On October 28, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) released tips on its October 7, 2022 Interim Final Rule (rule) that imposed new export controls on certain advanced computer integrated circuits (ICs), computer products that contain such ICs, and exported semiconductor manufacturing articles to the People’s Republic of China (PRC). Comments on the rule will be accepted until December 12, 2022. Our previous blog post on the rule can be found here.

The guidance offers several important clarifications, including with respect to the definition of a covered “facility,” the impact of the rule on deemed exports, and the scope of restrictions on “U.S. person activities.” An overview can be found below.

Installation definition

The guidelines clarified that the term “facility” refers to the building where production of the restricted technology occurs. Subsequent steps, such as assembly, testing, or packaging, are not covered by the rule. The guidelines further clarify that if the same entity owns multiple buildings on the same corporate campus, each building will be considered a separate “facility” for the purposes of the rule. Thus, if production at the restricted technology level takes place at a single facility on a company’s campus, other facilities will not be subject to the same restrictions. However, in practice it is likely to be difficult for suppliers to obtain accurate information about the specific building in which their products will be used.

American person

The guidance addresses the controls of U.S. persons in EAR § 744.6(c)(2) that apply to persons engaged in the following activities:

  1. Permission to Ship, Transmit, or Transfer In-Country (In-Country) of Non-EAR Items Used in the “Development” or “Production” of Integrated Circuits to Manufacturing Facilities in the PRC that manufacture integrated circuits meeting the criteria specified in EAR § 744.6(c)(2)(i)(A)-(C) of the EAR;
  2. Deliver, by shipment, transmission, or in-country transfer, non-EAR items used in the “development” or “production” of integrated circuits to a manufacturing “facility” in the PRC that manufactures circuits devices that meet the criteria specified in EAR § 744.6(c)(2)(i)(A)-(C) of the EAR; Where
  3. Servicing, including servicing, repair, overhaul or refurbishment of non-EAR items used in the “development” or “production” of integrated circuits at a manufacturing “facility” semiconductor company located in the PRC that manufactures integrated circuits meeting the criteria specified in EAR § 744.6(c)(2)(i)(A)–(C) of the EAR.

Guidance Notes US persons must exercise due diligence to ensure that manufacturing facilities do not engage in prohibited activities. Proper due diligence includes “reviewing publicly available information, items’ ability to supply or service, proprietary market data and end-use statements” and adhering to BIS “Know Your Customer” guidelines in EAR § 732, Supp. 3, to determine whether a manufacturing facility in the PRC manufactures integrated circuits that meet any of the criteria set forth in EAR § 744.6(c)(2)(i)(A)-(C).

According to BIS guidance, given the policy objectives of the rule, the US person restrictions in EAR § 744.6(c)(2)(i)-(vi) do not extend to US persons engaged in administrative or clerical activities (for example, arranging shipping or preparing financial documents) without knowledge of a violation. In addition, these restrictions do not apply to persons who implement a decision to approve a shipment, transmission or transfer within the country subject to restrictions, unless it there is evidence of knowledge of a breach by such persons. Finally, the restrictions also do not apply to development or production activities that are not directly related to the supply of specific items or the servicing of specific items for advanced manufacturing facilities in the PRC. It’s unclear how reassuring these guidelines will be for American people working in Chinese companies, but it does at least indicate that the BRI’s intent is not to broadly target American national employees working in China’s semi- drivers.

We note that the controls in EAR § 744.6(c)(2) also apply to other types of activities of US Persons, beyond those discussed above, which are not addressed by the guidelines.

Deemed exports/re-exports

The guidance also aims to clarify the impact of the rule on exports and re-exports of goods.

First, it clarifies that under section 742.6(a)(6)(ii) of the Export Administration Regulations (EAR), Regional Stability (RS) controls placed on New and Revised Export Control Classification (ECCN) only not apply to deemed exports/re-exports. However, deemed export restrictions will still apply to Anti-Terrorism (AT) controls. Thus, a license is still required for deemed exports to persons from countries listed under AT control (Iran, North Korea and Syria.).

Second, the guidelines indicate that a foreign person who has lawfully received technology or software source code prior on the date of entry into force of the new ECCN does not need to apply for a new license or authorization since, according to the BIS, they return the knowledge of this technology or this source code. However, the foreign person must seek these approvals to receive any new software or controlled technology, even if these products are classified in the previous ECCN.

encryption

The guidelines also clarified that items that meet the parameters of 5A992 or 5D992 and also meet or exceed the parameters of 3A090 or 4A090, are subject to the licensing requirements of 3A090 or 4A090, in addition to being subject to classification, the license and reporting requirements of Category 5, Part 2. Additionally, except for items specified in EAR § 740.2(a)(9)(i), items that meet or exceed the parameters of 3A090 or 4A090 cannot use ENC license exception.

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