BIS Provides Updated Foreign-Produced Direct Product Rule Guidance

Nov. 2, 2021

On October 28, 2021, the Bureau of Industry and Security (BIS) published updated guidance regarding the Foreign-Produced Direct Product Rule (FDPR) as it relates to the BIS Entity List found in Supplement No. 4 to Part 744 of the Export Administration Regulations (EAR). The updated guidance applies specifically to Entity List entities which contain a “footnote 1” designation, which to this point includes Huawei and Huawei non-US affiliates. The updated guidance provides additional clarity on situations involving complex supply chain scenarios and the potential pitfalls associated with the incorporation into a product of foreign made components captured by the FDPR.

When it was published in August of 2020 the revised FDPR caused major supply chain headaches for industry by significantly expanding the scope of items captured by the EAR, specifically when Huawei or a listen non-US Huawei entity is involved in a transaction. Under the revised rule, foreign made items that are the direct product of US-origin technology or software which fall under one of several enumerated ECCNs are captured by the EAR and require a BIS license if a listed Huawei entity containing a “footnote 1” designation on the BIS Entity List is a party to a transaction. The list of enumerated ECCNs includes 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, and 5E991.

Additionally, and particularly challenging for industry, the revised rule subjects foreign made items to a license requirement when they are the direct product of a foreign plant, when a major component of that foreign plant is the direct product of covered US items (see list of ECCNs above). In this scenario, a BIS license is required if a footnote 1 designated entity is a party to a transaction, or a party who is exporting, re-exporting, or transferring such items has knowledge that the item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by any entity containing a footnote 1 designation.

In its recently updated guidance, the BIS has now added “Q4” under the “supply chain” section found on page 4. Through the demonstration of an example scenario the BIS has confirmed that an item which is not in the US, not of US-origin, does not incorporate controlled US-origin commodities or software above the applicable de minimis threshold, and is not the direct product of US-origin technology or software controlled for national security reasons (the typical characteristics which subject an item to the EAR) is nonetheless captured by the FDPR if the manufacturer has knowledge that the item incorporates foreign-produced components that themselves are within the scope of the revised FDRP, and a footnote 1 designated entity is a party to the transaction. This analysis, although not unexpected, underscores the challenges associated with managing supply chains and highlights just how intimately suppliers must know the detailed origins of all inputs.

According to the BIS, in such an instance an exporter, re-exporter, or in country transferer must have either obtained a license themselves or have obtained confirmation that a license was obtained by the manufacturer of the foreign produced component(s) subject to the FDPR. According to the BIS, in this scenario the failure to either confirm that the component supplier has obtained a license for the export, reexport, or transfer of such an item or to obtain a license themselves implicates General Prohibition 10 of the EAR, which forbids one from proceeding with transactions with knowledge that a violation has or is about to occur.

If you have questions relating to the EAR, the FDPR, or the BIS Entity List do not hesitate to contact an attorney at Barnes, Richardson & Colburn LLP.