Additional due diligence may be required for many exports to China

The United States continues to tighten controls on the People’s Republic of China. In this article we address three regulatory changes that highlight the need for enhanced due diligence when dealing with China: 1) restrictions on recent additions to the Entity List; 2) controls on military end-uses and military end-users; and 3) elimination of Hong Kong as a separate destination under the Export Administration Regulations (EAR).

Entity List

On December 22, 2020, the Bureau of Industry and Security (BIS) added 59 Chinese entities to the Entity List, thereby expanding the licensing requirements on export transactions with these entities. See Notice at 85 Fed. Reg. 83416. The additions to the Entity List are the result of the collective determination by the Departments of Commerce, State, Defense, Energy, and where appropriate, the Treasury (collectively, the “End-User Review Committee”) that these entities are engaging in or enabling activities contrary to U.S. national security and foreign policy interests.

The Notice imposes a licensing requirement on all items “subject to the Export Administration Regulations (EAR) when they are to be exported, reexported, or transferred (in-country) to any of these entities.” Furthermore, no license exceptions are available for these transactions and none of the designated entities may be a “party” to the transaction as defined in EAR Part 744. Therefore, one must file a license application to export from the United States any item destined for these entities, or to reexport any item of U.S. origin or otherwise “subject to the EAR” to these entities or where any such entity is a party to the transaction.

The Notice groups the Chinese entities by designation reasoning and defines the applicable license application presumptions for each entity. These groupings are discussed further, below:

1. Semiconductor Manufacturing International Corporation Incorporated (“SMIC”), and several of its related entities are designated because of concerns with China’s military-civil fusion (“MCF”). License applications for the export of “Items uniquely required to produce semiconductors at advanced technology nodes 10 nanometers or below will be subject to a presumption of denial to prevent such key enabling technology from supporting China’s military modernization efforts.” All other license applications will be reviewed on a case-by-case basis.
   
   
2. AGCU Scientech; China National Scientific Instruments and Materials (“CNSIM”); DJI; and Kuang-Chi Group are cited for enabling wide-scale human rights abuses. License applications for these entities are subject to a case-by-case review for items necessary to detect, identify and treat infectious disease; all other license applications are subject to a presumption of denial.
   
   While not listed in the Notice, we suggest that importers in the U.S. also review any transactions with these entities to determine whether the product may be made with forced or convict labor.
   
   
3. China Communications Construction Company Ltd. is designated for its activities in enabling China to reclaim and militarize disputed outposts in the South China Sea.
   
   
4. Chongqing Chuandong Shipbuilding Industry Co Ltd.; CSSC Huangpu Wenchong Shipbuilding Co., Ltd.; Guangxin Shipbuilding and Heavy Industry Co., Ltd.; and Guangzhou Taicheng Shipbuilding Industry Co., Ltd. are involved in China’s efforts to assert its unlawful maritime claims in the South China Sea.
   
   
5. China State Shipbuilding Corporation, Ltd. (“CSSC”) and related entities, Beijing Institute of Technology; Nanjing University of Science and Technology; Nanjing University of Aeronautics and Astronautics; Nanjing Asset Management Co., Ltd.; and Jiangsu Hengxiang Science and Education Equipment Co., Ltd were designated for acquiring and attempting to acquire U.S.-origin items in support of programs for the People’s Liberation Army.
   
   
6. Tongfang Technology Ltd. (NucTech) was designated because the ERC determined that NucTech’s lower performing equipment impair U.S. efforts to counter illicit international trafficking in nuclear and other radioactive materials.
   
   
7. Beijing University of Posts and Telecommunications directly participates in the research and development, and production, of advanced weapons and advanced weapons systems in support of People’s Liberation Army modernization.
   
   
8. ROFS Microsystems; Tianjin Micro Nano Manufacturing; Tianjin University; and the individuals Chong Zhou; Huisui Zhang; Jinping Chen; Wei Pang; and Zhao Gang were designated because there is reasonable cause to believe that these individuals, in coordination with Tianjin University through its College of Precision Instruments and Optoelectronic Engineering Tianjin Micro Nano Manufacturing, and ROFS Microsystems, systematically coordinated and committed more than a dozen instances of theft of trade secrets from U.S. corporations.
   
   
9. Zigma Aviation Services; MRS GmbH; France Tech Services; Maintenance Services International GmbH; and Satori Corporation were added to the Entity List on the basis of actions and activities they have engaged in that are contrary to the national security and foreign policy interests of the United States. Specifically, these companies provided aircraft parts, without the necessary licenses, to one entity – Mahan Air – that is listed as a Specially Designated National (SDN) per the U.S. Department of Treasury’s Office of Foreign Assets Control.

Military end-uses and -users

The changes outlined above build on tightening of controls on China’s MCF. On April 28, 2020, 85 Fed. Reg. 23459, BIS expanded the export, reexport and transfer (in-country) controls applicable to military end-uses and military end-users in China, Russia and Venezuela. This rule required the exercise of enhanced due diligence for the sale of certain items to China. BIS has now published a Military End-User (“MEU”) List of 103 entities (58 Chinese, and 45 Russian) which the U.S. Government has determined to be military end-users. While this MEU List is helpful, BIS emphasizes that:

this is a non-exhaustive list, and does not imply that other parties not included on the list are exempt from regulatory prohibitions. For example, parties not listed on the MEU List but included on the Department of Defense’s Section 1237 list of the National Defense Authorization Act would raise a Red Flag under the EAR and require additional due diligence by exporters, reexporters, or transferors.

For example, the Department of Defense recently listed SMIC as a Communist Chinese military company. Given the fact that BIS included SMIC on the Entity List, it is surprising that SMIC was not listed on the MEU List. Our view is that one should take little solace in this omission and that one must do enhanced due diligence regarding all exports to SMIC and other similarly situated companies.

Hong Kong

On December 23, 2020, BIS posted an amendment to the EAR removing Hong Kong from the list of destinations under the EAR. This change is in response to new security measures that have been imposed on Hong Kong by China. As a result of this change, Hong Kong will, in almost all circumstances, be treated the same as China for purposes of the EAR. This change took immediate effect on December 23, 2020.

Conclusion

Business with China has become increasingly complicated over the last several years. Rather than waiting to be served with notice of a violation, companies would better off taking a proactive approach: understand the risks in the export marketplace, many of which are new, and take the time to assess how these risks may (or may not) threaten present and future business.