U.S. Export Controls Developments: New Advanced Computing and Semiconductor Manufacturing Equipment Controls, SDN-Related End-User Controls, and Controls on Nicaragua

U.S. Export Controls Developments: New Advanced Computing and Semiconductor Manufacturing Equipment Controls, SDN-Related End-User Controls, and Controls on Nicaragua

April 2, 2024, Covington Alert

On March 29, 2024, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) announced an interim final rule that corrects and revises the controls in the Export Administration Regulations (“EAR”) aimed at restricting China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors.

These EAR controls were first introduced on October 7, 2022 and expanded on October 17, 2023, effective November 17, 2023, as summarized in our previous client alerts. The new rule, which will take effect on April 4, 2024, is titled Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections; and Export Controls on Semiconductor Manufacturing Items; Corrections and Clarifications (the “2024 Corrections Rule”). Notable changes include the introduction of new Export Control Classification Number (“ECCN”) paragraph 4A090.b for certain advanced computing items; the division of License Exception Notified Advanced Computing (“NAC”) into two separate license exceptions; revision to the control status of extreme ultraviolet (“EUV”) masks and associated software and technology; a new distinction between direct and indirect exports under the semiconductor manufacturing items end-use controls of EAR § 744.23(a)(4); and clarification of the license review policies in relation to certain U.S. person and end-use controls. Additionally, the preamble to the new rule contains clarifications to prior BIS guidance on the EAR § 744.23 end-use controls on advanced-node integrated circuits (“ICs”) and semiconductor manufacturing equipment (“SME”). BIS is seeking public comments on these corrections, revisions, and clarifications until April 29, 2024.

Separately, effective March 21, 2024, BIS issued a final rule (the “SDN Final Rule”) consolidating and expanding the EAR’s end-user controls applicable to persons designated to the List of Specially Designated Nationals and Blocked Persons (the “SDN List”) maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). Specifically, the SDN Final Rule revises EAR § 744.8 to impose a license requirement on the export, reexport, and transfer (in-country) of commodities, software, and technology (collectively, “items”) subject to the EAR where any person designated to the SDN List under one or more of 14 OFAC-administered sanctions programs is a party to the transaction. This license requirement reaches exports, reexports, and transfers (in-country) of items subject to the EAR, including in circumstances in which such transactions would not have been prohibited by OFAC sanctions because the transactions did not involve U.S. persons or another U.S. nexus. To avoid duplication, a license from BIS is not required if the transaction is authorized by OFAC or would be authorized by an OFAC general license if the transaction were subject to U.S. sanctions jurisdiction.

Additionally, on March 15, 2024, the U.S. Department of State and the U.S. Commerce Department imposed stricter export controls on Nicaragua (together, the “Nicaragua Final Rules”). The State Department added Nicaragua to the list of arms-embargoed countries identified at International Traffic in Arms Regulations (“ITAR”) § 126.1, and established a policy of denial for applications seeking licenses or other approvals to export defense services or defense articles to Nicaragua and an obligation to report unauthorized defense trade activities involving Nicaragua as set out in ITAR § 126.1(e)(2). In parallel, BIS removed Nicaragua from the EAR’s Country Group B in Supplement No. 1 to EAR Part 740, added Nicaragua to Country Groups D:1 (National Security) and D:5 (U.S. Arms Embargoed Countries), and extended the EAR’s “military end use” and “military end user” restrictions in EAR § 744.21 to cover Nicaragua. According to press statements by the State and Commerce Departments, the Nicaragua Final Rules were issued in response to recent actions by the government of Nicaragua, including human rights abuses and military cooperation with Russia.

Commerce Control List Additions and Corrections

The 2024 Corrections Rule will establish on April 4, 2024, new ECCN sub-paragraph 4A090.b on the Commerce Control List (“CCL”) of the EAR to control computers, electronic assemblies, and components containing ICs that meet or exceed the limits of ECCN 3A090.b. This new sub-paragraph will be subject to the same regional stability (“RS”) controls applicable to ECCN 4A090.a, which impose a license requirement on exports, reexports, or transfers of such items to or within destinations specified in the EAR’s Country Groups D:1, D:4, and D:5, excluding destinations also specified in Country Groups A:5 or A:6.

Additionally, the 2024 Corrections Rule will extend national security (“NS”) controls to ECCN 3B001.j masks specially designed for EUV lithography.

Finally, the 2024 Corrections Rule will make several changes to the control summaries for various entries on the CCL to restore NS, missile technology (“MT”), nuclear nonproliferation (“NP”), and/or crime control (“CC”) references for items controlled in .z subparagraphs of ECCNs, and related technology and software. For example, ECCN 4A003 is controlled for NS reasons but when the .z entry was added to this ECCN in October 2023, it appeared that the .z entry was subject only to RS controls. With this change, BIS has clarified that NS controls have been restored for items classified under ECCN 4A003.z. To clarify the controls applicable to various ECCN 3A001.z items, BIS added four new .z paragraphs to ECCN 3A001 to distinguish between items subject to NS, RS, MT, and NP controls.

Expansion of U.S. Person Controls

Consistent with the addition of NS controls for EUV masks, with the 2024 Corrections Rule, BIS is expanding the U.S. person controls at EAR § 744.6 to cover certain activities involving EUV masks described at ECCN 3B001.j, and associated software and technology, that are not subject to the EAR.

BIS also reorganized the license application review policies applicable to U.S. person license applications and added a case-by-case review policy for license applications for activities involving items described in ECCNs 3A090, 4A090, and the .z ECCN subparagraphs, except for items designed or marketed for use in a datacenter and meeting the parameters of ECCN 3A090.a. A case-by-case review policy also applies to license applications seeking authorization to engage in activities involving an item subject to the license requirements at § 744.6(c)(2) where an item not subject to the license requirements performs the same function as the item that is subject to the requirements. Other U.S.-person-related license applications for Macau and destinations specified in Country Group D:5 and entities headquartered, or whose ultimate parent is headquartered in Macau, or destinations specified in Country Group D:5 remain subject to a licensing policy of presumption of denial.

Revisions to SME End-Use Controls

The 2024 Corrections Rule will expand, effective April 4, 2024, the SME end-use controls at EAR § 744.23(a)(4) to include EUV masks controlled under ECCN 3B001.j, as well as ECCN 3B991.b.2 equipment (other than equipment controlled at ECCN 3B991.b.2.a through .b). Additionally, the rule will create sub-paragraphs within EAR § 744.23(a)(4) to separately address direct exports, reexports, and transfers (in-country) to or within Macau or a destination in Country Group D:5 and indirect exports. In contrast to the license requirement applicable to direct exports, the license requirement applicable to indirect exports will apply only where the development or production end use is undertaken by an entity headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5. More specifically:

• Direct exports include exports, reexports, or transfers of any item subject to the EAR and specified on the CCL when destined to or within either Macau or a destination specified in Country Group D:5 for the development or production of front-end IC production equipment and components, assemblies, and accessories therefor specified in ECCNs 3B001 (except 3B001.g and .h), 3B002, 3B611, 3B991 (except 3B991.b.2.a through .b), 3B992, or associated software and technology in Categories 3D or 3E of the CCL.
• Indirect exports include exports, reexports, and transfers of any item subject to the EAR and specified on the CCL where all of the following apply:  
  • The item is for development or production of a foreign-made item, whether subject to the EAR or not, that is specified in ECCNs 3B001 (except 3B001.g and .h), 3B002, 3B611, 3B991 (except 3B991.b.2.a through .b), 3B992, or an associated software and technology ECCN in Categories 3D or 3E of the CCL. (It appears that this applies only to front-end IC production items, in view of the fact that the restriction on direct exports applies only in the context of front-end items and language in the 2024 Corrections Rule with respect to indirect exports noting that “BIS has limited the scope of this control to circumstances involving the ‘development’ or ‘production’ of front-end SME items by entities that are headquartered in, or whose ultimate parent company is headquartered in, Macau or a destination specified in Country Group D:5.”);
  • The foreign-made item is for development or production of any initial or subsequent foreign-made item, whether subject to the EAR or not, specified in ECCNs 3B001 (except 3B001.g and .h), 3B002, 3B611, 3B991 (except 3B991.b.2.a through .b), 3B992, or an associated software and technology ECCN in Categories 3D or 3E of the CCL. (As noted above, it appears that this applies only to front-end IC production items.); and
  • The development or production is by an entity headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5.

Additionally, the 2024 Corrections Rule revises the license exceptions that may apply in the context of the controls at EAR             §§ 744.23(a)(4) and (a)(3)(i); License Exception GOV will be available for such exports, reexports, or transfers when the rule becomes effective on April 4, 2024, subject to meeting the terms and conditions of that license exception.

The rule also reorganizes and clarifies the license application review policy: the presumption of denial applicable to applications for exports, reexports, and transfers to or within Macau and Country Group D:5 that are subject to a license requirement under              § 744.23(a) will be extended to such transactions for any entity headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5, except that:

• There will be a presumption of approval for applications involving end users headquartered in the United States or a destination specified in Country Groups A:5 or A:6 that are not majority-owned by an entity headquartered in Macau or a destination specified in Country Group D:5; and

• A case-by-case review policy will apply for applications involving (i) ECCNs 3A090, 4A090, and the .z entries, except for items designed or marketed for use in a datacenter and meeting the parameters of ECCN 3A090.a; or (ii) items subject to the              § 744.23(a) license requirements where there is a foreign-made item that is not subject to the license requirements that performs the same function as the item subject to the license requirements.

Finally, BIS made several clarifications to prior comment responses regarding these controls in the preamble to the 2024 Corrections Rule, which are worth reviewing. Notably, BIS provided new responses to certain commentary it had included in prior rules, in particular Topics 45 (regarding the scope of the license requirement at § 744.23(a)(4)), 46 (regarding the scope of the license requirement at § 744.23(a)(2), including with regard to the supply chain), and 49 (regarding the scope of diligence required to comply with § 744.23(a)(4)) from the October 2023 SME rule, and added additional guidance in response to Topic 47 from that rule (regarding whether there is a duty to know or otherwise be subject to a license requirement under § 744.23(a)(2)(ii)).

Addition of License Exception ACA and Revisions to License Exception Restrictions

The 2024 Corrections Rule will extend, effective April 4, 2024, the restrictions on license exceptions available for exports, reexports, and transfers of advanced computing items to destinations in Country Groups D:1, D:4, or D:5, excluding any destination also specified in Country Groups A:5 or A:6, to impose the same restrictions on the use of license exceptions for exports, reexports, or transfers to entities headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5, wherever located. Additionally, ECCN 3B001.j will be added to the list of items for which only License Exception GOV is available when the item is exported, reexported, or transferred to or within Macau or a destination specified in Country Group D:5.

Notably, the 2024 Corrections Rule also will divide existing License Exception NAC into two license exceptions: License Exception NAC (for transactions requiring prior notification) and License Exception Advanced Computing Authorized (“ACA”) (for transactions that do not require such notification). Two conditions apply to both license applications: (i) the exporter, reexporter, or transferor must obtain a purchase order for the items, other than for commercial samples, prior to shipment; and (ii) ECCN 5A002.z, 5A004.z, and 5D002.z items must be eligible for both License Exception ENC and either NAC or ACA. These license exceptions are not available to overcome license requirements under EAR Parts 744 or 746, other than the license requirement at EAR § 744.23(a)(3). More specifically:

• License Exception NAC is available for the export and reexport of any item classified in ECCNs 3A090, 4A090, 3A001.z, 4A003.z, 4A004.z, 4A005.z, 5A002.z, 5A004.z, 5A992.z, 5D002.z, or 5D992.z, except for items designed or marketed for use in a datacenter and meeting the parameters of ECCN 3A090.a, to Macau and Country Group D:5 or an entity headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5, wherever located. However, prior to relying on this license exception, a notification must be filed with BIS at least 25 calendar days in advance of shipment. The 2024 Corrections Rule identifies three circumstances that temporarily stop the 25-day processing clock for these notifications: (1) a lapse in appropriations funding (i.e., if Congress fails to fund BIS for a period of time); (2) a catastrophic event (e.g., an extreme weather event that impacts government services); or (3) a multi-day processing system failure.
• License Exception ACA is available for the export, reexport, and transfer (in-country) of any item classified in ECCNs 3A090, 4A090, 3A001.z, 4A003.z, 4A004.z, 4A005.z, 5A002.z, 5A004.z, 5A992.z, 5D002.z, or 5D992.z, except for items designed or marketed for use in a datacenter and meeting the parameters of ECCN 3A090.a, to or within any destination specified in Country Groups D:1 and D:4 (except Macau, a destination in Country Group D:5, or an entity headquartered in, or with an ultimate parent headquartered in, Macau or a destination specified in Country Group D:5, wherever located), as well as transfers (in-country) within Macau and destinations in Country Group D:5.

Savings Clause

Finally, the 2024 Corrections Rule includes a savings clause for items removed from license exception eligibility or eligibility for export, reexport, or transfer without a license that were on a dock for loading, on lighter, laden aboard an exporting carrier, or en route aboard a carrier to a port of export on the date of the rule’s publication in the Federal Register (currently scheduled for April 4, 2024), provided they have been exported, reexported, or transferred within 30 days after the date of publication in the Federal Register.

Effective March 21, 2024, the SDN Final Rule consolidated in EAR § 744.8 and expanded the EAR end-user controls on certain persons identified on OFAC’s SDN List. Specifically, the SDN Final Rule imposes a license requirement on exports, reexports, and transfers of all items that are subject to the EAR when a person designated to the SDN List under any of the following sanctions program identifiers is a party to the transaction: BELARUS; BELARUS–EO14038; RUSSIA–EO14024; UKRAINE–EO13660; UKRAINE–EO13661; UKRAINE–EO13662; UKRAINE–EO13685; FTO; SDGT; NPWMD; ILLICIT DRUGS–EO14059; SDNT; SDNTK; and TCO. The foregoing identifiers apply to OFAC sanctions programs related to Russia’s invasion of Ukraine and Belarus’s role in that invasion, terrorism, weapons proliferation, and narcotics trafficking and transnational crime.

Prior to the implementation of the SDN Final Rule, a BIS license had been required to export, reexport, or transfer (in-country) “luxury goods” (as identified in Supplement No. 5 to EAR Part 746) subject to the EAR where any Russian or Belarusian oligarch or “malign actor” designated on the SDN List with any of the following identifiers—BELARUS, BELARUS-EO14038, RUSSIA-EO14024, UKRAINE-EO13660, UKRAINE-EO13661, UKRAINE-EO13662, and UKRAINE-EO13685—was a “party to the transaction” as described in EAR § 748.5(c) through (f). The SDN Final Rule expanded the license requirement to all items subject to the EAR and moved the relevant end-user control from EAR § 746.10(a)(2) into a consolidated single section of the EAR under    § 744.8.

Also prior to the implementation of the SDN Final Rule, a BIS license had been required to export, reexport, or transfer (in-country) any item subject to the EAR in which persons designated to the SDN List under the FTO, SDGT, and NPWMD program identifiers were parties to the transaction. This control remains, but has been consolidated within EAR § 744.8.

Significantly, EAR § 744.8, as revised by the SDN Final Rule, also provides that in order to avoid duplication, no additional BIS authorization is required for exports, reexports, or transfers (in-country) of an item subject to the EAR and subject to a license requirement only under EAR § 744.8 if OFAC has authorized the transaction, the transaction would be authorized by an OFAC general license if it were subject to U.S. sanctions jurisdiction, or the transaction is exempt under OFAC’s regulations.

The SDN Final Rule also removes two end-user control provisions in EAR Part 744 that are no longer needed: § 744.13, relating to SDNs with the SDT identifier, which OFAC no longer uses, and § 744.18, relating to SDNs with the IRAQ2 identifier, which BIS has determined is no longer needed because the vast majority of natural persons and entities designated to the SDN List with the IRAQ2 identifier are either deceased or no longer in existence, and they remain designated as SDNs primarily for purposes of blocking financial assets.

Pursuant to §§ 744.8(c)-(d), in most cases, no EAR license exceptions may overcome the license requirements imposed by            § 744.8, and license applications required by this section will be reviewed subject to a presumption of denial.

The SDN Final Rule contains a savings clause, which provides that shipments of items that were previously eligible for a License Exception or for export, reexport, or transfer (in-country) without a license, that were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on March 21, 2024, pursuant to actual orders for export, reexport, or transfer (in-country) to or within a foreign destination, may proceed to that destination under the previous eligibility provided that the export, reexport, or transfer (in-country) is completed no later than April 22, 2024.

U.S. Department of State (ITAR) Final Rule

Effective March 15, 2024, the U.S. Department of State added Nicaragua to the list of countries subject to a U.S. arms embargo under the ITAR due to “growing concerns regarding Nicaragua’s continuing dismantling of democratic institutions, attacks on civil society, and increased security cooperation with Russia.” As a result, it is now the policy of the United States to deny licenses or other approvals for exports, reexports, and retransfers of ITAR-controlled defense articles or defense services to or within Nicaragua, except that a license or other approval may be issued on a case-by-case basis for non-lethal military equipment intended solely for humanitarian assistance (including natural disaster relief). Further, no broker (as described in ITAR § 129.2) may engage in or make a proposal to engage in brokering activities subject to the ITAR that involve Nicaragua without obtaining the approval of the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”), with such requests subject to a policy of denial. Additionally, any person who knows or has reason to know of a proposed, final, or actual sale, export, transfer, reexport, or retransfer of defense articles (including ITAR technical data) or defense services to Nicaragua has an obligation to immediately inform DDTC.

U.S. Commerce Department (EAR) Final Rule

Effective March 15, 2024, BIS removed Nicaragua from EAR Country Group B and added it to both Country Groups D:1 and D:5. As a result of its placement in Country Group D:1, Nicaragua is subject to more stringent licensing requirements for the export, reexport, and transfer (in-country) of items controlled for NS reasons. As a result of its placement in Country Group D:5, Nicaragua is now subject to additional restrictions in the EAR, including on de minimis U.S.-origin content, license exception availability, and licensing policy for certain items. Additionally, items subject to the product scopes of certain foreign direct product rules in the EAR are now controlled under the EAR if destined for Nicaragua.

BIS also made Nicaragua subject to “military end use” and “military end user” controls set forth in § 744.21 of the EAR (joining Belarus, Burma/Myanmar, Cambodia, China, Russia, and Venezuela as the countries subject to such controls). As a result, items listed in Supplement No. 2 to Part 744 of the EAR may not be exported, reexported, or transferred (in-country) without a BIS license if there is “knowledge” at the time of export, reexport, or transfer (in-country) that the item is intended, entirely or in part, for a Nicaraguan "military end user” or for a “military end use” in Nicaragua as those terms are defined in § 744.21(f) and (g), respectively. BIS noted that this action was undertaken to conform with the ITAR amendment that added Nicaragua to ITAR § 126.1.

Pursuant to a savings clause in BIS’s final rule, shipments of items removed from license exception eligibility or no license required (“NLR”) treatment as a result of the rule that were on dock for loading, on lighter, laden aboard an exporting carrier, or en route aboard a carrier to a port of export, on March 15, 2024, pursuant to actual orders for exports, reexports, and transfers (in-country) to a foreign destination may proceed to that destination under the previous license exception eligibility or without a license so long as they have been exported, reexported, or transferred (in-country) before April 15, 2024.

The Nicaragua Final Rules are indicative of growing concerns on the part of the U.S. government toward Nicaragua’s Ortega-Murillo regime. In that regard, on March 21, 2024, OFAC designated to the SDN List (i.e., imposed property-blocking sanctions against) Wendy Carolina Morales Urbina, Nicaragua’s Attorney General, for being complicit in the Ortega-Murillo regime’s oppression against the people of Nicaragua.

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We are closely monitoring these developments and would be happy to address any questions you may have.

Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with these new and expanded export controls.

Our trade controls lawyers also work closely with Covington's Global Public Policy team which consists of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia. Many of the members of the Public Policy team have had substantial government experience in sanctions and export controls matters, and regularly advise our clients on emerging trade controls policy matters and related engagements with government stakeholders.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls practice.