1 HOW TO COMPLY WITH THE NEW BIS

1 HOW TO COMPLY WITH THE NEW BIS CHINA RULE AN AUDIO-CONFERENCE BRIEFING Featuring Donald Alford Weadon Jr. Michael D. Turner Senior Adviser, MK Technology LLC Former Director, BIS Office of Export Enforcement Weadon & Associates Carol A. Kalinoski & Associates Former Chairman, BIS Operating Committee September 11, 2007 Presented by The Export Practitioner and Washington Tariff & Trade Letter

INTRODUCTORY COMMENTS 2 Two years in the making, and still subject to widespread industry criticism, the China Rule is now final. It is not our objective to criticize the China Rule. It is our objective to analyze what The China Rule requires to insure compliance with its technical and procedural provisions, and other aspects of the EAR while avoiding any violation of foreign domestic laws and regulations because of the scope of the China Rule. We hope to leave you with insight and a “to do” list to allow you to safely use the benefits conferred under the China Rule

I. Main Features of the New China Rule 3 1. 2. Changes to Export Administration Regulations: a) Section 742. 2 (Chemical and biological weapons); b) Section 742. 3 (Nuclear Nonproliferation); c) Section 742. 4(b)(7) (National Security Controls Specific to China); d) Section 742. 5 (Missile Technology) New Section 744. 21(a) for “The Gang of 31” 31 re-controlled items identified on Supplement No. 2 to Part 744 3. New Section 744. 21(b). . . a license required for any item… 4. New Section 748. 15 “Authorization Validated End-User (VEU)”

Changes in Licensing Review Policy for Controlled Items 4 Section 742. 4(b)(7) specific national security controls for the People’s Republic of China: General policy of approval for export, re-export or transfer of items to civil end-uses Presumption of denial for items that would make a “direct and significant contribution to the PRC’s military capabilities”, such as, but not limited to, the major weapons systems in new Supplement No. 7 to Part 742 of the EAR

5 New Licensing Policy for China Items are controlled under: Section 742. 2 (Chemical and biological weapons); Section 742. 3 (nuclear non-proliferation); and Section 742. 5 (missile technology) will be reviewed in conjunction with Section 742. 4(b)(7)(national security)

Supplement 7 to Part 742 6 Eleven non-exhaustive categories of major weapons systems to illustrate military end-uses, to include: Battle tanks, Armored combat vehicles, Offensive space weapons, and Night vision equipment, as well as Infrared focal plane array detectors and cameras specifically designed, developed, modified, or configured for military use

New Section 744. 21(a) 7 Part 744 also known as the Enhanced Proliferation Control Initiative (EPCI) or the “catch-all” control. A license is required for any of the 31 items in nine categories listed in new Supplement No. 2 to Part 744 if: The exporter, re-exporter or transferor has knowledge that The item is intended entirely or in part for a military end-use, or BIS informs that the item is or may be intended, entirely or in part, for a military end-use “Knowledge” is defined in Section 772. 1 of the EAR

“Military end-use” is defined in Section 744. 21(3)(f) to mean: 8 “incorporation into a military item described on the U. S. Munitions List, the Wassenaar Arrangement International Military List; or in items listed under ECCNs ending in ‘A 018’” Note to paragraph (f) of this section defines such key terms as “use”, “development”, “production”, “operation”, “installation”, “maintenance”, and “deployment” License application to include, among other things, “all known information concerning the military end-use of the item(s) sought to be exported”

Licensing review standard under Section 744. 21 (a) and (b) 9 “Case-by-case” to determine whether: The export, re-export or transfer would make a “material contribution to the military capabilities of the PRC and result in advancing the country’s military activities contrary to the national security interests of the U. S. ” If the proposed transaction would make such a material contribution, the license application will be denied Applications may be reviewed under the three nonproliferation control policies: 1. 2. 3. chemical/biological weapons, nuclear non-proliferation, missile tech not just material contribution to military capabilities of China Applications for items requiring a license for any other reasons that are destined to the PRC for a military enduse will be subject to review policy in this section

Section 744. 21(b) 10 Additional prohibitions on the export, re-export, or transfer of any item because there is an “unacceptable risk of use in or diversion to ‘military end-use’ activities in the PRC” BIS may inform either individually, by specific notice, through amendment to the EAR published in the Federal Register Absence of BIS notification does not excuse the exporter/re-exporter/transferor from compliance with the license requirement of this section: due diligence required by exporters/re-exporters/transferors

End-User Statements and Import Certificates Revisions 11 Section 748. 10(a) requires a MOFCOM End-User Statement (EUS) for all items requiring a license to the PRC for any reason Required if a transaction is valued $50, 000 or more May be required by BIS to obtain an Import Certificate for a transaction below $50, 000, except for computers or ECCN 6 A 003 night vision items Not required to be submitted along with the license application Applicant must retain such documents per EAR Section 762

Section 748. 15: Authorization Validated End-User (VEU) 12 Permits export, re-export, and transfer to VEUs of specific items identified by ECCNs described to the subparagraph level, to a specific “eligible” destination, for a specific end-use, under specific conditions and end -use restrictions Requests for VEU authorization submitted in form of an advisory opinion request [Section 748. 3( c)(2)] along with information identified in new Supplement No. 8 to Part 748 of the China Rule

VEU Application Procedure 13 Required Information Under New Supplement 8: All names of the VEU candidate A physical addresses located at eligible destinations, and contact information including Company website (if any) Overview of the structure, ownership, and business of the prospective VEU Overview of any business activity or corporate relationship the entity has with either government or military organizations Physical address of the location where the exported item(s) will be used Any end-user plans to re-export or transfer the item, including specific destination Description of end-user’s record keeping system to allow compliance with such requirement Continued. .

VEU Application Procedure 14 Original statement on letterhead of prospective VEU, signed by a person who has authority to legally bind the VEU, certifying VEU will comply with all VEU requirements Formal acknowledgment that use or diversion of such eligible items contrary to the EAR is prohibited Agreement to allow periodic on-site reviews by U. S. government officials to verify end-user’s compliance with requirements of VEU authorization Description of item sought to be exported, re-exported or transferred to subparagraph level Technical parameters for the items including performance specifications End-use description of the items Commodity Classification Automated Tracking System (CCATS) number for the items sought to be exported should be obtained from BIS and provided with the application.

End-User Review Committee 15 New Supplement No. 9 to Part 748 details procedures that interagency End-User Review Committee (ERC) will use to review advisory opinion requests for VEU status and eligible items Four departments comprise the ERC (Commerce, Defense, Energy and State), and other departments as appropriate The Department of Commerce chairs the ERC Unanimous vote of the EAR required to grant VEU authorization status or to add any eligible items to a pre-existing authorization Majority vote of the ERC required to remove VEU authorization or remove eligible items from a pre-existing authorization U. S. government may put forward candidates to the ERC for VEU authorization Such candidates to be notified before ERC determines whether authorization is appropriate End-users not obligated to accept the U. S. government’s VEU nomination

End-User Review Committee and Procedures 16 If no VEU authorization status is granted, no new license requirement is triggered nor does it render the end-user ineligible for license approvals ERC to make final determination no later than thirty (30) calendar days after complete application is distributed interagency for review If an ERC agency is not satisfied with the decision of the ERC, escalation to the Advisory Committee on Export Policy (ACEP) according to procedures set out in Executive order 12981, as amended

End-User Review Committee and Procedures 17 Factors to be considered interagency in determining VEU authorization eligibility (Entity Specific): q Exclusive engagement in civil end-use activities Compliance with U. S. export controls Need for on-site review prior to approval Capability of complying with requirements of the VEU authorization Agreement to periodic on-site inspections once authorized Relationships with U. S. and foreign companies Eligibility factors (Destination Specific): The status of export controls and the support and adherence to multilateral export control regimes of the destination government

VEU Authorization 18 Subject to revision, suspension or revocation entirely or in part at any time without prior notice, including approval for specific commodities Any material or substantive change relating to facts supporting authorization must be promptly reported to BIS whether VEU authorization status granted or under consideration The People’s Republic of China is currently the eligible destination for VEU status Items controlled for missile technology or crime control reasons not eligible for export or re-export under VEU authorization Items shipped under VEU authorization only for civil end-uses and not for any proliferation activities identified in Part 744 of

VEU End-Use Restrictions 19 Eligible items only for consignment to and use by the VEU authorized entity At VEU’s own facility located in an eligible destination, or at a facility located in an eligible destination over which the end-user demonstrates effective control The VEU must consume such items during use or Transfer or re-export such items only as authorized by BIS

Other Obligations Arising From VEU Authorization Status 20 Prior to initial export or re-export, obtain certifications including contents in Supplement 8 to Part 748 from the authorized VEU regarding end-use and compliance with VEU requirements (include contents of Supplement 8 to Part 744) Certification and all records relating to VEU authorization must be retained by any exporter or re-exporters utilizing this authorization per Part 762 of the EAR Such VEU exporters and re-exporters required to submit annual reports to BIS to contain specific information regarding the end-user, end-use, eligible destination, ECCNs, quantity, value Records maintained by exporters, re-exporters, and validated end-users subject to review, including on-site review by U. S. government representatives on a periodic basis

Final Words of Advice 21 Know the Requirements of that Section of the China Rule You Seek to Use to Assure Compliance, Appreciating That BIS Has Not Yet Provided Guidance on Key Components of the Rule

II. Due Diligence Under the China Rule 22 Revising Existing Compliance Programs The China Rule requirements can be incorporated within the framework of existing export compliance programs (EMSs) With modifications including check lists for “military enduse” activities (none yet available on the BIS website section concerning EMSs) Need to document and retain end-user/end-use screening/due diligence results Requires compliance programs of exporters, re-exporters, transferors, and end-users to include China Rule specific provisions Specific compliance issues arise under each of the four main elements of The China Rule

Special Compliance Issues 23 Four elements of the China Rule mandate different compliance responses and documentation modalities 1. 2. 3. 4. Controlled items now conflate with other WMD controls in the EAR New Section 744. 21(a)(1) re-controls “The Gang of 31” items in nine categories, New Section 744. 21(b), a “catch-all” for “any item” that carries an “unacceptable use in or diversion to a military end-use activities” Section 748. 15 Authorization Validated End-user requires certain end-user restrictions and record keeping retention requirements, end-user compliance programs, on-site inspections, and audit of records of all parties to the VEU

Civil vs. Military End-Use Activities 24 Focus of the China Rule is on “military end-use activities” “Military end-use” is defined in the China Rule as are related terms such as “use”. “development”, “production”, “operation”, “installation”, “maintenance”, “deployment” Thorough researching of a Chinese company/end-user/end-use bona fides will entail the use of China resident expert contacts who understand the specific due diligence needs the China Rule creates Certain Chinese companies are composed of different divisions and units: some may be involved in military end-use activities Obtain detailed information on how the Chinese company/end-user will use the item, at what location, and for what specific purpose or contract Identify if there is an “unacceptable risk of use in or diversion to military end-use activities in the PRC” and how this will really work in practice before the interagency reviewers) Craft safeguard measures to assure no subsequent change to military end-use activities by your VEU, its subsidiaries or parent will

25 Updating Screening Parameters and Need for New Military End-Use Checklist Customer vetting against several watch lists that identify specific end-users is key initial component of an effective EMS but focus under the China Rule is on end-use activities BIS has posted three nonproliferation (nuclear end-use, rocket systems and unmanned air vehicles, and CBW) detailed end-uses checklists as EMS’ tools for use in order vetting and processing systems BUT there is a need for BIS to develop a checklist to scope out military enduse activities. In its absence, you need to create your own. Imperative to get to know the Chinese company/end-user in person to understand the scope of its activities. Visiting the customer’s facility in China, its parent, its subsidiaries, sister companies or divisions to ascertain among other things its involvement with other Chinese government entities is essential before large export sales or VEU activities are undertaken. Reliance on local sales personnel without exporter/re-exporter’s personal involvement may be more than problematic – it could be dangerous. Distinguish between a private Chinese company and a state-owned or affiliated entity; there are significant differences which can make due diligence efforts difficult After sales service and maintenance contracts can assist in monitoring compliance.

Final Words of Advice 26 Fully Inquire into the End-Use of Your Product (Civil vs. Military) and Document the Process by which You Make that Determination

III. Commodity Classifications Under The China Rule 27 Commodity classifications are essential to ensure compliance under The China Rule If you believe your products, spare parts, and technology are not encompassed under “The Gang of 31 ECCNs” you need to have a formal written CCATS from the Department of Commerce to that effect Current commodity classification also are critical when you claim EAR 99 status [Section 744. 21(b)], especially when there is no bright line between controlled and decontrolled status and the review standard is material contribution or risk of diversion to military use activities.

Commodity Classifications 28 Classifications have been processed on a regular basis only since 1985, when the law was changed to mandate ten (10) day turnaround. A CCATS is recognized by BIS in perpetuity for the specific model classified Customs, however, only recognizes a CCATS as dispositive for export clearance and other purposes for two (2) years from date of issuance

Commodity Classification Strategies Under The China Rule 29 Sending a brochure or catalogue stapled to a 748 request is folly. Beware of “killer brochures” and other brochures or handouts your sales force has ginned up and distributed at trade shows, etc. without your review. They may inflate a product’s performance and are often provided BIS/DDTC by competitors to quash your ability to get a good classification. Important to thoroughly describe your product (send both tech specs and an analytical white paper), demonstrate with analytical specificity how it is covered by a particular ECCN down to the subparagraph level (key in distinguishing it from one of “the Gang of 3 l”) Also provide an exemplar of exactly what you want the

Commodity Classification Strategies Under The China Rule 30 Otherwise: your application may be a crap shoot! (Note: poorly documented applications can result in a nice classification which can be revoked in a compliance investigation). On important classifications (where it is a critical call between a NS/FT/AT or “The Gang of 31” classification and EAR 99 status) prior coordination with BIS is important, if not essential! CCATS requests are staffed, and there is no assurance that the licensing officer you have coordinated with will be the one who will be doing the actual analysis and preparation of the final CCATS. So, indicate on your cover letter the identify of the licensing officer with whom you have been coordinating

Commodity Classification Strategies Under The China Rule 31 Quality check the written CCATS when received and immediately request amendment of the CCATS where you feel errors have been made Renew the CCATS every two years Not necessary to classify every product you plan to export, but you should classify product families wherever possible (similar in kind or function) Utilize sensible, durable product family numbering (remember, your model numbers change -- in some cases monthly). Example: Utilize Model 55 XX Veeblefetzer in your classification request, rather than listing every Veeblefetzer model number currently in use) Be careful about classifications in general, but under the China Rule, be very careful!

Commodity Classification Strategies Under The China Rule 32 q If model numbers change over the next two years (Model 5550 is renumbered to Model 5570, your classification will not be valid, but if your CCATS states Model 55 XX, it will still be valid and dispositive) q Remember: Getting a good classification is beyond difficult when you are in the middle of a compliance inquiry or investigation, especially if all you have to support your case are sales brochures and arm waving!! q Best Protection Strategy: Keep a file and schedule reviews of old CCATS sixty days before expiration.

Commodity Classification Strategies Under The China Rule 33 q DO NOT guess or use other company’s CCATS or verbal representations for authority because you don’t know (or are you likely to learn) what they submitted to BIS q If exporting an OEM product, you can rely at the outset on your supplier’s CCATS IF you know them to be experienced exporters with a sound classification program. But sound compliance mandates that you get your own classification. Remember, you can speed the process by explaining that you are an OEM and submit with your tech presentation a copy of your supplier’s CCATS.

34 Commodity Classification Strategies Under The China Rule q BUT you are solely responsible for classification for the goods you export, even if they are not your own. So beware. q Use an internal technical advisory committee strategy to keep ahead of new products and classification issues, especially for the China market. Don’t allow a product to be placed on your price list or website unless and until it is classified q Also remember: Some combinations of software with decontrolled products can boost the product’s classification! Be careful about classifications in general,

IV. Sponsoring a VEU Candidate 35 Determine under what circumstances should the exporter/reexporter sponsor a Chinese entity for VEU authorization status because of legal and cost of compliance issues Consult with informed Chinese counsel before submitting any information about the activities or business relationships of the Chinese company as VEU candidate Distinguish between a private vs. state-owned or state-affiliated Chinese company Different requirements under Chinese company law pertain based on type of company (private vs. state-owned or state-affiliated) Know what Chinese company law provides in determining who can legally bind the Chinese entity in applying for VEU authorization status in compliance with Item No. 7, Supplement 8 to Part 748

Chinese Legal and Regulatory Considerations 36 Is there a risk that “trade or state secrets” may be provided to the U. S. government in the application process or subsequent reporting submissions or periodic audits thereby resulting in violation of Chinese law governing national security? Violations of broadly-written national security laws in most countries including China are criminal offenses. Consider the legality of a Chinese company official permitting on-site inspections by U. S. government officials and disclosing company proprietary information or trade or state secrets to the U. S. government without Chinese government consent. Can the licensed item be insulated from attachment under either evolving Chinese financial securitization laws and regulations, bankruptcy laws, mergers and acquisitions laws and regulations? The licensed item under the Rule must be consumed in use or prior authorization obtained from the US Government before re-export or transfer

Other Potential Conflicts of Law 37 Parties who are re-exporters or transferors in other foreign countries may have domestic legal and regulatory considerations such as trade secrets and privacy rules that may apply in sponsoring these as VEU candidates Check with local legal counsel before seriously embarking on sponsoring a foreign candidate for VEU authorization so as to avoid conflicts with local law and regulations

V. Dealing with Chinese Government Officials 38 Identify Chinese government officials and Chinesegovernment-authorized non-government organizations who can be of assistance, such as Chinese Ministry of Commerce State-sponsored non-government organizations specializing in export controls and related issues U. S. Embassy staff in Beijing (Remember: Currently there is only one individual who works export control matters for the U. S. Government there. )

39 VI. China Rule Requires Strict Due Diligence to Avoid Non. Compliance Do your homework and know the requirements of the Rule you wish to utilize to minimize non-compliance risks and potential conflicts of laws and regulations. The China Rule is still controversial and high visibility. Violations are a top OEE priority.

40 Questions and Answers

How to Reach Our Speakers 41 Michael D. Turner Senior Adviser, MK Technology LLC 1823 Jefferson Place N. W. , Washington, DC 20036 Phone: (202) 463 -0904 ext. 124 Cell: (202) 203 -0646 Email: mturner@mktechnology. co m Carol A. Kalinoski & Associates 1250 North Pitt Street, Suite 300 Alexandria, Virginia 22314 -5604 Phone: (202) 360 -1555 Fax: (202) 318 -8075 Email: kalinoski@consultant. com Donald Alford Weadon Jr. Weadon & Associates International House 3338 N Street, N. W. Washington, D. C. , 20007 Phone: (202) 965 -4100 Fax (202) 965 -4252 Email: dweadon@weadonlaw. com Sam Gilston Editor & Publisher The Export Practitioner Phone: (301) 570 -4544 Email: mailto: sgilston@comcast. net