Contractors Take Note – Substantially Expanded List of Unverified Entities For Exporting Under EAR
Despite recent political shifts away from globalization, international trade – particularly U.S. exports – will remain a substantial component of the U.S. economy. Companies doing business in the U.S. and overseas must be up to date on U.S. export control regulations. An important component of these regulations are the Export Administration Regulations (“EAR”), which are administered by the Department of Commerce, Bureau of Industry and Security (“BIS”). The EAR covers the export of commercial products that have the potential for dual use—meaning the item has both a commercial and military use—and as such, covers a broad range of products, hardware, software, technical information, and data.
Among the EAR requirements is the Unverified List (“UVL”). An entity listed on the UVL indicates a “red flag” for U.S. companies because the “bona fides” of these foreign recipients cannot be confirmed by the BIS. Specifically, entities end up on the UVL when BIS cannot verify the “legitimacy and reliability relating to the end use and end user of items subject to the EAR,” 15 CFR § 744.16(c), and, as such, BIS cannot confirm the location of the foreign entity or the stated use of a controlled item by that entity. (The UVL does not require any active intent to prevent “end use” verification. Foreign entities that have actively failed to cooperate with BIS end-use check risk ending up on the Entity List which imposes specific licensing requirements in addition to the other provisions of EAR.)
The UVL creates additional responsibilities for any exporter who intends to conduct business with an entity on the UVL. While the UVL does not preclude export activity involving UVL entities, U.S. exporters must comply with heightened requirements, including obtaining an end-use statement whereby the U.S. company verifies the proposed end use of the item to be transferred, and agrees to cooperate with any government requested end-use checks and post-shipment verification. Notably, in such cases, exporters cannot rely on any license exceptions.
It may not be obvious to U.S. companies that they may be dealing with an entity on the UVL given the frenetic pace at which BIS changes the UVL. On May 17, 2018, BIS added thirty-three (33) entities from seven different countries (primarily China and Russia) to the UVL. See EAR Part 744, Supplement 6. The UVL has seen rapid expansion in recent years, as it has been updated five previous times in the last four (4) years, with ninety-seven (97) additions and three (3) removals. The dramatic increase is due to changes to the UVL rules implemented in 2014, which saw BIS essentially start from scratch, removing all entities on the old version of the UVL and restarting with new additions since 2014.
The EAR can be complex and difficult to navigate in practice. Manufacturers who make commercial products sold overseas may unwittingly be subject to the EAR if the goods can be deemed to have a dual use and, thus, fall under the EAR’s list of controlled items. Companies that violate the EAR including the requirements regarding transactions with UVL entities may be subjected to criminal and administrative penalties.
Companies should assess their organization, agents, partners, supply chains, and end users to fully understand the nature of their business, and evaluate whether they may be subject to the export control regulations, including regular reviews of the Consolidated Screening List to determine if they are transacting business with parties subject to export limitations. These assessments are particularly important now given the uptick in enforcement actions by the BIS for EAR violations, particularly those involving Chinese and Russian entities.
Whether your company is conducting an export assessment for the first time or reviewing your existing program, consulting with outside counsel to preserve privilege and assist in navigating this complicated field is recommended. Only after a proper assessment has been completed, and your company understands its risk profile, can you appropriately evaluate a risk mitigation strategy for potential incidents, and implement measures for addressing violations or enforcement actions by the government.