We have been asked quite a bit recently as to the latest controls, restrictions and activities specific to exporting to China. Where to begin? There have been many changes over the last few months. The below are short summaries of the major areas of new export controls concerning exports to China.
Restrictions Involving Publicly Traded Securities
The restrictions per Executive Order No. 13959 will not be effective until 1/11/21. As of now the sanctions per this EO are limited to transactions involving publicly traded securities.
According to Section 1, the following actions are prohibited:
(i) beginning 9:30 a.m. eastern standard time on January 11, 2021, any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company as defined in section 4(a)(i) of this order, by any United States person; and
(ii) beginning 9:30 a.m. eastern standard time on the date that is 60 days after a person is determined to be a Communist Chinese military company pursuant to section (4)(a)(ii) or (iii) of this order, any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of that person, by any United States person.
List of Communist Chinese Military Companies Released
The Department of Defense released a list of additional companies that are Communist Chinese Military Companies (CCMC).
- Applies to all U.S. Persons
- Prohibits engaging in any transaction in publicly traded securities or any securities that are derivative of, or designed to provide investment exposure to such securities.
- Defines a Communist Chinese Military Company (CCMC) pursuant to the National Defense Authorization Act for Fiscal Year 1999 as:
- Any person or party that DoD has listed as a CCMC
- Any person that Treasury lists as meeting the criteria as being owned or controlled by the People’s Liberation Army and engaging in commercial services, manufacturing, producing or exporting or is a subsidiary of an entity already determined to be a CCMC
- Does not restrict commercial dealings with CCMCs or transactions involving securities of a CMMC that are not publicly traded.
- Defines “Security” as “currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding 9 months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”
The sanctions described in EO 13959 are specific to securities/investment and the list has continued to grow where the U.S. Government is designating companies as CMMC.
The designation as CCMCs is a positive identification as a military end user and we believe there are now cross over issues specific to companies identified as such specific to EAR Part § 744.21 RESTRICTIONS ON CERTAIN ‘MILITARY END USE’ OR ‘MILITARY END USER’ IN THE PEOPLE’S REPUBLIC OF CHINA, RUSSIA, OR VENEZUELA. The restrictions found in Part 744.21 may now be applicable and trigger licensing requirements to China depending on what you are selling and where you are exporting to.
As a result, we recommend that you treat these entities as military end users where a licensing requirement would be triggered via Part 744.21 of the EAR (when relevant) and at a minimum a red flag requiring further due diligence such as additional assurances regarding the end use.
In numerous other industry newsletters, it is thought that there may be additional companies identified as having military ties and additional sanctions and/or licensing requirements will be applicable.
Expansion of Licensing Requirements for Military End Use or Military End Users in China
Effective June 29, 2020, BIS amended the U.S. Export Administration Regulations (EAR) to expand licensing requirements on exports, reexports and transfers (in-country) of items that are intended for military end use or military end users in China (as well as Russia and Venezuela). The rule also broadens the list of items for which the licensing requirements and their review policy applies.
The key takeaways from these expanded end use restrictions include:
- If the end user meets the definition of a military end user, an item that is listed on Supplement No. 2 to Part 744.21 requires a license EVEN if the item is for a NON-military end use.
- Exporters must be aware that even if they are selling their products for a civilian end use, depending on the classification of the item and the types of business they are selling to, a licensing requirement may be triggered. This area is quite gray and provides exporters with significant risk and due diligence to resolve the risk and/or mitigate the risks.
- Exporters must know their customer and have a full understanding of who they are selling to and for what purposes. What are you selling? Will your customer re-sell your product? What will your product be manufactured into? What industry are they in?
- Review Part 744.21 and Supplement No. 2 to Part 744.21 to understand if your end uses and products are subject to these restrictions.
- Companies must also evaluate from a business standpoint who they wish to do business with.
Revisions to EEI Filing Requirements
As of a result of the expanded controls of Part 744.21, the Electronic Export Information (EEI) filing requirements for items listed on the Commerce Control List (CCL) destined to China (Russia and Venezuela) require the filing in AES regardless of the value. Per 758.1(b)(10), an EEI filing is required to be filed in the AES for all exports of items on the Commerce Control List to the People’s Republic of China, Russia, or Venezuela, regardless of value, unless the export may be made under the exemption listed under paragraph (c)(4) of this section.
No changes are made to the filing requirements concerning items classified as EAR99.
China Export Control Laws
In a blog posted earlier this year by Export Solutions, we provided information specific to China and their announcement regarding creating their own export control regulations. One specific measure that these regulations allow is for the Chinese Government to take reciprocal measures against countries that undermine their export control measures and threaten their national security and interests.
As part of these regulations, China also published import and export rules on encryption. On December 2, 2020, the Ministry of Commerce of China (MOFCOM) published various details concerning encryption controls on imports and exports.
“In accordance with the relevant provisions of the Export Control Law of the People’s Republic of China and the Customs Law of the People’s Republic of China, it was decided to impose import licensing and export controls on the relevant commercial passwords (see annex 1) in order to safeguard national security and the public interest.”
The Import Lists (not exhaustive):
- Encrypted phones;
- Encrypted fax machines;
- Crypto machines (including crypto cards) [i.e., machines with main function to perform cryptographic computing]; and
- Encryption VPN hardware devices.
The Export List (not exhaustive):
- Security chip
- Encrypted VPN device
- Key management products
- Dedicated cryptographic equipment
- Quantum cryptographic equipment
- Password development and production equipment
- Password test verification equipment
- Software and Technology for the above items
Addition of more Huawei and all subsidiaries and related companies to the Entity List
Changes to treatment of exports to Hong Kong including suspension of License Exceptions
License Exception Civilian End Users (CIV) was eliminated.
Amendments to General Prohibition 3 Foreign Produced Direct Product Rule and the Entity List.
Additions to the Entity List of many Chinese Entities
Identification of Emerging Technology that would be most likely be restricted to China
With all of these changes, it is important to be cognizant of how you may be affected. Operate your business activities regarding trade with China with the assumption that there will be continued controls and restrictions in doing business. This will and has involved exporting, importing and other business activities including securities and investments.
When doing business with China, exporters and U.S. businesses must be diligent in knowing their customer, understanding what they do and who they are owned by, as well as who they own and what their products will be used in or with. In addition, it is crucial to conduct robust Restricted Party Screening. Just like Santa does, check your list (and the regulations) twice! Don’t get caught not knowing the latest regulations.
We do not expect any significant relaxations of export restrictions with China with the new administration. Therefore, stay informed! If you need assistance, please reach out to Export Solutions for a free consultation.
Rebecca Yeager is a Trade Compliance Consultant for Export Solutions -- a full-service consulting firm that specializes in helping companies comply with U.S. and international import/export regulations.