U.S. Bureau of Industry and Security Updates Entity List with 44 Entities in China
What happened? On August 1, 2018, the U.S. Bureau of Industry and Security (BIS) updated the Export Administration Regulations (EAR) Entity List (EL) to add forty-four more entities in China (eight entities and thirty-six subordinate institutions, as well as numerous aliases for the listed entities), and modify one existing entry for another entity in China, on the basis that the entities have acted contrary to the national security or foreign policy interests of the United States. The BIS notice can be found in 83 FR 37423(August 1, 2018); the full EL can be found in Supplement No. 4 to Part 744 of the EAR.
What's the risk? All exports, re-exports, and transfers of EAR-controlled items to these new EL entities – including of non-sensitive, EAR99 items – are prohibited absent BIS approval, and license applications are subject to a presumption of denial. However, it is important to note that BIS did not sanction every subsidiary or affiliate of the eight lead entities, and BIS has previously provided guidance that subsidiaries, parent companies, and sister companies are legally distinct from listed entities and not automatically subject to EL restrictions placed upon affiliated EL entities (in contrast to the 50 Percent Rule applied in the context of U.S. economic sanctions administered by the Office of Foreign Assets Control). See BIS Licensing FAQ No. 134. However, BIS also cautions that extra due diligence should be performed when exporting to non-EL entities affiliated with EL entities, in order to ensure that the affiliate is in fact a separate legal entity (as opposed to a branch or operating division) and that the items are not ultimately destined for the EL entity.
What can businesses do to address the risk? In light of this recent action, U.S. and non-U.S. businesses trading in U.S. goods with China should promptly confirm that their denied party screening software is programmed to detect the newly-listed entities and their aliases. In addition, while not prohibited, transactions with EL entity affiliates pose potential diversion risks, and merit close review and careful coordination with compliance and management personnel. Companies may wish to take steps to identify known affiliates of listed entities and treat the presence of such entities in a transaction as a red flag warranting additional review, as well as adding the known affiliates to the company's list of business partners subject to regular re-screening, so as to ensure prompt notice if those entities are themselves added to the EL (or another denied party list) in the future.
Further detail: The newly listed entities are all related to one of five state-owned research institutes, two aerospace trading companies, and one information and communications technology company, as follows:
Many of these entities will already be familiar to compliance professionals engaged in denied party screening and due diligence for exports / re-exports to China. For example, the newly added 13th, 14th, 38th, and 55th Research Institutes of the China Electronics Technology Group Corporation (CETC) are affiliated with previously listed 10th, 11th, 20th, 29th, and 54th CETC Research Institutes. Similarly, newly listed China Aerospace Science and Industry Corporation (CASIC) Second Academy, China's main designer and producer of air and space defense systems, and newly listed China Volant Industry are both owned and controlled by the state-owned CASIC and join three other CASIC subordinates previously added to the EL (CASIC Third Academy and its subordinate No. 33 and No. 35 Research Institutes).
 According to the Guardian, CETC's No. 38 Research Institute designed the radar system for the KJ-500, the new airborne early warning and control aircraft for the Chinese People's Liberation Army, while the 14th Research Institute developed China's military quantum radar system, which is based on the technology of single photon detection.