I. Introduction
Efforts to enhance national security through economic measures have been on the rise in Japan in recent years. To control potential outflow of sensitive technologies which could compromise national security, the Japanese government has amended, effective May 1, 2002, the governmental notification known as the “Service Notification”[1] issued by the Ministry of Economy, Trade and Industry (“METI”) on December 21, 1992. This amendment (the “Amendment”) was issued in connection with the Foreign Exchange and Foreign Trade Act (the “FEFTA”) to clarify the concept referred to as “deemed exports” which is embedded within Article 25(1) of FEFTA.
As a result of the Amendment even technology transfers within a corporation and technology transfers from universities to their foreign students, which were not covered by deemed export controls before the Amendment, have become subject to deemed export controls, provided that such transfers fall under the "Specific Categories" as described below.
This article comments on the deemed export controls and goes into selected details of the Amendment.
II. Outline of Deemed Export Controls
The FEFTA specifies four types of foreign transactions to be controlled and/or coordinated in order to foster proper development of foreign transactions and the maintenance of peace and security both in Japan and abroad. The four types of foreign transactions are (1) Payment (Chapter 3), (2) Capital Transactions (Chapter 4), (3) Inward Direct Investments/Specific Acquisitions (Chapter 5), and (4) Foreign Trade (Chapter 6). Among these types, “deemed export controls” focused in this article constitute part of controls on service transactions included in (2) Capital Transactions above.
Article 25(1) of the FEFTA[1] addresses deemed export controls on “a transaction
[conducted for] the purpose of [providing] specified technology to a non-resident belonging to a specified country,”[1] as well as border controls for transactions intended to provide specified technologies in a specified country,[2] and requires that any person who intends to conduct such transactions must apply for permission from METI. “Specified technologies” and “specified countries” referred to in Article 25(1) of the FEFTA are specified in Article 17(1) of the Foreign Exchange Order[3] and the table appended thereto.
As described above, under the FEFTA, persons subject to deemed export controls are categorized as “residents” or “non-residents.” The FEFTA defines “residents” as “natural persons domiciled or residing in Japan and juridical persons with principal offices in Japan” (non-residents’ branch offices, local offices or other offices in Japan, irrespective of whether they have legal representative authority, are considered residents even when their principal office is located in a foreign state) (FEFTA, Art. 6, para. 1, item 5), and “non-residents” as “natural persons and juridical persons other than residents” (id, item 6). The FEFTA also
provides that, if it is not clear whether a person is a resident or non-resident, the applicable category will be determined pursuant to the criteria set out by the Minister of Finance (id, para. 2).
Such criteria for determining residency are stipulated in the governmental notification known as the “Notification of Interpretation”[1] as follows:
As described in the table above, according to the Notification of Interpretation, not only Japanese nationals are treated (as a basic rule) as residents, but also foreign nationals who work in offices located in Japan are categorized as residents. Therefore, before the Amendment, as a basic rule, technology transfer between Japanese and foreign nationals conducted internally within a company fell outside deemed export controls. In addition, in some cases, technology transfers from universities or other research institutions to foreign nationals who stayed in Japan for 6 months or more were not considered subject to deemed export controls because, in accordance with the Notification of Interpretation, such foreign nationals were categorized as residents.
Ⅲ. Outline of the Amendment
1. Background
Before the Amendment, transactions subject to deemed export controls, i.e., transactions conducted for “the purpose of [providing] specified technology to a non-resident belonging to a specified country” (FEFTA, Art. 25, para. 1), were defined and implemented narrowly under the deemed export controls rules, and residents were required to apply for permission only when they transferred technologies “directly” to non-residents.
Meanwhile, in an interim report issued on June 10, 2021 by the Subcommittee on Security Export Control Policy under the Industrial Structure Council’s Trade Committee, which included comments for clarifying the implementation of deemed export controls rules, it was pointed out that the above-described way of control (i.e., the way of implementation before the Amendment) might be inadequate in cases where sensitive technologies flowed out internationally by means of transfer through persons. The report also suggested that, even when technologies were transferred to a resident, if such resident was under a strong influence of a non-resident to the degree that such transaction could be considered effectively as a transaction through which technological information was transferred from the resident to such non-resident, such technology transfer should be clearly included in the scope of deemed export controls.
2. Changes introduced by the Amendment
Responding to the comment made in the above-mentioned interim report, the government
amended the Service Notification by clarifying that, even when technology is domestically transferred to a resident, such transfer will be subject to deemed export controls as “a transaction [conducted for] the purpose of [providing] specified technology to a non-resident belonging to a specified country” (FEFTA, Art. 25, para. 1), as long as the case falls within the “Specific Categories,” which refer to situations where the resident to whom technology is transferred is strongly influenced by a non-resident to the degree that such transaction can be considered effectively as a transaction through which technological information is transferred from resident to non-resident.
There are three Specific Categories, each in relation to persons, as specified below:
Below are some practical examples of each Category:
Category (1): technology transfer to a Japanese company’s employee who also works for a foreign company (excluding foreign-affiliated companies) not affiliated to it, and technology transfer to a Japanese company’s director or company auditor who is also appointed as a director or a company auditor of such a foreign company.
Category (2): technology transfer to a student who receives funding from a foreign government for studying abroad, and technology transfer to a researcher who participates in a science and engineering talent acquisition program organized by a foreign government, receiving a large amount of research funding and/or payment for living.
Category (3): a person who conducts any activity in Japan on a specific assignment given by Foreign Governments. It is expected that, in practice, the transferor will be informed by METI of persons who potentially fall under this Category because, considering the nature of this Category, it should be difficult for transferors to discern whether the intended transferee falls under this Category, especially when the transferor is a private entity.
Consequently, in accordance with the Amendment, prior permission is required to transfer sensitive technologies subject to controls under the FEFTA to any natural person who falls within the Specific Categories, even when such person is a “resident.”
3. Screening for the applicability to Specific Categories
When engaging in transactions intended for transferring technologies, the transferor must ascertain whether any of the Specific Categories applies to the intended transferee, to the extent that this can be confirmed as a result of exercising ordinary care. The transferor will be deemed to have exercised ordinary care if screening is performed in accordance with Appended Table 1-3 to the Service Notification (titled as “Guidelines for determining the applicability to the Specific Categories”), in which case the transferor will not be subject to criminal or administrative sanctions or penalties under the FEFTA, even when the transferor has missed the fact that the Specific Categories apply to the transferee.
For readers’ information, the gist of Appended Table 1-3 to the Service Notification is summarized in the table below:
