Regulatory intelligence for US exporters

Industry Faces Challenges Implementing Military Exports Rule

Companies affected by the Bureau of Industry and Security's recent rule on military-related exports (see 2004270027) were frustrated by the lack of a comment period before the rule was finalized and BIS’s decision not to postpone the effective date, industry officials said in interviews. Some officials said they were disappointed the new requirements were not first issued as a proposed rule, adding that smaller businesses with fewer compliance department employees have struggled to adjust.

Although industry executives said BIS has addressed most of their questions, the rule has caused challenges (see 2006150031, 2006180035 and 2005050035), particularly around the new Electronic Export Information (EEI) filing requirements. Along with new filing requirements, the rule, which was released April 28 and took effect June 29, imposed more due diligence requirements for exports to military end-users and for military end-uses in China, Russia and Venezuela.

“That 60 days was not at all sufficient to go through all the changes that people have to go through to implement it,” said Michael Mullen, executive director of the Express Association of America, which represents FedEx, UPS and DHL. Jan Fields, president of the National Customs Brokers & Forwarders Association of America, said the association was disappointed BIS issued a guidance (see 2006290045) on a Friday afternoon when the rule took effect the following Monday. “Our main concern was a lack of time to react -- just to wrap our brains around what was going to be required, what due diligence was required,” Fields said.

The rule created “uncertainty” for U.S. companies, particularly surrounding some of its unclear definitions, said Jacob Parker, senior vice president of the U.S.-China Business Council. Kelvin Stroud, the Aerospace Industries Association’s director for international affairs, said industry will react “quickly” to the new requirements but AIA plans to continue “gaining clarity” from BIS.

Despite the initial confusion, the industry officials called the June guidance helpful and said BIS has been quick to respond to concerns. The agency has addressed most of NCBFAA’s questions, Fields said, and Parker said USCBC members appreciated that the guidance clarified due diligence requirements for determining whether an export “supports” or “contributes” to a military end-use. And although BIS did not grant a request from at least 20 trade associations to push the rule's effective date further into the future (see 2006150031), the agency did postpone the effective date for a portion of the new EEI filing requirements (see 2006250026).

“There's still a few questions that aren't answered because you're going to just have some unique situations,” Fields said, but “we have a path forward and we understand the concept behind the regulations.” Both Fields and Mullen, however, called the process unusual, saying they expected BIS to first propose the rule before issuing it as a final version. “Usually BIS is really quite careful about these things. In the past, they've always asked for comments in advance, and they worked with us if there was something really complicated,” Mullen said. “I just don't know why they didn't follow their own normal procedures on something like this.” BIS did not comment.

Fields said the new requirements will be particularly challenging for smaller companies that are “short-staffed” due to the COVID-19 pandemic and aren’t “keeping up with the final notices on a daily basis.” But she said she is confident forwarders will adapt. “That's what we're accustomed to doing as freight forwarders -- not only making sure we are compliant, but to make sure our exporter knows what their responsibility is,” she said.

The rule will present the largest problems for the electronics and semiconductor industries, trade lawyer Doug Jacobson said, stressing that the overall impact will be limited. “This only applies to a very small universe of products,” Jacobson said. “Yes, there are industries who are going to be more affected … but it's not going to have a material impact on U.S. exports to China.”

Companies can take steps to meet BIS’s new requirements, Jacobson added, even if the agency’s guidance was “a little bit cryptic.” Jacobson is advising clients to obtain end-user and end-use statements from customers in China, certifying that the end user has no military connection. “In terms of due diligence, there is only so much that one can do. It simply needs to be reasonable,” Jacobson said. “It would be very difficult for BIS to criticize a company who obtained an end-use statement that had no indication of military end-use or military end-users.”

Due diligence may be complicated by the “opaque” ownership chains in China, which sometimes make it challenging to determine whether a customer is controlled by the state or has military affiliations, Jacobson said. “Not only is it opaque, there's very little public information and the information is not going to be in English,” he said. “All those are very challenging to U.S. companies.” Mullen sees that as being a major issue for exports the rule affects. “When you're sending something into China, you're sending it into a very murky world, and people that appear to be just civilian companies actually do have extensive ties with the Chinese military,” he said. “It’s a very complex issue.”