Industry News

A Zealous Commerce to Come in 2023

Jan. 10, 2023
By: Marvin E. McPherson

During 2022 the Department of Commerce promulgated an unprecedented number of rules as it pertained to the Export Administration Regulations (EAR). Most of the rules centered around the Russian invasion of Ukraine, but there were also many new rules centered around an increased control of U.S items and U.S Person Activity. We expect to see three areas at the forefront of enforcement actions in 2023; activities performed by U.S Person, expanded controls on items listed on the Commerce Control List (CCL) and increased review of end-use.

1. Activities by U.S Persons

BIS used its authority to promulgate sweeping regulation that impacted what activities U.S. persons can participate in without a license.  In October 2022, BIS issued a rule that requires a license for U.S. persons supporting activities related to the “development” or “production” advanced computing integrated circuits (ICs) that could involve support to WMD and missile end uses.

The EAR provides BIS the authority pursuant to 15 C.F.R. §744.6(c)(1) to inform U.S. persons that their activities could be in support of covered end uses, even without their knowledge, and that, therefore, a license is required for regulated activities. This is informally referred to as the “is informed” process. In use of this authority, BIS issued the October 2022 export controls on Chinese semiconductor, advanced computing, and supercomputer industries which enumerated activities that would fall under BIS’ definition of support and thus require a license.

In December 2022, The President signed the National Defense Authorization Act for Fiscal Year 2023 (NDAA). This act expands BIS’s authority to impose controls over activities of U.S. Persons in “support” of Foreign Military, Security or Intelligence Services. NDAA section 5589(b) amends ECRA section 4812(a)(2)(F) by adding the words and punctuation “security, or” before “intelligence.” Such amendment provides BIS the statutory authority to create and impose controls on the activities of U.S. persons, wherever located, in “support” of “military, security, or intelligence services”—even when all the underlying items at issue are not subject to the EAR.

These actions signal a broader use of power by BIS to the control activities by U.S Persons in support/aid of any adversary. We should expect to see more interpretations of the enumerating law and thus more regulations in 2023. 

2.     Expanded Controls on specific commodities, software and technologies (“items”)

Last year, BIS has streamlined its control designation authority. In May 2022, BIS announced a new approach to identifying certain “critical technologies” as defined under the Foreign Investment Risk Review Modernization Act (FIRRMA) and required under Section 1758 of the Export Control Reform Act (ECRA). The shift disregards any distinction between “emerging” and “foundational” technologies and introduces a new categorization of “Section 1758 technologies.” BIS hopes this change will speed up efforts to identify technologies significant to U.S. national security that should be subject to export controls under ECRA, eliminating the apparent difficulty of deciding whether a technology is “emerging” versus “foundational” and simplifying the interagency review process.

BIS added a number of controls on items in 2022. In August 2022, BIS finalized controls on Controls on Emerging and Foundational Technologies, add to the Commerce Control List (CCL) changes to technologies of two substrates of ultra-wide bandgap semiconductors (Gallium Oxide (Ga2O3) and diamond), Electronic Computer Aided Design (ECAD) software specially designed for the development of integrated circuits with any Gate-All- Around Field-Effect Transistor (GAAFET) structure, and pressure gain combustion (PGC) technology for the production and development of gas turbine engine components or systems.

Most recently, BIS added New Export Controls on Advanced Computing and Semiconductor. The rule issued the much-anticipated rules aimed at restricting China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors (“Rule”) (87 FR 62186). In addition to formalizing the licensing requirements included in the recent BIS “is informed” letters issued to certain US companies on related matters, the Rule imposes a wide range of new and enhanced restrictions targeting China’s advanced computing and semiconductor sectors.

As China and Russia are able to manipulate more and more dual- use or even previously EAR99 items, we should expect to see more controls of items on the CCL and more items declared Section 1758 technologies.

3.     Increased End Use Review

BIS conducts end-use checks to verify the legitimacy and reliability of the use and/or end user of items subject to the EAR. In particular end use check help to prevent the diversion of sensitive goods and technology. In October 2022, BIS announced new internal guidance and amendment Section 744.11 of the EAR to address instances where a foreign government prevents the agency from carrying out an end-use check. Under the new policy, BIS will initiate the process to add foreign parties to the Unverified List 60 days after checks are requested but host government inaction prevents their completion. If after 60 more days BIS is still unable to conduct an end-use check due to continued host government inaction, the entity will be added to the Entity List.

Unverified Entities can no longer benefit from the use of license exceptions under the EAR, and exporters/re-exporters must obtain a specific UVL statement (as outlined in Section 744.15(b) of the EAR) from the listed party for shipments where no license is required, such as exports of EAR99 items.

As BIS has spent much of 2022 promulgating rules, clarifying polices and informing parties of activities that require a license, BIS is likely to focus on enforcement in 2023. BIS has requested an additional $2.107 million to support enforcement activities to support what is to be a big year for enforcement.

As 2023 starts, all exporters should ensure the following;

1.     Ensure a review of classification of commodities, software and technologies (“items”)

2.     Review current controls and roles and responsibilities for all members of your organization.

3.     Review end-use certification with current transactions and ensure a thorough review of end-uses of future transactions.

The above steps should help a company ascertain where and what activities may be under the scope of the EAR and thus may require a license. Heed the writing on the wall from BIS, it is a shewing for enforcement actions in 2023.

If you have any questions regarding export compliance generally or EAR compliance in specific, do not hesitate to contact any attorney at Barnes, Richardson & Colburn, LLP.