Former BIS Head Suggests Entity List, Export Licensing Reform

The Bureau of Industry and Security should reform its Entity List process and its licensing procedures to more effectively prevent China from acquiring sensitive U.S. technologies, said Cordell Hull, former acting BIS undersecretary. Hull also suggested that BIS increase its penalties for export violations, and said he isn’t convinced creating a new multilateral export control regime is the best way to counter China.

Hull, testifying before a U.S.-China Economic and Security Review Commission hearing last week, praised the Entity List, but said it “does have its shortcomings.” Because the list targets names and addresses of specific companies, “malign actors can play corporate shell games to circumvent” the restrictions, Hull said in written testimony.

“It certainly is not difficult to change a corporate name or address to evade the listing,” said Hull, who left BIS in 2020 (see 2011190018) and is now a visiting fellow at George Mason University’s National Security Institute. Hull said it’s “worth exploring whether changes should be made to this process to ensure a more complete capture of related parties.”

BIS should look to the Treasury Department’s use of the 50% rule, Hull said, which restricts people and companies from conducting certain transactions with businesses owned 50% or more by a sanctioned party. “BIS could adopt a similar posture of putting all subsidiaries of a party on the Entity List or the MEU List or doing so at some prescribed threshold,” he said. “For administrative purposes, it would be preferable to put all subsidiaries on, regardless of ownership threshold.”

He also said the process of adding parties to the Entity List is a “time- and manpower-intensive process” that is “entirely too reliant on manual inputs.” BIS should use “big data analytic capability” to make the process more efficient. “Although we want to ensure we are putting eyes on the most relevant information, much of it can be culled by analytic programs that exist elsewhere,” he said, adding that if BIS is able to collect more information, it can protect itself from “litigation risk.”

“It is even more important that the agencies involved have considered sufficient information and build the file to withstand a potential court challenge,” Hull said.

BIS also can make its licensing procedures more efficient, he said. The agency and other federal government departments, which help BIS adjudicate license applications and commodity jurisdiction requests, “face a veritable deluge of licenses,” Hull said, and he expects that “upward” trend to continue.

The U.S.-China Economic and Security Review Commission should ask Congress or BIS to study whether it should move to a “single licensing system,” which could potentially limit input from other agencies. Hull specifically said commodity jurisdiction requests “are complex undertakings and can be time-consuming, often taking several months.”

“Although I do not currently have a well-formed view of whether a single licensing system and/or agency makes sense, I do think it is worth study,” Hull said. The last five years since Congress passed the Export Control Reform Act have been “busy,” he said, and allowing BIS “to move at pace with the threats, while reducing uncertainty to the exporting community, should be the goal.”

He also said a single licensing system “should, of course, have all necessary intelligence inputs to ensure effectiveness. If it is determined that such a licensing system would be preferable, it is critical to ensure that the administering body be well-resourced and have all necessary authorities” to “bring together sufficient economic and technical data, intelligence collection, and open-source information.”

Another step the U.S. can take to boost the effectiveness of its China-related export controls is more rigid enforcement, Hull said. He applauded the new policies announced by BIS last year, which were designed to strengthen the agency’s administrative enforcement tools and penalties (see 2206300069). Two new policies in particular -- eliminations of no-admit, no-deny clauses in settlements and publicly posting charging letters when they are first issued -- are “welcome changes” and “hopefully cause parties to reconsider before violating," Hull said.

But the U.S. can do more, he said. “Congress should look at increasing the incentives for compliance,” he said, noting that the “current ceiling” for a civil violation is $300,000, or twice the value of the transaction. He also said more export denial orders “would have a positive effect on incentivizing parties’ compliance with the rules.”

“Enforcement is and likely will always remain a challenge,” Hull said. “Keeping penalties significant may further incentivize exporters to comply with the law.”

While BIS is hoping that more enforcement actions convince industry to boost compliance surrounding its China-related export controls (see 2303030035), it’s also looking to limit Chinese acquisition of sensitive technologies through more coordinated actions with allies. Hull said he is convinced a plurilateral export control approach would work better than a multilateral one, saying he doesn’t believe creating a fifth multilateral export control regime would be “effective.”

The U.S. has discussed with allies the idea of establishing a new multilateral export control framework (see 2206290032), but it also has pursued agreements in one-on-one discussions or in small group settings, such as its chip export control pact with the Netherlands and Japan (see 2303310031 and 2303090032).

Although many U.S. allies “have made great strides in recognizing the threats” posed by China, Hull said “there is still too wide of a gulf to make a consensus-based regime workable.” He also said some U.S. allies “lack the legal frameworks to impose controls similar to” the those the U.S. has.

“Although I am currently skeptical of a new regime, I strongly believe the U.S. government should work closely with our allies to help them align their legal authorities to use export controls to meet this new challenge,” Hull said. “In doing so, we should offer drafting assistance, as well as share relevant intelligence to ensure our partners are armed with the information to make informed choices.”

Hull also called the BIS October chip restrictions “perhaps the most impactful controls” imposed on China’s indigenous semiconductor industry. He said the Dutch and Japanese restrictions are “unlikely to match the full scope” of the U.S. controls, but they are “likely” to “inhibit significant portions” of China’s chip industry.

“Time will tell on the ultimate effect of these controls,” Hull said, adding that they will need to be supplemented with more support for the U.S. domestic semiconductor industry, especially as China spends “vast sums of money” on its chip sector. “We must keep in mind that, like any export control, these controls will be time-limited and will need to be paired with efforts to run faster.”