Commerce Issues Guidance on Recent Advanced Computing and Semiconductor Manufacturing Controls for China

On October 28, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued guidance on its October 7, 2022 interim final rule (Rule) that imposed new export controls on certain advanced computing integrated circuits (ICs), computer commodities that contain such ICs, and semiconductor manufacturing items exported to the People’s Republic of China (PRC). Comments on the Rule will be accepted until December 12, 2022. Our previous blog post on the Rule may be found here.

The guidance offers several important clarifications, including regarding the definition of a covered “facility,” the impact of the Rule on deemed exports, and the scope of the “activities of U.S. persons” restrictions. An overview may be found below.

Definition of Facility
The guidance clarified that “facility” refers to the building where the production of restricted technology occurs. Subsequent steps, such as assembly, testing, or packaging, are not covered by the rule. The guidance further clarifies that if the same entity has multiple buildings on the same company campus, each building will be considered a separate “facility” for the purpose of the Rule. Thus, if production at the restricted technology level occurs at only one facility on a company’s campus, other facilities will not be subject to the same restrictions. Nonetheless, as practical matter, it likely will be difficult for suppliers to obtain precise information about the specific building in which their products will be used.

U.S. Person
The guidance discusses the U.S. persons controls in EAR § 744.6(c)(2) that apply to persons engaged in the following activities:

1. Authorization of the shipment, transmittal, or in-country transfer (in-country) of items not subject to the EAR used in the “development” or “production” of integrated circuits to fabrication facilities in the PRC that fabricate integrated circuits meeting the criteria specified in EAR § 744.6(c)(2)(i)(A)-(C) of the EAR;
2. Conducting the delivery, by shipment, transmittal, or transfer in-country, of items not subject to the EAR used in the “development” or “production” of integrated circuits to a fabrication “facility” in the PRC that fabricate integrated circuits meeting the criteria specified in EAR § 744.6(c)(2)(i)(A)-(C) of the EAR; or
3. Servicing, including maintaining, repairing, overhauling, or refurbishing items not subject to the EAR used in the “development” or “production” of integrated circuits at a semiconductor fabrication “facility” located in the PRC that fabricate integrated circuits meeting the criteria specified in EAR § 744.6(c)(2)(i)(A)–(C) of the EAR.

The guidance notes U.S. persons should engage in due diligence to ensure that fabrication facilities do not engage in prohibited activity. Appropriate due diligence includes “review of publicly available information, capability of items to be provided or serviced, proprietary market data, and end-use statements” and following BIS’s “Know Your Customer” guidance in EAR § 732, Supp. 3, to determine whether a fabrication facility in the PRC fabricates integrated circuits meeting any of the criteria set forth in EAR § 744.6(c)(2)(i)(A)-(C).

According to the BIS guidance, given the policy objectives of the rule, the U.S. persons restrictions in EAR § 744.6(c)(2)(i)-(vi) do not extend to U.S. persons engaged in administrative or clerical activities (e.g., arranging for shipment or preparing financial documents) absent knowledge of a violation. Furthermore, those restrictions do not apply to persons who implement a decision to approve a restricted shipment, transmittal, or in-country transfer, unless there is evidence of knowledge of a violation by those persons. Finally, the restrictions also do not apply to development or production activities that are not directly related to the provision of specific items to or servicing of specific items for advanced PRC fabrication facilities. It is unclear to what extent this guidance will provide comfort to U.S. persons working at Chinese companies, but it at least indicates that BIS’ intent is not to broadly target U.S. national employees working in the Chinese semiconductor sector.

We note that the controls in EAR § 744.6(c)(2) also apply to additional types of activities of U.S. persons, beyond those discussed above, which are not addressed by the guidance.

Deemed Exports/Reexports
The guidance also seeks to clarify how the Rule impacts exports and reexports of goods.

First, it clarifies that under § 742.6(a)(6)(ii) of the Export Administration Regulations (EAR), regional stability (RS) controls placed on the new and revised export control classification numbers (ECCNs) do not apply to deemed exports/reexports. However, deemed export restrictions will still apply to the anti-terrorism (AT) controls. Thus, a license is still required for deemed exports to persons from listed AT controlled countries (Iran, North Korea and Syria).

Second, the guidance notes that a foreign person who lawfully received technology or software source code prior to the effective date of the new ECCNs does not need to apply for a new license or authorization since, according to BIS, they return knowledge of such technology or source code. However, the foreign person must apply for such approvals to receive any new controlled software or technology, even if such products are classified under the prior ECCN.

Encryption
The guidance also clarified that items that meet the parameters of 5A992 or 5D992 and also meet or exceed the parameters of 3A090 or 4A090, are subject to the licensing requirements of 3A090 or 4A090, in addition to being subject to the classification, licensing, and reporting requirements in Category 5, Part 2. In addition, excluding items specified in EAR § 740.2(a)(9)(i), items that meet or exceed the parameters of 3A090 or 4A090 may not use License Exception ENC.