BIS Targets Russian 'Procurement Entities,' Issues New Software-Related Controls

The Bureau of Industry and Security is expanding the scope of its Russia/Belarus-related Foreign-Direct Product rule and adding new export controls on certain computer numerical control (CNC) machine tools-related software, the agency said last week. The FDP rule changes, effective Aug. 27, allow BIS to “more aggressively target” third-country companies procuring controlled goods that are indirectly sent to Russia, BIS said, while the CNC machine tool controls, effective Sept. 16, will prevent those tools in Russia and Belarus from receiving certain software updates.

Thea Kendler, the assistant secretary for export administration, said the new controls are an "important step forward in bottlenecking the procurement networks Russia has turned to in the face of aggressive U.S. and allied export controls. We will not stop until Russia has nowhere to turn.”

The final rule, released Aug. 23, revises the agency's Russia/Belarus-Military End User FDP rule to also apply it to Russian and Belarusian “procurement entities” described on the Entity List, which include companies that have a high risk of diverting U.S.-controlled items to procurement networks for the Russian and Belarusian defense industry or intelligence services. The FDP rule will now be called the Russia/Belarus-Military End User and Procurement FDP rule, and BIS will continue to identify entities subject to the rule by adding a “footnote 3” designation to their entry on the Entity List.

The change could allow BIS to target a foreign company sending U.S.-branded electronic parts -- produced outside the U.S. -- to a Russian trading company with a record of supplying Russian defense or intelligence services, BIS said. Before the change, BIS could apply the FDP rule restrictions only to companies that it deemed to be Russian or Belarusian military end users.

If subject to this revised FDP rule, those foreign companies would face restrictions under the Export Administration Regulations that would limit their “ability to continue to obtain the U.S.-branded electronic components that are of concern, including certain foreign-made items, and cut off the support such entity is providing to Russian or Belarusian defense industry or intelligence services,” the agency said.

BIS said both Russia and Belarus have created “extensive” procurement networks to buy export controlled items from third countries, including items BIS and other countries have named on their Common High Priority List. Because of the “elongated nature of these supply chains,” BIS added that entities involved in this procurement “may be multiple steps removed from military production, even as they supply items critical to Russia’s war effort.” The rule said it’s possible third-country companies may not “have actual knowledge of the intended end use of the items they are” sending to Russia or Belarus.

BIS said it expects the change to lead to 15 more license applications each year.

The agency's final rule also will revise CNC machine tool controls by placing license requirements on certain software designated as EAR99 -- items that aren’t specifically controlled for export to other countries -- to ensure that currently controlled CNC machine tools in Russia and Belarus can’t receive software updates. BIS said its controls already restrict certain software used to design industrial parts and convert them into “machine-readable instructions,” but this change will now allow BIS to target “operation ‘software’ embedded in CNC machine tools that allows them to carry out these instructions to produce the finished industrial ‘parts’ and ‘components.’”

BIS said this includes software that:

• provides a user interface for setting up, operating and troubleshooting the machine tool
• translates the instructions produced by computer-aided manufacturing software into physical actions by the machine tool
• monitors conditions during the machining process
• automatically adjusts the machine tool’s settings based on real-time conditions.

Machine tools in Russia and Belarus likely already have some version of this software preinstalled, BIS said, and companies that offer the CNC machine tools typically offer software updates or fixes. The new controls will now place new license requirements on those activities, with certain exclusions for EAR99 software destined for companies “exclusively operating” in the Russian or Belarusian agricultural or medical industries.

BIS said it expects the change to lead to 20 more license applications each year.

The rule also corrects various “inadvertent errors” BIS previously made in the EAR and “eliminates obsolete cross references.”

All exports that now require a license as a result of this rule but were aboard a carrier to a port as of Aug. 27 may proceed to their destinations under the previous eligibility as long as the items are exported before Sept. 26, BIS said.