BIS Releases New Rules Updating Restrictions On Advanced Computing Chips, Manufacturing Equipment, And Supercomputing Items To Countries Of Concern – Export Controls & Trade & Investment Sanctions – United States

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On October 17, 2023, the U.S. Department of Commerce Bureau of Industry & Security (“BIS”) released three rules amending the Export Administration Regulations (“EAR”) to strengthen export controls on advanced computing semiconductors and semiconductor manufacturing equipment to arms embargoed countries, including the People’s Republic of China (“China”), and to place certain additional entities in China on BIS’s Entity List. Designed to reinforce BIS’s October 7, 2022, export controls restricting China’s ability to purchase and manufacture certain high-end, dual-use computer chips, BIS’s three new rules make changes to improve the effectiveness and durability of BIS’s existing controls, expand certain licensing requirements to additional countries, and close certain loopholes.

On October 7, 2022, BIS released an interim final rule (“Oct. 7 IFR”), amending the EAR to implement controls on advanced computing integrated circuits (“ICs”), computer commodities that contain such ICs, and certain semiconductor manufacturing items, and to make other EAR changes to implement appropriate related controls, including on certain “U.S. person” activities. The Oct. 7 IFR imposed controls on two sets of items and activities, establishing (1) new Export Control Classification Numbers (“ECCNs”) and end-use controls on certain advanced computing ICs, computer commodities that contain such ICs, and supercomputers; and (2) a new ECCN for certain semiconductor manufacturing equipment (“SME”) and end-use controls related to the “development” and “production” of three types of “advanced-node ICs,” as well as end-use controls on the “development” and “production” of SME.

On October 25, 2023, BIS published an interim final rule (“AC/S IFR”), expanding the scope of the advanced computing controls and related end-use provisions of the Oct. 7 IFR. The AC/S IFR retains the stringent China-wide licensing requirements imposed in the Oct. 7 IFR but also (i) adjusts the parameters that determine whether an advanced computing chip is restricted and (ii) imposes new measures to address circumvention risks.

With respect to the parameter adjustments, the AC/S IFR removes “interconnect bandwidth” as a parameter for identifying restricted computer chips; restricts the export of computer chips if they exceed either the preexisting performance threshold in the Oct. 7 IFR or a new “performance density threshold”; and requires a notification for the export of certain additional computer chips with performance below the restricted threshold. Under the newly-created Notified Advanced Computing (“NAC”) license exception, the U.S. Government will determine within 25 days, following receipt of notification for exports and reexports to Macau and destinations identified as subject to a U.S. arms embargo, whether the transaction may proceed under the NAC license exception or whether a license will be required.

With respect to circumvention prevention, the AC/S IFR amends the EAR to establish a worldwide licensing requirement for export of controlled chips to any company headquartered in any destination subject to a U.S. arms embargo (including China) or Macau, or whose ultimate parent company is headquartered in such destinations; expands licensing requirements for export of advanced chips, with a presumption of denial, to all 22 countries to which the U.S. maintains an arms embargo and Macau; and creates new red flags and due diligence requirements to help foundries assess whether foreign parties are attempting to circumvent BIS’s controls by illicitly fabricating restricted computer chips.

The AC/S IFR also summarizes and addresses public comments received in response to the Oct. 7 IFR related to the advanced computing provisions as well as general comments applicable to all aspects of the Oct. 7 IFR. Importantly, in response to a comment requesting more information on the scope of restricted U.S. person activities, BIS narrowed the scope of § 744.6 of the EAR and clarified the scope of “U.S. person” activities that are covered.

The AC/S IFR is effective on November 17, 2023, and BIS is soliciting public comments on the AC/S IFR to be received by BIS no later than December 18, 2023.

On October 25, 2023, BIS also published an interim final rule (“SME IFR”), amending the EAR by refining the scope of BIS’s SME controls adopted in the Oct. 7 IFR. The SME controls in BIS’s Oct. 7 IFR were imposed to restrict China’s military modernization efforts and degrade China’s ability to violate human rights. On January 18, 2023, BIS imposed the same SME controls implemented on China in the Oct. 7 IFR to Macau, a Special Administrative Region of China, due to the potential risk of diversion of items subject to the EAR from Macau to China.

The SME IFR amends the EAR to implement several important changes from the Oct. 7 IFR, including imposing controls on additional types of SME, refining the “U.S. persons” restrictions and codifying existing agency guidance, and expanding license requirements for SME to apply beyond China and Macau to 21 other countries for which the U.S. maintains an arms embargo. The SME IFR also addresses public comments received in response to the Oct. 7 IFR specifically related to SMEs and the production of advanced-node ICs. One interesting response from BIS included in the SME IFR clarifies that the “U.S. person” control under § 744.6 of the EAR is, in fact, triggered by “knowledge” of the violation.

The SME IFR is effective on November 17, 2023, and BIS is again soliciting public comments on the SME IFR to be received by BIS no later than December 18, 2023.

On October 19, 2023, BIS published a final rule adding 13 Chinese entities to the Entity List following a determination by the U.S. Government that such entities are acting contrary to the national security or foreign policy interests of the U.S. BIS determined that the 13 entities located in China are involved in the development of advanced computing ICs that could be used to provide artificial intelligence (“AI”) capabilities to further development of weapons of mass destruction, advanced weapons systems, and high-tech surveillance applications that create U.S. national security concerns.

For all these recent additions to the Entity List, BIS imposes a license requirement for all items subject to the EAR, which will be reviewed under a policy of a presumption of denial. Moreover, these entities are also given a footnote 4 designation, which means that these entities are also subject to certain restrictions on foreign-produced items made with U.S. technology. In short, foundries producing computer chips for these listed parties will require a license from BIS to send such chips to these entities or parties acting on their behalf.

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Torres Trade Law will continue to monitor the latest developments from BIS, including any updates to U.S. export controls related to advanced computing, AI, semiconductor manufacturing, or other cutting-edge technologies. If you have questions regarding how BIS’s new rules might affect your business operations or any of the above, please feel free to reach out to the attorneys at Torres Trade Law. Parties interested in submitting public comments in response to BIS’s AC/S IFR or SME IFR must do so by the end of the comment period on December 18, 2023. For assistance with preparing public comments for BIS, please contact Torres Trade Law.

Footnotes

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