The two most important categories of export controls are the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR). The vast majority of controlled exports fall under EAR, while the ITAR’s scope is limited to only military and defense-related articles, services, information, and technology. The US Department of Commerce’s Bureau of Industry & Security (BIS) is charged with enforcing EAR under 15 C.F.R. parts 730-774.
This article provides an overview of the significant BIS policy and regulatory changes in 2023, including updates to the voluntary disclosure policy, an update on the semiconductor export control rules, expansion of Russia sanctions, and a human rights amendment to the EAR.
Background on EAR
The purpose of EAR is to safeguard US national security interests by ensuring that certain critical technology does not fall into the wrong hands.
The EAR governs whether a person or entity may:
- Export an item from the US.
- Reexport that item from a foreign country.
- Transfer an item from one person to another.
BIS has repeatedly demonstrated its commitment to enforcing EAR and violations can carry heavy penalties. Civil penalties may be up to $300,000 per violation or twice the value of the transaction, whichever is greater. EAR violations can even result in criminal liability, such as a $1 million criminal penalty per violation or up to 20 years in prison. EAR violations can also result in items being surrendered and loss of export privileges.
The new BIS rules and policies explained below underscore the importance of maintaining a strong export compliance program that includes effectively training all employees on export compliance requirements.
On March 30, 2023, BIS issued a final rule amending the EAR to explicitly confirm that the foreign policy interest of protecting human rights worldwide is a basis for adding entities to the Entity List. The change confirms a longstanding position that the protection of human rights throughout the world is a foreign policy interest considered in assessing whether the activities of an entity—and those acting on behalf of such entity, are contrary to the national security or foreign policy of the US.
In April 2023, BIS issued guidance clarifying their policies regarding voluntary self-disclosures (VSDs) to further incentivize the submission of VSDs for significant violations. According to the agency, the guidance underscores a commitment to fostering and incentivizing a strong culture of compliance.
The guidance specifically addresses how BIS applies existing guidelines in situations where there is a deliberate non-disclosure of significant violations. BIS will now apply affirmatively choosing not to file a VSD for a significant violation as an aggravating factor. In other words, if a company or individual uncovers a significant possible violation but then affirmatively chooses not to file a VSD and BIS later uncovers the violation, they will consider the decision not to file as an aggravating factor under their existing guidelines.
The guidance also attempts to incentivize individuals, companies, and universities to disclose when they become aware of others who are violating the rules. The guidance makes explicit that disclosing another party’s violation will be considered as an “exceptional cooperation” mitigation with BIS. That is, if a company becomes aware of another company’s violating conduct and discloses such conduct, the tip—if it results in an enforcement action—will be considered a mitigating factor if a future enforcement action is ever brought against the disclosing party.
For individuals, when conduct of an export control violation is disclosed, there may be monetary awards available.
On June 9, 2023, the US Departments of Justice, Commerce, State and Treasury issued an advisory to alert the international community, private sector, and public to the threat posed by Iran’s procurement, development and proliferation of unmanned aerial vehicles (UAVs).
The advisory identifies key components Iran seeks to develop its UAV program and entities involved in the procurement, production, and proliferation of Iranian UAVs. The advisory also provides recommendations to exporters, manufacturers, distributors, and financial institutions on implementing effective due diligence and internal controls to ensure compliance with legal requirements across the entire supply chain and to avoid unintentionally contributing to Iran’s UAV programs.
On Oct. 25, 2023, BIS released two interim final rules to reinforce and expand controls on advanced semiconductors and related computing items and semiconductor manufacturing equipment. BIS explained that the new rules, which expand upon a previous rule issued Oct. 7, 2022 are intended to address China’s efforts to obtain advanced integrated circuits (ICs) for the development of artificial intelligence (AI) and other technologies for military applications and to procure manufacturing equipment essential to producing ICs for advanced weapons systems.
Specifically, the new rules:
- Impose licensing requirements for approximately 40 countries beyond China.
- Broaden the technical control parameters for semiconductors and semiconductor manufacturing equipment established in the previous rule.
- Impose end-use controls for companies headquartered or whose “ultimate parent” is located in China.
- Provide clarification and updates to restrictions on “US Person” activities.
- Add new red flags to help entities spot prohibited behavior.
The update also includes responses to the many comments on the October 2022 rule and provides guidance and interpretation on several topics. Commerce Secretary Gina Raimondo said the new measures are intended to close loopholes and that they will likely be updated at least annually.
In December 2023, BIS released three rules as part of a broad effort to ease several categories of export licensing requirements and expand the availability of export license exceptions for key allied and partner countries, as well as for members of certain multilateral export control regimes. The rule updates are intended to “more accurately reflect the current national security and foreign policy posture of the United States Government.”
AG Country Licensing Requirements
The first rule changes licensing requirements for certain Australia Group (AG)-controlled pathogens and toxins (and their related technologies). Under the new rule, no license is required for AG countries, unless the item is also subject to Chemical Weapons Convention controls. The rule also removes crime control licensing requirements for Finland, Australia, Ireland, South Korea, Liechtenstein, Sweden, and Switzerland.
Missile Technology License Exceptions
The second rule broadens eligibility for the use of license exceptions for Missile Technology (MT) controlled items under the Export Administration Regulations (EAR). For example, under the rule change, certain components used for the production of civil manned aircraft will now be eligible for an EAR license exception.
The third rule seeks input from industry and the public on ways to facilitate use of License Exception Strategic Trade Authorization (STA). The rule proposes a number of changes intended to increase STA usage and reduce the burden on exporters. The rule also seeks to clarify which items are eligible for STA to certain destinations.
On Dec. 11, 2023, the US Departments of Commerce, State, Justice, Treasury and Homeland Security published a joint Quint-Seal Compliance Note, “Know Your Cargo: Reinforcing Best Practices to Ensure the Safe and Compliant Transport of Goods in Maritime and Other Forms of Transportation.”
The agencies highlight the increasingly complex nature of global supply chains and opportunities for nefarious actors to evade export control laws and US sanctions. The note also highlights the responsibility of individuals and entities participating in the global transport of goods to assess their risk profile and implement compliance programs.
The note outlines potential indicators of efforts to evade sanctions and export controls, recommended compliance practices, and recent activity to combat the illicit shipment of cargo.
In response to Russia’s February 2022 further invasion of Ukraine, BIS imposed extensive sanctions on Russia under the EAR. In 2023, they took further action building upon the policy objectives set forth in the initial rule—to protect US national security and foreign policy interests by restricting Russia’s access to items that it needs to project power and fulfill its strategic ambitions.
On Feb. 27, 2023, BIS issued a final rule expanding the scope of the Russian and Belarusian Industry Sector Sanctions by adding 322 additional HTS-6 Code entries corresponding to 322 industrial items that will require a license for export or reexport to or transfer within Russia or Belarus. The items added include a variety of electronics, industrial machinery, and equipment.
On May 23, 2023, the agency issued a final rule expanding the scope of the EAR’s Russian and Belarusian Industry Sector Sanctions and expanding the foreign direct product rule that currently applied to Russia and Belarus to apply to the temporarily occupied Crimea region of Ukraine as well. Additionally, the rule revised restrictions targeting Iran’s supply of Unmanned Aerial Vehicles to Russia.
Specifically, the new rule added 1,224 additional HTS-6 Code entries corresponding to 1,224 types of industrial items that now require a license for export or reexport to or transfer within Russia or Belarus.
BIS stated that these revisions reflect the US Government’s position that Russia’s invasion of Ukraine and Belarus’s complicity in the invasion, flagrantly violated international law, are contrary to US national security and foreign policy interests, and undermine global order, peace, and security.
Beginning in early 2023, BIS along with partner agencies released a number of guidance documents aimed to prevent Russia-related sanctions and export controls evasion and to help industry identify best practices and suspicious behavior.
Joint Compliance Note on Russia-Related Sanctions Evasion & Export Controls
On March 2, 2023, BIS, the Department of the Treasury’s Office of Foreign Asset Control (OFAC), and the Department of Justice issued a joint compliance note on the use of third-party intermediaries or transshipment points to evade Russian- and Belarussian-related sanctions and export controls.
The compliance note highlights the use of third-party intermediaries or transshipment points as one of the most common tactics used to evade Russia-related sanctions and export controls. The note provides warning signs on what to look for if a company suspects that a customer is using a third-party intermediary to evade sanctions or export controls as well as recent examples of tactics allegedly used by defendants to evade detection while attempting to flout the controls. The note also provides guidance on how to maintain an effective, risk-based sanctions and export compliance program.
E5 Joint Guidance on Countering Russia Evasion
The governments of Australia, Canada, New Zealand, the UK, and the US (collectively the “E5”) on Sept. 26, 2023, issued joint guidance to industry and academia identifying high priority items critical to Russian weapons systems. The guidance also urged specific actions to prevent diversion of these items to Russia through third countries.
The guidance is a follow-on to the June 2023 establishment of the E5 partnership to significantly enhance the effectiveness of each country’s export control regimes, minimize gaps in enforcement, and foster joint investigations and coordinated enforcement actions. The guidance provides industry and academia with the list of 45 prioritized Harmonized System (HS) codes containing items Russia needs for its weapons systems, of which nine codes are the highest priority.
The guidance also identifies anomalous patterns of importers in countries outside of the Global Export Control Coalition (GECC), that may raise diversion concerns, due diligence tips for screening, and red flag indicators to assist in determining whether an activity may indicate export control and/or sanctions evasion.
Guidance to Prevent High-Priority Items From Being Diverted to Russia
On Sept. 28, 2023, BIS announced new best practice guidance for industry to help prevent items that are considered the most significant to Russian weaponry requirements from being diverted for use in Russia’s war against Ukraine.
The guidance provides a list of information that companies should consider adding to existing documentation to help prevent diversion and encourages exporters to carefully review information provided for errors.
BIS also recommends that exporters and reexporters of these highest priority items seek written assurances of compliance from their customers to help prevent diversion. The guidance provides a sample written certification.
New Suspicious Activity Report Key Term for Financial Institutions
On Nov. 6, 2023, BIS and the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a joint notice highlighting a new Suspicious Activity Report (SAR) key term (“FIN-2023-GLOBALEXPORT”) for financial institutions to reference when reporting potential efforts by individuals or entities seeking to evade US export controls not related to Russia’s invasion of Ukraine.
The joint notice emphasizes the need for financial institutions to remain vigilant against entities or individuals attempting to evade export controls. The notice also highlights global red flag indicators of export control evasion including:
- Transactions involving entities with little to no web presence.
- Customer refuses to provide details to third parties about end-users or company ownership.
- The item does not fit the purchaser’s line of business.
- The customer is significantly overpaying for an item.
The joint notice is part of larger ongoing efforts by BIS and the US Department of the Treasury to work together to prevent evasion of US export controls.
The latest updates from BIS reflect the agency’s response to growing threats to US national security. The agency has demonstrated that it is dedicated to revisiting rules and amending them to prevent workarounds and ensure compliance. US exporters should be as proactive as possible to ensure that they are aware of red flags and that their compliance programs are well maintained.
Copyright 2024 Bloomberg Industry Group, Inc. (800-372-1033) Reproduced with permission. BIS Regulatory Updates: 2023 Significant Changes.