New BIS Guidance Calls for Enhanced Due Diligence of Military End Users in China

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February 11, 2021

The U.S. Department of Commerce has tightened restrictions on exports to China, Russia, and Venezuela to counter the acquisition of U.S. technology for military use. Now, military end users in all three countries are subject to licensing requirements. Identifying military end users requires investigating an entity’s business activities and network of relationships.

 

New export regulations highlight the risk of military end users in China

In 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published new rules regulating the export of dual-use items to China, Russia, and Venezuela. The definition of “military end use” was broadened to cover any item that “supports or contributes to the operation, maintenance, repair, overhaul, refurbishing, development, or production of military items.” In the case of China, BIS also expanded licensing requirements to include “military end user” as well as “military end use.”

 

Identifying military end users requires enhanced due diligence

Determining what qualifies as a military end user can be challenging. In December, BIS published the names of 58 Chinese entities determined to be “military end users.” However, it stresses that the list is “not exhaustive,” and that there may be many more entities that trigger regulatory prohibitions.

A FAQ published by BIS sheds light on the complexity of the new regulations. Military end users include not only “traditional foreign military and related organizations,” but also “any other end user whose activities are intended to support military end uses.” They also cover “state-owned enterprises or other specific entities that develop, produce, maintain, or use military items.”

As for how to determine if an entity meets these criteria, BIS calls for due diligence into both the entity itself — its relationships and business activity — and the relationships and activities of its broader corporate network, including both parents and subordinates.

 

Section 1237 list entities also high risk

Additionally, BIS noted that entities not included on its “military end users” list but part of the Department of Defense’s Section 1237 list warrant the Red Flag under its Export Administration Regulations. Combined with its guidance on parent and subordinate entities, this suggests that any entity owned or controlled by a Section 1237 entity should be subject to enhanced due diligence.

 

Public records can enable due diligence into Chinese end users

These guidelines highlight both the importance and the challenge of conducting adequate due diligence on Chinese partners. An entity might fall under BIS’s expanded definition of “military end user” in a number of ways, including business scope, relationships with China’s armed forces, and even the relationships or activities of its parent or subordinate entities.

Public records can help identify an entity’s business activities and map out its larger network, uncovering hidden military ties to support a risk-based decision to continue doing business with that partner.

On February 24, we will host a live master class, “Understanding China’s Military Civil Fusion Strategy & its Practical Implications for Trade Compliance, Export Controls, and Third Party Risk Management.” Join us to learn more about how to use public records to identify military end users and better understand military-affiliated risk in China.

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