This week we are pleased to have a guest post from Edward Heath and Kevin Daly. Attorneys Heath and Daly are members of Robinson+Cole’s Manufacturing Industry Team and regularly counsel clients on trade compliance, anti-corruption compliance, and other corporate compliance issues.
On October 7, 2022, the U.S. Department of Commerce announced a series of new export controls designed to curtail China’s access to certain advanced semiconductor chips and technology, integrated circuits, and advanced computing technology. The new regulations continue a trend of export controls aimed at curtailing certain sectors of the Chinese economy that touch on military and national security interests. Exporters in virtually any industry that export to China may be affected, thus reinforcing the importance of know-your-customer diligence for transactions with China.
There are four key takeaways:
- First, certain semiconductor equipment, advanced computer chips, computers containing such equipment, and related manufacturing equipment have been added to the Commerce Control List and now require a license for export to China.
- Second, a new license requirement has been imposed for exports of any items subject to EAR, the Export Administration Regulations (even items classified as “EAR99,” which often do not require a license for export to China) relating to supercomputing, semiconductor, and integrated circuit uses in China.
- Third, the new rule expands the EAR’s “foreign direct product” rules to encompass more advanced computing and semiconductor items, thereby increasing the reach of the EAR to regulate transactions that involve some products that are not produced in and never shipped from the United States, but which are the product of U.S. manufacturing and technology.
- Fourth, the new rule prohibits U.S. persons (U.S. citizens and green card holders) from facilitating the development of certain integrated circuits in China.
The most significant immediate impact of these new restrictions is on the computer chip and semiconductor industries. The prohibition on U.S. persons facilitating development of chip technology in China has had a significant effect. Some chip manufacturers have already announced that they will suspend dealings with China by U.S. personnel and business operations in light of the new regulations. Although foreign companies and foreign subsidiaries of U.S. companies are not considered U.S. companies, their U.S. personnel and U.S parent companies would be subject to the facilitation ban.
The new regulations are likely to affect a broad array of industries because they impose a license requirement for exports of all items destined for supercomputing, semiconductor, and integrated circuit end uses in China, even those classified as EAR99 that often do not require an export license for export to China. Accordingly, know-your-customer diligence is critical in the new regulatory environment. Companies exporting to China cannot determine their licensing obligations based merely on the nature of product to be exported. The U.S. government expects exporters to identify the end user, end use, and country of ultimate destination for all export transactions. This begins with obtaining that information from the other party or parties to the transaction. (The BIS-711 “Statement by Ultimate Consignee and Purchaser” form is one method for collecting this information). Additionally, the U.S. government expects companies to follow up on and resolve any “red flags” it encounters in the information provided before proceeding with a transaction. For example, discrepancies in the information provided (such as a mismatch between the provided name of the end user and the name of the business actually located at the delivery address) could indicate that the facts of the transaction are different from what was represented. As licensing requirements for exports to China are increasingly determined by the end use and end user and not just the nature of the item to be exported, such know-your-customer diligence takes on increased importance.