International Law Advisory - BIS Issues Proposed Rule Expanding Entity List Licensing Authorization

On June 5, 2007, the Department of Commerce, Bureau of Industry and Security (BIS) issued a proposed rule amending the Export Administration Regulations (EAR) to expand the reasons for which it may add parties to the Entity List (see 72 Fed Reg. 31005-31008).

The EAR contain an Entity List in Supplement No. 4 to Part 744 to the EAR (15 C.F.R. Part 744, Supp. No. 4) that imposes license requirements for transactions involving certain listed foreign end users who have been determined to present an unacceptable risk of diversion to developing weapons of mass destruction or missiles used to deliver these weapons. The Entity List was established to inform the public of who those entities are, and it specifies the more stringent license requirements imposed on each listed entity. Those license requirements are independent of and in addition to any license requirements imposed elsewhere in the EAR.

As mentioned above, the proposed rule would expand the reasons for which BIS can add entities to the Entity List. Specifically, in addition to the grounds set forth in Sec. 744.2, 744.3, 744.4, 744.6 or 744.20, the proposed measure would add a section 744.11 to the EAR that would “authorize BIS to add to the Entity List entities that BIS has reasonable cause to believe, based on specific and articulable facts, have been, are, or pose a risk of being involved in activities that are contrary to the national security or foreign policy interests of the United States or those acting on behalf of such entities.” (BIS specifically notes that the addition of this section would not be used to list US persons.) The notice lists five examples to illustrate the types of conduct that BIS could determine are contrary to US national security or foreign policy interests:

• (i) Supporting persons engaged in acts of terror;
• (ii) Actions that could enhance the military capability of, or the ability to support terrorism of governments that have been designated by the Secretary of State as having repeatedly provided support for acts of international terrorism;
• (iii) Transferring, developing, servicing, repairing, or producing conventional weapons in a manner that is contrary to United States national security or foreign policy interests or enabling such transfer, development, service, repair or production by supplying parts, components, technology, or financing for such activity;
• (iv) Deliberately failing or refusing to comply with an end use check conducted by or on behalf of BIS or the Department of State, Directorate of Defense Trade Controls by denying access, by refusing to provide information about parties to a transaction, or by providing information about such parties that is false or that cannot be verified or authenticated; and
• (v) Engaging in conduct that poses a risk of violating the EAR and raises sufficient concern that prior review of exports or reexports involving the party and the possible imposition of license conditions or license denial enhances BIS's ability to prevent violations of the EAR.

The current proposed rule is the latest evolution in the expansion of the grounds for listing an entity. This rule seems to continue a general export control enforcement trend toward “end user” based export controls, as opposed to controls that blanket an entire country. BIS’s stated reasons for the proposed change, namely that such targeted application of license requirements allow the United States to effectively control exports with minimal cost to foreign trade, suggests an increasing level of interest on the part of US regulators regarding who is receiving US origin goods and technology and for what purpose.  Also significant is that the proposed change will reduce BIS’s need to issue general orders to impose license requirements on specific parties, thus reducing the number of EAR provisions that the public has to review to determine their compliance with the regulations. Because exports and reexports would require a license only after suspected entities are added to the Entity List, the proposed rule would not necessarily dictate immediate changes to compliance programs on the part of exporters. However, the proposed changes also suggest that more and more customer screening may be needed as part of compliance programs.

Public comments on the proposed rule must be received by BIS by August 6, 2007. If you have any questions regarding the proposed rule, please contact Ed Krauland at 202.429.8083 or Meredith Rathbone at 202.429.6437.