New export control compliance requirements announced for U.S. Aerospace companies dealing with partners and customers of certain origin.
Just a week after the U.S blacklisted Chinese drone maker DJI and introduced new rules that would bar Chinese public companies from U.S. stock markets should they fail to comply with financial reporting requirements, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), announced more export control requirements for the aerospace sector.
A new military end-user list.
On December 23, 2020, BIS issued a Federal Register notice where Export Administration Regulations (EAR) amendments were announced. Notably, BIS announced the addition a new Military End User (MEU) List.
BIS identified 103 entities which it determined to be “military end users” as defined in the EAR (i.e., 15 C.F.R. § 744.21). BIS added the 103 “military end users” to the new MEU List, including 58 companies from China and 45 companies from Russia. A reserved category for Venezuela would be added to the MEU List in the future.
The Department of Commerce saw the creation of a MEU list necessary to prevent U.S.-origin civil aviation products from being used for military purposes and in order to protect U.S. national security interests.
Noteworthy: major Chinese & Russian aerospace groups were identified as “military end-users,” including China’s AVIC and COMAC, Aero-Engine Company of China, Harbin General Aircraft Industries, as well as Russia’s United Aircraft Corporation, Sukhoi Civil Aircraft, Kazan Helicopters, Beriev, and Irkut.
But the creation of the MEU list also came after multiple clarification requests were submitted by U.S. companies and exporters for clarity since the earlier MEU rule had been published in 28 April 2020. The U.S. export community reportedly requested support in identifying military end-users known to the U.S. Government. As a result, BIS agreed that identifying `military end users’ on the MEU List, where possible, would ease the public’s compliance burden and make for a more effective `military end-use’ and `end user’ control.
According to Wilbur Ross, Commerce Secretary:
“This action establishes a new process to designate military end-users on the MEU List to assist exporters in screening their customers for military end-users,” said Ross. “The Department recognizes the importance of leveraging its partnerships with U.S. and global companies to combat efforts by China and Russia to divert U.S. technology for their destabilizing military programs, including by highlighting red flag indicators such as those related to Communist Chinese military companies identified by the Department of Defense.”
Through this notice, BIS wanted to “inform all potential exporters, reexporters, and transferors that all exports, reexports, or transfers (in-country) of designated items to these entities represent an unacceptable risk of use in or diversion to a ‘military end use’ or a ‘military end user’ for purposes of § 744.21, and therefore require a license.”
An export license would therefore be required in the event the exporter, reexporter, or transferor has knowledge or reason to believe that the export-controlled item is meant for a military end user.
BIS will review such license applications with a presumption of denial.
Should we be surprised?
The creation of this new MEU list should hardly come as a surprise since it is merely a continuation of BIS’ last April announcement that it was looking to “prevent efforts by entities in China, Russia, and Venezuela to acquire U.S. technology that could be used in development of weapons, military aircraft, or surveillance technology through civilian supply chains, or under civilian-use pretenses, for military end uses and military end-users.”
However, of particular interest, is the intense focus placed on China under the Trump administration. Whilst export controls restrictions only applied to military end users in Russia and Venezuela before; the April restrictions expanded to include military end users in China. The rule change was meant to target trade with companies involved in China’s Civil-Military Fusion strategy – with a particular focus on aerospace technology.
On 12 June 2020, the U.S. Department of Defense (DOD) – in a seemingly unrelated announcement – published a list of “Communist Chinese military companies operating in the United States”. The list specifically designated 20 private and state-owned companies deemed to qualify as “military companies operating in the United States.”, including Huawei, Hikvision, Aviation Industry Corporation of China, China Railway Construction Corporation, and China State Shipbuilding Corporation. The list has been amended with further additions since.
The Trump Administration certainly deployed a panoply of other control measures targeting China during its term, including restrictions in the communications technology and technology destined to Huawei.
Key compliance takeaways.
- Compliance with the new MEU requirements remains the obligation of the exporter, reexporter or transferors.
- Companies exporting certain controlled items – such as covered navigation systems, avionics equipment, aircraft, gas turbine engines, and related parts, equipment, software, and technology – must now apply for a license if the intended recipient is on the Military End User list.
- BIS will review license applications intended for entities on the MEU list with a presumption of denial.
- Not being listed in the MEU list does not mean that a license is not required. Other parties, not included on the MEU list, may still be subject to the ‘military end-use’ and ‘military end user’ controls under the EAR.”
- Companies are expected to continue conducting their due diligence efforts, including screening parties against denied/restricted party lists, applying BIS’ “Know Your Customer” guidelines and “Red Flag” indicators.
- In particular companies should be screening their end-users against the Department of Defense’s Section 1237 list of the National Defense Authorization Act. BIS mentioned that 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 therefore require additional due diligence.
- The MEU list includes presently 103 entities, but additional entities may be added or deleted from the MEU List at the discretion of the End-User Review Committee (BIS, in consultation with the Departments of Defense, Energy, State and the Treasury)
- No EAR license exceptions are available for transactions involving the listed entities, except exceptions authorized under the provisions of License Exception GOV such as exports to U.S. government agencies or other recognized international organisms.
- BIS has not explained so far what requirements will be associated with these particular export license applications. 5 C.F.R. § 744.21(a) continues to govern the license requirements for items identified in Supplement No. 2 to Part 744 for transactions involving China, Russia and Venezuela in the context of “military end use”.
- Obtaining necessary end-use certifications remains an important compliance step.
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