NDAA Change to Export Regs Will Require New Compliance Efforts, Law Firm Says

A revision to U.S. export regulations included in the fiscal year 2023 defense spending bill could lead to new end-use screening obligations for U.S. people and companies operating abroad, Akin Gump said in a Jan. 5 client alert. Although it remains unclear how and when the Bureau of Industry and Security will implement the change, the law firm said it could lead to new restrictions on activities that support foreign military, security or intelligence services even if the activity doesn’t involve technology subject to the Export Administration Regulations.

The National Defense Authorization Act provision was designed to allow the U.S. to limit the provision of certain sensitive services to foreign intelligence agencies, including hacking technology and expertise, lawmakers said last month (see 2212210032). Former Rep. Tom Malinowski, D-N.J., said it “represents the largest expansion of presidential export control authority in several years.”

The provision amended the Export Control Reform Act of 2018 to give BIS “clear statutory authority” to “impose controls on the activities of U.S. persons, wherever located, in ‘support’ of ‘military, security, or intelligence services’ -- even when all the underlying items at issue are not subject to the EAR,” Akin Gump said. The firm said it doesn’t know “what BIS has in mind for how it will implement its new authorities or against which countries it would impose new controls,” but it listed several examples of how the controls could be applied.

BIS could, for instance, use the authority to impose controls on U.S. person activities in countries not subject to embargoes if those activities support the “production, development or use of less-sensitive foreign-origin military items not subject to the EAR” and that are also not controlled on the U.S. Munitions List, the firm said. Akin Gump pointed out that if the foreign-origin defense items were described on the USML, then those services would already be controlled under the International Traffic in Arms Regulations as defense services. “Thus, such a new control would be a ‘defense services-like’ type of control and would apply, by definition, to services related to less sensitive foreign-origin military items.”

BIS also could use the authority to expand the types of services that are prohibited from being provided to companies on the Entity List, Akin Gump said. Those prohibited services could include any activities that “‘assist or benefit’ listed entities even when all the items involved in the services are not subject to the EAR,” the firm said. “For example, BIS could decide that any listed entities that provide support to a company involved in the military-industrial complex of a country of concern should be subject to additional controls on activities of U.S. persons beyond the export, reexport or transfer of items subject to the EAR.”

Because the EAR’s definition of “support” includes “financing,” the law firm said, BIS also could use its “is informed” process to impose “an outbound investment-like control prohibiting U.S. persons from ‘financing’ activities that could ‘assist or benefit,’ directly or indirectly, the military, security or intelligence services in specific countries.” The agency also may impose controls on activities that “support foreign internal security services” involved in human rights violations, the firm said, or that restrict U.S. persons' support for foreign intelligence agencies.

Akin Gump said it doesn’t “know the timing of any possible new controls” or whether BIS will first seek public comments or publish them as a final rule. A BIS spokesperson said the agency "will implement these authorities expeditiously in line with Congressional intent," but declined to say whether it will first seek public comment. “BIS thanks Sen. Ron Wyden, former Rep. Malinowski, and other Congressional advocates for their leadership in expanding these critical authorities, which will enhance our ability to advance our national security and foreign policy interests, including combatting mass surveillance and other human rights abuses," the spokesperson said Jan. 6.

Akin Gump speculated the U.S. could decide to implement the new authority during the second Summit for Democracy, scheduled for March. At the 2021 summit, President Joe Biden announced a new multilateral export control initiative to curb the proliferation of dual-use technologies used for human rights abuses (see 2112090030).

Whenever the controls are implemented, “they will certainly impose new end-use screening obligations on U.S. persons engaged in activities outside” the U.S., Akin Gump said. U.S. companies “will need to set up internal compliance systems to determine when they have knowledge of such end uses and are otherwise able to spot ‘red flags’ that require additional compliance efforts.”