The Department of Commerce Bureau of Industry and Security (“BIS”) recently promulgated new rules establishing Validated End-User (“VEU”) authorization. VEU authorization will allow the export, reexport, and transfer of eligible items to specified end-users who engage in civil end-use activities in the People’s Republic of China (“PRC”) and India. Revisions and Clarification of Export and Reexport Controls for the People’s Republic of China, 72 Fed. Reg. 33646 (June 19, 2007) (“the Rule”); Authorization of Validate End-User: Addition of India as an Eligible Destination, 72 Fed. Reg. 56010 (October 2, 2007). Reed Smith first reported on VEU authorization in the Summer 2006 edition of the Sentinel when BIS proposed the new rule. The VEU authorization is intended to reduce the administrative burden on U.S. exporters of commodities, software and high technology by taking the place of individual licenses. VEU authorizations also differ from licenses in that the authorizations will be valid for an indefinite period of time. U.S. companies should take the time to understand U.S. Government policy and compliance requirements when deciding whether the VEU program is right for them and their business partners.

Policy Driving the Selection of China and India as Eligible Destinations for VEU Authorization

Both China and India represent some of the fastest growing markets for U.S. companies. The policies driving the new Rule are the facilitation of trade in these markets, and regulation of exports of certain high-technology products. Under the new Rule, items eligible for VEU authorization include commodities, as well as software and technology. In order for companies to receive VEU authorization for these eligible items, the U.S. Government conducts a thorough review of the end-user, the item, and the final destination for the item, to ensure the item will be used for civil, rather than military, purposes. Through this review, VEU authorization advances the U.S. Government policy of preventing the flow of high-technology to China for military purposes, while at the same time fostering cooperative investment in high-technology with India.

With regard to the U.S. Government policy toward China, the new Rule states, “It is the policy of the United States Government to facilitate U.S. exports to legitimate civilian end-users in the People’s Republic of China (PRC), while preventing exports that would enhance the military capability of the PRC.” 72 Fed. Reg. 33646 (June 19, 2007). The Assistant Secretary of Commerce for Export Administration, Bureau of Industry and Security, Christopher A. Padilla, addressed some of the causes for concern with China’s military capabilities in his Jan. 29, 2007 remarks in Shenzhen, China. He stated, “China is modernizing its nuclear forces, rapidly expanding its navy, deploying precision-strike weapons, developing sophisticated command and control networks, and recently tested an antisatellite capability in space…[and] has reported double-digit real increases in defense spending for more than a decade.” In light of the lack of insight into China’s motivations for this modernization, he stated, “America’s export controls must support our longstanding arms embargo and not allow exports that would make a direct and significant contribution to China’s military.”

In contrast to limiting technology exports to China that may further their military modernization, the U.S. Government’s policy toward India includes strengthening cooperation through the U.S.-India High Technology Cooperation Group and the Next Steps in Strategic Partnership (NSSP) initiative, and focuses on using VEU authorization to encourage trade and investment in high-technology with India. On Oct. 2, 2007, U.S. Commerce Secretary Carlos M. Gutierrez announced the establishment of the VEU program for India. In his remarks, Secretary Gutierrez stated “The Validated End-User [program] builds upon the enormous progress made over the last six years in facilitating secure high-technology trade and investment…[and] will make it easier for U.S. companies to sell American products to pre-screened customers in India, while maintaining vigilance over U.S. technologies.” Although U.S. policy interests in China and India differ, the U.S. Government views the VEU authorization program as a means of increasing U.S. industry access to lucrative markets in both India and China, as well as furthering U.S. national security goals through its regulation of high-technology exports.

The Regulations and Key Considerations Related to VEU Authorization

The VEU authorization program regulations are found in 15 C.F.R. § 748.15 and in Supplement Nos. 7, 8, and 9 to § 748 of the Department of Commerce Export Administration Regulations (“EAR”). The key considerations for U.S. exporters, reexporters, and end-users related to these regulations will be discussed in turn below.

The VEU Authorization Program

Under the program outlined in the EAR, VEUs are those entities in either China or India that have been approved in advance by the U.S. Government to receive U.S. items for civil use. VEU authorization eliminates the requirement for the exporter or reexporter to obtain an export license for certain specified products. A deemed export license also is not required if the Chinese or Indian employees of the VEU receive VEU authorized technology, including through a transfer in the United States. 72 Fed. Reg. 33646 (June 19, 2007). The EAR identifies factors used to determine a Chinese or Indian company’s eligibility for VEU authorization and restrictions on VEU authorization, as well as certification and recordkeeping requirements imposed on the exporter, reexporter and VEU.

The factors used to evaluate an enduser’s eligibility for VEU authorization are: “the entity’s record of exclusive engagement in civil end-use activities; the entity’s compliance with U.S. export controls; the need for an on-site review prior to approval; the entity’s capability of complying with the requirements of VEU authorization; the entity’s agreement to on-site reviews to ensure adherence to the conditions of the VEU authorization by representatives of the U.S.; and the entity’s relationship with U.S. and foreign companies. In addition, when evaluating the eligibility of an enduser, the ERC will consider the status of export controls and the support and adherence to multilateral export control regimes of the government of the eligible destination.”

First, this regulation states both the eligible end-user and the government of the eligible destination, currently defined in the EAR as either the government of the PRC or India, will be evaluated when a VEU authorization determination is made. Second, prior to submitting an application for VEU authorization to the BIS, these factors should be considered as part of a thorough investigation of the end-user structure, ownership and business, including subsidiaries and joint ventures, as well as part of an evaluation of the end-users export controls compliance systems. Finally, if a request for VEU authorization for a particular end-user is not granted, the exporter may still be eligible for license approvals from the Bureau of Industry and Security (“BIS”).

There are several restrictions on exports using VEU authorization. First, items controlled under the EAR for Missile Technology (“MT”) and Crime Control (“CC”) reasons, including ballistic missile systems, space launch vehicles, and unmanned air vehicle systems, as well as shotguns and fingerprint computers, may not be exported or reexported under this authorization. Second, exports, reexports or transfers made under VEU authorization may only be made to specific end-users. Authorization as a VEU for one country specified as an eligible destination does not constitute authorization as VEU for any other country. Finally, eligible end-users may only (1) use such items at the end-user’s own facility located in an eligible destination over which the end-user demonstrates effective control; (2) consume such items during use; or (3) transfer or reexport such items only as authorized by BIS.

U.S. exporters, reexporters, and VEUs must comply with certification, reporting and records review requirements. The VEU must make certifications regarding end-use and compliance with VEU requirements. The exporter or reexporter must retain copies of these VEU certifications, as well as records related to the eligible destinations to which items were exported or reexported; the quantity of such items; the value of such items; and the Export Control Classification Numbers (“ECCNs”) of such items. The exporter or reexporter must also submit annual reports to BIS regarding the use of the VEU authorization during the year. Finally, the exporter and reexporter, as well as the VEU, must allow representatives of the U.S. Government to review these records, including as part of on-site reviews. These certification, reporting, and review requirements are similar to and intended to be no more burdensome than those required for an individual license or for a Special Comprehensive License (“SCL”). 72 Fed. Reg. 33646 (June 19, 2007).

VEU “Trusted Customer” List

The BIS publishes a “trusted customer” list in the EAR that identifies each VEU, as well as the eligible export items and the eligible export destinations for each VEU. This means the list of VEUs will be publicly available on the BIS website. BIS believes that publicly identifying Chinese and Indian customers as VEUs will help expand high-technology trade and U.S. exports by making clear to all potential U.S. exporters that there is a universe of end-users in the PRC and India that may receive certain items controlled on the Commerce Control List (“CCL”) without obtaining an individual license. 72 Fed. Reg. 33646 (June 19, 2007). BIS also believes that publishing this “trusted customer list” creates market-based incentives for VEUs to use U.S. items responsibly in exchange for easier access to controlled U.S. technology.

Before submitting an application for VEU authorization for a Chinese or Indian trading partner, U.S. companies should weigh the cost of individual export license applications versus the cost of the VEU authorization application and the potential loss of a competitive advantage. When VEU authorization is granted, the U.S. company’s competitors will have access to its Chinese and Indian customers via the publicly available VEU list. To date, BIS has granted five companies VEU authorization: Applied Materials China, a subsidiary of Applied Materials, USA, and a supplier of semiconductor manufacturing equipment; Boeing Hexcel AVIC I Joint Venture, a composites manufacturing facility in Tianjin that produces composite parts for secondary structures and interior applications for commercial aircraft, including the Boeing 787; National Semiconductor Corporation, a manufacturer of electronic components such as analogto- digital converters; Semiconductor Manufacturing International Corporation, a pure-play integrated circuits foundry that offers integrated circuits manufacturing services; and Shanghai Hua Hong NEC Corporation, a pure-play integrated circuits foundry that produces a variety of integrated circuits.

The VEU Authorization Request

The U.S. exporter, reexporter, or eligible end-user may apply for VEU authorization. Requests should be in the form of an advisory opinion request. The information required in a VEU authorization request includes an overview of the structure, ownership, and business activities of the eligible end-user, including any business activity the entity has with either government or military organizations. The request also should include the items proposed for VEU authorization approval, their intended enduses, and the applicable ECCN for each item. The applicant also should describe the end-user’s export control compliance system and describe how the end-user’s recordkeeping system will comply with recordkeeping requirements. Finally, the request should include an original copy of the statement by the prospective enduser certifying that the end-user will comply with all VEU authorization requirements, including submitting to on-site compliance reviews by U.S. Government.

The End-User Review Committee

The End-User Review Committee (“ERC”) is composed of representatives from the Departments of Commerce, State, Defense, and Energy, as well as other agencies as appropriate. The Department of Commerce chairs the ERC. The ERC will make determination as to whether to grant an end-user VEU authorization within 30 calendar days of receiving a completed application. Applicants should recognize that the review process may take more than 30 calendar days if the U.S. government considers the application incomplete upon receipt.


The new VEU authorization offers an efficient export control regime for trade in civil use items with China and India. VEU authorization is intended to support U.S. policy interests in China and India with regard to national security and controlling the export of high-technology items, as well as increasing market access for U.S. companies and VEUs. Prior to seeking VEU authorization, the U.S. exporter, reexporter or the end-user seeking the authorization should conduct a thorough investigation of the end-user’s ability to comply with the requirements of the VEU authorization program. VEU authorization imposes additional burdens on the VEU, including recordkeeping and onsite reviews by U.S. government representatives, in exchange for greater access to U.S. markets as a BIS “trusted customer.” VEU authorization also allows U.S. exporters and reexporters to forgo the time and expense of applying for individual licenses for the export of civil use items to China and India. U.S. companies must weigh the benefit of forgoing this time and expense against the cost of applying for the VEU authorization and the potential loss of a competitive advantage when the applicant’s Chinese and Indian customers are publicly classified VEUs. In short, U.S. exporters, reexporters, and VEUs should understand U.S. Government policy and the effect these compliance requirements will have on their businesses prior to pursuing VEU authorization