Archive for the ‘BIS’ Category

Jun

27

US to China: No Robots for You!

Posted by at 11:23 am on June 27, 2018
Category: BIS • China • Export Control Proposals

Robot by Johnson Cameraface [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/87B4de [cropped]The Wall Street Journal reports that the White House is cooking up new export controls on China. The idea is to restrict exports to China of technologies that could assist in China’s Made in China 2025 manufacturing upgrade initiative. That initiative focuses on 10 priority industries, which include new advanced information technology; automated machine tools and robotics; aerospace and aeronautical equipment; maritime equipment and high-tech shipping; modern rail transport equipment; new-energy vehicles and equipment; power equipment; agricultural equipment; new materials; and biopharma and advanced medical products.

Some of these items and technology might on the Commerce Control List and may already be controlled for export to China. Others clearly are not. Politico reports that the National Security Council is drawing up a list of technologies to be controlled for export to China targeting the priority sectors for Made in China 2025. It is not clear whether “technology” here includes the common usage which would cover goods or only the more technical use of that term by BIS which covers information only. The NSC List is scheduled to be released on Friday, so we should know more then.

How this new list will play out in relation to foreign availability determinations under Part 768 of the EAR is also anyone’s guess. Certainly technologies in many of the targeted sectors will remain available to China from other foreign countries, none of which can reasonably be expected to adopt these controls.

Another issue, not to suppose that the White House cares about complying with the General Agreement on Tariffs and Trade (“GATT”), is the extent to which these new export restrictions comply with the prohibition on quantitative export restrictions in Article XI of GATT. Certainly, these restrictions will not fit within the stated exceptions to the prohibitions on such restrictions in Article XI — namely, protection of domestic supply of “foodstuffs or other products essential to” the exporting country. Nor do they have any relation to “classification, grading or marketing of commodities in international trade.”

Instead, the restrictions can only be justified on the basis of Article XXI’s national security exception which provides the basis in GATT for most export control regimes. The national security exception in Article XII is related to “fissionable materials,” “traffic in arms,” or “war or other emergency in international relations.” Obviously the reference to war in Article XII is not a reference to a trade war, so it seems unlikely that the new export restrictions could survive a WTO challenge.

Photo Credit: Robot by Johnson Cameraface [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/87B4de [cropped]. Copyright 2010 Johnson Cameraface

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Copyright © 2018 Clif Burns. All Rights Reserved.
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May

15

Export Control Reform Finally Announced for Guns and Ammo

Posted by at 7:04 pm on May 15, 2018
Category: BIS • CCL • DDTC • Export Reform • USMIL • USML

Guns by Al [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/6gPGbx [cropped]The Directorate of Defense Trade Controls and the Bureau of Industry and Security today announced the proposed rules for the long awaited export control reform of Categories I, II and III of the United States Munitions List.  The proposed rules for DDTC are here; the proposed rules for BIS are here.

Under the proposed rules, the only items remaining in Category I will be firearms that fire caseless ammunition, are fully automatic, or are specially designed to integrate fire control, automatic tracking, or automatic firing.  Other small arms that were once in Category I will be moved to 0A501 and 0A502.  Small arms that are on Category I of the USMIL will still be subject to the brokering rules of the ITAR even if they have been moved to 0A501 or 0A502.

These new proposed ECCNs will be controlled by, among others, RS1 and FC meaning that licenses will be required for all destinations.  (RS1 captures every country but Canada and FC captures Canada).  The BIS proposed rules also exclude the use of most license exceptions so that the new regime will closely parallel the available exemptions that were available under the ITAR.   So the result of the transition of these items from the USML to the CCL will mostly be a change in the agency with licensing authority.

There are a few significant changes, however, worth noting.  First, the proposed rules would eliminate a particular bugbear of mine relating to the classification of rifle scopes.  Currently, rifle scopes are ITAR if they are “manufactured to military specifications,” whatever that means.   Foreign manufacturers of rifle scopes routinely decline to state whether their scopes are Category I(f) or 0A987 and do not provide enough information to decide whether a particular scope is manufactured to military specifications.  Under the proposed rules, a scope is on the USML only if it has night vision or infrared capabilities that would cause it to be captured under Category XII.  Everything else is now 0A987.

Second, these new rules will reverse the questionable position that DDTC has taken in the Defense Distributed case.   In that case, DDTC argued that posting 3D gun plans on the Internet is an export of controlled technical date on Category I firearms to every foreign person with access to the Internet.  BIS has a somewhat different take on posting things to the Internet.   Here’s what the proposed BIS rules say:

The EAR also includes well-established and well understood criteria for excluding certain information from the scope of what is “subject to the EAR.” (See part 734 of the EAR.) Items that would move to the CCL would be subject to existing EAR concepts of jurisdiction and controls related to “development” and “production,” as well operation, installation, and maintenance “technology.” While controlling such “technology,” as well as other “technology” is important, the EAR includes criteria in part 734 that would exclude certain information and software from control. For example, if a gun manufacturer posts a firearm’s operation and maintenance manual on the Internet, making it publicly available to anyone interested in accessing it and without restrictions on further dissemination (i.e., unlimited distribution), the operation and maintenance information included in that published operation and maintenance manual would no longer be “subject to the EAR.”

Part 734 makes clear that publication of technology on the Internet is not an export of that technology to the rest of the world; rather it is a release of that technology from export controls.

Third, the new rules will eliminate the issue as to whether firearms training is a defense service that cannot be provided by a U.S. person to a foreign individual without a license.  Both the existing and latest proposed DDTC rule defining defense services would require a license to provide basic firearms training to a foreign individual.  (The latest proposed rule permits basic training but only if there is an approved license to export the firearm to that individual.)  The BIS analysis of this is somewhat different.  The BIS notice of proposed rulemaking somewhat wryly states:

The EAR does not include a concept of “defense services,” and the “technology” related controls are more narrowly focused and apply in limited contexts as compared to the ITAR.

In fact, of course, under the proposed rules training a foreign individual in firearms use would require a license only if it involved a control of technology covered by proposed ECCNs 0E501 or 0E502.  However, neither ECCN covers information related to the use of 0A501 or 0A502 firearms.   As a result, firearms training that would have required a license under the old rules will not require a license if the new rules are adopted.

Photo Credit: Guns by Al [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/6gPGbx [cropped]. Copyright 2009 Al

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May

11

CBP Sued Over Requiring Hold Harmless Agreement for Return of Seized Property

Posted by at 8:15 pm on May 11, 2018
Category: BIS • CBP

OFO Officer via Flickr https://www.flickr.com/photos/cbpphotos/8406672912/in/album-72157632584772091/ [Public Domain - Work of U.S. Government]Okay, exporters, raise your hands if this has happened to you. You are exporting goods and some over excited and under informed U.S. Customs and Border Patrol Agent wrongfully seizes the item. For example, he decides that the EAR99 spark plugs that you are exporting are ECCN 3A228 triggered spark gaps. You file the necessary paperwork in response to the notice of seizure. In the meantime, your customer sues you for non-delivery. CBP finally admits after consulting with BIS that these are spark plugs and not triggered spark gaps and, six months later, agrees to return them. But here’s the catch:  they will return them only if you sign a standard release form absolving CBP from any liability for having wrongfully seized your spark plugs. Reluctantly you sign the papers, wait for your spark plugs and settle the lawsuit with your customer for unreimbursable damages caused by CBP.

Of course, the bitter taste here comes from the fact that these spark plugs are yours. You have the right to them unconditionally. You don’t have to waive your rights or promise to run naked through a public square as a prerequisite to the return of what is yours and which CBP should never have seized in the first place.

Now consider the case of Anthonia Nwaorie, a nurse who was traveling to Nigeria to establish a medical clinic for women and children in Nigeria. She had with her $41,377.  This was money which she had saved from her nurse’s salary.  It was intended to seed money for the clinic.   All of the money was seized by CBP at the airport because she did not file a declaration of the cash at the CBP Office six miles from the airport just before her departure.

When she received the Notice of Seizure under the Civil Asset Forfeiture Reform Act (“CAFRA”), she elected the option of having the matter referred to the U.S. Attorney for judicial resolution and filed that election along with the required CAFRA form. When the U.S. government did not file a judicial forfeiture action within 90 days of receiving the claim form, CAFRA required the government to “promptly release” the seized property and forbade the government from taking “any further action to effect the civil forfeiture of such property.” 18 U.S.C. § 983(a)(3)(B)(ii).

Thereafter CBP mailed her the all-too-familiar letter saying it would give her cash back to her but only if she signed a hold harmless agreement which would prevent her from filing suit against the government and would require her to indemnify the government against any future claims made against the released property. The letter also said that if she did not sign the hold harmless agreement within 30 days, administrative procedures to forfeit the cash would be instituted. Ms. Nwaorie refused to sign and instead called a lawyer. The Institute for Justice then took on her case, and, on May 2, filed a class action lawsuit against CBP alleging that CBP had no right to condition the return of forfeited funds on a hold harmless agreement. The suit requests return of Ms. Nwaorie’s seized property as well as that of the class members who also refused to sign the hold harmless agreement. It also seeks a judgment enjoining CBP in the future from conditioning release of seized funds on the hold harmless agreement.

The theory behind the suit is simple. Nothing in CAFRA authorizes conditioning the release of funds on a hold harmless agreement. Moreover, doing so violates the specific requirement to “promptly release” the funds if no forfeiture action has been filed within the statutorily mandated time period. And, of course, CAFRA’s prohibition on further forfeiture proceedings directly prohibits CBP from threatening administrative forfeiture if the hold harmless agreement is not signed.

Although this seizure, because it involved a currency reporting violation, was under CAFRA, the same logic would apply to seizures under the Tariff Act of 1930. If an exporter files a claim under 19 U.S.C. § 1608 and prevails in the subsequent federal court litigation or the government decides under 19 U.S.C. § 1604 not to prosecute the forfeiture action, nothing in the statute permits CBP to condition return upon a hold harmless or waiver of rights.

One thing to consider while waiting for the outcome of this lawsuit is this:  when signing and returning the hold harmless agreement, send it back with a cover letter indicating that the hold harmless was not signed voluntarily but was signed because of CBP’s unlawful demand that it be signed as a condition to return property that is lawfully yours.  Be aware, of course, that this is not something that should be done where Customs has lawfully seized the property and has decided to mitigate the forfeiture.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
May

3

De Minimis Rules Create De Maximis Confusion for ZTE Exports

Posted by at 7:53 pm on May 3, 2018
Category: BIS • Denied Party List

ZTE China via http://res.www.zte.com.cn/mediares/zte/Files/bannerCN/rmrb0424.jpg?h=270&la=en&w=470 [Fair Use]Trade wars, like all wars, inevitably inflict collateral damage on unintended targets. This article in the Wall Street Journal provides an interesting run-down of the collateral damage that the ZTE denial order has had on U.S. companies.  These are companies for which ZTE was a significant customer and which have seen significant drops in their stock prices on the heels of the denial order.

Although most of the attention has been focused on the scope of the order’s impact on exports to ZTE from the United States, less attention has been paid to the issue of foreign made products incorporating U.S. content. Consider the dilemma of the company that makes the Gorilla Glass used on ZTE smartphones:

Corning Inc., GLW -0.49% which makes Gorilla Glass screens used in smartphones from ZTE and others, said it was assessing whether the sales ban applies to its products made at its factories in Taiwan, Japan and South Korea. The company said it wasn’t sure whether Gorilla Glass includes content that falls under U.S. export controls.

There could be a number of reasons for this, including not knowing the origin of the raw materials. But more likely, it could be the confusion over how to apply the de minimis rules in the context of the denial order, which only covers items “subject to the Regulations,” i.e. items “subject to the EAR.” Section 734.4(d)(1) notes that the following items are not “subject to the EAR”:

Reexports of a foreign-made commodity incorporating controlled U.S.-origin commodities … valued at 25% or less of the total value of the foreign-made commodity.

The crucial, and confusing, part of this provision is what is meant by “controlled U.S.-origin commodities,” a term that is never defined in the regulations. The only guidance as to the meaning of this phrase is in Supplement 2 to Part 734 which says this:

To identify U.S.-origin controlled content for purposes of the de minimis rules, you must determine the Export Control Classification Number (ECCN) of each U.S.-origin item incorporated into a foreign-made product. Then, you must identify which, if any, of those U.S.-origin items would require a license from BIS if they were to be exported or reexported (in the form in which you received them) to the foreign-made product’s country of destination. In identifying U.S.-origin controlled content, do not take account of commodities, software, or technology that could be exported or reexported to the country of destination without a license (designated as “NLR”) or under License Exception GBS (see part 740 of the EAR).

Reading the above provision literally, “controlled U.S. origin commodities” for purposes of the ZTE Denial Order would not include EAR99 items and many other items that did not require a license to China because whether something is controlled for de minimis computation depends on whether it is controlled for the “country of destination,” not the recipient.

One suspects that BIS means, and would like to cover, all EAR99 or items that were NLR for China in the de minimis computation for foreign made products exported to ZTE on the notion that these exports are controlled to ZTE. But, of course, if wishes were horses, all beggars would ride or, more to the point in this context, if wishes were rules, all agencies would ride roughshod over fairness. I don’t think BIS can cure this by posting some slapdash FAQ on its website instead of going through the procedures required by the APA to amend Supplement 2 to Part 734 to decouple the meaning of controlled from the country of destination.

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(No republication, syndication or use permitted without my consent.)
Apr

18

ZTE Snapback Order Based on Condition Not In Original Order

Posted by at 7:05 pm on April 18, 2018
Category: BIS • Civil Penalties

ZTE Stand 6 via http://www.zte.com.cn/cn/events/ces2013/show/201301/t20130110_381605.html [Fair Use]Earlier this week, the Bureau of Industry and Security re-imposed on Chinese telecom giant ZTE a seven-year export denial order which the agency imposed and suspended on March 23. 2017. That March 2017 order noted that the suspension could be lifted and the order reimposed if various probationary conditions detailed in the order were not met.

This week’s order re-imposing the previously suspended export denial order is premised on misrepresentations made in two letters sent by ZTE to BIS. The first, sent on November 30, 2016, and before the March 23, 2017 order itself, referred to “employee disciplinary measures” that ZTE had taken or would take in the future. The second, sent on July 20, 2017, said it was sent “to confirm that the measures detailed by ZTE with respect to discipline have been implemented.” In fact, according to BIS, the promised letters of reprimand were not sent out when these letters were written and the employees at issue had received their full 2016 bonus.

Now, of course, lying to BIS is a very bad thing. But, honestly, are these two letters enough for BIS to back out of the deal and rescind the suspension of the export denial order?

In fact, if you look at how the new order justifies this action, it is clearly playing fast and loose with the facts, leaving the undeniable impression that U.S. trade policy and our broader disagreements with China had more to do with this action than these two letters. Here is the relevant language from the new order:

The Settlement Agreement and March 23, 2017 Order require that during the probationary period, ZTE is to, among other things, complete and submit six audit reports regarding ZTE’s compliance with U.S. export control laws. The Settlement Agreement and March 23, 2017 Order also include a broad cooperation provision during the period of the suspended denial order. This cooperation provision specifically requires that ZTE make truthful disclosures of any requested factual information. The Settlement Agreement and March 23, 2017 Order thus, by their terms, essentially incorporate the prohibition set forth in Section 764.2(g) of the EAR against making any false or misleading representation or statement to BIS during, inter alia, the course of an investigation or other action subject to the EAR.

Of course, the whole game is given away by the statement that certain provisions “essentially incorporate” section 764.2(g) of the EAR. “Essentially incorporates” means, of course, that the probationary conditions did not include 764.2(g) but BIS firmly wishes that they had.

The “Tenth” section of the Order clearly indicates that suspension is premised on compliance with the “probationary conditions set forth above.” So that doesn’t include the “cooperation provision” which is referenced in the above quoted language of the order and which is contained in the “Twelfth” section.  Last time I checked, “Twelfth” is below not above the “Tenth” Section. And even if you suspend the laws of geometry and physics to put it above the “Tenth” section, that provision requires ZTE “to continue to cooperate.” There’s nothing in it at all that says anything about statements made before the order was even entered such as those in the November 2016 letter.

In fact, the probationary conditions are in the “Third,” “Fourth,” and “Fifth” sections of the Order. These deal with the monitor’s reports, compliance training, maintaining a compliance program, and retention of records in a fashion accessible in the United States. You won’t find in these sections, which are the probationary conditions “above” the “Tenth” section, any requirement that ZTE send reprimand letters, dock bonuses, comply in the future with section 764.2(g) of the EAR, or have fully complied with that section in the past.

As I said, lying to federal agencies is bad. But so is not abiding by the rule of law.

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