US Government Imposes Export Restrictions on SMIC, DJI and 75 Other Entities

The US Department of Commerce’s Bureau of Industry and Security has issued a Final Rule adding 77 companies to the Entity List, a restricted party list that identifies foreign persons that engage in activities contrary to US national security and/or foreign policy interests. These latest designations by BIS include companies located in China, as well as Bulgaria, France, Germany, Hong Kong, Italy, Malta, Pakistan, Russia and the United Arab Emirates. Most notably, the designations include Semiconductor Manufacturing International Corporation Incorporated and DJI, which are prominent companies in China’s semiconductor and consumer drone industries, respectively. Pursuant to these designations, exports, reexports and in-country transfers of commodities, software and technology subject to the US Export Administration Regulations to SMIC, DJI and other designated entities will now require a specific license from BIS.

The 77 Entity List Designations

As a general matter, designations to the Entity List are made upon a determination that there is a reasonable cause to believe – based on specific and articulable facts – that a particular entity has been involved, is involved or poses a significant risk of being or becoming involved in activities contrary to the national security and/or foreign policy interests of the United States.

Pursuant to the Final Rule – which states that it is effective as of December 18, 2020, prior to its publication in the Federal Register – exports, reexports and in-country transfers of any item (i.e., commodities, software or technology) subject to the EAR to the designated entities will require a specific license from BIS. Items subject to the EAR include all items:

• in the United States (irrespective of origin)
• US-origin items wherever located
• foreign-origin (i.e., non-US) items that incorporate more than a de minimis amount of US-origin controlled content
• certain foreign-made direct products of US-origin technology or software
• certain commodities produced by any plant or major component of a plant located outside the United States that is a direct product of US-origin technology or software

Exports to designated entities will not be eligible for any license exceptions under the EAR, and license applications for exports to these entities will be subject to a policy of denial with few exceptions.

The Final Rule contains a “savings clause” that authorizes affected shipments to the newly designated entities, provided they were shipped prior to December 18, 2020 and are en route via a carrier.

In the case of SMIC and its designated affiliates, the Final Rule explains that the designation is based on China’s military-civil fusion doctrine – a strategy by which China seeks to eliminate barriers between its commercial and defense sectors and leverage commercial technologies to achieve military technological superiority – and evidence that SMIC has engaged with entities of concern in China’s military industrial complex. Pursuant to the designation, an export license is required for all exports to SMIC and its designated affiliates of all items subject to the EAR. The Final Rule specifies that items uniquely required for production of semiconductors at advanced technology nodes of 10 nanometers or below will be subject to a presumption of denial to prevent the transfer of key enabling technology, while license applications for other items will be reviewed on a case-by-case basis.

The Final Rule specifies that DJI has been designated because of activities determined to be contrary to US foreign policy interests, namely the provision of technology to enable wide-scale human rights abuses through surveillance. Pursuant to the designation, an export license will be required for all exports to DJI of all items subject to the EAR. License applications for items necessary to detect, identify and treat infectious disease will be reviewed on a case-by-case basis, but license applications involving all other items will be reviewed with a presumption of denial.

Additional information regarding the SMIC- and DJI-related Entity List designations is provided in the table below.

Compliance Implications

The addition of these 77 companies to the Entity List has immediate and significant implications for companies doing business with SMIC, DJI and other designated entities. Suppliers to these designated companies will need to screen shipments destined for the designated entities and determine whether they contain items or technology subject to the EAR. Such suppliers will generally be prohibited – in the absence of a license – from providing a designated entity with any equipment, software or technology that is of US-origin, contains more than a de minimis level of controlled US-origin content or that is otherwise subject to the EAR. The types of activities that could violate these restrictions include:

• sending design information from the United States to a designated entity
• transferring US-origin goods or software to a designated entity within China
• permitting a designated entity to download software or nonpublic technical information from servers in the US
• exporting or transferring non-US origin products that are subject to the EAR to a designated entity

For assistance in assessing the applicability of these new export restrictions to your existing or potential business, please contact a team member on this page.