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Please use the attached public comment and delete the similar one uploaded earlier. (The difference is only to address typos and minor edits.) Uploaded to: https://www.regulations.gov/commenton/BIS-2023-0016-0023 Public Comment about BIS’s Statements in the Preamble that Restructuring a Transaction to “Avoid” an EAR Licensing Requirement Could be a Violation of the EAR Ref: Comments on 89 Fed. Reg. 23876 (April 4, 2024); RIN 0694-AJ23; BIS-2023-0016 April 29, 2024 The purpose of this comment is to express concern about statements the Bureau of Industry and Security (BIS) made in the preamble to this corrections Interim Final Rule (Corrections IFR) that suggest BIS believes that restructuring a transaction to “avoid” an EAR licensing requirement could be a violation of the Export Administration Regulations (EAR). Such a BIS position would be beyond BIS’s statutory and regulatory authorities, which prohibit “evading” an EAR requirement, but not “avoiding” one. 50 USC 4819(a)(2)(G) and 15 CFR § 764.2(h). Also, unlike all sanctions regulations administered by the Office of Foreign Assets Controls (OFAC) and contrary to the suggestion in the preamble, the EAR do not contain a general prohibition on “facilitating” a legal transaction by a foreign person overseas if it would have been illegal if engaged in directly by the US person or with respect to an item subject to the EAR. See, e.g., 31 CFR § 560.208 and § 510.211. This conclusion is reinforced by the fact that that the EAR contain only two specific prohibitions on “facilitating” an activity. The first is in EAR § 744.6(b)(6)(iii), which prohibits US persons from “facilitating” the shipment, transmission, or transfer (in-country) of an item not subject to the EAR when there is knowledge that it would support the development, production, or use of nuclear explosive devices, missiles, chemical or biological weapons, whole plants to make chemical weapons precursors, or military-intelligence end uses or end users. The second is in EAR § 764.2(e), which prohibits conducting negotiations to “facilitate” activities with respect to any item when there is knowledge that a violation of the EAR has occurred, is about to occur, or intended to occur in connection with the item. |persons from “facilitating” the shipment, transmission, or transfer (in-country) of an item not subject to| |the EAR when there is knowledge that it would support the development, production, or use of nuclear| |explosive devices, missiles, chemical or biological weapons, whole plants to make chemical weapons| |precursors, or military-intelligence end uses or end users. The second is in EAR § 764.2(e), which| |prohibits conducting negotiations to “facilitate” activities with respect to any item when there is| |knowledge that a violation of the EAR has occurred, is about to occur, or intended to occur in| |connection with the item.| If BIS wants to make the unlicensed facilitation of otherwise legal transactions illegal under the EAR, then it can only address this policy objective through a proposed change to EAR § 764.2 with a chance for public comment. It cannot do so through commentary in the preamble of a rule on a different topic. If BIS’s “avoid”-related comments were only references to already-existing sections 744.6(b)(6)(iii) and 764.2(e), then BIS should make that point clear in its response to public comments on the IFR. Otherwise, a BIS position that structuring transactions or taking actions to “avoid” an EAR obligation is or could be illegal is not based on any existing regulatory authority. Moreover, taking such a position would inject considerable uncertainty into ordinary compliance and business planning efforts worldwide. Companies all over the world make decisions daily about which items to ship where, and where to develop and produce other items. Those decisions are routinely influenced by a desire not to be limited by export control obligations or even to run the risk of a possible violation. Contrary to such decisions being illegal, they are made to ensure that a violation of the EAR does not occur. They are meant to ensure compliance with the EAR. They are thus the opposite of the EAR § 764.2(e) prohibitions in that they are deliberately taken with knowledge that the transaction would not trigger an EAR licensing requirement. Companies, for example, may decide to manufacture items otherwise subject to unilateral US controls outside the United States that are not “subject to the EAR” because the items (i) are foreign produced; 1 (ii) do not contain more than a de minimis amount of controlled content; and (iii) are not subject to one of the EAR’s foreign direct product rules. They make such decisions because the EAR’s jurisdictional provision, which is in EAR § 734.3, makes it clear that there are only four ways in which an item could be “subject to the EAR.” The first is that the item is in the United States or moving through it. EAR § 734.3(a)(1). The second is that the item is US origin. EAR § 734.3(a)(2). The third is that the item is a foreign-made item that contains more than a de minimis amount of controlled content. EAR § 734.3(a)(3). The fourth is that the foreign-produced item is subject to one of the now ten foreign direct product rules described in EAR section 734.9. EAR §§ 734.3(a)(4) and (a)(5). Indeed, EAR § 734.2(a)(1) states that “items and activities that are not subject to the EAR are outside the regulatory jurisdiction of the EAR and are not affected by these regulations.” There is nothing in the EAR that states or suggests that producing and shipping a type of a foreign-made item outside the United States that could have been or was once produced in the United States are violations of the EAR. If the foreign- produced item outside the United States does not have more than a de minimis amount of controlled content and is not subject to a foreign direct product rule, then it is not subject to the EAR. If it does or is, then it is subject to the EAR. The issue is binary. The EAR also do not prohibit decisions to deliberately produce or purchase less capable items that are below control thresholds in the Commerce Control List (CCL) to not trigger licensing obligations when shipping the item. Indeed, the CCL contains thousands of specific technical parameters BIS and its interagency and regime partners have developed over decades. If BIS does not like that a particular item can be legally shipped without a license because it is just below a regulatory control threshold, then BIS must change the control parameter in the CCL rather than forcing exporters to guess which exports of items not on the CCL could bring enforcement attention. BIS does not have the discretion to change the meaning of the EAR provisions through any means other than the formal rulemaking process required by the Export Control Reform Act of 2018 (ECRA). The EAR also do not prohibit a foreign company from deliberately designing out all US content or US person involvement to ensure that extraterritorial EAR requirements do not apply. Such “de-risking” decisions are a normal and ordinary part of foreign company compliance programs to ensure that they do not violate the EAR. Similarly, the EAR do not prohibit a foreign company from deliberately making foreign-produced items with less than a de minimis amount of controlled content. If BIS believes, for example, that a foreign-produced product with 20% US-origin controlled content should be subject to the EAR when the rule is that it is controlled with more than 25% controlled content, then BIS must amend the EAR via a regular order rulemaking process to make it so rather than forcing companies to wonder whether a deliberate decision to not purchase more US-origin controlled content could result in an investigation. Also, if BIS does not like the policy implications of a foreign company’s designing out all US-origin content and all US person involvement to ensure that its products are not subject to any export controls, then it should work harder to convince other countries to impose the same controls. To eliminate unnecessary compliance uncertainty and regulatory burden, BIS needs to state clearly and convincingly that it is normal and expected for companies to engage in good-faith efforts to ensure that they do not violate the EAR by, for example, “avoiding” the shipment of items subject to EAR licensing requirements. In other words, BIS should resolve any ambiguity this preamble has created by stating that deliberately engaging in an activity known to not be subject to an EAR licensing obligation cannot somehow be a violation of the EAR. BIS should then also make it clear that “evading” EAR licensing obligations, such as though engaging in deception to make an illegal transaction appear to be legal, is and has always been illegal. In other words, we ask BIS to confirm that if one knows that a transaction would be legal, then it cannot 2 somehow result in compliance exposure under the EAR. If one knows that a transaction would be illegal, then it would. Without BIS’s confirming this truism, the meaning of “knowledge” in the EAR is lost. In addition, it will be impossible for those who want to comply with the EAR to know with certainty whether any particular transaction not involving an item subject to the EAR or a controlled US person activity would or would not be seen by BIS as a violation. Most companies that routinely engage in cross-border transactions have inserted rigorous compliance planning into their regular business activities. This is a method of ensuring compliance that has been codified in both law and behavior in the US for over 30 years since the concept of “informed compliance” was introduced by the Customs Modernization Act of 1993. This policy instructed the importing community that it is responsible to understand (and be informed of) the regulations with which they are obligated to comply. The exporting community has always been able to apply a similar standard of “knowledge” of the EAR as they plan their global manufacturing and sales. With the obfuscated language BIS inserted into the Corrections IFR, if left uncorrected, the agency could nullify a well-known and effective method for companies to manage their own compliance. As noted above, if BIS intends to change the way companies comply with the EAR, it must do so by amending the regulations via the rulemaking process as stipulated in ECRA. I. Background Traditionally, BIS and the EAR have distinguished between “evasion” of the EAR’s licensing requirements, which is prohibited, and “avoidance” of such requirements to achieve compliance, which is permissible. This is found most recently in ECRA, which states that “[n]o person may engage in any transaction or take any other action with intent to evade the provisions of this title, the Export Administration Regulations, or any order, license, or authorization issued thereunder.” 50 USC § 4819(a)(2)(G). (emphasis supplied). The EAR mirror this statutory provision in section 7642(h) -- “Evasion. No person may engage in any transaction or take any other action with intent to evade the provisions of ECRA, the EAR, or any order, license or authorization issued thereunder.” (emphasis supplied). The Corrections IFR, however, included certain responses to comments that could be read to suggest BIS may seek to depart from its historical distinction and expand the scope of the EAR’s jurisdiction beyond the scope of this statutory language to prohibit activities that “avoid” the EAR’s licensing requirements, e.g., taking good faith steps to change one’s supply chain in order to comply with the EAR or otherwise take the transaction outside of EAR jurisdiction. Specifically, BIS referenced “avoidance” of EAR license requirements four times in the Correction IFR: • In response to Topic 45, BIS stated “exporters may not self-blind or disregard “knowledge” that the transaction is structured to avoid a license requirement. For example, an exporter may not ignore readily available information that the customer will integrate the exported item into an item destined for Macau or a Country Group D:5 destination for the production of equipment and items specified in § 744.23(a)(4)(i).” 89 Fed. Reg. 23876, 23881 (Apr. 4, 2024) (emphasis supplied). • In response to Topic 46, BIS stated “[i]n any case, the reexporter or transferor must separately assess whether a license would be required to reexport or transfer (in-country) the foreign-made item under § 734.4 (De Minimis Rule), including for items ineligible for de minimis under § 734.4(a), or other provisions of the EAR. However, if an OEM restructures its supply chain to avoid a license requirement, then a license would still be required under § 744.23(a)(2), without which such restructuring indicates an attempt to evade or otherwise violate the EAR.” Id. 3 In addition, unlike the EAR, all OFAC sanctions programs prohibit “facilitation” of a transaction that would be prohibited by US sanctions if conducted directly by a US person.23 OFAC has historically interpreted this term to include situations when a US person “assists” or “supports” a non-US person in transactions involving sanctioned countries or persons. This means that that US persons, for example, may not participate in decision-making, approvals, providing insurance in connection with an activity prohibited by sanctions regulations. US persons also may not alter their operating policies or those of their foreign affiliates to facilitate activities or transactions involving sanctioned countries or persons. US persons are also prohibited from referring to foreign persons business opportunities involving sanctioned countries or individuals to which the US person could not respond directly. The EAR do not contain any broad OFAC-like prohibitions on the facilitation of otherwise legal transactions if conducted by a US person or involving an item subject to the EAR. Rather, there are only two references to prohibited “facilitations” in the EAR and they support the point of this comment. First, EAR § 744.6(b)(6)(iii) prohibits US persons from “facilitating” the shipment, transmission, or transfer (in-country) of an item not subject to the EAR when there is knowledge that one of the end uses or end users described in 744.6(b)(1) through (b)(5) would be involved. These subsections, in essence, prohibit US persons from “supporting” the development, production, or use of nuclear explosive devices, missiles, chemical or biological weapons, whole plants to make chemical weapons precursors, or military-intelligence end uses or end users. This “facilitation” prohibition does not apply to any other EAR provision. Indeed, when BIS amended in October 2022 the section 744.6 controls to apply them to support for the development or production in China of advanced node semiconductors and specific types of semiconductor production equipment, it explicitly defined and limited the scope of covered “support” activities. That is, instead of generally prohibiting any kind of “facilitation” of the development or production of advanced node semiconductors in China, BIS limited the controlled activities only to “authoriz[ing] the shipment, transmittal, or transfer” of items, “conduct[ing] the delivery” of items; or “servic[ing]” covered items.24 |transfer (in-country) of an item not subject to the EAR when there is knowledge that one of the end uses| |or end users described in 744.6(b)(1) through (b)(5) would be involved. These subsections, in essence,| |prohibit US persons from “supporting” the development, production, or use of nuclear explosive| |devices, missiles, chemical or biological weapons, whole plants to make chemical weapons precursors,| |or military-intelligence end uses or end users. This “facilitation” prohibition does not apply to any| |other EAR provision. Indeed, when BIS amended in October 2022 the section 744.6 controls to apply| |them to support for the development or production in China of advanced node semiconductors and| |specific types of semiconductor production equipment, it explicitly defined and limited the scope of| |covered “support” activities. That is, instead of generally prohibiting any kind of “facilitation” of the| |development or production of advanced node semiconductors in China, BIS limited the controlled| |activities only to “authoriz[ing] the shipment, transmittal, or transfer” of items, “conduct[ing] the| |delivery” of items; or “servic[ing]” covered items.24| |The second reference is in EAR § 764.2(e), which prohibits conducting negotiations to “facilitate”| |activities with respect to any item when there is knowledge that a violation of the EAR has occurred, is| |about to occur, or intended to occur in connection with the item. Longstanding case law, BIS practice,| |and regulatory application of similar concepts have concluded that “avoiding” a regulatory obligation is| |exactly the opposite of EAR section 764.2(e) in that it constitutes the taking an action knowing that the| |transaction is not illegal.| The second reference is in EAR § 764.2(e), which prohibits conducting negotiations to “facilitate” activities with respect to any item when there is knowledge that a violation of the EAR has occurred, is about to occur, or intended to occur in connection with the item. Longstanding case law, BIS practice, and regulatory application of similar concepts have concluded that “avoiding” a regulatory obligation is exactly the opposite of EAR section 764.2(e) in that it constitutes the taking an action knowing that the transaction is not illegal. If BIS wants to make the unlicensed facilitation of otherwise legal transactions illegal under the EAR, then it can only address this policy objective through a proposed change to EAR § 764.2 with a chance for public comment. It cannot do so through commentary in the preamble of a rule on a different topic. If BIS’s “avoid”-related comments were only references to already-existing sections 744.6(b)(6)(iii) and 764.2(e), then BIS should make that point clear in its response to public comments on the IFR. recognized that ‘evade’ can have a slightly more nefarious connotation than ‘avoid’ in some contexts.” Id. at 125 n.1 (citations omitted). Cf. SUPERVALU, Inc. v. Bd. of Trs., 500 F.3d 334, 341 (3d Cir. 2007) (interpreting the ordinary meaning of the clause “evade or avoid liability” in the context of an ERISA claim and explaining that “[t]he verb ‘avoid’ means ‘to stay clear of’ or ‘to keep from happening’ and is synonymous with escape,” while “[t]he verb ‘evade’ means ‘to escape or avoid by cleverness or deceit’ or ‘to fail to make a payment of’” (internal brackets omitted) (quoting Am. Heritage Dictionary 128, 634 (3d ed. 1992)). 23 See, e.g., 31 §§ 560.208, 510, 211, and 542.210, and Sec. 1(a)(iv) of Executive Order 13685 (the Crimea embargo). 24 15 CFR § 744.6(c)(3). 9

Comment BIS-2023-0016-0034