The US Commerce Department, Bureau of Industry and Security (BIS), published an interim final rule on April 4, 2024 addressing corrections and revisions to the previously issued Export Administration Regulations (EAR) semiconductor and semiconductor equipment regulations.
The April 4 rule [1] (the Correction Rules) corrects and revises the EAR controls to amend and clarify the limitations that apply and the circumstances in which those limitations have changed. [2]
At a high level, the new regulations address the following areas:
- BIS acknowledged that certain products and technology that were not caught by the new export controls actually should have been, which led the agency to reinstitute controls on certain items.
- BIS confirmed several key definitions and how the agency interprets them, including how BIS views “knowledge” for restrictions under the regulations, where “production” begins and ends, and when license exceptions such as STA (Strategic Trade Authorization) do or do not overcome restrictions under EAR § 740.2(a)(9)(ii).
- BIS emphasized the licensing requirements for entities when a party subject to US jurisdiction is unable to confirm end use.
- BIS confirmed that licenses continue to be required in those instances where facilities conduct both mature and advanced technology research or activity, including in those circumstances where advanced technology research or activity may not actually be occurring but could occur.
In addition to these high-level modifications, BIS made a number of more granular updates and corrections designed to maintain the administration’s policies toward restricting access by China to advanced semiconductor and semiconductor equipment technology and items.
Notable changes include the following:
- The division of License Exception NAC (Notified Advanced Computing) into two separate license exceptions
- Revision to the control status of extreme ultraviolet (EUV) masks and associated software and technology
- The introduction of new Export Control Classification Number (ECCN) paragraph 4A090.b for certain advanced computing items
- The development of a new distinction between direct and indirect exports under the semiconductor manufacturing item end-use controls of EAR § 744.23(a)(4)
- Clarification of the license review policies in relation to certain US person and end-use controls
The preamble to the new rule includes clarifications to prior BIS guidance on the EAR § 744.23 end-use controls on advanced-node integrated circuits (ICs) and semiconductor manufacturing equipment (SME). BIS is seeking public comments through April 29, 2024.
Below we break down some of the more detailed nuances and updates to the regulations that impact those organizations participating at all levels of the semiconductor and semiconductor equipment supply chain and customer base.
CORRECTIONS FOR AC/S IFR
The Correction Rules primarily focus on updating and clarifying export regulations within the Commerce Control List (CCL) regarding non-CCL corrections and specific activities by US persons, among other areas.
The regulations include significant updates to EAR § 740.8 to distinguish between License Exceptions Notified Advanced Computing (NAC) and Advanced Computing Authorized (ACA), specifying the conditions under which each exception applies, including the need for notification to BIS in certain cases.
Under these separate license exceptions:
- The NAC license exception will authorize exports and reexports of specified items to Macau and destinations in Country Group D:5 as well as entities headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5, wherever located, that require a notification to BIS.
- The ACA license exception will authorize exports, reexports, and transfers (in-country) of specified items to destinations in Country Group D:1 or D:4 (except Macau and destinations specified in Country Group D:5) that do not require a notification to BIS. License Exception ACA will also authorize transfers (in-country) to Macau and destinations in Country Group D:5 as well as entities headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5 that do not require a notification to BIS.
This delineation aims to streamline the process and requirements for exports and reexports of specified items to various destinations, particularly emphasizing the difference in notification requirements between License Exceptions NAC and ACA and detailing when a single notification can cover multiple exports or reexports.
The Correction Rules also clarify the use of License Exceptions NAC and ACA in relation to encryption commodities, software, and technology, ensuring that certain processes and procedures under License Exception ENC (Encryption Commodities, Software, and Technology) are not circumvented. Further amendments include removing redundant restrictions, adding references to ACA, and specifying prior notification procedures for NAC, including what constitutes a valid notification and the actions BIS will take upon receiving a notification.
Moreover, the updates regarding the restrictions on specific activities of “U.S. Persons” now include enhanced controls for EUV masks and associated technology. These updates, in conjunction with the restructuring of the license review policy, offers greater clarity on the likely outcome for license requests.
The Correction Rules also address corrections to model certifications and licensing requirements for encryption items as well as remove outdated references and restore controls for ECCNs containing .z paragraphs. Specifically, the Correction Rules restore controls in the license requirement table of ECCNs 3A001, 3D001, 3E001, 4A003, 4A004, 4A005, 4D001, 4E001, 5A002, 5A004, 5D002, and 5E002 by removing the exceptions for .z paragraphs from the national security, missile technology, nuclear proliferation, and/or crime control license requirement paragraphs.
The Correction Rules also add a new note to the License Exception section of each of the ECCNs that have or impose controls on .z items: 3A001, 3D001, 3E001, 4A003, 4A004, 4A005, 4D001, 4E001, 5A002, 5A992, 5A004, 5D002, 5D992, 5E002, and 5E992. This reinstitution of controls implements Commerce’s stated policy of ensuring that the scope of the regulation covers those products and technologies of interest to US national security objectives.
BIS explained that these changes are designed to ensure that the introduction of .z paragraphs does not inadvertently alter the control status or license exception availability of items—“for instance, by inserting a chip to make the item a .z item and thereby eligible for License Exceptions NAC or ACA, provided the export, reexport, or transfer (in-country) also otherwise meet the applicable terms and conditions of License Exceptions NAC or ACA.”
As emphasized by both Undersecretary of Industry and Security Alan Estevez and Assistant Secretary for Export Enforcement Matthew Axelrod at the BIS Update held in March 2024, ensuring that diversions and circumvention of the EAR and US national security objectives do not occur remains a high priority.
Lastly, the Correction Rules revise several other ECCNs to address the aforementioned objectives:
- ECCN 3A001: Added four new .z paragraphs to ECCN 3A001 to make a distinction of those paragraphs controlled for NS:1, RS:1, MT:1, and NP:1 reasons
- ECCN 3D001: Restored NS:1 license requirements by adding 3A001.z to control software for commodities controlled by 3A001.z
- ECCN 3D001: Added RS to the reason for control and removed 3A001.z from the NS:1, MT:1, and NP:1 license requirement paragraphs
- ECCN 4A090.b: Added the previously missing paragraph to control computers, “electronic assemblies,” and “components” containing ICs, any of which meets or exceeds the limits in 3A090.b
- ECCN 4E001: Removed an incorrect phrase in 4E001.a
- ECCNs 5D002 and 5D992: Corrected the Related Control paragraphs
- ECCNs 5E992 and 5E002: Added “RS” to indicate the regional stability license requirements
CORRECTIONS FOR SME IFR
For SME IFR, BIS also corrected several ECCNs for consistency and accuracy. For example, the Correction Rules make corrections to ECCN 3B001 to adjust certain scientific units and values for consistency and accuracy, such as changing pressure units from kPa to Pa and correcting the representation of megapascals (MPa).
The updates also address the scope of items subject to national security and regional stability controls, specifically adding details about mask “substrate blanks” designed for EUV lithography and ensuring they fall under the appropriate control sections of the EAR. ECCN 3B991 made a correction to its heading by removing references to a removed ECCN, which aligns with changes made by the SME IFR.
EAR § 744.23(a)(4) was revised to narrow the exceptions for masks and equipment, ensuring that exceptions are specific and do not unintentionally exempt certain items from control, such as EUV masks in ECCN 3B001.j.
The Correction Rules also address public comments seeking clarification on the application of Section 744.23(a)(4) concerning the incorporation of CCL-listed items into foreign-made items destined for development or production in sensitive areas. BIS clarified that the definition of “production” includes integration—thus covering the incorporation of items—and added a new paragraph to distinguish between direct and indirect exports for development or production, aiming to prevent circumvention of controls intended to restrict support for indigenous development and production of sensitive equipment in specific destinations.
This clarification confirms BIS’s views on the scope of “production” and provides additional details regarding key facts that could impact whether and when the EAR requirements would or could apply.
BIS also clarified responses to public comments regarding a supply chain’s extent and obligations under Section 744.23(a)(4), affirming the requirement for a license where there is “knowledge” of an item’s end use in sensitive developments or productions regardless of the supply chain’s complexity. While not adding to the clarity needed to ensure that organizations understand the depth and scope of their diligence obligations, BIS did emphasize that the definition of “knowledge” remains the same and the obligation to conduct reasonable and adequate diligence, even within a complex supply chain, remains with the organizations dealing with foreign companies and countries.
Additionally, the Correction Rules restructured Section 744.23(d) for clarity, breaking down the license review standards into presumption of denial, presumption of approval, and case-by-case policies. This restructuring aims to improve the understanding and application of the review policies, particularly in distinguishing between different scenarios and entities involved in exports, reexports, and transfers subject to EAR.
RESPONSES TO INDUSTRY QUESTIONS
Overall, BIS provided much-needed clarity on several critical definitions and the scope of regulations. For instance, Topic 45 addresses the requirement for an export license when the exporter knows that the item will be integrated into a foreign-made item, classified under ECCN 3B991, and subsequently sent to a Category 3 item manufacturer in China. BIS noted that, according to Section 744.23(a), in such situation a license is required if, at the time of export, reexport, or transfer, the exporter is aware that the item is intended for a specific destination, use, or end user as outlined in paragraphs (a)(1) to (a)(4). These paragraphs cover various categories and end uses of items, highlighting the comprehensive nature of “production” as defined by the EAR.
Moreover, BIS specified that paragraphs (a)(2) and (a)(3) of Section 744.23 specifically relate to the production of certain ICs, while paragraph (a)(4) focuses on the equipment for producing these circuits. Exporters must now determine whether the end product, incorporating the exported item, is subject to EAR control through the de minimis or foreign-direct product rules. The Correction Rules thus reemphasize the importance of not overlooking information that suggests the exported item may support sensitive end uses in specific destinations, underscoring the importance of an exporter’s “err on the side of caution” approach to export controls.
Additionally, in response to Topic 47, BIS addressed situations where exports are intended for facilities involved in both legacy/mature and advanced-node or where the exporter, as an upstream distributor, cannot fully ascertain the product’s end use. BIS confirmed that a license is required for shipping all items in such cases unless the exporter, reexporter, or transferor can identify which items will not contribute to the “development” or “production” of ICs in Macau or a Country Group D:5 destination. This stance reflects BIS’s stringent measures to prevent the diversion of items to sensitive uses.
INDUSTRY CHALLENGES
The Correction Rules highlight BIS’s expectations for companies to perform due diligence in verifying end-uses and -users. While it places the onus on exporters to make business judgment calls when due diligence results are not definitive, this approach, combined with stricter export requirements and the challenges of conducting due diligence, raises significant questions regarding the standards of reasonableness that BIS may apply to the diligence conducted in international transactions.
Coupled with the difficulty in obtaining information, the opacity of the supply chain overall, and the global reach of that chain, organizations have adjusted their “know your customer” guidance to mitigate risk associated with the existing information gaps. The success of these efforts will be tested when BIS publishes its first enforcement actions related to these diligence efforts.
The frequent updates to the regulations, changes in policy, and repeated revisions and corrections to the semiconductor/supercomputer rule also highlight the haste in implementing regulations without fully assessing their impact, focus, or potential unintended consequences. This rapid regulatory pace has led to multiple amendments to both the AC/S IFR and SME IFR, now in its third iteration for the semiconductor/supercomputer rule, necessitating changes in requirements.
Such a process is not only costly to taxpayers but also breeds inconsistency, making it difficult for businesses to maintain consistent and reasonable compliance and a competitive edge in the international arena. This highlights the importance of a more deliberative regulatory process that considers the far-reaching effects on the industry, ensuring that measures taken in the name of national security do not inadvertently hinder global trade competitiveness.
It is notable that the recent announcement of enhanced enforcement initiatives by Assistant Secretary Axelrod, alongside efforts to rectify inadvertent errors through the Correction Rules’ publication, reflects the administration’s dedication to national security and the stringent enforcement of export controls (as further detailed in the table below). However, balancing the protection of national security with the need for regulatory stability and predictability can enhance the government’s national security objectives and arm organizations with the information needed to conduct reasonable and compliant activities.
For context, the following table highlights the enforcement and related memoranda issued by the US government since 2022.
We will continue to monitor the government’s policies, procedures, regulations, and approach as the situation develops.
OUR THOUGHT LEADERSHIP ON NAVIGATING THE NEW EXPORT MAZE
[1] Bureau of Industry and Security, Department of Commerce, Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections; and Export Controls on Semiconductor Manufacturing Items; Corrections and Clarifications (Apr. 4, 2024).
[2] “Export Controls on Semiconductor Manufacturing Items” (SME IFR) and “Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections” (AC/S IFR). For additional details on the previous rules, please refer to our related thought leadership here and here.
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