BIS Issues Guidance for Military Exports Rule

The Bureau of Industry and Security stressed the importance of increased due diligence measures in a guidance (see 2004280052) on its new export licensing restrictions for military-related exports, saying industry must be careful to avoid shipping goods to entities with any nexus to the Chinese military. The newly issued guidance touches on due diligence best practices and addresses shipments to distributors and universities but does little to address the “unmanageable” compliance burdens industry said the rule will cause (see 2006150031, 2006180035 and 2005050035). BIS also did not grant a request by at least 20 industry groups to delay the rule’s effective date (see 2006150031). The rule took effect June 29.

The rule, which also applies for exports to Russia and Venezuela but may have the largest impact on exports to China, requires “due diligence” to determine whether a customer is involved in military end-uses or is a military end-user, the guidance said. End-users are not captured by the rule if they are “engaged exclusively in civilian work,” BIS said, adding that “you must ascertain the activities of the specific end users in determining whether the intended end user is a ‘military end user.’” The agency said companies should refer to BIS’s “Know Your Customer Guidance” for more help and said it will provide advisory opinions if companies submit questions.

In many cases, the burden is on the exporter to find proof that its customer is solely involved in civilian activities, BIS said. For example, companies exporting goods to a military hospital need to check a “number of factors” to determine whether the shipment falls under licensing restrictions, including the “actual relation” of the hospital to the country’s national armed services and the “patient population served by the hospital.”

The same restrictions may also apply to “subordinate” or parent entities of customers, BIS said. If a parent company of a customer is involved in military activities, BIS said, U.S. exporters “must exercise due diligence to determine whether the parent or subordinate entity’s military activities are relevant to the specific end user’s activities.” This can apply to offices within any of the three countries’ defense ministries, BIS said, such as a finance, human resources or an “administrative office.”

BIS also said companies must determine whether a customer falls under the licensing restriction by examining “the activities of the specific end user,” including whether it “develops, produces, maintains, or uses” military items. “There is no specific volume level for such activities that would trigger a license requirement,” BIS added.

While BIS said a license is not necessary if a U.S. company is selling items to a distributor, such as a forwarding agent or an intermediary, a license may be required if the company has “knowledge” that the distributor intends to reexport or transfer the item for a military end-use. Similarly, a “systems integrator” does not qualify as a military end-user if the integrator is using “mass market items for products sold to the general market.” However, U.S. exporters need a license if they have knowledge that the integrator intends to sell the item for military end-use.

Many of the same due diligence requirements apply to exports to universities, BIS said. If a U.S. exporter sells to a university that does civil research but also does military research, that exporter may have “knowledge” that it is selling to a military end-user and may be subject to a license requirement, BIS said. BIS said it defines knowledge as “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.” The agency added that “knowledge of university’s military-related activities is relevant and should be taken into account along with information regarding the specific department.”

BIS also clarified that exporters are required to file Electronic Export Information for commercial shipments valued under $2,500 with an Export Control Classification Number. The filing requirement does not apply to Export Administration Regulations 99 items, BIS added, and certain shipments may be eligible for License Exception Governments, International Organizations, International Inspections under Chemical Weapons Convention, and the International Space Station (GOV). In addition, the EEI filing requirements do not apply to “intangible exports.”