Commerce's Military End-User Restrictions Could Create Significant Due Diligence Burdens, Law Firms Say
The Commerce Department’s new export restrictions on military end-users may significantly raise due diligence requirements for industry, leading to licensing delays and a burdensome vetting process for technology companies, law firms said. If Commerce's Bureau of Industry and Security does not clarify the scope of the rule to limit its impact, the rules are likely to damage the semiconductor, telecommunications and aircraft sectors, the law firms said. “This could have a detrimental impact on a broad swath of U.S. industry,” Baker McKenzie said in an April 30 blog post. “A universe of transactions triggering license requirements could significantly increase.”
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The rules, announced last month, included an amendment to the Export Administration Regulations that broadened licensing requirements for exports, re-exports and transfers of items intended for military uses and users in China, Russia and Venezuela (see 2004270027). After industry voiced concerns about the rule, Commerce said it planned to issue guidance to help companies comply with the new requirements (see 2004280052). But if the guidance does not adequately clarify definitions in the rule and address industry's responsibility for vetting whether a customer qualifies as a military end-user, it could significantly disrupt trade, according to Squire Patton Boggs. “Without any clarifications or limitations on this definition,” the firm said May 1, “the rule could [extend] deep into the supply chain to items that are steps away from a military item, but that could indirectly support or contribute to an ultimate military item.”
U.S. companies that supply the covered items to a Chinese business that conducts “any … degree of business in support of military end uses” could trigger a license requirement, Baker McKenzie said. The law firm said Chinese semiconductor foundries can now be considered military end-users “if even a small volume of semiconductor wafers they produce is used for integrated circuits for incorporation into defense articles.” The rule would also apply to Chinese aircraft organizations that supply maintenance services for both commercial and military planes, the law firm said.
And because Commerce plans to review license applications under a presumption of denial, some U.S. companies may see their business with China restricted. “Should the U.S. Government adopt a broad interpretation of these terms,” Baker McKenzie said, “U.S. companies supplying non-sensitive, broadly available items to Chinese companies for civilian applications … may need BIS licenses.”
Once the rule takes effect June 29, companies will need to impose “significant additional due diligence” measures on their customers, Fried Frank said in an April 30 alert. The law firm said it is advising clients to update their compliance policies and sales agreements to “include the necessary compliance procedures … to account for these export restrictions.” The new restrictions will likely require suppliers of the designated exports to “go through a rigorous vetting process,” Baker McKenzie said.
And while the rule also restricts exports to Russia and Venezuela, it will “have an especially acute effect on transactions with China,” according to a May 1 post from Kelley Drye. Companies doing business in China may need “additional certification from their business partners” that their exports will not violate the end-use and end-user requirements, the law firm said. The additional due diligence requirements and the increased uncertainty may lead to delays during the licensing process, the firm said.
“These significant new restrictions are primarily aimed at and will especially impact trade with China,” according to the post. “Companies exporting covered items to China … should immediately begin preparation to comply with these rules.”