International Law Advisory - Department of Commerce Issues Proposed Revision to Deemed Export Rules, Requests Comments

(Note:  This advisory corrects and replaces the advisory we issued yesterday, which included two typographical errors.  We apologize for any confusion the earlier advisory may have caused.)

In March 2004, the Department of Commerce’s Office of Inspector General issued a report regarding specific measures that the Departments’ Bureau of Industry and Security (BIS) could undertake to strengthen U.S. export controls relating to “deemed exports” of U.S.-controlled technology to foreign nationals.  A number of these measures, if implemented, would necessitate revision of the Export Administration Regulations (EAR), and would have significant implications for U.S. companies who employ or do business in the United States with foreign nationals.  Yesterday, BIS issued a Federal Register notice  requesting public comments on how the proposed revisions would affect industry, the academic community, and government agencies involved in research.  See 70 Fed. Reg. 15,607 ( March 28, 2005 ).  Comments must be received by BIS by May 27, 2005 .

The changes proposed in the Inspector General report are as follows:

1.         Definition of “Use” of Equipment

Under the current section 772.1 of the EAR, the definition of “use” of equipment by foreign nationals in the United States includes “{o}peration, installation (including on-site installation), maintenance (checking), repair, overhaul, and refurbishing.”  (Emphasis added.)  The Inspector General has recommended removing the conjunction “and” and replacing it with “or” or removing the conjunction altogether, out of a concern that the current definition of “use” could be interpreted to imply that all of the activities must be performed in order for the statutory meaning of “use” to be satisfied.

2.         Use of Foreign National’s Country of Birth As Criterion for Deemed Export License Requirement.

Under current BIS policy for deemed exports, a foreign person’s nationality is considered to be their most recently-obtained nationality.  Accordingly, if an individual is born in country X but later becomes a national of country Y, the deemed export license requirements for country Y will apply for that individual.  The Inspector General’s recommendation would reverse the current rule, and require application of license requirements pertaining to the foreign national’s country of birth, irrespective of their current nationality.

The proposed rule may have significant consequences for companies who employ or do business with foreign nationals.  Many foreign nationals who work in the United States or with U.S. companies have obtained citizenship in countries (such as Canada and the United Kingdom ) that have relatively few export controls restrictions, but whose countries of birth are subject to substantial restrictions under the EAR.  For those foreign nationals -- some of whom may have been employed in the United States for significant periods of time -- the proposed revision to the deemed exports rule would require a BIS license application, which, depending on the country of birth and the type of technology at issue, might or might not be granted. 

3.        Proposed Revisions to Part 734 Supplement 1

The Inspector General has proposed, and BIS has accepted, two clarifications to the questions-and-answers set forth in Supplement 1 to Part 734 of the EAR  (Supplement 1 contains a series of questions and answers on technology and software subject to the EAR.)  First, with respect to Question A(4), which relates to EAR export controls on research funded by the Department of Energy, BIS will clarify the response to indicate that if government restrictions are imposed on the publication of the research in question, the technology at issue would continue to be subject to the EAR.  Second, with respect to question D(1), which relates to scientific exchanges, BIS has agreed to clarify the response to indicate that the “use” of equipment related to scientific research does not qualify under the “fundamental research” exemption.

We will continue to monitor the proposed changes, and will advise you of any developments.  If you would like in the meantime to discuss the proposed changes and the opportunity for comment, please contact Ed Krauland at 202-429-8083 or David Lorello at 202-429-6757.