Industry Urges BIS to Scale Back, Clarify Proposed End-User Controls

The proposed rules -- which could place controls on all items subject to the Export Administration Regulations when destined to military end-users in certain countries, along with other restrictions (see 2407250032) -- were widely panned in public comments submitted to BIS and published this month. Multiple companies said the restrictions, if finalized, would place unparalleled due diligence obligations on exporters and may dramatically increase the number of license applications submitted to BIS, overwhelming both trade practitioners and government licensing officers.

Including all EAR items -- including even low-level goods that qualify as EAR99 -- within the scope of the agency’s military end user and end-use rules would be a ”massive” expansion of U.S. export controls, the Information Technology Industry Council said.

The industry group noted that even a U.S.-origin pencil would face licensing requirements when destined to a military end user in Country Group D5 locations -- which are countries subject to a U.S. arms embargo -- “even though the purchasers can obtain pencils from competitors around the world."

That means an exporter of both pencils and advanced semiconductor equipment would need to “devote similar resources” to their due diligence obligations covered by the proposed rules, ITI said.

“This broad impact on competitiveness and the costs to U.S. exporters does not appear to rise to the level of being necessary for reasons of national security or human rights concerns,” the industry group said.

Boeing also said the rules -- which place license requirements on certain exports and activities involving not just certain military end users but also so-called military support end users, intelligence end users and foreign security end users -- would be a “significant expansion” of export controls, especially because they cover specific end-users “that are not clearly defined.” Companies with “complex and interdependent” supply chains will particularly face challenges performing due diligence under the rules, Boeing said, adding that different exporters looking to sell to the same end-user “will spend numerous hours and resources on this due diligence exercise and may not reach the same conclusion.”

The firm asked BIS to publish a “mechanism” for companies to vet potential customers under the rules “expeditiously.” This could include creating a “positive list” of entities that BIS has said are military or intelligence end users. “BIS would know better than industry who these entities are,” Boeing said, “and as result would reduce the burden on both industry whose compliance responsibilities are dramatically increasing and on BIS whose licensing volumes may rise exponentially.”

Aerospace company RTX also said the proposed restriction would create a “significant compliance burden for industry,” possibly “without a corresponding benefit to national security or foreign policy.” It specifically pointed to what it said would be an “inconsistent” BIS approach to different categories of end-user controls: while the new military end use and end-user controls and the intelligence end user controls would be expanded to cover EAR99 items, the agency’s foreign security end user controls wouldn’t cover those same items.

“Given that an end user may be subject to multiple levels of control,” RTX said “this both presents a risk of confusion and serious implementation challenges for industry and undermines the argument that there is a national security basis for the controls.”

The company asked BIS to add specific EAR99 “items of concern” to the Commerce Control List instead of capturing all of EAR99 within the control scope. “Doing so would also ensure the restrictions have been vetted for foreign availability and policy concerns through the CCL process,” RTX said. If BIS doesn’t choose this approach, it should “at a minimum” align its controls on EAR99 items for military end users, foreign security end users and intelligence end users.”

SpaceX, an American spacecraft and satellite communications firm, said the rules could have “unintended consequences” on the low-level controlled commercial products that it sells around the world, including its satellite internet system Starlink. Even companies with products that have “no real military advantage,” including many household goods, “will now need to navigate complexities” within the BIS military end-user controls when exporting to certain countries, it said.

“This includes, for example, implementing new (and potentially burdensome) diligence requirements for exports of low-level controlled goods,” SpaceX said. It also may include obtaining certifications or other “contractual protections” from customers, “educating them to ensure they understand the underlying legal requirements and consequences of violations.”

The Semiconductor Industry Association asked BIS to make a range of changes to the rules, including to clarify its meaning of the term “support” in the definition of a “military-support end user.” The proposed rules would introduce license requirements for certain exports when there is “knowledge” the item is intended for a military-support end user, which it defines as “any person or entity whose actions or functions support ‘military end uses,’ as defined in § 744.21(f).”

But the industry group said the term “support” isn’t defined. “SIA submits that clarity for identifying entities considered to be MSEUs would be critical for companies’ due diligence and compliance efforts, given that ambiguities with respect to what is meant by ‘support’ could lead to different interpretations, and in turn lead to different applications of the proposed control,” it said.

The Association of University Export Control Officers asked for a similar clarification, calling the proposed definition for military-support end users “ambiguous.” Not only should the agency better define what it means by “support,” but it should also clarify what amount of military-related activity would render an organization a military-support end user.

The agency’s current language suggests that an entity with just a “single project or contract” involving military items would qualify as a military-support end user, the association said, “even when the vast majority of its business is purely civilian, and even when a given export has nothing to do with the recipient’s comparatively incidental military-related activities.”

For example: AUECO asked BIS how exporters should classify a Chinese or Russian university with thousands of researchers if only a “relative handful” are involved in military-related work.

“Of course there will be clear cases,” AUECO said. “But other cases will be less straightforward.”

Akin said the rule would specifically impact its clients in the United Arab Emirates. “The UAE, like many Gulf countries, has very strong ties between its public and private sectors,” the law firm said. The new restrictions could render UAE government agencies and “wide swaths of UAE private enterprise subject to an embargo akin to parties designated on the Entity List.”

The firm said it recognizes that BIS may use a different licensing policy for an export to a company on the Entity List versus an export to an intelligence end user outside of a D-5 country. But “the reality is that some key suppliers will simply refrain from dealing with these UAE government agencies and UAE entities and will not approach BIS for licensing because that nuance will be lost on them,” Akin said. They may also “not want to devote, or may not have, the funds and resources required to prepare a license application or to wait for a license to be approved, or to deal with the compliance complexities."

Several commenters said the rule would create too large a licensing burden on BIS and companies. Boeing said BIS should devote more resources to its licensing staff to avoid supply chain disruptions that could result from a surge in applications. ITI made similar points, adding that exporters may choose to “over-apply for licenses out of an abundance of caution,” causing backlogs within BIS.

“It raises the question [of] whether BIS is prepared to manage a significant increase in license applications, especially due to the reality of existing delays,” the industry group said. It said its member companies have reported some BIS licenses pending for more than a year.

ITI suggested BIS create a new license exception to authorize exports to entities that aren’t intended to be covered by the new rules, such as civilian fire departments and public hospitals.

“The licensing process as it stands already takes several months for BIS to review,” it said. “An additional influx is likely to create an untenable administration burden on the agency and will require a significant investment of internal resources for companies to prepare license applications for customers that BIS says it is not intending to restrict.”

Business groups also said the rules would lead to too many new license applications. The U.S.-China Business Council said its members “have made considerable investments in their compliance architectures to acquire export licenses and perform due diligence.” But if the proposed rules are adopted as written, “they will place severe bandwidth constraints on both corporate due diligence and government license processing capacity.”

The council also said the rules would hurt the competitiveness of American products and services abroad, adding that their inclusion of low-tech goods is a departure from the Biden administration’s stated “small yard, high fence” framework -- the strategy that involved placing strict controls around a small set of advanced technologies.

“Capturing all items subject to the EAR represents a considerable expansion of scope, including for items which do not have national security and foreign policy implications,” it said. Changes are needed “to ensure that the rules are clear, implementable, and appropriately scoped to only cover transactions with clear and identifiable foreign policy and national security risks.”

The American Chamber of Commerce in Shanghai also called the rules' scope too broad, saying they appear to “cover all items subject to EAR including low-tech and non-sensitive goods,” which “imposes a significant burden in terms of compliance and due diligence.”

Although it said American companies already have in place “rigorous” export compliance systems, the “broad nature of the newly proposed rules will require even more exhaustive checks and certifications for products that may not have any tangible national security implications.”