Chip Industry Struggling With Complex BIS Rules, Seeking Clearer Guidance

Nearly a month after the U.S. announced new export controls on advanced computing and semiconductor equipment destined to China, lawyers and companies are still grappling with what they say is a complex set of regulations and are awaiting clearer government guidance on how and whether their activities are covered. The dense regulations, along with lengthy response times from the Bureau of Industry and Security, have caused firms to delay decisions on shipments until they can better understand their risks and BIS’s due diligence requirements, trade attorneys and industry officials said in recent interviews.

“These are the most sweeping and complicated export control rules that have ever been” in the Export Administration Regulations, said Anthony Rapa, a trade lawyer with Blank Rome. He said guidance from BIS will be “crucial” in helping the industry understand the restrictions.

The controls, outlined in a 139-page set of regulations last month (see 2210070049), imposed sweeping new restrictions on China’s ability to acquire advanced computing chips and manufacture advanced semiconductors. Not only did the rules introduce a new set of Export Control Classification Numbers, they also revised existing ECCNs, created new foreign direct product rule restrictions, placed controls on certain supercomputing and semiconductor manufacturing end-uses, set new restrictions on certain U.S. persons activities involving Chinese fabrication facilities and more.

While some chip companies, including South Korea's SK Hynix, received a one-year authorization from BIS to continue certain activities in China (see 2210120002), others temporarily paused operations in the country until they determine how the new controls restrict their business. KLA last week said it’s preparing for up to a $900 million revenue hit in 2023 and is looking at moving its products to customers not subject to the restrictions until it receives clearer guidance from BIS (see 2210270018).

“Companies that are in the supercomputing and semiconductor equipment manufacturing businesses are definitely in a wait-and-see mode right now,” said Don Pearce, a former BIS agent and now a senior adviser with Torres Trade Advisory.

SEMI, a trade group representing the microelectronics industry, said it’s getting a large number of questions on the rule and is still “evaluating the potential effects.” The group plans to send BIS feedback to stress the importance of implementing the controls multilaterally. “We believe it is vitally important that the U.S. government implements these rules in close collaboration with and inputs from our key international partners,” a SEMI spokesperson said, which will “limit unintended adverse consequences that could reverberate through the domestic supply chain of this critical industry.”

Lawyers said the last few weeks have been particularly hectic as companies scramble to understand the new regulations. Although BIS last month published its first set of frequently asked questions for the rule (see 2210310044), which included guidance on certain U.S.-persons restrictions, deemed exports and a definition for semiconductor “facility,” several portions of the restrictions still remain unclear, including the lack of an official definition for “facilitation.”

“Everyone wants to have a better feel for facilitation,” Giovanna Cinelli, a trade lawyer with Morgan Lewis, said in an interview before BIS published the FAQs. Cinelli said BIS should issue a “complete definition” for the term in its regulations.

Lawyers also said BIS’s standard for conducting due diligence can be vague. “What does BIS mean when they recommend enhanced diligence?” Cinelli said. “If I already screen, I already keep records, I already collect compliance certifications or end-user declarations and I already screen at the time of shipment, what additional steps would be considered sufficient to meet the standard?”

BIS included a new “model certificate” in the regulations, which can be used by exporters to require other parties in a transaction to certify that they are not violating BIS’s new advanced computing foreign direct product rule. BIS hopes the certificate helps companies conduct due diligence, but Cinelli said the certificate isn’t a novel compliance approach.

“It's nothing new,” she said. “Most companies conduct that kind of diligence anyway.”

Rapa said exporters who may be captured by the FDP rule could start using the certificate in their contracts. But it’s unclear how much companies can rely on the wording for compliance purposes. “This is probably one of the areas where there's going to be healthy feedback from industry,” he said. “How much comfort can companies draw from the use of this certificate?”

BIS plans to issue more FAQs on a rolling basis as it receives comments and questions. Multiple semiconductor industry executives said they are submitting feedback and hope BIS revises portions of the regulations to make the restrictions more clear.

Rapa said he thinks BIS is unlikely to make “any hard changes to the scope of the controls," but there could be “some changes around the edges.” Even so, lawyers and officials say a range of other questions still need clarification, and the agency hasn’t been quick to respond -- a problem long before the new regulations were announced.

In an October client alert, Morgan Lewis said BIS is “currently resource challenged to the point that responsiveness remains” a concern. “What we're seeing, generically, is a lot more questions have to get elevated because people are unsure,” Cinelli said. “That's just creating some challenges in the system.”

A BIS spokesperson pointed to the agency's public briefing last month, where Thea Kendler, the agency's assistant secretary for export administration, said BIS had received more than 100 questions on the new rules (see 2210130009). Kendler also said BIS will issue more FAQs as it receives more questions.

Pearce, who served as the Office of Export Enforcement’s acting unit chief for liaison and interdiction before retiring from the agency in 2020, said companies with touchpoints to the chip sector are being “extremely cautious” and waiting for more clarity from BIS. “These things never go out perfect,” Pearce said.

And while industry is hoping for more certainty around these latest regulations, Pearce said, companies have already begun preparing for further controls. BIS Undersecretary Alan Estevez said last month the agency isn’t done imposing restrictions on China’s semiconductor sector and is considering new controls on a range of emerging technologies, including artificial intelligence and quantum computing items (see 2210270047).

“Pretty much anyone who's doing any business in China in any semiconductor-related field, even if they're not directly impacted by the current regs, they're all asking the same question,” Pearce said. “What's the next shoe to drop?”