreign policy objectives of the United States.

This is part of DDTC and BIS’ periodic post-Export Control Review (ECR) of the USML/CCL.

Comments for both notices are due on April 13.

BIS published a Final Rule in the January 26 Federal Register adding 21 persons to the Entity List, Supplement No. 4 to part 744 of the Export Administration Regulations (EAR).

The Entity List identifies entities and other persons reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States. The EAR imposes additional license requirements on, and limits the availability of most license exceptions for, exports, re-exports, and transfers (in-country) to those listed.

These twenty-one persons will be listed on the Entity List under the destinations of Bulgaria, China, Kazakhstan, Russia, Syria, and the United Arab Emirates (U.A.E.).

Among the 21 are a number of entities from China, Kazakhstan, Russia, and the U.A.E. They are:

Country Name
China Chengdu Spaceon Technology Co., Ltd., along with the alias “Tianao Electronics Co. Ltd.”
Kazakhstan/Russia Abtronics
UAE Advanced Aerospace Industries
UAE Deira General Marketing
UAE DGL Clearing and Forwarding LLC
UAE Emitech Middle East FZC
UAE Eurotech DMCC
UAE Foremost International FZE
UAE Jazirah Aviation Club
UAE Modest Marketing LLC
UAE Pearltrainer FZE
UAE Sky Gulf Consultancy and Researches LLC
UAE Stealth Telecom FZC

In addition, this rule amends the EAR by removing three entities from the Entity List. This rule removes one entity listed under the destination of Taiwan and two entities listed under the destination of the U.A.E. from the Entity List. All three of the removals are the results of requests for removal received by BIS pursuant to the section of the EAR used for requesting removal or modification of an Entity List entry and a review of information provided in the removal requests.

Finally, this final rule modifies two existing entries on the Entity List. This rule modifies one entry under China and one entry under Pakistan to provide additional or modified addresses and/or names for these persons