Former BIS Officials Discuss High-Risk Exports, Voluntary Disclosure Calculus

Although entities on the Treasury and Defense departments’ Chinese military company lists aren't necessarily subject to export controls, it's still very risky to do certain business with them, former Bureau of Industry and Security officials said this week. They said they would advise companies to treat those listed entities as prohibited Chinese military end-users unless they can prove otherwise.

“I'd certainly think, at a minimum, it is a very high-risk transaction,” Opher Shweiki, who departed as BIS chief counsel in February to join Akin Gump (see 2402200021), said during a webinar this week hosted by risk advisory firm Kharon. For companies that do ship export-controlled items to those entities, Shweiki said “you should be expecting some inquiries from the United States government with regard to what's going to happen next.”

Both the Treasury’s Chinese Military-Industrial Complex Companies List and the Pentagon’s 1260H List include a range of entities that the U.S. government said have some connection to China’s military. The CMIC List subjects entities to certain investment restrictions, while DOD’s list imposes certain contracting restrictions.

Kevin Wolf, also an Akin Gump lawyer and a former senior BIS official, noted that the lists are separate from the Military End-User List maintained by BIS, which places certain export license requirements on entities with ties to certain foreign militaries, including in China.

But even if a customer isn’t on the MEU List, Wolf said, exporters should still view them with suspicion if they are on the CMIC List or 1260H List. That’s because an important part of determining whether a customer is a military end user, he said, is whether the U.S. exporter has “knowledge” that the customer has ties to China’s military.

“Here you have the U.S. government, of all entities, saying they're not only a risk, but they are actually a Chinese military industrial complex company,” Wolf said during the webinar. “Oddly enough, it's not a legal prohibition” if they are only on the CMIC List or 1260H List, but it’s a “really, really high bar” for a U.S. company to do enough due diligence to show “that the government is wrong with respect to its conclusion that it's a CMIC entity.”

Wolf added that it’s “theoretically legally possible” that an entity on the CMIC List or 1260H List “is not a military end user, but it's a really high bar to overcome with a lot of investigation, a lot of work and a lot of interaction with the company to make sure you don't get triggered by the knowledge requirements” in the Export Administration Regulations. He said exporters that are unsure should ask Commerce about how to proceed.

Shweiki agreed. “We've been talking about red flags,” he said, “and so that is certainly a blinking one.”

Speakers during the webinar also discussed the updated voluntary disclosure policies BIS has released over the last two years (see 2304180071 and 2401170059). The agency said those changes are meant to encourage more companies to submit disclosures and come forward with tips about their competitors, but Marwa Hassoun, associate general counsel for global trade services at TE Connectivity, said there has been "industry discussion" about whether the updates have had a “chilling effect” on disclosures.

Other lawyers have made similar points, saying it still isn’t clear what BIS considers a disclosure of a minor violation and what it considers a disclosure of a more serious one, which can be the difference between a warning letter and a public penalty (see 2402130013).

Hassoun said there’s still “a lot of risk involved” -- especially if the disclosure involves a company on the Entity List -- “even if you've got the best compliance program on Earth.”

Shweiki said that is “certainly an understandable position to have,” especially if the disclosure involves a company on the Entity List or another serious matter.

Wolf noted that companies aren’t required to report violations. “There are only a couple of limited places where there's actually an obligation,” he said.

But he also said companies that are weighing whether to disclose a serious violation should assess whether the government is likely to discover it through other avenues. Wolf said competitors in the same industry may find out about the violation and tell BIS, or reporters may discover the issue. There are also “150 special agents in the Commerce Department whose sole job is to investigate and hunt around and follow up on leads and tips,” Wolf said, adding that DOJ recently has put more resources into investigating and prosecuting possible export control breaches (see 2402090042 and 2403110043).

“The odds are, particularly with Russia and China, that you're not going to be able to keep your violations quiet just to yourself. Somebody else is going to find out about it,” Wolf said, adding “that should factor into your decision to submit or not.”

Hassoun also touched on changing due diligence expectations from BIS and the Office of Foreign Assets Control. She said there’s a “concern” within industry that “companies don't necessarily have the capabilities to do what BIS and OFAC are asking for.”

The number of transactions some companies need to monitor are “enormous,” Hassoun said, and obtaining information about counterparties can be challenging, especially if they’re in China.

"Of course, you go out to outside sources, and you collect as much information as you can. But the reality is it's changing constantly," she said. “I think it raises this bar of: What do you actually have to do?”