BIS issues clarifications to the foreign-direct product rules

On February 3, 2022, BIS published a rule, effective on the same day, that clarified, reorganized, and made minor corrections to the provisions of the FDP rules, which includes the following changes:

• The rule consolidated the FDP provisions that were previously set forth in § 736.2(b)(3) (“General Prohibition 3”) and footnote 1 to supplement no. 4 to part 744 (the “Entity List”) into § 734.9 of the EAR. BIS moved these provisions to part 734 (“Scope of the EAR”), where the other provisions used to determine whether an item is subject to the EAR are found.

• The rule consolidated the license requirement, license review policy, and license exception applicability text for Entity List entities in § 744.11(a), which includes the overall license requirements pertaining to listed entities. This text was previously located in the Entity List’s footnote 1.

• Without changing the substance of the FDP rules, the rule reorganized the FDP provisions in § 734.9 into four paragraphs:
  • the National Security FDP rule (“[t]he original national security-focused FDP rule”);
  • the 9x515 FDP rule;
  • the “600 series” FDP rule; and
  • the Entity List FDP rule.

• BIS moved the definition of “major component” from a note to footnote 1 to supplement no. 4 to part 744 of the EAR to a new definition paragraph in § 734.9(a) of the EAR, to clarify that this definition applies to all the FDP rules, not just the Entity List FDP rule.

For all FDP rules, a “major component of a plant located outside the United States means ‘equipment’ that is essential to the ‘production’ of an item, including testing ‘equipment.’” Pursuant to 85 FR 51596, “any equipment . . . that is involved in any of the production stages is considered essential.”

• BIS added single quotation marks around the term “major component” whenever it appears in § 734.9 to indicate that it is defined within the section.

• The rule adds double quotation marks around terms that are defined in part 772 of the EAR, such as direct product, technology, software, and equipment. BIS made this change partially as a response to requests for additional guidance about determining the scope of production equipment in relation to the Entity List FDP rule.

• The rule revises General Prohibition Three to clarify that foreign-direct products subject to the EAR are not necessarily subject to a license requirement and that license requirements must be determined based on an assessment of the classification, destination, end user, and end use of the items.

• The amendment clarifies that the “600 series” FDP rule applies to items described in  Export Control Classification Number (“ECCN”) 0A919.

Previously, although the text of ECCN 0A919 included the foreign direct product of “600 series” technology or software, the text of General Prohibition Three did not explicitly mention ECCN 0A919 items in provisions on the applicability of the “600 series” FDP rule. This rule also made a conforming edit in the cross reference in ECCN 0A919.a.3.

• The rule makes revisions in the text of each of the FDP rules to specifically state that the application of the rule relates to U.S.-origin technology or software.

This change is made to correct the misunderstanding and confusion generated by the removal of the word “U.S.” from the heading of § 736.2(b)(3) in BIS’s May 19, 2020 amendments to General Prohibition Three and the Entity List to implement the Entity List FDP rule. The Entity List FDP rule in § 734.9(e) applies to the FDP of technology or software that is subject to the EAR, but that is not necessarily technology or software of U.S. origin. BIS did not intend to change the scope of the other FDP rules with its May 19, 2020 amendments. However, the change to the General Prohibition Three heading may have inadvertently caused confusion as to whether the scope of all the FDP rules had changed.

Next Steps

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Authored by Deborah Wei and Hao-Kai Pai.