BIS Military Exports Rule Creating Questions for Industry, Former BIS Official Says

The Bureau of Industry and Security's increased restrictions on shipments to military end-users (see 2004270027) presents “significant questions” for industry, which may struggle to comply with the new due diligence expectations, said Ajay Kuntamukkala, an export controls lawyer with Hogan Lovells and a former BIS official. Kuntamukkala said the rule will “significantly impact business transactions” with Chinese entities.

“It is easy to get this wrong,” Kuntamukkala said, speaking during a June 18 webinar hosted by the Massachusetts Export Center. The rule -- which increases license restrictions on shipments to military end-users and for military end-uses in China, Russia and Venezuela -- has been criticized by at least 20 industry groups for being vague and unclear (see 2006150031). “It's very difficult to know what's going on in the market and what end-users in China may do with your item,” said Kuntamukkala, who was a senior adviser to the BIS undersecretary from 2003 to 2005. BIS did not comment.

Industry has voiced concerns about the rule’s definitions for military end-uses and end-users, which could potentially restrict exports to a broad range of Chinese companies. The rule’s language does not clarify what would trigger the restrictions, Kuntamukkala said. Without further guidance from BIS, the rule may, for example, capture exports of “mass market cell phones” or “mass market software” to a Chinese company “for purely civilian use” if that company is also working on a contract with the Chinese military for a fighter jet. “Would that be covered?” Kuntamukkala said. “It's not clear on the face of the rule.”

Kuntamukkala said the restrictions will have a large impact on U.S. business with Chinese companies because it is difficult to distinguish whether Chinese entities -- especially state-owned entities -- are involved in military activities. “Their organizational structures are opaque and their connections are opaque,” he said. “That's why the due diligence is so important.”

Companies should conduct a risk assessment before the rule takes effect June 29 to determine whether their transactions could be involved with companies with a nexus to the Chinese military, Kuntamukkala said. Companies can develop a questionnaire for potential customers that “asks questions about military activities,” he said, and should look to bolster contractual language and termination provisions to address military end-uses and end-users. “Taking those steps to show that … you didn't have knowledge [of export violations], that's a very, very important compliance process to implement,” Kuntamukkala said.

Industry should expect more restrictions on China, Russia and potentially Venezuela, Kuntamukkala said. “Certainly there will continue to be Entity List designations,” adding that the U.S. might designate Chinese officials due to Beijing’s infringement in Hong Kong’s autonomy (see 2006120039), which could include additions to the Treasury Department’s Specially Designated Nationals List. “This is certainly not it for China,” Kuntamukkala said.