New US Persons Controls May Call for Big Changes to Compliance Programs, Law Firm Says

A new set of export controls on U.S. persons activities and other transactions could require “dramatic expansions” to some companies’ internal compliance programs, Akin Gump said this month, including additional compliance training, end-user certifications and greater due diligence of suppliers and customers.

An in-depth client alert published by the law firm summarizes and analyzes the proposed restrictions, which were released by the Bureau of Industry and Security and Directorate of Defense Trade Controls in July. The rules could lead to new restrictions on U.S. persons’ support for foreign military intelligence and foreign security end users, revise the export licensing scope of certain defense-related services, introduce a new control for exports of artificial intelligence-powered facial recognition technology, and more (see 2407250032).

“The proposed rules are dense, full of nuance and variation, and take considerable time to work through to understand their full scope and implications,” Akin said, which could include updates to industry compliance procedures.

Companies “should immediately begin to evaluate what [they] would need to change within [their] internal compliance programs and systems to ensure compliance” with the rules,” the firm said. “The types of [Export Administration Regulations] controls proposed differ considerably from what most multinational corporations account for now in their day-to-day business involving commercial and otherwise uncontrolled items and services.”

One of the many changes highlighted by Akin would expand the BIS “military end use” and “military end user” controls to capture all items subject to the EAR, including goods designated as EAR99 -- items that aren’t specifically controlled for export to other countries. The firm noted that those MEU restrictions currently only apply to a “subset” of items controlled on the Commerce Control List for anti-terrorism reasons.

“From a compliance program screening point of view,” this proposed change “will have the most significant impact” on American and foreign persons that export U.S.-origin items not described on any control list, Akin said. “Thus, for example, a foreign person’s reexporting from abroad a U.S.-origin toothbrush (an EAR99 item) to China to an entity known to be a ‘military end user’ would require a license even if the toothbrush would be used for purely non-military applications.”

Akin noted that the BIS military end user controls apply to shipments beyond those destined specifically to an MEU in a covered country, such as China. As a result, the new proposed controls could, for example, place an export license requirement on a foreign “person’s reexporting from abroad a U.S.-origin toothbrush to an entity in France” that is known to be a military end user of China, the firm said. A foreign person would also need a license to ship a U.S.-origin EAR99 item from France to Germany “with knowledge that the U.S.-origin item is intended, even in part, for the production of a foreign-made military item destined to China or another arms embargoed destination.”

Another proposed change would require an export license for certain shipments if the exporter has “knowledge” that the item is intended in part for a “military-support end user” in certain countries or to certain entities on the Entity List. Akin noted that the rule doesn’t define the word “support” here, which is different from the U.S. person controls that contain a "broad definition of ‘support,’ but which is applicable only to the U.S. person controls” in section 744.6 of the EAR.

“Because the impact of the term is significant for due diligence and compliance efforts, and because different interpretations would lead to different applications of the control by different companies, a worthwhile comment to BIS would be for it to define the term,” Akin said.

Other changes could lead to new controls over U.S. person support of certain “military-support end users.” This could place restrictions on U.S. person support for certain Chinese, Russian, or other military end users “wherever located,” Akin said.

“Thus, for example, a U.S. person’s support for an end-user in France would be controlled” if they have knowledge that the end user is a military end user from China, the firm said. “If this control is adopted, due diligence programs to screen recipients of support services in any country will need to be considerably adjusted to ensure compliance.”

The firm also said some companies may need to update their compliance programs to comply with new controls designed to restrict support for “military-production activities.” Companies may need to make sure that none of their employees or “others acting on their behalf” are supporting the “development, production, or use of either military items or non-military and otherwise uncontrolled items destined to or for use by a military end-user in one of the arms embargoed countries.”

The alert also touches on DDTC’s proposed changes to its definition of defense services in the International Traffic in Arms Regulations. Akin said companies may want to ask DDTC to clarify how the repair of an EAR item might be impacted under this control if that item is installed in an ITAR-controlled item. “That is, a good comment would be to ask DDTC to explain how repairing only a 600 series or other items subject to the EAR inside of a defense article could be a defense service if the sole object of the assistance is not a defense article,” Akin said. "Would this mean that a U.S. person’s changing a tire, without more, on a foreign military vehicle or aircraft would be a 'defense service?'"