2010-18733. Foreign Direct Products of U.S. Technology

AGENCY:

Bureau of Industry and Security, Commerce.

ACTION:

Final rule.

SUMMARY:

The Bureau of Industry and Security (BIS) clarifies the scope of the “direct product rule” set forth in the Export Administration Regulations (EAR). Under the EAR's “direct product rule,” foreign-made items that are located outside of the United States; subject to national security controls under the EAR; the direct product of U.S.-origin software or technology that requires a written assurance as a supporting document for a license or as a pre-condition for use of License Exception Technology and Software, Restricted (TSR); and are being reexported to a destination in a country of national security concern or a terrorist supporting country, are subject to the EAR and require an export license or license exception. This rule also makes parallel revisions or clarifications to written assurances required under License Exception TSR (Technology and Software Restricted), information required on the license application for national security controlled technology, and the instructional steps in the EAR that provide guidance on how to apply the direct product rule.

DATES:

Effective Date: This rule is effective July 30, 2010.

ADDRESSES:

Although this rule is in final form, written comments may be submitted via http://www.regulations.gov;​; by e-mail directly to BIS at [e-mail]; in hardcopy to U.S. Department of Commerce, Bureau of Industry and Security, Regulatory Policy Division, 14th and Pennsylvania Ave., NW., Room H-2705, Washington, DC 20230; or by fax to [phone]. Please insert “0694-AE27” in the subject line of the written comments.

FOR FURTHER INFORMATION CONTACT:

Sharron Cook, Office of Exporter Services, Bureau of Industry and Security, U.S. Department of Commerce, at [phone] or by e-mail: [e-mail].

Comments regarding the collections of information associated with this rule, including suggestions for reducing the burden, should be sent to OMB Desk Officer, New Executive Office Building, Washington, DC 20503, Attention: Jasmeet Seehra, or by e-mail to [e-mail], or by fax to [phone]; and to the Office of Administration, Bureau of Industry and Security, Department of Commerce, 14th and Pennsylvania Avenue, NW., Room 6883, Washington, DC 20230.

SUPPLEMENTARY INFORMATION:

Direct Product Rule

Items subject to the Export Administration Regulations (EAR) include items located in the United States, wherever they are produced; items of “U.S. origin,” that is, those produced in the United States, wherever they are located; and certain foreign produced items, including items subject to the EAR only on the basis of the “direct product rule.” The “direct product rule” is found in General Prohibition No. 3, section 736.2(b)(3) of the EAR, and in section 734.3(a)(4). Under the “direct product rule” as amended, foreign-made items are subject to the EAR and require an export license or license exception, if such items are:

• Located outside of the United States;
• Subject to national security controls under the EAR;
• The direct product of U.S.-origin software or technology that requires a written assurance as a supporting document for a license or as a pre-condition for use of License Exception Technology and Software, Restricted (TSR); and
• Being reexported to a destination in Country Group D:1 and E:1 of Supplement No. 1 to part 740.

As discussed in section 732.2(f), it is necessary to determine whether an item is potentially subject to the “direct product rule” only with regard to foreign-produced items located in foreign countries.

This final rule changes the “direct product rule” as it is codified in the EAR, by expanding the country scope of the rule from Country Group D:1 and Cuba to Country Group D:1 and E:1 (Cuba, Iran, North Korea, Sudan, and Syria). This change is being made to bring the “direct product rule” into harmony with the policies the United States maintains against terrorist supporting countries in Country Group E:1.

Part 732—Steps for Using the EAR

This rule amends section 732.2, “Steps Regarding Scope of the EAR,” by revising paragraph (f)(1)(i) in “Step 6: Foreign-made items produced with certain U.S. technology for export to specified destinations,” specifically paragraph (f)(1)(i) and amending section 732.3, “Steps Regarding the Ten General Prohibitions,” by revising paragraph (f)(1)(ii) “Step 11: Foreign-produced direct product” to expand the country scope of these steps to include all the countries in Country Group E:1, namely, Cuba, Iran, North Korea, Sudan, and Syria. Because this part of the EAR is merely guidance, it will not affect the paperwork burden of the public.

License Exception TSR (Technology and Software Restricted)

A “License Exception” is an authorization contained in part 740 of the EAR that allows export or reexport under stated conditions of items subject to the EAR that would otherwise require a license under the provisions of the EAR. License Exception TSR, found in section 740.6 of the EAR, authorizes exports and reexports of certain technology and software to destinations in Country Group B of Supplement No. 1 to part 740 of the EAR. Eligible technology and software are those that require a license for national security reasons only, and are identified by “TSR—Yes” in Export Control Classification Numbers (ECCNs) on the Commerce Control List (Supplement No. 1 to part 774 of the EAR). Prior to using this license exception, a written assurance as described in section 740.6 of the EAR must be obtained from the consignee. This assurance is required as a preventative measure against diversion or release of U.S.-origin technology, a national security-controlled foreign direct product of such technology, and a national security-controlled foreign direct product of a plant or manufacturing equipment made from such technology to Cuba or countries with which the U.S. has national security concerns and nationals thereof. This rule expands the country scope covered by this assurance to include all the countries in Country Group E:1 of Supplement No. 1 to part 740 of the EAR. License Exception TSR is subject to the restrictions of section 740.2 of the EAR that apply to all license exceptions in part 740 of the EAR. This revision will have no effect on the paperwork burden of exporters using License Exception TSR.

License Applications for Shipments That Include U.S.-Origin Technology

In addition to the instructions contained in Supplement No. 1 to part 748 that describe how to submit an application to BIS, section 748.9 and Supplement No. 2 to part 748 of the EAR set out requirements that license applicants must address for certain items or types of transactions. This rule revises the instructions under paragraph (i), “Parts, components, and materials incorporated abroad into foreign-made products” by expanding the country scope to include all the countries in Country Group E:1. With the publication of this rule, paragraph (i)(2)(x) now states that if the foreign-made product is the direct product of U.S.-origin technology, and U.S.-origin technology will accompany a shipment to a country listed in Country Group D:1 or E:1 (see Supplement No. 1 to part 740 of the EAR), Block 24 must describe the type of technology and how it will be used. This change is being made to conform to the changes being made elsewhere in this rule to the “direct product rule.” The effect of this amendment on the paperwork burden hours for filling out a license application is negligible, as there are rarely transactions involving these items to countries in Country Group E:1.

Export Administration Act

Since August 21, 2001, the Act has been in lapse. However, the President, through Executive Order 13222 of August 17, 2001 (3 CFR, 2001 Comp. 783 (2002)), which has been extended by successive Presidential Notices, the most recent being that of August 13, 2009 (74 FR 41325 (August 14, 2009)), has continued the Regulations in effect under the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.).

Saving Clause

Shipments of items removed from license exception eligibility or from eligibility for export without a license as a result of this regulatory action 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 July 30, 2010, pursuant to actual orders for export 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 from the United States before September 28, 2010. Any such items not actually exported before midnight, on September 28, 2010, require a license in accordance with this regulation.

Rulemaking Requirements

1. This final rule has been determined to be significant for purposes of Executive Order 12866.

2. Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (PRA), unless that collection of information displays a currently valid Office of Management and Budget (OMB) Control Number. This rule involves two collections of information subject to the PRA. One of the collections has been approved by OMB under control number 0694-0088, “Multi Purpose Application,” and carries a burden hour estimate of 58 minutes for a manual or electronic submission. The other collection has been approved by OMB under control number 0694-0106, “Reporting and Recordkeeping Requirements under the Wassenaar Arrangement,” and carries a burden hour estimate of 21 minutes for a manual or electronic submission. Send comments regarding these burden estimates or any other aspect of these collections of information, including suggestions for reducing the burden, to OMB Desk Officer, New Executive Office Building, Washington, DC 20503; and to Jasmeet Seehra, OMB Desk Officer, by e-mail at [e-mail] or by fax to [phone]; and to the Office of Administration, Bureau of Industry and Security, Department of Commerce, 14th and Pennsylvania Avenue, NW., Room 6622, Washington, DC 20230.

3. This rule does not contain policies with Federalism implications as that term is defined under Executive Order 13132.

4. The provisions of the Administrative Procedure Act (5 U.S.C. 553) requiring notice of proposed rulemaking, the opportunity for public participation, and a delay in effective date, are inapplicable because this regulation involves a military and foreign affairs function of the United States (5 U.S.C. 553(a)(1)). Further, no other law requires that a notice of proposed rulemaking and an opportunity for public comment be given for this final rule. Because a notice of proposed rulemaking and an opportunity for public comment are not required to be given for this rule under the Administrative Procedure Act or by any other law, the analytical requirements of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) are not applicable. BIS implements the “direct product rule” to require licenses for the reexport of items controlled for national security reasons to countries in Country Groups D:1 and E:2. If this rule were delayed to allow for notice and comment and a delay in the effective date, it would provide additional time to the embargoed countries, which are being added to the list of countries for which the direct product rule applies, to receive items without a license, contrary to the foreign policy and national security of the United States. Therefore, this regulation is issued in final form. Although there is no formal comment period, public comments on this regulation are welcome on a continuing basis. Comments should be submitted to Sharron Cook, Office of Exporter Services, Bureau of Industry and Security, Department of Commerce, 14th and Pennsylvania Ave., NW., Room 2705, Washington, DC 20230.

List of Subjects

15 CFR Part 732

• Administrative practice and procedure
• Exports
• Reporting and recordkeeping requirements

15 CFR Part 736

• Exports

15 CFR Parts 740 and 748

• Administrative practice and procedure
• Exports
• Reporting and recordkeeping requirements

Accordingly, Parts 732, 736, 740 and 748 of the Export Administration Regulations (15 CFR Parts 730-774) are amended as follows:

PART 732—[AMENDED]

1. The authority citation for Part 732 continues to read as follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701-1706; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August 13, 2009, 74 FR 41325 (August 14, 2009).

2. Section 732.2 is amended by revising paragraph (f)(1)(i) to read as follows:

§ 732.2

Steps regarding scope of the EAR.

* * * * *

(f) * * *

(1) * * *

(i) Country scope of prohibition. Your reexport destination for the foreign-produced direct product is a destination in Country Group D:1 or E:1 (see Supplement No. 1 to part 740 of the EAR) (reexports of foreign-produced direct products to other destinations are not subject to General Prohibition Three);

* * * * *

3. Section 732.3 is amended by revising paragraph (f)(1)(i), to read as follows:

§ 732.3

Steps regarding the ten general prohibitions.

* * * * *

(f) * * *

(1) * * *

(i) Country scope of prohibition. Your reexport destination for the direct product is a destination in Country Group D:1 or E:1 (see Supplement No. 1 to part 740 of the EAR) (reexports of foreign-produced direct products to other destinations are not subject to General Prohibition Three described in § 736.2(b)(3) of the EAR);

* * * * *

PART 736—[AMENDED]

4. The authority citation for Part 736 continues to read as follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 22 U.S.C. 2151 note; E.O. 12938, 59 FR 59099, 3 CFR, 1994 Comp., p. 950; E.O. 13020, 61 FR 54079, 3 CFR, 1996 Comp., p. 219; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; E.O. 13338, 69 FR 26751, May 13, 2004; Notice of August 13, 2009, 74 FR 41325 (August 14, 2009); Notice of November 6, 2009, 74 FR 58187 (November 10, 2009).

5. Section 736.2 is amended by revising paragraph (b)(3)(i), to read as follows:

§ 736.2

General prohibitions and determination of applicability.

* * * * *

(b) * * *

(3) * * *

(i) Country scope of prohibition. You may not, without a license or license exception, reexport any item subject to the scope of this General Prohibition Three to a destination in Country Group D:1 or E:1 (See Supplement No. 1 to part 740 of the EAR).

* * * * *

PART 740—[AMENDED]

6. The authority citation for Part 740 continues to read as follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 22 U.S.C. 7201 et seq.; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August 13, 2009, 74 FR 41325 (August 14, 2009).

§ 740.6

[Amended]

7. Section 740.6 is amended by removing the reference to “E:2” and adding in its place “E:1” in paragraphs (a)(1)(i), (a)(1)(ii), (a)(1)(iii), (a)(2)(i) and (a)(2)(ii).

PART 748—[AMENDED]

8. The authority citation for Part 748 continues to read as follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August 13, 2009, 74 FR 41325 (August 14, 2009).

9. Supplement No. 2 to Part 748 is amended by removing the reference to “E:2” and adding in its place “E:1” in paragraph (i)(2)(x) and twice in paragraph (o)(3)(i).

Dated: July 23, 2010.

Kevin J. Wolf,

Assistant Secretary for Export Administration.