BIS issues new Military End-User List and removes Hong Kong as a Separate Destination Under the EAR

On 23 December 2020, the Department of Commerce’s Bureau of Industry and Security (BIS)  published two final rules in the Federal Register, which were effective immediately:

• BIS amended the Export Administration Regulations (EAR) by adding a new Military End User (MEU) List as supplement no. 7 to part 744, which designates 102 entities that BIS has determined are “military end users” subject to the enhanced licensing requirements of section 744.21 of the EAR. The creation of the MEU List follows BIS’s expansion of military end use/user controls for China, Russia, and Venezuela in June 2020.
• Separately, BIS amended the EAR by removing Hong Kong from the list of destinations in the EAR. Hong Kong will be treated the same as mainland China. This change was made to implement a July 2020 Executive Order that eliminated Hong Kong’s preferential treatment for export and other trade-related purposes.

The Military End User List

The new MEU List identifies the first tranche of 102 entities, including 57 Chinese and 45 Russian entities, that BIS has determined are “military end users” subject to the enhanced licensing requirements of section 744.21 of the EAR (the MEU rule).  The creation of the MEU List follows BIS’s expansion of the MEU rule for military end use/users in China, Russia, and Venezuela in June 2020. The final rule does not change the scope of the MEU rule, which imposes a license requirement on the export, re-export, or transfer (in-country) of items specified in supplement no. 2 to part 744 of the EAR to China, Russia, and Venezuela, when the exporter, re-exporter, or transferor has knowledge that the item is destined for a “military end use” or “military end user.”  BIS explains that it created the MEU List after continuing requests from U.S. companies and exporters for clarity and to “inform all potential exporters, re-exporters, and transferors that all exports, re-exports, or transfers (in-country) of designated items to these entities represent an unacceptable risk of use in or diversion to a ’military end use' or a ‘military end user' for purposes of § 744.21, and therefore require a license.” BIS’s license review policy will be a presumption of denial for entities on the MEU List, as well as all other MEUs.

Although the MEU List provides clarity by expressly identifying certain MEU entities subject to the MEU rule’s licensing requirements, BIS notes that the list is not exhaustive and “compliance remains the obligation of the exporter, re-exporter or transferor.” Accordingly, companies must continue to conduct due diligence when engaging with non-listed companies in China, Russia, or Venezuela to determine whether the non-listed company meets the definition of a “military end user,” (as defined in § 744.21(g)) or the contemplated activity constitutes a “military end use” (as defined in § 744.21(f)).   

The BIS MEU List is a separate list from the U.S. Department of Defense’s list of Chinese Communist military companies (the DoD List), issued in multiple tranches on 24 June 2020, 28 August 2020, and 3 December 2020. Unlike designation on the MEU List, parties designated on the DoD List are not automatically considered MEUs by BIS; however, identification on the DoD List is considered a “red flag” by BIS and requires “additional due diligence by the exporter, re-exporter, or transferor to determine whether a license is required” under the MEU rule.

Further, BIS clarified that additional parties may be added or deleted from the MEU List pursuant to determinations made by the End-User Review Committee (ERC) following the same procedures used to make changes to the Entity List.

Removal of Hong Kong as Separate Destination Under the EAR

In addition to the MEU List, BIS issued a second final rule formally removing Hong Kong as a separate destination under the EAR. Hong Kong will be treated the same as mainland China for EAR purposes. This change was made to implement a July 2020 Executive Order that eliminated Hong Kong’s preferential treatment for export and other trade-related purposes.

The key changes are as follows:

• Part 738 – Removal of Hong Kong from the country chart. Exporters should now refer to the entry for China for licensing requirements.
• Part 740 – A number of license exceptions were modified, including the following:
  • APP – Hong Kong was removed from the list of Computer Tier 1 countries and is now part of Computer Tier 3 (the same as the PRC).
  • GOV – GOV is no longer available for Hong Kong.
  • APR – Hong Kong was removed from the list of countries authorized by APR paragraphs (a) and (b) (for shipments to and among specified countries, including A:1 countries and Hong Kong), but is now a D:1 destination eligible for re-exports consistent with paragraph (a).
  • Supp. No. 1 – Hong Kong is removed from country groups A:6 and B, and is now subject to the same restrictions as the PRC, which is listed in country groups D:1, D:3, D:4, and D:5.
• Part 744 – The Hong Kong entries in the Entity List and Unverified List have been reorganized under China.
• Part 748.10 – Amended to clarify that a PRC-issued End User Statement is not required for license applications for exports or reexports to Hong Kong.
• Part 758 – The EEI filing requirements for China in section 758.1(b)(10) (requiring EEI filings for all Commerce Control List items to China) apply to Hong Kong, even though the destination to be filed in EEI is listed as Hong Kong.

BIS also notes that the MEU restrictions of Section 744.21 apply to Hong Kong to the same extent they apply to mainland China. The General Prohibition 3 foreign-produced direct product rule also applies to the same extent as to mainland China.

Hong Kong is also subject to restrictions as a D:5 country subject to an arms embargo, consistent with the State Department’s interpretation that Hong Kong is now to be considered as part of mainland China for purposes of the International Traffic in Arms Regulations. Finally, Hong Kong end users are also now eligible to be added as validated end users.

Next steps

In light of the new MEU List and removal of Hong Kong as a separate destination in the EAR, U.S. companies and exporters should continue to conduct robust due diligence to “know your customer” and assess whether the new MEU List designations and/or EAR changes related to Hong Kong impose new licensing obligations.

For further information or assistance, please contact any of the Hogan Lovells lawyers identified below.

Authored by Adam Berry, Deborah Wei and Lindsay K. Brown