Export Agencies Continue Emphasis On Restricted Party Screening Under Export Control Laws – International Law


The U.S. Government is continuing its frequent and highly
visible use of denied party lists as an important tool in
administering the export control laws.  Each of the Bureau of
Industry and Security (BIS), the Office of Foreign Assets Control
(OFAC) and the Directorate of Defense Trade Controls (DDTC) has its
own restricted party lists, and new parties are being added
regularly – U.S. exporters are challenged to keep up with the
steady flow of changes.  The following are examples of recent
restricted party actions for exporters to have on their radar
screens. 

1. BIS Entity List.  BIS announced a
number of additional designations to the Entity List within recent
weeks under §744.16 of the Export Administration Regulations
(EAR).  These include:

  • On December 17, 2021 BIS added a total of 37 entities to the
    Entity List including 34 in China, 3 in Georgia, 2 in Turkey and 1
    in Malaysia.  These included the Chinese Academy of Military
    Medical Sciences and eleven of its research institutes based on
    BIS’s conclusions that they use biotechnology processes to
    support Chinese military end uses and end users, including
    purported “brain-control” weaponry.  Other reasons
    for designations include the listed parties’ support of
    China’s military modernization, their attempts to acquire
    U.S.-origin items in support of the Chinese People’s Liberation
    Army and their provision of material support for Iran’s defense
    program.  Further details are available here.   

  • On November 26, 2021 BIS added 27 entities to the Entity List
    located in China, Japan, Pakistan and Singapore.  These
    included eight Chinese companies as part of BIS’s efforts to
    prevent U.S. emerging technologies “from being used for
    China’s quantum computing efforts that support military
    applications, such as counter-stealth and counter-submarine
    applications, and the ability to break encryption or develop
    unbreakable encryption.”  (See Federal Register release
    here.)  In addition, sixteen parties in
    China and Pakistan were added as a result of their work involving
    Pakistan’s nuclear activities and ballistic missile
    program. 

  • On November 4, 2021 BIS added 4 entities to the Entity List
    located in Israel, Russia and Singapore in a widely publicized
    action.  According to the Federal Register Notice, two Israeli
    companies – NSO Group and Candiru – were added to the list based on
    BIS’s determination that the entities “developed and
    supplied spyware to foreign governments that used these tools to
    maliciously target government officials, journalists,
    businesspeople, activists, academics, and embassy workers.”
     Also, two additional companies were added in Russia and
    Singapore based on BIS’s determination that they traffic in
    cyber tools used to gain unauthorized access to corporate and
    individual information systems.  Further details are available
    here.    

A large number of parties listed in Entity List designations are
located in China, but parties in other countries are frequently
designated as well, such as Pakistan, Singapore, Russia, Taiwan,
Netherlands and Canada.  Common reasons for listings include
providing support for the Chinese military, theft of U.S.
technology (especially if this will be used to support foreign
military efforts), repression of ethnic and religious minority
groups, corruption, undermining free and fair elections, malicious
cyber activities and evasion of U.S. sanctions such as those on
Iran.

2. BIS Military End User List.  BIS also
administers the Military End User List under the Military End
Use/End User regulations set forth at EAR §744.21.  In
addition, BIS administers the Military-Intelligence End Use/End
User regulations set out at EAR §744.22.  The following
are a number of recent actions under these regulations:

  • On November 26, 2021 BIS added the Russian entity Moscow
    Institute of Physics and Technology to the BIS Military End User
    List due to its production of military end-use products for an
    undisclosed military end-user.  Further details are available
    here.     

  • On December 9, 2021 BIS added Cambodia to the list of countries
    subject to the Military End Use/End User controls under EAR
    §744.21 and to the list of countries subject to the
    Military-Intelligence End Use/End User controls in EAR
    §744.22.  In the action BIS also added Cambodia to the
    list of countries subject to the licensing policy in EAR
    §742.4(b)(7) and to the list of countries subject to a U.S.
    arms embargo under Country Group D:5.  Further details are
    available here.  

It is significant to note that the Military-Intelligence End
Use/End User regulation not only restricts U.S. exporters from
entering into transactions with certain restricted parties, but
also prohibits U.S. persons from
supporting” a
military-intelligence end use or a military-intelligence end user
in countries covered under the rule.1  This
requirement applies to activities by U.S. persons even if the items
involved are not subject to the EAR
.  The term
“support” is broadly defined to include performing any
contract, service, or employment the exporter knows may assist or
benefit the above end uses or end users including ordering, buying,
removing, concealing, storing, using, selling, loaning, disposing,
servicing, financing, transporting, freight forwarding, conducting
negotiations in furtherance of and otherwise facilitating such
activities.2

3. Non-SDN Chinese Military-Industrial Complex Companies
List
.  On December 16, 2021, the following eight
Chinese companies were added to the OFAC Non-SDN Chinese
Military-Industrial Complex Companies List (the “Non-SDN CMIC
List)”:

  • Cloudwalk Technology Co., Ltd.; 

  • Dawning Information Industry Co., Ltd.; 

  • Leon Technology Company Limited; 

  • Megvii Technology Limited; 

  • Netposa Technologies Limited; 

  • SZ DJI Technology Co., Ltd.; 

  • Xiamen Meiya Pico Information Co., Ltd.; and 

  • Yitu Limited.

In addition, on December 10, 2021 OFAC added the Chinese company
Sensetime Group Limited to the Non-SDN CMIC List.

4. OFAC SDN List.  Perhaps the best-known
U.S. restricted party list is the OFAC List of Specially Designated
Nationals and Blocked Persons (the “SDN List”). 
OFAC has continued to add parties regularly to the SDN List in
recent months (this is in addition to OFAC’s eight other
restricted party lists).  In December 2021 alone OFAC issued
announcements on ten separate occasions announcing new SDN
designations under a variety of OFAC sanctions programs including
Hong Kong, Central African Republic, Venezuela, N. Korea, Burma,
Iran, Syria, Belarus, CAATSA, Counter Terrorism, Counter Narcotics,
Kingpin Act and Global Magnitsky programs.

5. BIS Enforcement Action For Dealing With Parties On
the Entity List
.  On November 8,
2021 BIS announced an enforcement action and penalty against SP
Industries, Inc. (d/b/a SP Scientific) of Warminster, Pennsylvania
for exporting items to Huawei Technologies Co. Ltd. and its two
subsidiaries Huawei Device Co., Ltd. and HiSilicon Technologies
Co., Ltd., which are listed on the Entity List.  BIS is
actively enforcing the prohibition against engaging in export
transactions with parties on the Entity List, and more enforcement
actions likely are underway.  Additional information regarding
this case is available here.

The above are just examples over an eight-week period of
developments involving restricted parties – additional
amendments are occurring on a regular basis. 

In the old days, the most important export requirement involved
checking your export against the Commerce Control List (CCL) under
the EAR and the U.S. Munitions List (USML) under the International
Traffic In Arms Regulations (ITAR) to see if an export license was
required.  In recent years, however, the agencies have been
placing increasing emphasis on the full array of export
requirements under the EAR, OFAC sanctions and ITAR, including:

  • Licensing requirements for exports, reexports and in-country
    transfers of restricted items listed on the CCL or the USML;

  • Restrictions on exports to prohibited destinations under the
    OFAC sanctions programs and to embargoed countries under EAR Part
    746;

  • Restrictions on transactions with parties listed on the various
    restricted parties lists promulgated by BIS, OFAC and DDTC;

  • Restrictions on exports that will be used in the prohibited
    end-uses under EAR Part 744; and

  • Other requirements including the reporting, recordkeeping,
    licensing, brokering, reexport/retransfer, antiboycott, export
    clearance, short supply and Chemical Weapons Convention provisions
    contained throughout the EAR, ITAR and OFAC sanctions laws. 
     

Restricted party screening is now a critical component of the
export compliance tool kit and an important cornerstone of export
compliance activities. 

There are a number of compliance best practices that exporters
frequently utilize in their denied party screening activities,
including:

  • Frequency of Screening.  The designation
    of prohibited parties is a dynamic process – parties can be
    added to a restricted party list at any time.  It is possible
    that a long-time existing customer of a company can be added to a
    list on a moment’s notice.  Consequently many companies
    screen transactions against prohibited party lists on a regular,
    ongoing basis rather than only at the time of establishing a
    business relationship with the party.

  • Due Diligence Review.  It is prudent to
    conduct due diligence reviews of transactions to help confirm the
    identify of parties and other facts that are important in assessing
    compliance (such as if a party is a military end user or a
    military-intelligence end user).

  • Screening Procedure.  Screening can be
    conducted through a number of techniques including manual screening
    against official U.S. government restricted party lists or through
    use of commercially available screening software programs.
     For example, some companies have automated screening software
    built into their ERP systems to conduct screening on an automated
    basis, and many routinely screen all of their existing customers,
    vendors and other parties on a periodic basis (including
    retroactive screening in the event a party has been added to the
    list after an initial screening).

  • Search Criteria.  Companies often utilize
    “fuzzy logic” or similar search techniques to screen for
    variations in spelling, abbreviated or fictitious names, etc.

  • Assessing Matches and False Hits.  If
    there is a match, the Company will need to assess if it is a true
    match or a false hit and to communicate the results to the company
    employees involved in the transaction.

  • Screening Compliance Tools.  There are a
    growing number of automated compliance tools that can be of great
    assistance in the denied party screening process.  However,
    companies are advised not to rely blindly on automated compliance
    resources – use of such resources should be combined with
    proper user training, oversight and good old fashioned judgment by
    experienced export professionals to be the most effective.

Restricted party screening likely will continue to increase in
importance in the coming years. Exporters will be well served to
pay proper attention to this important function in their compliance
efforts.

Footnotes

1. See EAR §744.6(b).

2. EAR §736.2(b)(7)(i)(A) provides in
pertinent part: If you are a ”U.S. person,” as
that term is defined in § 772.1 of the EAR, you may not engage
in any activities prohibited by § 744.6(b) or (c) of the EAR,
which prohibit, without a license from BIS, the shipment,
transmission, or transfer (in-country) of items not subject to the
EAR; facilitating such shipment, transmission, or transfer
(in-country); or the performance of any contract, service, or
employment (including, but not limited to: ordering, buying,
removing, concealing, storing, using, selling, loaning, disposing,
servicing, financing, or transporting, freight forwarding, or
conducting negotiations in furtherance of) that you know or are
informed by BIS will support:… (5) A ‘military-intelligence
end use’ or a ‘military-intelligence end user,’ as
defined in § 744.22(f) of the EAR, in the People’s
Republic of China, Russia, or Venezuela; or a country listed in
Country Groups E:1 or E:2.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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