The Biden administration continues to utilize United States trade sanctions and export controls as a key tool in its efforts to put pressure on China, Myanmar/Burma and Russia. Since our last update, actions by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the U.S. Commerce Department’s Bureau of Industry and Security (BIS), the U.S. State Department (State) and the U.S. State Department’s Directorate of Defense Trade Controls (DDTC) have been bolstered by similar actions taken by U.S. allies, indicating multilateral support for the Biden administration’s efforts to combat ongoing human rights crises and national security concerns in these regions.
Military Intelligence End-User (MIEU) Rule
On January 15, 2021, BIS published an interim final rule set to take effect on March 16, 2021, under which licenses would be required for certain transactions (and actions) related to military intelligence end-users and end-uses. However, it was expected to be suspended like several other agency actions published in the last days of the Trump administration. On March 17, 2021, BIS announced a correction to the rule, stating it had taken effect on March 16, 2021. This rule is broader than the “Military End User” rule revised last summer, in that it applies to activities of U.S. persons even when goods, technology or software (collectively, “items”) not subject to the EAR are involved, and applies to countries beyond Russia, Venezuela, China and Myanmar/Burma (e.g., Iran, Cuba, Syria and North Korea).
Specifically, BIS created a new section in the Export Administration Regulations (EAR), 15 C.F.R. § 744.22 to implement a mandate in the Export Control Reform Act (ECRA) signed into law on August 13, 2018. Specifically, 15 C.F.R. § 744.22 states that a license is required for the export, reexport or transfer (in-country) of any item subject to the EAR “if, at the time of the export, reexport, or transfer (in-country), [the exporter has] ‘knowledge’ that the item is intended, entirely or in part, for a ‘military-intelligence end use’ or a ‘military-intelligence end user’ in Burma, the People’s Republic of China, Russia, or Venezuela; or a country listed in Country Groups E:1 or E:2.” This section also defines “military intelligence end user” and “military intelligence end use” and provides a non-exhaustive list of military intelligence end users.
BIS revised § 736.2(b)(7) to broaden the prohibition, absent a license from BIS, to include specific activities of U.S. persons in support of certain military intelligence end uses and end users. BIS also revised § 744.6 to echo that general prohibition and to make clear that the Section applies to the activities of U.S. persons, even when not involving items subject to the EAR.
Changes to the EAR
On March 29, 2021, BIS published a final rule modifying the reporting requirements for encryption items pursuant to License Exception Encryption Commodities, Software and Technology (ENC), as well as 22 export control classification number (ECCN) entries on the Commerce Control List (CCL). These changes were made to harmonize the CCL with changes made to the Wassenaar Arrangement List of Dual-Use Goods and Technologies at the 2019 Plenary Meeting.
With respect to License Exception ENC, found at 15 C.F.R. § 740.17, the new rule eliminates the annual self-classification reporting requirement for many mass-market encryption hardware and software items. BIS also revised License Exception ENC to provide that certain encryption items no longer require formal classification by BIS. BIS also removed the requirement to send an email notification to BIS and the National Security Agency’s ENC Encryption Request Coordinator when making encryption source code and beta test encryption software available for unrestricted download.
Finally, BIS revised certain ECCN entries on the CCL in Categories 0, 1, 2, 3, 5 – Part 2, 6, and 9. It added clarifying language to some ECCN entries to harmonize them with the Wassenaar Arrangement and to allow for exclusions.
In response to ongoing alleged human rights abuses in the Xinjiang Uyghur Autonomous Region of China, OFAC named two additional Chinese government officials to the Specially Designated Nationals (SDN) List on March 22: Secretary of the Party Committee of the Xinjiang Production and Construction Corps (XPCC) Wang Junzheng, and Director of the Xinjiang Public Security Bureau Chen Mingguo. U.S. persons are prohibited from engaging in transactions with any individuals or entities designated as SDNs, including any entities that are owned, directly or indirectly, 50% or more by an SDN (or in the aggregate by multiple SDNs).
These designations are the latest in a series of coordinated actions by OFAC, BIS and CBP over the last year aimed at addressing China’s practice of forced labor involving Uyghurs and members of other Muslim minority groups in Xinjiang and lend further support to similar sanctions recently imposed by U.S. allies.
For example, the EU, U.K. and Canada each took measures to block XPCC and four individuals with former or current ties to the Chinese government in the Xinjiang region: Zhu Hailun, Wang Junzheng, Wang Mingshan, and Chen Mingguo. These actions include travel bans and freezing of assets. In response, China announced sanctions on a number of European individuals and entities, barring them from entering China, Hong Kong or Macao, or doing business therein.
In addition to the sanctions outlined above, CBP has issued a number of enforcement actions targeting goods from Xinjiang.
The U.S. District Court for the District of Columbia granted a preliminary injunction on March 12 in favor of Xiaomi Corporation, a Chinese electronics company and leading global smartphone manufacturer. Xiaomi sought removal from a list of entities identified by the U.S. government as “Communist Chinese military companies” pursuant to EO 13959, issued in November 2020. EO 13959 prohibits U.S. persons from engaging in transactions in publicly traded securities of entities identified as “Communist Chinese military companies,” and requires U.S. persons to divest their interests in such entities within 60 days of such designation.
The injunction is preliminary, but pending further proceedings, the prohibitions and requirements of EO 13959 do not apply with respect to Xiaomi Corporation.
Additions to the Entity List
On April 8, 2021, BIS added seven Chinese supercomputing entities to its Entity List for conducting activities contrary to the national security or foreign policy interests of the U.S. These entities include: Tianjin Phytium Information Technology, Shanghai High-Performance Integrated Circuit Design Center, Sunway Microelectronics, the National Supercomputing Center Jinan, the National Supercomputing Center Shenzhen, the National Supercomputing Center Wuxi and the National Supercomputing Center Zhengzhou. Generally, BIS requires a license to export, re-export, transfer (in-country) or release any items subject to the EAR to entities on its List.
Enforcement of ICTS Interim Final Rule
Since our last alert, in March and then again in April, BIS served subpoenas on multiple Chinese companies that provide information and communications technology (ICTS) in the United States. These subpoenas appear to be the agency’s method of implementing an interim final rule published on January 19, 2021, which took effect March 22, 2021.
It was expected that this ICTS would be suspended, as it was issued in the last days of the Trump administration. However, on March 17, 2021, BIS announced it had issued subpoenas pursuant to its authority under the interim final rule.
This interim final rule established a process for BIS to review commercial transactions between U.S. and foreign parties for certain ICTS transactions. It gave BIS broad discretion to investigate, modify, block or unwind transactions involving certain identified foreign adversaries on national security grounds. This authority is separate from that exercised by the Committee on Foreign Investment in the United States (CFIUS).
On April 15, 2021, President Biden issued an EO “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation.” The EO establishes a national emergency and declares sanctions may be imposed on individuals and entities furthering the following harmful activities: undermining free and fair elections; malicious cyber-enabled activities; transnational corruption; extraterritorial activities targeting dissidents or journalists; undermining security, international law and the territorial integrity of states.
Specifically, the EO provides for blocking sanctions on persons operating in the defense, technology and materiel sectors of the Russian economy, and leaves discretion to State and Treasury to identify other sectors. It preliminarily lists six companies as SDNs. The EO also prohibits U.S. banks and their foreign branches from engaging in transactions involving the primary market for ruble or non-ruble denominated bonds issued by, or lending ruble or non-ruble denominated funds from, certain entities.
Last month, on March 18, the U.S. Department of State published its previously announced sanctions targeting Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, in response to its determination that the Russian government had used chemical weapons against its own citizens in violation of international law. The new sanctions terminate sales to Russia of defense articles and services, and any financing related to such sales. All licenses for export to Russia of any item on the United States Munition List (USML) are terminated. Likewise, foreign assistance (other than urgent humanitarian assistance and food or other agricultural commodities), and any financial assistance, credit, or credit guarantees by any department, agency, or instrumentality of the U.S. Government is prohibited.
Simultaneously, DDTC also published notices implementing further sanctions. DDTC amended the International Trade in Arms Regulations (ITAR) to implement a policy of denial for applications to export or reexport items and services subject to the USML to Russia, except in cases involving government space cooperation or commercial space launches prior to September 1, 2021. Similarly, BIS announced that all license applications for exports or reexports of national security-controlled items to Russia would be reviewed under a presumption of denial. In particular, BIS is concerned about exports and reexports to commercial end-users in Russia and state-owned and state-funded enterprises in Russia. Certain license exceptions were suspended as well.
On March 25, OFAC issued four general licenses with respect to recently re-imposed sanctions on Myanmar (also known as Burma). The general licenses authorize transactions with blocked Burmese persons for official business of the U.S. Government, for official activities of certain international organizations, and for certain transactions in support of nongovernmental organizations’ activities. The fourth general license establishes a wind-down period expiring on June 22, 2021, for transactions involving Myanmar Economic Corporation Limited and Myanmar Economic Holdings Public Company Limited, both of which have been designated SDNs.
Since our last alert, OFAC has also added the following state-owned entities in Myanmar/Burma to its SDN list, including Myanmar Gems Enterprise, Myanmar Timber Enterprise, and Myanmar Pearl Enterprise.
On March 8, 2020, BIS announced its 2020 changes to the military end-use and end-user rule, as well as its military intelligence end-user and end-use rule would apply to Myanmar. In addition, BIS designated four entities linked to the coup to the Entity List. All BIS licenses for transactions involving Myanmar are now subject to a presumption of denial.
Although businesses and trade practitioners may have been hoping the rapid changes in the export controls and sanctions environment would slow a bit under the new administration, the actions above highlight the need for continued vigilance. Specifically, U.S. businesses should continue to screen parties involved in all international transactions, but focus especially on those involving Russia, Myanmar/Burma and China. Red flags and due diligence on business partners’ beneficial owners are increasingly important. For more information on the above, please do not hesitate to contact Mollie Sitkowski, Matt Levy, Qiusi Newcom, or Allison Schten.