The U.S. Government’s approach to export controls and sanctions increasingly targets individuals, companies, and economy sectors, as opposed to countries, to achieve specific national security and foreign policy goals. Many of the restrictions have extraterritorial reach and require proactive and additional due diligence by companies to segregate legitimate exports to a country, and to guard against in-country diversion from legitimate end users to prohibited entities.

The targeted controls imposed by the government are exemplified by recent regulatory actions involving a major Chinese technology company and its worldwide affiliates. In a series of regulatory measures taken under the Export Administration Regulations (EAR), the U.S. Department of Commerce has expanded the imposed license requirements on exports, reexports, and in-country transfers involving items manufactured by or for these entities, if they involved certain U.S.-origin software or technology, wherever located.

In 2019, the Commerce Department added the Chinese company and over 100 of its foreign affiliates to the Entity List maintained in the EAR. In 2020, the Commerce Department redefined its foreign-produced direct product rule. The agency expanded the jurisdictional scope of the EAR to add to its controls foreign-made items that are a product of U.S.-origin software or technology. Such items now require a license if they are known to be destined for these entities. As a result, exporters and other companies have to be more alert in carrying out their screening and due diligence responsibilities. This is especially complicated because of the large number of affected entities globally.

The Commerce Department Entity List, first published in the late 1990s, was initially targeted in scope and focused on identifying entities involved in the proliferation of foreign weapons of mass destruction programs. Since that time, the grounds for inclusion on the Entity List have expanded to include activities contrary to U.S. national security and/or foreign policy interests.

Companies need to be particularly vigilant in vetting parties against the Entity List because exports, reexports, and in-country transfers involving listed entities are subject to broader licensing requirements and usually a license denial policy. The failure to comply with the licensing requirements is a violation of the EAR and could result in criminal and/or civil penalties.

The Commerce Department strongly recommends that exporters and overseas reexporters screen the parties to transactions against the Entity List to ensure compliance with the EAR. In addition, companies should be aware that the Commerce Department advises it considers that transactions of any nature with listed entities carry a “red flag,” and the agency recommends that companies proceed with caution with respect to such transactions.