Industrial Manufacturers Facing Challenges Keeping Up With Export Controls, Lawyer Says

The Bureau of Industry and Security and its technical advisory committees should do more public outreach to make sure companies are aware of important export control updates sometimes buried in Federal Register notices, a BIS committee heard last week. That outreach is especially critical for companies working with industrial chemical processing equipment, a committee member and industry lawyer said, which has commercial uses but is increasingly drawing BIS scrutiny for its military capabilities, including in chemical weapons.

Eric McClafferty, a Kelley Drye lawyer who works with several industry associations that represent members making pumps, valves and similar industrial items, said some of these companies have accidentally exported equipment that they didn’t realize needed a license. He said businesses aren’t always monitoring the Federal Register for daily export control updates and may miss technical but important changes, specifically pointing to recent BIS moves to control exports of items to Russia that are classified under certain Harmonized Tariff Schedule codes (see 2203040020) as well as the agency’s military end-user restrictions (see 2004270027).

McClafferty, speaking during a Materials and Equipment TAC meeting, said some of the industrial items being exported by these companies have traditionally been viewed under the Export Administration Regulations as EAR99 -- which are items that generally don’t require specific licenses -- but that has changed in recent years.

He said he’s currently working with a company that exports an industrial product that was “blindsided by the addition of their HTS number” to the scope of BIS controls. The company made three shipments before realizing they needed a license, McClafferty said, and have since filed voluntary disclosures with BIS.

“It's kind of a do-or-die situation for them, because if they don't get those licenses, they are going to really be damaged significantly,” he said. “It came out of left field.”

He added that “a lot” of other companies are exporting items that they believe are EAR99 but are actually controlled under Export Control Classification Number 2B999, which covers a range of broad industrial processing equipment, including stainless steel plates. McClafferty said that ECCN had traditionally imposed an anti-terrorism control only for exports to North Korea, and many exporters “ignored” it because very few American companies do business with North Korea, which is subject to strict financial sanctions.

But McClafferty noted that BIS has since added that ECCN to the scope of its military end-user restrictions, which covers exports to China, Myanmar, Cambodia, Russia and Venezuela. This has caused “​​big issues” for stainless steel plate manufacturers, McClafferty said, especially when taking into account the due diligence that BIS expects companies to undertake before potentially shipping to a customer that could be considered a military end-user (see 2007090075, 2201270063 and 2105050048).

“It puts a lot of additional burden on folks who are manufacturing, selling products into these countries to know if these pretty mundane products need a license,” he said. “It’s a fairly big burden, and it's the kind of thing where outreach to an industry association affected by this might be useful.”

He also said outreach is important to educate U.S. companies about diversion attempts by restricted Russian or Belarusian end-users. He said companies in both countries are looking to buy U.S.-origin replacement parts, including industrial equipment, by placing orders through a third country, such as Turkey or Kazakhstan.

McClafferty suggested the TAC or BIS licensing officers reach out to industry associations whenever the government publishes a rule that may affect their members, especially for more complicated rules, like the BIS military end-user controls.

“Especially in the last five or six years, there has been a lot of diligence burden assigned to manufacturers,” he said. “Instead of just having to look at a denied parties list, you have to know your customer, to know what they're doing, [and you’re faced with] all kinds of additional diligence burdens that lots of folks aren’t really knowledgeable about.

“So informing and educating manufacturers about those additional diligence burdens is something that we've used associations to do and try and get people up to speed,” he said, “but there's plenty of other opportunities to help manufacturers do that.”

Several TAC members agreed that more outreach would be helpful.