Military licence review factors expanded for NS-controlled items to China, Venezuela and Russia

Introduction
Background
What does this mean for future licence applications?

Introduction

The US Department of Commerce, Bureau of Industry and Security (BIS) recently issued a final rule amending the licence review policy for items on the Commerce Control List that are controlled for national security (NS) reasons and destined for China, Venezuela or Russia.

The amendment to Section 742.4(b)(7) of the Export Administration Regulations (EARs) is effective as of 29 October 2020. The EARs already specifically called out China and Russia in Section 742.4(b)(7), but the new language:

• expands the provision to include Venezuela;
• triggers a presumption of denial in a more expansive way; and
• specifies new and expansive factors which BIS will use in its case-by-case licence application assessment.

Background

This amendment to the EARs is unsurprising given the series of new restrictions relating to China, Venezuela and Russia. In April 2020 BIS issued a final rule imposing stricter licence requirements on a wide range of exports, re-exports and transfers to China, Russia or Venezuela for military end uses or to military end users.(1)

What does this mean for future licence applications?

All licence applications for NS-controlled items to China, Venezuela or Russia will be reviewed to determine the risk of diversion to a military end user or military end use. BIS will maintain a general policy of approval for licence applications to export, re-export or transfer (in-country) items for civil end users or civil end uses. However, it will assess on a case-by-case basis whether the transaction:

would make a material contribution to the 'development,' 'production,' maintenance, repair, or operation of weapons systems, subsystems, and assemblies, such as but not limited to, those described in supplement no. 7 to part 742 of the EAR.

If BIS concludes that the transaction will make a material contribution, its licensing review policy is a presumption of denial. Notably, the previous language stated that the presumption of denial kicked in when the transaction "would make a direct and significant contribution to the PRC's or Russia's military capabilities such as, but not limited to, the major weapons systems", such as those listed in EAR Part 742, Supplement 7.

The amendment adds the following factors that BIS will consider in reviewing licence applications for NS-controlled items destined for China, Venezuela or Russia:

• the appropriateness of the export, re-export or transfer for the stated end use;
• the significance of the item for the weapons systems capabilities of the importing country;
• whether any party is a 'military end user', as defined in Section 744.21(g) of the EARs;
• the reliability of the parties(2) to the transaction, including whether:
  • an export or re-export licence application has previously been denied;
  • any parties are or have been engaged in unlawful procurement or diversion activities;
  • the parties can securely handle and store the items; and
  • end-use checks have been and may be conducted by BIS or another US government agency on parties to the transaction;
• the involvement of any party to the transaction in military activities, including activities involving the development, production, maintenance, repair or operation of weapons systems, subsystems and assemblies;
• government strategies and policies that support the diversion of exports from their stated civil end use and redirection towards military end use; and
• the scope and effectiveness of the export control system in the importing country.

Any party seeking a licence to export, re-export, or transfer (in-country) NS-controlled items should attempt to address these concerns in its licence application.

Most exporters will not have ready access to some of this information, but they should provide as much background as possible in their licence application regarding the parties to the transaction and the civil end use. These criteria may also result in a proliferation of additional non-standard licence conditions. Exporters should ensure that any proposed conditions are feasible and, if not, work with BIS to see whether alternative conditions can be agreed among the reviewing agencies.

The review will also include an assessment of the impact of the proposed export of an item on the United States defence industrial base and the denial of an application for a licence that would have a significant negative impact on such defence industrial base. Consistent with 50 US Code 4815(d)(3), BIS will examine the following criteria to determine whether there is a significant negative impact:

• a reduction in the availability of an item produced in the United States that is likely to be acquired by the Department of Defence (DoD) or another agency for the advancement of US national security or for the production of an item in the United States for the DoD or other agencies;
• a reduction in the production in the United States of an item that is the result of research and development carried out, or funded by, the DoD or another federal department or agency to advance US national security;
• a reduction in the employment of US persons whose knowledge and skills are necessary for the continued production in the United States of an item that is likely to be acquired by the DoD or another federal department or agency for the advancement of US national security.

Therefore, in addition to addressing the factors listed in the amended Section 742.4(b)(7) of the EARs, parties should also address the criteria to examine whether a proposed export of an item will have a significant negative impact on the defence industrial base.

For further information on this topic please contact Marwa M Hassoun at Arent Fox LLP's Los Angeles office by telephone (+1 213 629 7400) or email (marwa.hassoun@arentfox.com). Alternatively, contact Regan K Alberda, Aman Kakar or Kay C Georgi at Arent Fox LLP's Washington DC office by telephone (+1 202 857 6000) or email (regan.alberda@arentfox.com, aman.kakar@arentfox.com or kay.georgi@arentfox.com). The Arent Fox LLP website can be accessed at www.arentfox.com.

Endnotes

(1) Further information is available here.

(2) The reference in 4 to the "reliability of the parties to the transaction" could be seen as a 'back at you' reference to China's creation of an Unreliable Entity List and the listing of some US companies on that list. This will hopefully not devolve into a tit-for-tat series of amendments to the export control laws, which historically have not been used for political name calling.