Commerce Imposes Sweeping Semiconductor Export Controls on China and Changes to Unverified List Enforcement Policy

October 12, 2022 – On October 7, 2022, the U.S. Department of Commerce’s (“Commerce”) Bureau of Industry and Security (“BIS”) made available for public inspection two significant new export control rules, both aimed at controlling the flow of technology to China. These new rules are the most restrictive U.S. export control measures against Chinese entities since the foreign direct product (“FDP”) rule targeting Huawei, and significantly impact a broad range of Chinese technology companies, especially the semiconductor and artificial intelligence industries, as well as their business partners and suppliers across the globe.

The first, an interim final rule, introduces a set of new controls governing the export of certain advanced computing and semiconductor manufacturing items to China and related activities (the “Semiconductor and FDP Rule”). The Semiconductor and FDP Rule will be published in the Federal Register on October 13, 2022, but certain of its provisions take effect on successive dates, specifically October 7, October 12, and October 21, 2022. BIS will accept public comment on the Semiconductor and FDP Rule for 60 days following its publication. The Semiconductor and FDP Rule is available here.

The second rule clarifies that the circumstances under which BIS may add foreign companies to the Entity List, thereby imposing stringent export controls, includes certain situations in which companies were previously added to the Unverified List (“UVL”), which imposes lesser controls (the “UVL Rule”). The UVL Rule also makes certain additions to and removals from the UVL. The UVL Rule will be published in the Federal Register on October 13, 2022, but took effect October 7, 2022. It is available here. A related new BIS policy Memorandum is available here.

Background

U.S. government officials in both the executive and legislative branches, and from both major political parties, have in recent years sought to stem the flow of advanced technology to China, highlighting the security risks posed by China’s “civil-military fusion,” i.e., the diversion of dual-use technologies to military and other destabilizing uses. The Semiconductor and FDP Rule emerges from sustained U.S. government focus on preventing advanced U.S. computer technology from diversion to such uses, and builds on numerous previous efforts, for example the restrictions placed on exports to Huawei. Relatedly, the UVL Rule represents a response by BIS to apparent difficulties conducting certain end-use checks on location at companies in China, in part from reported persistent refusals by the Chinese government to timely schedule such checks.  

The Semiconductor and FDP Rule

The controls introduced by the new Semiconductor and FDP Rule are summarized as follows:

New Regional Stability (“RS”) Controls at § 742.6(a)(6) of the Export Administration Regulations (“EAR”) (Effective in part October 7, 2022, and in part October 12, 2022)

The Semiconductor and FDP Rule establishes a new RS control at § 742.6(a)(6), which imposes a license requirement for exports, reexports and transfers (in-country) to China and applies to:

• Newly created Export Control Classification Numbers (“ECCNs”) 3A090 (certain high-performance integrated circuits (“ICs”), see more below) and 4A090 (certain items containing high performance ICs, see more below), and associated software and technology controlled under ECCNs 3D001, 3E001, 4D090, and 4E001 (effective October 21, 2022).
• Newly created ECCN 3B090 (certain advanced semiconductor manufacturing equipment, see more below) and related software and technology in 3D001 and 3E001 (effective October 7, 2022).
• Mass market encryption items controlled under 5A992 and 5D992 when those items have performance that meets or exceeds the parameters of ECCNs 3A090 or 4A090.

In addition, the RS control imposes a license requirement for the export from China to any destination worldwide of technology for the design, development, or production of advanced computer chips (i.e., 3E001 for 3A090) which has been developed by an entity headquartered in China, is the direct product of certain software subject to the EAR and is for the production of certain advanced computing integrated circuits and computers or assemblies containing them.

There will be a license review policy of a presumption of denial for most items subject to the RS control, but a case-by-case license review policy for semiconductor manufacturing items destined to end users located in China that are headquartered in the United States or in a country in Country Group A:5 or A:6). The license requirement does not apply to deemed exports.

New Export Controls on Advanced Computing Chips and Circuits (Effective October 7, 2022)

The Semiconductor and FDP Rule revises supplement no. 1 to § 774 (the “Commerce Control List”) by adding the following new ECCNs:

• Newly created ECCN 3A090 for specified high-performance ICs. Associated software and technology will be controlled under ECCNs 3D001 and 3E001. Items controlled under these ECCNs are subject to RS controls for exports to, reexports to, and transfers in China, with only limited license exceptions available.
• Newly created ECCN 4A090 for computers, electronic assemblies, and components containing ICs in ECCN 3A090. Associated software and technology will be controlled under ECCNs 4D091 and 4E001. Items controlled under these ECCNs are subject to RS controls for exports to, reexports to, and transfers in China, with only limited license exceptions available.
• Newly created ECCN 3B090 for certain advanced semiconductor manufacturing equipment. Associated software and technology will be controlled under ECCNs 3D001 and 3E001. Items subject to these ECCNs are subject to RS and anti-terrorism (“AT”) controls.

The Semiconductor and FDP Rule also revises ECCN 3A991 to add new paragraphs for specified high performance ICs and revises ECCN 4A994 to include a catchall paragraph for computers not elsewhere specified. Both of these ECCNs are subject to AT controls.

New End-Use Controls for Supercomputers (Effective in part October 7, 2022, and in part October 21, 2022)

Effective October 21, 2022, the Semiconductor and FDP Rule introduces the following new definition for “Supercomputer” in § 772.1:

• A computing “system” having a collective maximum theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops within a 41,600 ft³ or smaller envelope.
  • Note 1 to “Supercomputer”: The 41,600 ft³ envelope corresponds, for example, to a 4x4x6.5 ft rack size and therefore 6,400 ft² of floor space. The envelope may include empty floor space between racks as well as adjacent floors for multi-floor systems.
  • Note 2 to “Supercomputer”: Typically, a ‘supercomputer’ is a high-performance multirack system having thousands of closely coupled compute cores connected in parallel with networking technology and having a high peak power capacity requiring cooling elements. They are used for computationally intensive tasks including scientific and engineering work. Supercomputers may include shared memory, distributed memory, or a combination of both.

Effective October 7, 2022, the Semiconductor and FDP Rule introduces a new § 744.23 which requires an end-use based license for any item that is:

• Subject to the EAR when there is knowledge that it will be used in the development or production of ICs at a semiconductor fabrication facility in China that fabricates ICs meeting the following criteria (collectively, the “IC Criteria”):
  • Logic integrated circuits using a non-planar architecture or with a “production” technology node of 16/14 nanometers or less;
  • NOT AND (“NAND”) memory integrated circuits with 128 layers or more; or
  • Dynamic random-access memory (DRAM) integrated circuits using a “production” technology node of 18 nanometer half-pitch or less.
• Subject to the EAR and classified under product groups B, C, D, or E in Category 3 of the CCL when there is knowledge it will be used in the development or production of ICs at a semiconductor fabrication facility in China, regardless of knowledge of whether such facility fabricates ICs meeting the IC criteria above.
• Subject to the EAR when there is knowledge it will be used in the development or production of parts or components or equipment classified under ECCNs 3B001, 3B002, 3B090, 3B611, 3B991, or 3B992.

Effective October 21, 2022, § 744.23 also introduces a license requirement for:

• ICs classified under ECCN 3A001, 3A991, 4A994, 5A002, 5A004, or 5A992, or
• a computer, electronic assembly, or component classified under ECCN 4A003, 4A004, 4A994, 5A002, 5A004, or 5A992,
  • when there is knowledge that the item will be used for, or incorporated into an item used for the development, production, use, operation, installation, maintenance, repair, overhaul, or refurbishing of a supercomputer in China, or be incorporated into a component or equipment that will be used in a supercomputer in China.

Section 744.23 also includes “is informed” authority for BIS, i.e., authority to inform persons either individually or through amendment to the EAR that a license is required for a specific export, reexport, or transfer (in-country) of any item subject to the EAR to a certain end-user.

No license exceptions are available for the prohibitions in § 744.23. There is a presumption of denial for applications to export, reexport, or transfer (in-country) most items subject to the prohibitions of § 744.23, but there is a case-by-case license review policy for some IC manufacturing items destined to end users located in China that are headquartered in the United States or in a country in Country Group A:5 or A:6 (consisting of the UK, the EU, and other U.S. allied countries).

Restriction on U.S. Persons Engaging in Activity to Support the Development or Production of Certain ICs (Effective October 12, 2022)

The Semiconductor and FDP Rule revises § 744.6 by adding a new paragraph at § 744.6(c) to inform U.S. persons that a license is required for the following activities:

• Shipping, transmitting, or transferring, or facilitating the same, or servicing items not subject to the EAR when there is knowledge they will be used in the development or production of ICs at a semiconductor fabrication facility in China that fabricates ICs meeting the IC criteria, i.e.,
  • Logic ICs using a non-planar architecture or with a “production” technology node of 16/14 nanometers or less;
  • NOT-AND (NAND) memory integrated circuits with 128 layers or more; or
  • Dynamic random-access memory (DRAM) integrated circuits using a “production” technology node of 18 nanometer half-pitch or less.
• Shipping, transmitting, or transferring, or facilitating the same, or servicing items not subject to the EAR described in product groups B, C, D, or E of Category 3 of the CCL when there is knowledge they will be used in the development or production of ICs at a semiconductor fabrication facility in China, regardless of knowledge of whether such facility fabricates ICs meeting the IC Criteria above.
• Shipping, transmitting, or transferring, or facilitating the same, or servicing items not subject to the EAR described by ECCNs 3B090, 3D001 (for 3B090), or 3E001 (for 3B090), regardless of end use or end user. Note there is no knowledge requirement.

No license exceptions are available for the prohibitions in § 744.6(c). A presumption of denial applies to license applications to export, reexport, or transfer items subject to the prohibitions of § 744.6(c), but there is a case-by-case license review policy for end users in China that are headquartered in the United States or in a country in Country Group A:5 or A:6.

Revising the Entity List Foreign Direct Product ("FDP") Rule (Effective October 21, 2022)

The Semiconductor and FDP Rule revises the Entity List FDP rule at § 734.9(e), which provides for the application of the EAR to foreign-made products when certain Entity List entities are involved in a transaction. In effect, this change extends the version of the FDP that previously applied to Huawei and its subsidiaries, which are designated with “footnote 1” on the Entity List, to other Entity List parties with a new “footnote 4” designation. Section 734.9(e)(2) now provides that a foreign-produced item is subject to the EAR if it meets a specified product scope and destination scope.

A foreign-produced item meets the product scope if the item is a direct product of technology or software subject to the EAR and classified under specified ECCNs, or the product of a plant or plant component that is the direct product of such technology or software.

A foreign-produced item meets the destination scope if:

• The item will be incorporated into any part, component, or equipment produced, purchased, or ordered by an Entity List entity designated with new footnote 4, or
• An Entity List entity designated with footnote 4 is party to any transaction involving the item.

Notably, the same ECCNs triggering application of the Entity List FDP Rule to “footnote 1” entities (i.e., Huawei and its listed subsidiaries) also apply with respect to footnote 4 entities; in addition, encryption technology under ECCN 5E002 will also trigger application of the Entity List FDP Rule to footnote 4 entities. Thus, the ECCNs applicable to footnote 4 parties include 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E991, and 5E002.

The Semiconductor and FDP Rule also revises the Entity List to designate 28 entities located in China that were previously added to the Entity List between 2015 and 2021 as footnote 4 entities. The Semiconductor and FDP Rule states that certain of these entities are “developing supercomputers believed to be used in nuclear explosive activities” or are developing and producing ICs and are otherwise involved with weapons of mass destruction and military end uses and/or users.

Advanced Computing FDP Rule (Effective October 21, 2022)

The Semiconductor and FDP Rule adds § 734.9(h), which provides that a foreign-produced item is subject to the EAR if it meets a specified product scope and destination scope.

A foreign-produced item meets the product scope if it is the direct product of technology or software subject to the EAR and classified under specified ECCNs (the same list that applies to footnote 4 parties under the Entity List FDP plus new ECCN 4D090), or the product of a plant or plant component that is the direct product of such technology or software, and the item is specified in 3A090, 3E001 (for 3A090), 4A090, or 4E001 (for 4A090), or is an IC meeting the performance parameters of ECCN 3A090 or 4A090.

A foreign-produced item meets the destination scope if there is knowledge that:

• The item is destined for China or will be incorporated into any item not EAR99 and destined for China; or
• The item is technology developed by an entity headquartered in China for the production of a mask or IC wafer or die.

The Semiconductor and FDP Rule adds § 734.9(h)(3) containing a model certificate to assist in determining whether items being exported, reexported, or transferred are subject to the EAR based on the Advanced Computing FDP. Use of the certificate is not required but may help resolve potential red flags regarding whether an item is subject to the EAR based on § 734.9(h). The Semiconductor and FDP Rule states that “BIS does not view use of this certificate alone to be a comprehensive due diligence process.” In practice, this may mean that reliance on the certificate may establish a lack of “knowledge” in the absence of other red flags, but BIS may view any information suggesting the certification is incorrect to require additional diligence.

Supercomputer FDP Rule (Effective October 21, 2022)

The Semiconductor and FDP Rule adds § 734.9(i) which provides that a foreign-produced item is subject to the EAR if it meets a specified product scope and destination scope.

A foreign-produced item meets the product scope if it is the direct product of technology or software subject to the EAR and classified under certain ECCNs (the same list that applies to footnote 4 parties under the Entity List FDP), or the product of a plant or plant component that is itself a direct product of such technology or software.

A foreign-produced item meets the destination scope if there is knowledge that the item will be used in the development, production, operation, installation, maintenance, repair, overhaul, or refurbishing of a supercomputer or incorporated into any part or component that will be used in a supercomputer in China.

Temporary General License ("TGL") (Effective October 21, 2022, through April 7, 2023)

The Semiconductor and FDP Rule establishes a TGL in new paragraph (d) of supplement no. 1 to § 736. The TGL allows exports, reexports or transfers destined to or within China by companies not headquartered in Country Groups D:1 or D:5 or E to continue or to engage in integration, assembly, inspection, quality assurance, and distribution of the following:

• Items covered by ECCN 3A090, 4A090, and associated software and technology in ECCN 3D001, 3E001, 4D090, or 4E001.
• Any item that is a computer, IC, electronic assembly, or component and associated software and technology that meets or exceeds the performance parameters of ECCN 3A090 or 4A090.

However, notably, the TGL does not authorize the export, reexport, in-country transfer, or export from abroad to “end-users” or “ultimate consignees” in China.

The TGL is intended to avoid disruption of supply chains for covered items that are ultimately destined to customers outside of China and does not authorize the export, reexport, or transfer to ultimate consignees or end users in China. Records of the name of the entity receiving the item and the complete physical address of where the item is destined in China and the location of that company’s headquarters must be retained.

Savings Clause

Shipments of items removed from license exception eligibility or eligibility for export, reexport or transfer without a license as a result of the Semiconductor and FDP Rule that were on dock for loading, on lighter, laden aboard an exporting carrier, or enroute aboard a carrier to a port of export, on October 7, 2022, may continue to the destination under the previous license exception eligibility or without a license so long as they have been exported, reexported or transferred before November 7, 2022.

Deemed exports and reexports of technology and software related to ECCNs 3A991.p and 4A994.l that previously did not require a license, but now require a license because of the controls implemented by the Semiconductor and FDP Rule, will only require licenses if the technology or software release exceeds the scope of the technology or software that the foreign national already had access to prior to the implementation of controls in the Semiconductor and FDP Rule.

BIS will accept public comments on the Semiconductor and FDP Rule for 60 days following its publication in the Federal Register, or until December 12, 2022.

The UVL Rule

The relevant standards for, and changes implemented by, the UVL Rule, as well as pertinent details in a related new BIS enforcement policy memo are summarized below:

Relevant Legal Standards

§ 744.11(b) provides BIS the authority to add entities to the Entity List when “there is reasonable cause to believe, based on specific and articulable facts, that the entity has been involved, is involved, or poses a significant risk of being or becoming involved in activities that are contrary to the national security or foreign policy interests of the United States . . . .”  For entities added to the Entity List, BIS may impose specific license requirements, limitations on availability of license exceptions, and set license application review policy separate from and in addition to the requirements, limitations, and policies set out elsewhere in the EAR.

Section 744.15(c) provides BIS the authority to add entities to the UVL when BIS “cannot verify the bona fides (i.e., the legitimacy and reliability relating to the end use and end user of items subject to the EAR) of such persons because an end-use check . . . cannot be completed satisfactorily for reasons outside of the U.S. Government’s control.”  Under § 740.2(a)(17), the use of license exceptions for exports, reexports, and transfers is suspended for transactions involving an entity on the UVL. In addition, pursuant to § 744.15(b), where a transaction with an entity on the UVL involves an item subject to the EAR but not subject to a license requirement, the exporter, re-exporter, or transferor must obtain from the listed entity a “UVL statement” by which, among other things, it agrees not to use the item for any use prohibited by the EAR.

Changes to § 744.11

The UVL Rule revises § 744.11(b) to clarify that “a sustained lack of cooperation by a host government authority that prevents an end-use check from being conducted may constitute a basis for adding a party to the Entity List.”  The UVL Rule supports this revision by stating that:

• If BIS cannot conduct timely end-use checks, its ability “to prevent diversion and resolve concerns about potentially problematic end uses and users is negatively impacted.”
• The “sustained and deliberate prevention of an end-use check by a foreign government is therefore contrary to the national security and foreign policy interests of the United States” (i.e., meets Entity List listing criteria).
• Failure to implement a timely end-use check on an entity could lead to a determination that an entity is “at significant risk of involvement in activities contrary to U.S. national security or foreign policy interests.”

The UVL Rule also revises the heading and certain introductory text in § 744.11 to refer to entities that are “at significant risk” of acting contrary to the foreign policy and national security interests of the United States.

Changes to the UVL

The UVL Rule adds 31 persons to the UVL, including Yangtze Memory Technology Company (YMTC), which has been subject to recent scrutiny by U.S. lawmakers critical of business ties between the company and Apple, Inc. Exports, reexports, and in-country transfers to these companies are not prohibited under the EAR but do require heightened recordkeeping and documentation requirements and are subject to limited available license exceptions. The rule also removes nine persons from the UVL. All are Chinese companies. The UVL Rule does not provide details on how issues with foreign government interference in carrying out timely end-use checks may have played a role in the changes.

New Enforcement Policy (Effective October 7, 2022)

On October 7, 2022, BIS published an enforcement policy memo setting out a new two-step policy to address instances in which a foreign government prevents BIS from accomplishing an end-use check. The memo provides that:

• If 60 days pass without a requested check being conducted, BIS will initiate the process for adding a foreign party to the UVL.
• If 60 days pass after a foreign party has been added to the UVL due to a foreign government’s prevention of a timely end-use check, BIS will initiate the process to have the foreign party moved from the UVL to the Entity List. Notably, this second 60-day clock for such parties on the UVL as of October 7, 2022, began to run effective October 7, 2022.
• Where BIS determines that extenuating circumstances justify the foreign government’s inability to ensure an end-use check is conducted within the relevant 60-day period, BIS may extend the deadline for successful completion of the check.
• Upon successful completion of an end-use check with favorable results, BIS will initiate the process for removing the foreign party from the UVL or Entity List, depending on where they are listed when the end-use check is conducted.

Conclusion

The increased controls in the Semiconductor and FDP Rule have been described as the “broadest export controls issued in a decade.” They are far broader in scope than the earlier generation of rules targeting Huawei, and will significantly affect dozens of Chinese companies as well as their supply chains, which stretch around the world, with a predominant dependency on the United States. All impacted parties should familiarize themselves with the relevant changes as soon as possible and determine the applicability of the new restrictions to their business. The UVL Rule and BIS’s associated new policies also pose significant potential challenges to Chinese companies undergoing BIS end use checks and their international suppliers, and should be reviewed carefully to minimize the risk of detrimental impact from a UVL or Entity List listing.