From PLI’s Course Handbook Coping with U.S. Export Controls 2007#11207

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“END-USE” CONTROLS IN THE EXPORTADMINISTRATION REGULATIONS

Evan R. BerlackBaker Botts L.L.P.

This paper is a revision and updating of the paper I published in the Practicing Law Institute's Course Handbook Coping with U.S. Export Controls 2006.

"END USE" CONTROLS IN THEEXPORT ADMINISTRATION REGULATIONS

Evan R. Berlack

October 15, 2007

"END USE" CONTROLS IN THEEXPORT ADMINISTRATION REGULATIONS1

This paper will review and analyze the various "end use rules" which are an important

part of the Export Administration Regulations.2

By "end use rule", I mean the responsibility imposed by the EAR on a "shipper" (i.e., an

exporter or reexporter) to apply for a license when he either (a) "knows", or (b) is informed by

BIS, that the end use of a shipment will be for unauthorized purposes, even though the shipment

would not ordinarily require a license.

The EAR contains a definition of "knowledge" and its variants "know", "reason to

know", or "reason to believe" in Part 772.

End Use Rules have acquired significant importance for shippers especially since the

number of "items" (i.e., hardware, technology or software) requiring BIS licenses to some or all

destinations is relatively small compared to the cold war era. The use of License Exceptions, or

basket category EAR 99, are the rule for most shippers, but this "good news" is tempered

considerably by the need to take the End Use Rules into full account.

The End Use Rules, as presently contained in the EAR, are found in the following areas:

-- The Proliferation Controls in Part 744, specifically Supplement No. 4 to Part 744 (the Entity List), §744.2 (nuclear end uses), §744.3 (missile end uses), §744.4 (CBW end uses) and §744.6 (activities of U.S. Persons);

-- The civil end use rule under License Exception CIV as set forth in §740.5.

-- The Iraq military end use/end user Rule in § 746.3

-- The new China Military End Uses rule set forth primarily in new § 744.21 and new Supplement No. 2 to Part 744.

1 This paper is a revision and updating of the paper I published in the Practicing Law Institute's Course Handbook Coping with U.S. Export Controls 2006

2 I have not dealt with legislative proposals in this paper inasmuch as , at the time of writing, there is virtually no legislative movement towards passage of a new Export Administration Act.

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I will discuss each of the End Use Rules below.

PLEASE NOTE that "publicly available" technical data and software may always be

shipped to any destination under the EAR and is not affected by any of the End Use Rules

described below. Such publicly available data, the definition of which is elaborated in §§734.7-

11, is not "subject to the EAR" within the meaning of §734.3(b)(3).3

I. The Entity List in Supplement No. 4 to Part 744:

On February 3, 1997, BIS published in the Federal Register4 the first entry (Ben Gurion

University of Israel for computers between 2000 and 7000 MTOPS) in the Entity List contained

in the newly established Supplement No. 4 to Part 744. The inauguration of the Entity List

provided shippers, for the first time, the names of specific end users to whom specific items, or a

broad range of items, could not be shipped without a License even though such items might

normally not require a license. For example, computers with MTOPS of 2000-7000, could

normally be shipped to Israel without a license under ECCN 4A003. But the word “normally” is

quite important. As the following sections of this paper will emphasize, whenever a shipper

“knows”, or is otherwise informed by BIS, of an unauthorized end use under Part 744, it must

seek a BIS license. Accordingly, the Entity List must be viewed as but one additional, albeit

specific, guidepost regarding the need to apply for a license because of the proliferation controls

of Part 744.

BIS has added names to the Entity List on numerous occasions February 3, 1997. Care

must be taken to ascertain the scope of the restriction applicable to each entity. In some cases,

“all items subject to the EAR” are restricted. In other cases, only specific items, and/or specific

locations are restricted.

3 See L. Christensen's Article on "Technology and Software Controls" in this volume.

4 62 F.R. 4910

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On June 5, 2007, BIS announced a Proposed Rule in the Federal Register 5 that would

expand the use of the Entity List through the addition of a new §744.11. Such expansion would

enable BIS to add entities to the Entity List which were deemed to pose a risk of being involved

in activities which are contrary to the “national security or foreign policy interests of the U.S.”

by demonstrating engagement on the basis of “specific and articulable facts”6 in any of the

following activities: (1) supporting terrorists; (2) enhancing the military capability or ability to

support terrorism of countries who have been designated as State Supporters of Terrorism by the

State Department’ (3) transferring, producing, servicing etc. conventional weapons “contrary to

U.S. policy”, (4) deliberately refusing to comply with a BIS or State end use check or other

request for information (5) engaging in conduct that “poses a risk of violation of the EAR. “

When making an addition to the Entity List, BIS will indicate in each instance the extent to

which this will apply to items Subject to the EAR, the Licensing criteria to be employed and the

availability of License Exceptions if any. I note three points regarding this Proposed Rule:

5 72 F.R. 310056 It is not clear in the Proposed Rule if BIS will publish any or all of such “facts.”

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(a) This is not a “catch all” mechanism--an exporter would not be required to seek a

BIS license only because it “knows” its customer is involved in any of the

foregoing activities but is not listed on the Entity List.

(b) BIS indicates in the Notice that a principal factor leading it to propose the

expansion of the Entity List is to substitute a more transparent and accessible

mechanism than General Orders for listing companies such as Mayrow General

Trading which is accused of selling components to be used with roadside bombs

by insurgent forces in Iraq. Mayrow is currently the subject of General Order

No.3 in Supplement No.1 to EAR Part 736.

(c) The proposed Rule would add a new §744.16 providing a mechanism whereby an

entity on the Entity List for any reason may seek its removal from the List.

II. Nuclear End Use Controls in §744.2:

Under §309(c) of The Nuclear Non-Proliferation Act of 1978,7 the Commerce

Department, in consultation with the other relevant Cabinet agencies, was directed to control

items which, "if used for purposes other than those for which export is intended," had

significance for nuclear explosive purposes, but which were not otherwise controlled by the

Nuclear Regulatory Commission. This led to the provisions which are now contained at §742.3

of the EAR requiring licenses for specific items which form part of the "Nuclear Referral List",

as adopted by the multilateral Nuclear Suppliers Group.

Under §744.2, a license is required for any other item when:

7 42 U.S.C. 2139a(c).

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-- it will be exported or reexported to any country except those listed on Supplement No. 3 to Part 744 (Original NATO members plus Australia, Japan, New Zealand, Austria, Finland, Switzerland, Sweden and Ireland);8

-- the shipper "knows,"9 or is informed by BIS, that the item will be used directly or indirectly in the following specific activities:

-- design, manufacture, or use of nuclear explosives, or components or subsystems thereof;

-- design, manufacture or use of nuclear reactors or any facility for the fabrication of nuclear fuels which are not subject to safeguards by the International Atomic Energy Agency or where the end user is failing to meet its obligation to allow such safeguards;10

-- specific nuclear fuel cycle facilities whether or not safeguarded by the IAEA such as facilities for the fabrication of nuclear reactor fuel containing plutonium.

Note that §744.2(b) makes clear that an oral notice from BIS must be followed by a

written confirmation, within two days, by the Deputy Assistant Secretary for Export

Administration. This notice provision is controversial because no provision is made for placing

all similarly situated exporters or reexporters on the same footing and there is a danger that one

shipper could be singled out to his disadvantage. However, the Entity List in Supplement No. 4

to Part 744 (discussed above) mitigates this problem at least as to the entities on that list.

III. Naval Nuclear Propulsion End Use Rule in §744.5:

Under §744.5, a license is required before U.S. naval nuclear technology may be

disclosed to any destination, including Canada, which the exporter or reexporter knows will be

used "in connection with" any "foreign maritime nuclear propulsion project.”

8 Note: At the time of writing, the list of NATO members does not include the more recent members, e.g., Poland.

9 See discussion of "knows”, infra

10 It is not always clear that a facility is, in fact, subject to IAEA safeguards. The State Department's Office of Nuclear Energy Affairs (202-647-3310) will supply this information.

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IV. The Rocket Systems and Unmanned Air Vehicles End Use Rule in §744.3:

Specific items on the Commerce Control List (CCL) are controlled to all destinations

except Canada because they are related to the design, development, production or use of

"Missiles." which are defined in §742.5 to include rocket systems and unmanned air vehicles

systems capable of delivering at least 500 kg payload to a range of at least 300km. They are

items which have largely been identified by the multilateral Missile Technology Control Regime

(MTCR)11 as being important to control for purposes of stemming the proliferation of missiles

and missile technology.

In addition to the specifically controlled items, BIS requires under §744.3 (under revised

rules issued on November 8, 200412), a license for the export or reexport of any item when:

-- the shipper "knows [the item] will be used" in the design, development, production or use of rocket systems (defined as including but not limited to ballistic missile systems, space launch vehicles and sounding rockets) or unmanned air vehicles (defined as including but not limited to cruise missile systems, target drones and reconnaissance drones) capable of a range of at least 300 km, in or by a country listed in Country Group D:4 regardless of its payload capability or,

-- the shipper knows that the items will be used anywhere in world in the design development, production or use of rocket systems or unmanned air vehicles regardless of range capabilities for the delivery of chemical biological or nuclear weapons, except when the shipment is to a NATO country which is deemed to be a Nuclear Weapons State under the NPT (meaning only the UK and France), or:

-- the shipper knows that the item will be used in the design development production or use of any rocket systems or unmanned air vehicles in or by a country listed in Country Group D:4 when the shipper is unable (i) to determine the range capabilities of the rocket systems or unmanned air vehicles or (ii) cannot determine whether the rocket systems or unmanned air vehicles, regardless of range capabilities, will be used for the delivery of chemical biological or nuclear weapons, or

11 See the Appendix for the List of Member Countries.12 69 Fed. Reg. 64657 et seq., November 8, 2004. This notice, inter alia, removed the reference to specific “projects” in § 744.3 and Country Group D:4.

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-- the shipper is "informed" by BIS that a license is required for a specific export because there is an "unacceptable risk of [the item's] use in or diversion to any of the activities in the first two bullets above.

As discussed above, the Entity List in Supplement No. 4 to Part 744 “informs” shippers

regarding the entities, and the scope of restrictions applicable to them, as set forth in that list.

On December 23, 1993, BIS published "Guidance" in the Federal Register which defined

the term "will be used" in the equivalent provisions of the former EAR,13 to mean "will be

directly employed in." The Guidance was intended to remove a concept held by some in the

business sector that items which have a general function (e.g., video monitoring systems) might

be caught by these provisions even though they are not utilized directly for purposes of missile or

CBW activity. The "Guidance" was not codified in the Revised EAR in 1995 and its continued

validity may be open to some theoretical doubt, although BIS has not said or done anything to

suggest that the Guidance has been revoked. In my view, the Guidance remains a useful tool of

interpretation.

There are two points to be made about the Rockets and Unmanned Air Vehicles End Use Rule:

1. Delivery systems which do not fall within the range parameters set forth above are not covered by these rules unless they can or might be used for delivery of chemical, biological or nuclear weapons. The language “cannot be determined” appears to mean that any doubt whatsoever regarding the possibility of such end use in the shipper’s mind must be resolved in favor of seeking a license.

2. Except to the extent indicated from time to time in the Entity List in Supplement No. 4 to Part 744, and in situations where chemical, biological or nuclear end use is a possibility, the Rockets and Unmanned Air Vehicles End Use Rule is limited to the specific countries identified in Country Group D:4. Note that these countries and projects were not identified until Supplement No. 6 (the predecessor to Country Group D:4) was published on June 16, 1992,14 10 months after the initiation of the EPCI Rules.

13 58 Fed. Reg. 68029 et seq., December 23, 1993.

14 57 Fed. Reg. 26773, June 16, 1992. The August 15, 1991 notice stated that the requirements of former §778.7(c)(1) would not be "applicable" until Supplement No. 6 was completed.

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V. The CBW End Use Rule in §744.4:

The U.S. maintains controls on specific chemical precursors, biological agents and

associated equipment, software and technology to a range of countries on the basis of lists which

are periodically reviewed by the multinational Australia Group. These specific controls are

identified in the relevant entities of the CCL and are summarized at EAR §742.2(a).15

In addition, under EAR §744.4, the U.S. unilaterally requires validated licenses for any

item when:

-- a shipper "knows" it will be used in the design, development, production, stockpiling or use of chemical or biological weapons in or by the countries identified in Country Group D:3 in Supplement No. 1 to Part 740. (See appendix); or,

-- The shipper is informed by BIS that there is "an unacceptable risk of [the item's] use in or diversion to... [the foregoing] activities anywhere in the world" and not just the countries listed in Supplement No. 5.

The presence of an entity on the Entity List in Supplement No. 4 could be another means

by which a shipper is “informed” by BIS, depending on the scope of the restrictions stated

therein to pertain to an entity.

As in the case of the Rockets and Unmanned Air Vehicles End Use controls discussed

above, BIS's December 23, 1993 Guidance16 interprets the phrase "will be used" to mean

"directly employed in."

The unique points concerning CBW End Use controls are as follows:

1. As noted, they are limited to the countries identified on Country Group D:3.

2. "Stockpiling" is a covered activity, which is not included in the Rockets and Unmanned Air Vehicles End Use controls.

15 CBW Weapons, as such, including the chemicals and biological agents utilized in CBW together with related technology and software are controlled under Category XIV of the U.S. Munitions List of the State Department's International Traffic in Arms Regulations, 22 CFR §121.1.16 See footnote 10, above.

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3. Unlike the Rockets and Unmanned Air Vehicles End Use Rules, the CBW End Use Rule does not have a legislative foundation inasmuch as §6(m) of the EAA,17

is silent on any kind of knowledge test for CBW shipments, and is limited to licensing requirements for specifically listed items.

VI. U.S. Person Controls-§744.6:

The End Use controls on U.S. Persons set forth in this section are extensive. U.S.

Persons are defined §744.6(c) to mean in any U.S. citizen or permanent resident, wherever

located in the world; any individual of any nationality when found in the U.S.; and any entity

incorporated in the U.S., or the overseas branch of such entity. The term does not include a

foreign incorporated subsidiary of a U.S. firm.

The controls on U.S. Persons are directed at their participation in certain targeted

activities in aid of Nuclear, Missile or CBW proliferation, and can involve any item, whether or

not of U.S. origin.18 These targeted U.S. Person activities give rise to a validated license or

reexport authorization requirement when:

1. The U.S. Person knows that his shipment will be used in (i.e. will be directly employed in) the design development, production or use of "missiles"19 in Country Group D:4 projects or countries;20 the design, development, production, stockpiling or use of CBW in Country Group D:3 countries, or, the design, development, production or use of nuclear explosive devices in countries listed in Country Group D:2 of Supplement No. 1 of Part 740.

2. The U.S. Person intends to perform a contract, service or employment which the U.S. Person knows will assist in the design, development, production, or use of “missiles” in Country Group D:4 countries; or the design development, production, stockpiling or use of CBW in Country Group D:3 countries; or the

17 50 U.S.C. App. §2405(m). This provision was added to the EAA by §304(b) of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, P.L. No. 102-182, 105 Stat. 1245, 1246-1247.18 BIS interprets 744.6 to apply in this manner because the text is based on the phrase” any item” as opposed to “any item subject to the EAR” or equivalent phrase which is the EAR ‘s way of referring to items of U.S origin.

19 While the term “missiles” is not defined in § 744.6., there is a definition of this term in the EAR’s general definitions provisions in Part 772 which reflects the 500 kg payload and 300 km range criteria set forth in § 742.5 and the MTCR. Presumably the broader definitions in § 744.3 would not be applicable to § 744.6 but this is not entirely clear. Also note the special definition of “ballistic missiles” in respect of Iraq in § 746.3 discussed below.20 This requirement did not become effective until June 16, 1992. See footnote 13 above.

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design, development, production or use of nuclear explosive devices in Country Group D:2 countries.

3. The U.S. Person intends to participate in the design, construction, or export of a whole plant to make any of the chemical weapons precursors identified in ECCN 1C350 in all countries except members of the Australia Group.

4. The U.S. Person, although not the actual exporter or reexporter, intends knowingly to support, by e.g. financing, transporting or freight forwarding, the export, reexport or transfer of an item that lacks a license required by Part 744.

5. BIS informs a U.S. Person that "an activity could involve the types of participation and support" described above "anywhere in the world."

Regarding point 5, above, U.S. Persons would, of course, be well advised to consider that

they have been so “informed” as to the end users and items identified on the Entity List in

Supplement No. 4 to Part 744.

The U.S. Person rules carry the potential of exposing U.S. based banks and insurance

companies, as well as their overseas branches to the U.S. EAR. This is not a customary posture

for such entities and ought to be a cause of some concern for them, although no enforcement

actions have yet been brought against any of them by BIS. Freight forwarders and transporters,

on the other hand, have long been accustomed to dealing with the EAR.

U.S. citizens working abroad as decision making executives of non-U.S. entities are

another vulnerable group. Any such individual who has the discretion to decide on the shipment

of an item, whether or not of U.S. origin, to, or in support, of a targeted missile, or CBW related,

or nuclear explosive related activity, could find himself in violation of the U.S. EAR.

VII. The "Know" Rule in The End Use Provisions:

Aside from the instances where BIS "informs" a shipper or the end user appears on the

Entity List, the key to the EAR's End Use Provisions is the extent of knowledge of the forbidden

end use possessed by the shipper. The Definitions section in Part 772 of the revised EAR

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contains the following definition of "Knowledge" that is applicable, as well to variants such as

"know," "reason to know" and "reason to believe":

Knowledge of a circumstance...includes not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts.

The revised EAR's definition in 1996 remedied a major deficiency of the former EAR's

end use controls. The history of the "know" test in the end use controls deserves the following

brief summary.

Although the old nuclear end use test in former §778.3 had for many years employed the

widely used phrase "know or has reason to know," the missile, CBW and U.S. Person end use

tests when they first appeared as a Proposed Rule on March 13, 1991,21 used the word "know"

instead of the phrase, "know or have reason to know." This latter phrase, which remained part of

the nuclear end use test, is widely used in Federal administrative law and regulations, and has

accumulated a considerable body of judicial interpretation. However, the Commerce

Department in the March 13, 1991 Proposed Regulation included the following definition of

"know" as a means of aiding the exporter:

Know. [A] person shall be considered to know a circumstance or result when that person:

(a) Is aware that such circumstance exists, or that such result is substantially certain to occur; or

(b) Has a firm belief that such circumstance exists, or that such result is substantially certain to occur.

A person knows of the existence of a particular circumstance if that person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.

21 56 Fed. Reg. 10765, March 13, 1991.

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Commerce's proposed definition, and indeed the word "know" itself, was derived from

the amendments to the Foreign Corrupt Practices Act (FCPA)22 which had been enacted in Title

V of the Omnibus Trade and Competitiveness Act of 1988.23 These amendments had substituted

the word "know" in the FCPA for the concept "know or have reason to know" of circumstances

indicating illegal payments to foreign officials. The legislative history of the word "know"

included, as its key passage, the same definition of "know" which the Commerce Department

reproduced in the March 13 Proposed Regulation. This definition of "know or have reason to

know" was similar to several cases defining this phrase which had arisen under the old FCPA

and other statutes where the same phrase was important. Accordingly, most practitioners

concluded that the switch to "know" from "reason to know" in the FCPA was without practical

effect and that prior case law could still be relied upon. Further, with this history, the

juxtaposition of "know or have reason to know" in the nuclear end use controls with "know" in

the missile, CBW and U.S. Person controls did not seem to pose a problem of interpretation

because of the Commerce Department's proposed definition of "know".

However, when Commerce published its final rule on August 15, 1991,24 the language of

the "know" rule in the Missile, CBW and U.S. Person provisions in former §§778.7, 778.8 and

778.9 remained unchanged, but the "background" section of that notice announced that the

definition of "know" had been dropped because several commentators found the definition too

vague and preferred leaving the term undefined. Commerce followed the lead of these

commentators and further stated:

22 15 U.S.C. §78.

23 P.L. 100-418, 100 Stat. 1107.

24 56 Fed. Reg. 40494, August 15, 1991.

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"At this time, the Department believes that existing case law and judicial interpretation provide adequate guidance to exporters."25

But this statement left a large open question as to whether Commerce agreed that the

legislative history of "know" as used in the amended FCPA was still valid guidance for the EPCI

regulations. Moreover, the nuclear end use controls remained unchanged, using "know or having

reason to know", raising the possibility of different interpretations of the all important

knowledge test in the end use rules.

As could be expected, Commerce's announcement in the August 15, 1991 notice caught

the attention of the exporting community and their counsel and caused a reaction. Commerce

officials subsequently took the oral position in official Commerce seminars for exporters and

other conferences such as PLI's "Coping with U.S. Export Controls" programs, that the

Commerce Department would interpret the word "know" the same as the phrase "know or have

reason to know."

As noted above, the revised EAR in 1996 addressed the problem. The knowledge test

became the same for nuclear as well as missile, CBW and U.S. Person end uses, and the

definition of "knowledge" was reasonably, but not entirely, close to the familiar FCPA

definition.

There are two differences between the 1996 EAR definition and the FCPA version:

• In the FCPA version, a person must have a "firm belief" that a "circumstance exists," but the "firm belief" words are missing from the EAR's language regarding positive knowledge;

• In the FCPA definition, knowledge will not be inferred where a person "actually believes" that a "circumstance does not exist," even if there is a "high probability" of its existence. The EAR omits the "actual belief" element.

25 56 Fed. Reg. 40494, 40495.

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Thus, there are nuanced differences between the EAR and FCPA knowledge definitions,

with the EAR giving somewhat less credence to actual perceptions or understandings of the

occurrence of a circumstance.26

26 On October 13, 2004, BIS announced a proposed revision to the Knowledge definition, 69 F.R. 60829. Essentially, the proposal would have broadened somewhat the ability of BIS to infer knowledge in a given set of circumstances, The proposal attracted considerable criticism from the exporting community and was withdrawn by BIS effective October 18, 2006 by announcement in the Federal Register. 71 F.R. 61435. I discussed the proposal in some detail in the version of this article contained in the 2005 edition of the Course Handbook. at pp. 179-180

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VIII. License Exception CIV End Use Rule:

When so indicated in a particular ECCN, and as explained in §740.5, License Exception

CIV permits a range of hardware, and some software, items, to be exported or reexported without

a License which would otherwise be necessary for the group of several former Warsaw Pact

countries and the PRC listed in Country Group D:1 in Supplement No. 1 to Part 740. However,

this License Exception is not available if the item is being shipped to "military end users or to

known military end uses."27

Thus, this License Exception requires shippers to "know" the ultimate end use and end

user of an item. The EAR's existing definition of "knowledge" discussed above is applicable to

License Exception CIV. Note also that the prohibited Nuclear, Rockets and Unmanned Air

Vehicles, CBW and U.S. Person end use rules in Part 744 are considered to be "military" for

purposes of §740.5. The Entity List will also control, to the extent of the restrictions set forth

therein.

Nevertheless, there will always be practical difficulties with CIV's military end use

knowledge test. This will be particularly true in the case of the PRC, where a shipper may know

or suspect that an entity, while seemingly engaged solely in commercial activity, is in fact owned

by the Chinese Military as such or by individual high ranking military officers. If the entity is

actually engaging only in commercial activity, does the military ownership mean that CIV is not

available? This is not a hypothetical question inasmuch as the Chinese military seems to be

engaging in significant commercial enterprises.

The final rule published by BIS on June 19, 2007 on Chinese Military End Uses28 will be

complementary to License Exception CIV as applied to China. This Rule, as discussed in more

27 Note that semi-annual reporting of use of CIV is required by EAR Part 743 for certain ECCN’s.

28 72 F.R. 33646, June 19, 2007. See the Apprendix.

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detail below, now applies to certain items, as identified in the new Supplement No. 2 to Part

744, which did not theretofore require a BIS license for China under the CCL and the possible

use of License Exception CIV. A shipper is now required to obtain a BIS license if it knows the

Supplement No. 2 listed item will have military end uses as defined in new § 744.21. There will

not also be a military end user test under this new rule.

IX. Iraq Military End Use and End User Rule:

When BIS published its revised regulations on Iraq on July 30, 2004,29 it included a

special military end use /end user rule in § 746.3(a)(4). Under this rule a shipper must seek a

BIS license for any item subject to the EAR (whether or not controlled on the CCL) if it knows,

or has reason to know, or is informed by BIS, that the item (i) will be, or (ii) is intended to be,

used or a “military end use” or by a “military end user” except for shipments to U.S.

Government agencies or personnel, or to the Government of Iraq or to the Multinational Force in

Iraq. The rule is thus intended to limit shipments which might be used by insurgency forces. The

rule also specifically extends to shipments made within Iraq.

“Military End Use” in § 746.3(a)(4)(i) is specially defined to mean incorporation of the

shipment into a military item described on the U.S. Munitions List (“USML”)or the Wassenaar

Arrangement Munitions List (“WAML”)30 or the use, development or deployment of military

items as described on the USML or WAML. “Military end user” in § 746.3(a)(4) (ii) is defined

to mean any persons whose “actions” and “functions” are intended to support these defined

“military end uses” and which is not recognized as a “legitimate military organization” by the

U.S. Government. While this latter rule clearly is directed at insurgent forces, it is nevertheless

quite unclear how a shipper is supposed to know if a particular end user was recognized as

29 69 F.R. 46070, et seq, July 30, 200430 See http:// www.wassenaar.org

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“legitimate” by the USG. Also note that the Iraq rule requires seeking a license for any item

being shipped to someone who seems to fit the description of “military end user” whether nor not

the item fits the “military end use” description.

Also note that § 746.3 makes clear that the end use provisions relating to Nuclear items,

Rockets and Unmanned Air Vehicles , CBW and U.S Persons in Part 744, discussed above, will

also be applicable for shipments to or within Iraq. However to the extent the Part 744 rules might

apply to a ballistic missile with a range of 300 km or more, § 746.3 (a)(5) substitutes a range

threshold of 150 km for ballistic missiles destined for, or for transfer within, Iraq.

X. New BIS China Military End Use “Catch-All” Rule

As indicated above in the discussion of License Exception CIV, BIS published a Final

Rule on June 19, 2007 establishing a new requirement for the licensing of items being shipped to

China which are not subject to CCL list based controls for that country but which are identified

in a new proposed Supplement No. 2 to Part 744.31 The licensing requirement will be triggered

if the shipper “knows,” ( i.e. has knowledge) or is informed by BIS , that such a item is

intended, entirely or in part, for a “military end use” as defined in new § 744.21. That the Rule

also amends the U.S. Person rule in § 744.6, discussed above, to apply to any action in which a

U.S. Person knowingly supports a shipment which does not have a BIS license required by §

744.21 including financing, transportation, freight forwarding, and the “facilitation” of freight

forwarding.

Although not stated explicitly in §744.21, BIS indicates that the “knowledge” test in

therein will be governed by the definitions in Part 772 as discussed above.32 However, the Rule

contains a detailed definition of “military end use” in § 744.21(f). Building on the military end 31 The Final Rule was originally published as a Proposed Rule on July 6, 2006, 71 F.R. 38313, and received extensive commentary from the exporting community.32 See “Q.s & A.s on the BIS China Policy Rule” set forth on the BIS web site.

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use definition in the Iraq rule in § 746.3 discussed above, the China rule also looks to items

described in the U.S,. Munitions List, the Wassenaar Arrangement’s International Munitions List

or any of the EAR’s ECCN’s ending in “A018.” “Military end use” for these items is

determined by whether the item being shipped is intended for incorporation into any of the

foregoing listed items, or used for their production, design, development ,maintenance,

operation, installation or deployment, repair overhaul or refurbishing. The Note to § 244.21 goes

on to provide its own special definitions of the terms “production”, “development”,

“maintenance,” “operation,” “installation” and “deployment.”

The Rule substantially stiffens the standards to be used by used by BIS not only in

reviewing license applications submitted pursuant to proposed § 744.21, but also applications

submitted for items specifically controlled on the CCL for China. The Rule amends § 742.4 (b)

(7) so that it would no longer provide that licenses may be approved even where they might

contribute to Chinese “military development” or the end use or end user is in fact military except

in cases where a “ direct and significant contribution” might be made to electronic and anti-

submarine warfare, intelligence gathering, power projection and air superiority. Instead, the

standard of review for revised §742.4(b)(7), while retaining the “direct and significant”

language (as opposed to the “material contribution” language of new 744.21), now specifies that

a license will be denied if China’s “military capabilities” are involved as principally defined in a

new long list of specific military systems set forth in a new Supplement No.7 to Part 742, which

replaces the aforementioned limited list.

There are two other end use-related features of the Final Rule: (1) A new requirement for PRC

Ministry of Commerce End Use Certificates and (2) A Validated End-User (“VEU”)

Authorization mechanism. Briefly:

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1. A PRC End-Use certificate will now be required to support any license

application for China exceeding, in most cases, $50, 000 (formerly $5000) in value, not just, as

previously, for items controlled for National Security (NS) reasons. This will include license

applications submitted under §744.21.

2. The VEU Authorization if issued by BIS, will permit exports and

reexports of specifically identified “eligible “U.S. origin items, which would otherwise require a

BIS license because listed on the CCL, for use in civil applications by specific PRC end users

approved by BIS.33 The proposed VEU Authorization will not be available for the items listed in

Supplement No.2 to Part 744 which fit the definition of military end use and theretofore require

a license under §744.21.34

I note that on October 2, 2007, BIS announced that India will now be an eligible

destination for the VEU Authorization.35 Similar to the PRC, such authorization will be subject

to BIS approval of the specific Indian end user and of specific CCL items to be contained in each

authorization. However, the §744.21 procedure for China will not be applicable to India.

I have the following brief comments on the Rule:

1. The need for this Rule --together with the burdens it imposes on

exporters--is mysterious. The U.S. origin Items Listed in proposed Supplement No 2 to Part 744

can presently be freely exported and reexported to most of areas of the world (all countries

except T5) without a BIS license and their wide availability will continue to be the case. It is 33 At the time of writing, BIS has not approved any PRC end users. One criterion for such approval is the PRC end user’s commitment to permit BIS auditing of its sales to ensure they are only for civil uses. On September 13, 2007, the PRC Ministry of Commerce announced that such commitment may only be given with the prior approval of the Ministry. See the Ministry’s web site at http://english.mofcom.gov.cn/aarticle/policyrelease/domestic policy/200709/20070905091778.html. This announcement was reported by Donald A Weadon and Carol A. Kalinoski in their article “China Adds New hurdle to Verified End User Approval” in the October 2007 edition of the Export Practitioner, Vol.. 21 No.10.34 See the BIS Q & A explanation of the VEU Authorization on its web site at www.bis.doc.gov35 See 72 F.R. 56010, October 2, 2007

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simply not tenable to believe that by placing these items under a “catch all” type control that the

U.S. will meaningfully arrest the material development of PRC military capabilities. Instead,

U.S. exporters will face a compliance challenge if they fail the “catch all” knowledge test and it

is utterly impossible to believe that BIS will able effectively to police compliance with this rule

by foreign reexporters. And note, the Proposed VEU Authorization will be of no help for any

shipments subject to proposed §744.21.

2. On a positive note, BIS has not indicated that the de minimis rules in EAR

§734.4 are affected by the Final Rule. This means that non-U.S. end products containing 25% or

less controlled U.S. origin content could be shipped to the PRC without a BIS license even if the

end product would fail the proposed §744.21 tests had been it been of U.S. origin.

Conclusion

Shippers must view all these end use/end user rules with great caution. If an entity is not

found on the Entity List, consideration should always be given to the desirability of discussing a

proposed shipment with BIS in an effort to ascertain whether an end use or end user is civilian or

military, or whether a project is engaged in prohibited nuclear, rockets and unmanned air

vehicles, or CBW activity. The problem with making such enquiries is that the answer may be

just as vague as the situation confronting the shipper, because the U.S. intelligence community

will prevent Commerce from disclosing the U.S. Government's own knowledge. Thus, in the

end, a shipper may have to rely on its own judgment and instincts. The ancient rule that

"prudence is the better part of valor" may be the only true guide. Or, in other words, "when in

doubt, don't!"

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