The U.S. Government has implemented several new restrictions on dealings with certain Chinese entities due in part to China’s activities in the South China Sea and the diversion of U.S. goods and technology to the Chinese military. Summaries of the more significant actions are provided below:
1. CNOOC added to BIS Entity List. On January 14, 2021, China National Offshore Oil Corporation Ltd. (CNOOC) was added to the Entity List maintained by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS). Typically, all exports subject to the Export Administration Regulations (EAR) require a license to companies on the Entity List, but CNOOC’s addition is unique in that there are several exceptions. The Entity List license requirements and exceptions are provided below:
All items subjects to the EAR except for:
- crude oil, condensates, aromatics, natural gas liquids, hydrocarbon gas liquids, natural gas plant liquids, refined petroleum products, liquefied natural gas, natural gas, synthetic natural gas, and compressed natural gas under the following Harmonized System (HS) codes: 271111, 2711210000, 2711210000, 2709, 2709002010, 2707, 27075000, 2710, 271019, 271112, 271113, 271114, 271119, 27111990, 271311, 271312, 271012250, 2901, 290511, 2701, 29109020, 29151310, 29155020, 29156050, 29159020, 29161210, 29280025, 29321910, 29362920, 29419030, 2909300000, 2917194500, 2922504500, 2924296000, 2925294500, 2928002500, 2933194350; or
- required for the continued operation of joint ventures with persons from countries in Country Group A:1 in supplement no. 1 to part 740 of the EAR not operating in the South China Sea.
Any exports involving CNOOC that are subject to the EAR should be closely scrutinized to determine whether they meet one of the above exceptions to the license requirements.
2. BIS Creates Military End User List. On December 23, 2020, BIS published a notice amending the EAR to add a new Military End User (MEU) List in association with existing restrictions contained in Part 744 of the EAR. The entities on the new MEU List are entities the U.S. Government has determined are ‘military end users’ for purposes of the ‘military end user’ control in the EAR that applies to specified items for export, reexport, or transfer (in-country) to the People’s Republic of China (China), Russia, and Venezuela when such items are destined for a ‘military end user.’ The initial publication is expected to be the first tranche, with additional entities to be added to the MEU List in the future. The newly added Chinese entities include CSSC Xijiang Shipbuilding Co., Ltd., and Hangzhou Bearing Test & Research Center Co., Ltd., to name just two examples.
The restrictions associated with the new MEU List impose a licensing requirement only for items (including technology) classified under an Export Control Classification Number (ECCN) listed in Supplement No. 2 to Part 744 of the EAR. Specifically, the new rule provides that a license is required to export, reexport, or transfer (in-country) any item subject to the EAR listed in Supplement No. 2 to Part 744 when an entity included on the MEU List is a party to the transaction (i.e., purchaser, intermediate consignee, ultimate consignee, and/or end-user).
The new rule supplements the existing requirements in Section 744.21 – Restrictions on Certain ‘Military End Use’ or ‘Military End User’ in the People’s Republic of China, Russia, or Venezuela, which set forth a license requirement for exports, reexports, or transfers (in-country) of items identified in Supplement No. 2 of Part 744 to China, Russia, and Venezuela, when the exporter, reexporter, or transferor has ‘‘knowledge’’ that the item is destined for a ‘military end use’ or ‘military end user’ as those terms are defined in Section 744.21 (These more enhanced ‘military end user’ requirements for China went into effect in June 2020.). Prior to publication of the MEU List, exporters were responsible for identifying ‘military end users’ themselves, and BIS notes in the new rule that exporters “will still be responsible for ensuring their transactions are in compliance with the license requirements set forth in § 744.21 because BIS cannot list every ‘military end user’ or party representing a risk of diversion thereto in the MEU List, or identify all situations which could lead to an item being used for a ‘military end use.’”
Prior to any transaction involving China, Russia, or Venezuela, exporters should review the full list of items subject to the Military End Use and End User restrictions to ensure no unlicensed exports, reexports, or transfers to restricted entities occur.
3. OFAC Creates “Non-SDN Communist Chinese Military Companies List”. On November 12, 2020, President Trump issued Executive Order 13959 that, among other things, prohibits certain transactions with respect to publicly traded securities of entities identified as Communist Chinese military companies. Since the publication of the executive order, OFAC has published a list of companies subject to these restrictions that it continues to update. At this time, the restrictions on dealing with these companies are limited to certain financial transactions, but BIS has noted that inclusion on this list is a red flag that items subject to the EAR might be diverted to a prohibited end user or end use. As such, any transactions involving listed companies should be closely reviewed to ensure compliance with all applicable regulations.
Although we expect the new Biden Administration will bring many changes to U.S. sanctions and export control policy, all signs indicate that the tensions with China are here to stay and that additional restrictions might be forthcoming. On January 25, 2021, White House press secretary Jen Psaki noted that “[w]hat we’ve seen over the last few years is that China is growing more authoritarian at home and more assertive abroad. And Beijing is now challenging our security, prosperity and values in significant ways that require a new U.S. approach.” McGinnis Lochridge is monitoring these changes, and we will continue to provide updates as more developments occur.
For more information on how these could impact your business, contact:
- Martin Lutz, Partner (firstname.lastname@example.org, 512-495-6024),
- Jamie Joiner, Special Counsel (email@example.com, 713-615-8530),
- Lindsey Roskopf, Partner (firstname.lastname@example.org, 713-615-8534),
- Justin Cawley, Senior Counsel (email@example.com, 202-812-2644), or
- Another member of the McGinnis Lochridge International Trade and Transactions Practice Group