The August rules discussed here primarily targeted Huawei’s acquisition of semiconductors that are the direct product of U.S. technology or software. BIS has now issued a total of 26 FAQs which are published here regarding the FDP rule/ General Prohibition 3 (GP 3). The FAQs address general topics related to these provisions of the EAR, as well as specific topics including how these rules interact with BIS’ de minimis rules and how they apply to particular supply chain and item-specific questions. Note that for now, only a number of Huawei entities are subject to the “footnote 1” restrictions of GP 3, but BIS could designate additional companies in the future under this footnote.
Noteworthy FAQs are outlined below:
Types of Items Covered
- FAQ Question #4: “Does the FDP rule only cover semiconductors?”
FAQ Answer #4: “The rule applies to any item that meets the criteria of footnote 1 of Supplement No. 4 to part 744 of the EAR.”
This FAQ makes clear that the FDP rule covers anything that is a direct product of the relevant Export Control Classification Numbers (ECCNs), not just certain kinds of items, such as semiconductors.
Supply Chain Issues
- FAQ Question #13: “Company A is selling items subject to the FDP rule to Company B, which will incorporate a percentage of Company A’s items into products that are not subject to the FDP rule (or otherwise subject to the EAR). Company A knows that some Company B products are destined to a footnote 1 designated entity. Does the FDP rule impose a license requirement on Company A?”
- FAQ Answer #13a: “If Company A knows that its items are destined for incorporation into Company B’s products that will be sold to a footnote 1 designated entity, a license is required for the export from abroad, reexport, or transfer (in-country) of those items to Company B.”
This FAQ appears to apply a strict approach that triggers a licensing requirement regardless of the applicable de minimis level of the finished product. Even if the item sold by Company B is not subject to the EAR, under FAQ A13a, a license will be required for Company A to sell its products if it knows that they are intended for incorporation into products that will be sold on to an entity designated in footnote 1.
- FAQ Answer #13b: “If a percentage of Company A’s items are destined for incorporation into a Company B’s products that will be sold to a footnote 1 designated entity, a license is required for the export from abroad, reexport, or transfer (in-country) of the percentage of those items to Company B.”
This FAQ again appears strict, and does not allow for any level of such sales without a license being required. Even if only 0.01% of the items that Company A is selling to Company B will be incorporated into products destined to a footnote 1 designated entity, Company A will need a license for those items according to this FAQ. This approach appears even stricter than that applied by the Office of Foreign Assets Control (OFAC) in its “inventory rule,” which only applies a similarly strict approach when a company knows that items are specifically, predominantly, or exclusively intended for Iran.
- FAQ Answer #13c: “If Company A knows that some percentage of the items it sells to Company B are destined for a footnote 1 entity but does not know which items, or what percentage of the items will be incorporated into those products, Company A should ask for that information from Company B. If no information is provided by Company B, a license would be required for all of Company A’s items that will be exported from abroad, reexported, or transferred (in-country) to Company B.”
This FAQ stipulates that if Company A knows that the item it is selling will be incorporated into products destined to a footnote 1 designated entity in some quantity, it should ask for that information from Company B. If Company B does not provide the requested information, Company A will need a license for all such items to be sold to Company, effectively assuming that all of them could be ultimately destined to a footnote 1 designated entity.
Prior Exports
- FAQ Question #9: “Aside from the savings clause, does the FDP rule require a license for the servicing or repair of an item lawfully exported prior to the implementation of the August 2020 FDP rule?”
FAQ Answer #9: The FDP rule does not require a license for such transactions though parties need to review other provisions of the EAR to determine if a license is required for such transactions, such as a replacement part for equipment at a footnote 1 designated entity (see Supplement No. 4 to part 744 of the EAR).”
This FAQ clarifies under the FDP rule, the servicing or repair of an item lawfully exported prior to the implementation of the FDP rule is not subject to a licensing requirement unless such activities involve the export of additional items, such as replacement parts.
Prior Licenses
- FAQ Question #16: “If a supplier obtains a license for an FDP to be reexported, exported from abroad, or transferred (in-country) to a footnote 1 designated entity on the Entity List and notifies the recipient that the item is subject to the FDP rule and requires a license under footnote 1 of Supplement No. 4 to part 744 of the EAR, is the recipient required to submit its own license application either to transfer the item directly, or to cover the transfer by a subsequent recipient, to a footnote 1 designated entity?”
FAQ Answer #16: “The recipient can rely on the supplier’s license. The recipient must receive written confirmation of the license and any conditions relevant to the transaction prior to using it. The recipient should notify any subsequent recipients of the license conditions and direct them to further notify the next recipient.”
This clarifies that a supplier who obtains a license under the FDP rule must notify the recipient of the licensed items for them to be able to rely upon the license, otherwise, consistent with FAQ #17, subsequent transfers to a footnote 1 designated entity will require the recipient to obtain their own license. The FAQ also appears to require the recipient to further notify subsequent recipients of the licensing conditions.
- FAQ Question #17: “If a supplier notifies the next recipient in the production chain that the item being transferred is subject to the FDP rule and requires a license under footnote 1 of Supplement No. 4 to part 744 of the EAR, but the supplier has not informed the recipient that the supplier has already obtained a license for the transfer of the items to the recipient and end user, is the recipient required to submit a license application to Commerce to transfer the item to the end user, directly or by a subsequent recipient, to a footnote 1 designated entity?”
FAQ Answer #17: “Yes. The recipient must obtain a Department of Commerce license for such a transfer. If a license is granted, the recipient should notify subsequent recipients and the footnote 1 designated entity of any license conditions.”
This FAQ clarifies that under the FDP rule, if the recipient of an item subject to the FDP rule does not know whether the supplier received a required license for an item being transferred, the recipient must obtain its own license for any subsequent transfers to a footnote 1 designated entity.
- FAQ Question #18: “If a supplier does not notify a subsequent recipient that the item is covered by FDP footnote 1 but the recipient knows the item is covered by paragraph (1) or (2) in footnote 1, is a Department of Commerce license required for the item’s transfer, directly or by a subsequent recipient, to a footnote 1 designated entity?”
FAQ Answer #18: “Yes. If the recipient has knowledge, as defined in the EAR, that the item is covered by footnote 1 to Supplement No. 4 to part 744 of the EAR, the recipient may not transfer the item without a Department of Commerce license.”
This FAQ clarifies that the recipient will be held to a knowledge standard, as defined in Part 772 of the EAR, of the license requirements under the FDP rule. For purposes of the EAR, “knowledge” means not only positive knowledge that a circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts.
Next steps
Companies that export items subject to the FDP Rule, as well as companies that purchase them, should review their existing procedures and arrangements with their business partners to confirm that they are in compliance with this guidance from BIS. Depending upon the facts and circumstances, some companies may need to seek BIS licenses where they were not previously doing so.
Authored by Adam Berry and Barbra Kim
