BIS Announces New Export Controls on Advance Computing and Semiconductor Manufacturing, Including Revisions to Foreign Direct Product Rule for Entities on Entity List

Summary of Key Points:

Although this rule is aimed at the semiconductor and supercomputer industries, it will have a much broader effect on U.S. and ex-U.S. manufacturing, including even certain EAR99 goods manufactured in the U.S.

Specifically, for products manufactured outside the U.S. or even in the U.S., (even if they are EAR99), BIS may impose jurisdiction in one of the following ways:

End Use 

Restrictions may apply: 

• When any item subject to the EAR is being provided to a Chinese facility that manufactures semiconductors or supercomputers if the exporter knows or has reason to know that the facility manufactures integrated circuits (ICs) or supercomputers that meet certain technical parameters.
• When an item subject to the EAR with certain ECCNs is provided to a Chinese facility that manufactures semiconductors or supercomputers regardless of whether the exporter knows or has reason to know the items manufactured meet the technical parameters.
• When an item is manufactured outside the United States based on certain U.S. technology or software or in a plant based on or containing equipment based on certain U.S. technology or software and that item is destined for China and may be incorporated into any part, component, computer, or equipment not designated as EAR99 or is technology developed by an entity headquartered in China for the production of a mask or an IC wafer or die.
• U.S. persons shipping, transmitting, transferring, servicing or facilitating the shipping, transmitting, or transferring of items not subject to the EAR in certain circumstances when the item is used for the production or development of integrated circuits at a semiconductor facility in the PRC. 

End User

Restrictions may apply for specific entities on the Entity List for items manufactured outside the U.S. based on certain U.S. technology or software or in plants containing or on equipment based on certain U.S. technology or software.

New Export Control Classification Numbers (ECCNs)

For products manufactured in the United States, there are two new ECCNs that may affect U.S. goods, specifically, 3A090 and 4A090, as well as associated technology and software (including in Category 5 Part II). Those items are now controlled for export to China.

On Friday, October 7, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced an Interim Final Rule with a Request for Comments expanding the scope of the Export Administration Regulations (EAR) to additional exports and activities relating to the semiconductor and supercomputer industries, but with implications for a potentially wide range of industries that support the semiconductor and supercomputer industries.

Comments must be received by December 12, 2022.

The full text of the new rule was published on October 13. However, the rule becomes final for certain controls on the following dates:

• October 7, 2022: addition of new Export Control Classification Numbers (ECCNs) in Category 3 of the Commerce Control List (CCL) and expansion of controls under ECCNs in Categories 4 and 5, creating license requirements (and limiting license exceptions) targeted primarily for the end destination of China.
  
  • October 7, 2022, is also the effective date for an expansion of end use controls relating to the semiconductor industries in China that apply to any items subject to the EAR (i.e., even those not specifically described on the CCL that are known as EAR99), even when there is no specific knowledge the items subject to the EAR will be used in the manufacture of items in China meeting certain technical parameters.
  • There is a “Savings Clause” to allow exports that meet certain requirements as of October 7, 2022, and that are exported, re-exported, transferred or released prior to November 7, 2022, as well as one concerning the export of technology or software. 
• October 12, 2022: restriction on the activities of U.S. persons, wherever located, for facilitating the semiconductor and supercomputer industries in China. 
• October 21, 2022: expansion of the foreign direct product rule, expansion of the semiconductor end use rule to supercomputers, restrictions on license exceptions (but new license exception for certain transactions), and enhanced regional stability controls for China, and additions to the Entity List. 

End Use Restrictions

Perhaps the changes to the EAR that will have the broadest impact globally (including within the U.S.) are new end use restrictions relating to the semiconductor and supercomputer industries in China. 

Effective October 7, 2022, for semiconductors and October 21, 2022, for supercomputers, BIS will require a license to export, re-export or transfer (in-country) any commodities, software or technology (collectively, “items”) subject to the EAR (i.e., even EAR99 items) when the exporter has knowledge (or reason to know) that the items will be used in the development or production of ICs or supercomputers meeting certain technical parameters, or certain parts, components or equipment related thereto meeting certain technical parameters. 

Importantly, this rule also applies to any items subject to the EAR and classified under certain ECCNs when exported, re-exported or transferred to any facility in China that manufactures semiconductors or supercomputers regardless of knowledge of whether those supercomputers and ICs meet the requisite technical parameters. 

Additionally, effective October 12, 2022, this rule sets out a licensing requirement for U.S persons to undertake specific activities if so informed by BIS. The rule then states that consistent with this requirement, BIS is informing all U.S. persons that certain activities require a license because they may be in support of weapons of mass destruction-related end uses.  

The listed activities include activities relating to items not subject to the EAR, regardless of dual-use classification (i.e., even EAR99 items), that the U.S. person knows will be used in the development or production of ICs meeting certain requirements at a facility in China, such as shipping, transferring, transmitting, servicing such items, or facilitating the shipping, transmission, or transfer of such items. This prohibition also includes activities involving items not subject to the EAR, but which would be classified under certain ECCNs if subject to the EAR, when destined for a semiconductor facility in China, regardless of knowledge of whether such a facility produces ICs meeting the requisite technical parameters.

Finally, the rule amends the “foreign direct product rule” specifically related to products manufactured outside the U.S. when a party has knowledge that the foreign produced item will be destined for China and may be incorporated into any part, component, computer, or equipment not designated as EAR99 and destined for China, or is technology developed by an entity headquartered in China for the production of a mask or an IC wafer or die. This rule applies to foreign-produced items meeting certain criteria, regardless of end user. BIS added a sample certification for purposes of documenting a party’s notice to the Chinese end user of this new rule. 

In summary, the rule contains a host of novel licensing requirements, including new requirements to license the export, reexport and transfer of even EAR99 items. There are prohibitions and licensing requirements on certain actions of U.S. persons relating to items not subject to the EAR. There are also new controls and jurisdiction over items manufactured outside the U.S. when those transactions involve facilities in China which produce ICs or supercomputers. 

End User Restrictions

On October 21, 2022, BIS will also expand license requirements for items manufactured outside the United States when an entity listed on the Entity List and subject to Footnote 4 on the Entity List is involved in a transaction. Footnote 4 on the Entity List refers to the expanded foreign direct product rule (FDPR) added to 15 C.F.R. § 734.9.

The expanded Footnote 4 FDPR states that a foreign produced item may become subject to the EAR if it is the direct product of technology or software subject to the EAR and classified under certain ECCNs, or is produced in a plant or by a major component of a plant which is a direct product of software or technology specified in certain ECCNs. This Footnote 4 FDPR only applies when there is knowledge that the items will be incorporated into or will be used in the production or development of any part, component, or equipment produced, purchased, or ordered by a designated entity on the Entity List or is a party involved in the transaction.

New ECCNs and License Requirements

Effective October 7, 2022, BIS added new ECCNs 3A090 for specified high-performance ICs and 4A090 for computers, etc. containing ICs described by 3A090, which are both controlled for Regional Stability (RS) reasons to China and Anti-Terrorism reasons. BIS also added new language to certain technology and software ECCNs (as well as Category 5 Part II) to incorporate these new ECCNs, with new licensing requirements for 

BIS restricted license exceptions for the items subject to the new restrictions, including revising the license exception for replacement parts and equipment (RPL), and clarifying the applicability of license exceptions for governments, international organizations, International Inspections Under Chemical Weapons Convention, and the International Space Station (GOV) and Technology and Software Unrestricted (TSU).

BIS has also clarified that a Temporary General License (TGL) may apply to exports, re-exports, in-country transfers and exports from abroad of items subject to the new license requirements when they are destined for companies in China not headquartered in Country Groups D:1, D:5, or E from October 21, 2022, through April 7, 2023.

Revisions to the Unverified List

In a separate rulemaking on October 7, 2022, BIS announced the addition of 31 persons to the Unverified List, because the Agency was unable to verify their bona fides with an end-use check for reasons outside the U.S. Government’s control. Furthermore, BIS amended the EAR to specify that a sustained lack of cooperation by a host government authority (i.e., China) that prevents an end-use check from being conducted may constitute a basis for adding a party to the Entity List. The full text of the new rule was published on October 13.

In conjunction with these amendments, the BIS published a Memorandum for All Export Enforcement Employees, instituting the following two-step policy, effective as of October 7:

1. Requested end-use checks are expected to be conducted within 60 days of request.  If 60 days pass without a request end-use check being conducted, the entity will be added to the Unverified List.
2. The addition of an entity to the Unverified List will start a 60-day clock.  If an end-use check is not satisfactorily completed within that period, the entity will be added to the Entity List.

For More Information

BIS also provided some helpful tips to the trade community in exercising due diligence under the EAR. Specifically, BIS reminds the trade community that General Prohibition 10 (found in 15 C.F.R. § 736.2), which prohibits transactions involving items exported, re-exported, transferred or released in violation of the EAR, applies to these new licensing restrictions. BIS further reminds companies that its “Know Your Customer” requirements apply to end use and end user restrictions. BIS specifically recommends obtaining end user certificates from end users in China, as well as intermediary parties if the end user is not known, in addition to evaluating “all other available information” to determine whether a license is required. Ideally, end user statements from intermediary parties will state that the parties understand the requirements in the EAR and will either a) inform the exporter of the end user, once identified, or b) evaluate the end use and end user itself and apply for any required licenses.

Please note that we will continue to closely monitor this situation and provide timely updates, as warranted.  In the meantime, please do not hesitate to reach out to a member of the Faegre Drinker Customs and International Trade Team if you have any questions.