On June 19, 2007, the Bureau of Industry and Security (“BIS”) published a final rule setting forth changes to export and reexport controls for the People’s Republic of China (“PRC”), details of the new Validated End-User authorization for end-users in the PRC, and revisions to the Import Certifi cate and End-User Statement requirements. (72 Fed. Reg. 33,646). This rule fi nalizes changes to the Export Administration Regulations (“EAR”) that were published in proposed form on July 6, 2006. (71 Fed. Reg. 38,313).

The final rule, which was effective as of its publication in the Federal Register, includes a few important differences from the proposed rule published last year. As a whole, however, the rule is substantially unchanged. Highlights of the new rule include:

  • a new export control based on knowledge of a military end-use for exports to the PRC of specifi ed items on the Commerce Control List that do not otherwise require a license to the PRC;
  • a revision of the license application review policy for items destined to the PRC that are controlled for national security reasons, as well as a requirement that items controlled for chemical and biological weapons, nuclear proliferation and missile technology reasons must also be reviewed in conjunction with this new policy;
  • implementation of the Validated End-User (“VEU”) process and procedures under which VEUs will be reviewed and approved; and
  • a change in the circumstances under which an End-User Statement (“EUS”) may be required from the PRC’s Ministry of Commerce (“MOFCOM”) from $5,000 to $50,000 for most items.

Some important changes from the rule as it was proposed in July 2006 include:

  • BIS has reduced the number of Export Control Classifi cation Numbers (“ECCNs”) to which the new military end-use licensing requirements apply from 47 in the proposed rule to 31 in the fi nal rule. The proposed list of ECCNs was reviewed based on the military applicability of the products, as well as their foreign availability, to determine which ECCNs could be dropped from the list. BIS backed off somewhat from its earlier position that only “foreign availability” within the PRC would be taken into account, although in the end availability within the PRC was given greater weight than availability from other countries. Although BIS states in the rule that it also considered “commercial impact” in reviewing which items could, or should, be removed from the list, it does not appear as though that criterion was given much, if any, weight.
  • The agency received numerous comments that the proposed standard for its license review policy of a “material contribution to military capability” was too broad and subjective. Therefore, the agency has decided to maintain the “direct and signifi cant” standard that currently exists in the regulations.
  • The term “military end-use” has also been further defi ned in the final rule.
  • In response to requests that BIS shift the burden to identify military end-users from the exporter to the U.S. Government, BIS published a proposed rule on June 5, 2007 expanding the existing Entity List to include military end-users. Although this does not reduce the burden on an exporter who knows or has reason to know that an item is destined for a military end-use, it will make it easier to identify such end-users. At the same time, of course, identifi cation of a military end-user on the Entity List will generally create a presumption that all U.S. exporters “know” that the party is a military end-user.
  • The threshold for the requirement of a MOFCOM EUS for licensed exports of most products has increased from $5,000 to $50,000. Exceptions include night vision cameras under ECCN 6A003 and certain computers.
  • BIS has published additional detail and procedures concerning the VEU program, including the addition that employees of VEU companies in the United States will be eligible to receive the VEU benefi ts for deemed exports.

In summary, although the overall tone and purpose of the new rule is consistent with the July 2006 publication, BIS did make some changes in response to comments it received.

As a result of this rule, exporters of items controlled either under the new PRC military end-use control or for one of the other reasons called out in the rule (national security, chemical biological weapons, nuclear proliferation, and missile technology) should review their practices and procedures to ensure they will be in a position to identify potential military end-users. In particular, such exporters should review their end-user screening practices and make sure that they are ready in the event military end-users are added to the Entity List. Exporters should also review their relationships with customers or affi liates in the PRC to determine whether the new VEU procedure could be a cost-effective alternative to individual licenses.