BIS amends EAR concerning the Entity List

On August 21, 2008, the US Bureau of Industry and Security ("BIS") published a final rule concerning export and re-export requirements for persons and entities on the Entity List.
The changes are effective immediately. The point of the amendments are as follows.

- A newly-established End-User Review Committee ("Committee"), consisting of various US government departments., will have the discretion to add a party to, remove a party from, or modify a party's designation on the Entity List.

- Changes will be made to the Entity List where there is reasonable cause to believe, based on specific facts, that an entity has been involved in, or poses a risk of being involved in, activities that are contrary to the national security or foreign policy interests of the United States.
Note that BIS has stated "US persons" will not be placed on the Entity List under this new procedure. Thus, the Entity List restricts only foreign persons from receiving EAR-controlled items that are exported from the United States or re-exported from abroad.

- BIS now will have the authority to impose foreign policy export and re-export licensing requirements, limit the availability of license exceptions, and establish a license application review policy for export and re-exports to designated entities.
License exceptions will not be available to designated parties named on the Entity List unless specifically noted.

- These amendments reflect BIS's policy statements that US export controls should not only focus on certain countries, but also target individual persons or entities of concern with more effective and specific controls.

The new rule could severely disrupt business with foreign companies. To minimize that risk, US exporters should be particularly vigilant in ensuring they know their foreign customers.


Japan will lower CVD 9.1% to Hynix Korea DRAM

Japan have been imposed 27.2% of Counter Vailing Duty ("CVD") to Hynix Korea DRAM since January 2006. Korean Government argued in WTO that this CVD was not appropriate and WTO advised Japan to make correction based on more accurate investigation.

Based on WTO advisory, Japan will lower CVD to 9.1% from September 1st after the approval of Cabinet. The details of this decision are described in below web site of Ministry of Finance. (Language: Japanese only)

(Source: http://www.mof.go.jp/singikai/kanzegaita/siryou/kanb200822.htm )


US CBP collect "First Sale" data

On August 20, US Customs and Border Protection ("CBP") announced that they will start to collect the statistics of using "First Sale" data in customs declaration. This is an interim rule and first step action for importer declaration requirement utilizing the "First Sale Rule".

The First Sale rule is a beneficial rule for importer because they can save duty amount based on the payment by first shipper to middle men, not by transaction price by importer to middle men.
CBP once tried to eliminate this rule in January 2008, but due to strong opposition from business society, CBP announced the withdrawal of their proposal.

In case an importer use "First Sale" price of goods when they declare in customs, they need to insert a single code "F" on CBP form 7501 at the line item level. This new rule is effective immediately but they have grace period until September 19, that means the input will not be rejected.

By collecting statistics how the First Sale rule affect customs and business, CBP may seek further action for this rule.

(Source: Bryan Cave LLP, International Regulatory Bulletin No. 400 on August 21, 2008 http://www.bryancave.com/bulletins/)


US request for a panel to examine EU's duty to IT products

According to Nikkei Press on Aug. 19, US requested to WTO for a panel to examine its complaint against the EU's imposition of customs duties on imports of IT products. This panel request was made together with Japan and Taiwan, as their discussion with EU was not successful.

US insist EU have violated the provision of ITA (Information Technology Agreement), which indicate an abolition of customs duty on IT products. EU express their intention to dispute against this in the panel process. It will be discussed in WTO on Aug 29 whether or not the panel will be established.

EU impose the customs duty on PC, monitor, multi-function printer, TV set top box etc. EU's interpretation of ITA is that such products are electrical commodities rather than genuine high-tech products, therefore they are not subject to duty exemption granted in ITA.


Reality in Japanese small & medium companies

As reported in this Blog on Aug. 01, Japanese machine tool maker, Horkos, was raided by Police under the violation of export control law.
They are allegedly investigated the exportation of license required machine tool to South Korea without license. The machine tool is said to be license required item due to its high technical specification. The company recognized it, but they declared its technical specification falsely to Customs, with intention to skip the troublesome export licensing application, and expected to cut lead time of shipment. In addition, their products may be re-exported to North Korea or Iran.
Horkos has 665 employees and its sales turn over is 21 billions yen, according to their web site.
The result of police investigation is still uncertain.

This kind of violation case is actually commonly happens (and unfortunately will continue to happen) in Japan, especially for small or medium sized company.
I pick up some reasons why.

1) Complicated regulation and implementation
Japanese export control law is too complicated to fully understand, even for educated business people. In order to correctly understand and know what to do, people must understand the combination of Law, Order, ministerial order, notification and circulars from METI. These are written with "law words", therefore normal Japanese cannot understand what it states.

2) Resource shortage
As export control skill is very niche category, not many trained employees are available who understand export control law. Even for logistics manager, many are not familiar with export control. Big companies such as Toshiba, Cannon, Mitsubishi etc. have experts in-house, however small and medium companies don't have such human resource.

3) Expensive advisory cost of CISTEC
There is official and public advisory organization in export control, such as CISTEC.
They offer advisory, training seminar, and books etc. to members companies.
However, the annual member fee is expensive, JPY800,000 (US$7,300) per company with its capital exceeding JPY100 millions, or JPY400,000 (US$3,600) for small companies with its capital below JPY100 millions. Small companies hesitate to be a member of CISTEC. Although CISTEC's service is available to non-members, the seminar fee and the books are priced as double of that of members. Currently, CISTEC members companies are only 338 as of August 1, 2008.

4) Classification difficulty
Much of operational difficulty is in classification of items, whether the items are required export license or not. The classification technique is relied on both technical knowledge and legal knowledge. Either one is not enough, definitely needs both area of knowledge and experience. There are not many engineers who has export control legal knowledge. In addition, basically METI don't touch the classification of items. I know in some countries government organizations take care of items classification, but in Japan, it is totally responsibility of exporter.

5) Export license application
When applying export license to METI, it takes much time. Maximum would be 90 days but basically in case by case. Not only the lead time, but documents preparation is troublesome. Exporter must prepare and submit a contract, a written pledge, or any other possible documents METI request. Such things motivate exporter to skip license application as much as possible. This circumstance is one of the reasons Horkos Corp. exported their items illegally. In addition, Yamazaki Mazak gave up building the new factory in India as reported in this Blog on Aug. 5. It is said they just gave up before applying export license to METI, possibly due to this reason.

6) Customer and business driven ethics
In Japan, business ethics are more in customer oriented (or sales oriented) than compliance. It is more important to expand business than to be compliant to law.
Such culture is more emphasized in small companies with slow economy, and especially in provincial companies where the economy is much worse than Tokyo area. Culture doesn't change soon. In addition, generally, sales managers have much more political power than operation guys in the organization. Sales logic and ethics tend to move the business to skip export license applicaiton or false classification.


Export Controls in One Page

To reduce all of export control decision-making down to one page.


(1) What is at issue, i.e., hardware, software, or information ("item"), or a service?
(2) What is the jurisdictional status of the item or service, i.e., is it controlled by the Export Administration Regulations ("EAR") or International Traffic in Arms Regulations ("ITAR")?
(3) What is the classification status of the item or service, i.e., if EAR-controlled, what is its Export Control Classification Number ("ECCN"), or, if ITAR-controlled, what is its U.S. Munitions List ("USML") subcategory number?
(4) Does the applicable ECCN or USML subcategory require a license or other authorization for exports to the country or the foreign persons (even if in the U.S.) at issue? (If EAR, check "Reasons for Control." If ITAR, worldwide.)
(5) If so, are there any exceptions or exemptions in the EAR or ITAR, as applicable, that would allow the item or service to nonetheless be exported without a license?
(6) Regardless of the answers to the foregoing questions, is a General Prohibition applicable to the transaction, i.e., is there a prohibited end-use (e.g., one related to weapons of mass destruction), prohibited end-user (e.g., a Specially Designated National ("SDN")), prohibited destination (e.g., an embargoed country), or knowledge that a violation or other red flag exists in connection with the item or service?
(7) Regardless of the answers to the foregoing questions, are there any applicable licenses, license conditions, or provisos that affect or limit the proposed activity?
(8) Regardless of the answers to the foregoing questions, are there any known U.S. Government concerns or issues, from a policy or other perspective, with respect to the proposed transaction?
(9) Regardless of the answers to the foregoing questions, will all registration, recordkeeping, and document creation requirements be satisfied with respect to the proposed export activity?
(10) Are there related limitations or issues, such as those imposed by contract terms, payment issues (e.g., with letters of credit); intellectual property rights, internal business policies, conflict of interest rules, foreign export and import laws, or hazardous materials or other safety-related regulations?

(Source: Author: Kevin Wolf, Esq., Bryan Cave LLP)


India - Asean FTA filalizing the agreement

According to Nikkei press on Aug. 11, the on-going India and Asean FTA is finalizing and will be signed on Dec. 2008.

Both parties will reduce the import duty to 5% to promote the goods trade. India will reduce the average duty rate from 30% to 5%, and Asean will reduce from 10% to 5%. This will certainly helpful for Japanese traders which have facility in Asean.

For Asean, India is 4th FTA agreement, followed by China, Korea and Japan.


Warning of export violation to Nakano Corp.

As reported on this Blog on June 16, vacuum pomp which was manufactured by Japanese manufacturer was found in North Korea to be used in their nuclear facility.

According to the news report, the vacuum pomp was not likely to be falling into "List control" of Japanese export control law, which is classified with technical specification. Instead, METI try to accuse with "Catch-all" control violation, which impose export license of all products to be used for WMD.
However, in order to judge as guilty in this Catch-all control, it is required to prove the shipper have clear written evidence which shows the product will be used for WMD purpose "objectively". METI call this as "objective condition".
Nakano Corp clearly had recognition their exported products to Taiwan would be re-exported to North Korea, however they didn't have clear written evidence from Taiwan impotter for that.

Therefore, METI impose only warning to Nakano Corp, made public in METI web site on Aug 08, 2008, and didn't impose penalty such as export suspension. In 2007, Yamaha and Mitutoyo were imposed the suspension of export for certain period as penalty.

Considering the Nakano Corp's exported goods lead to threat to national security, the warning only this time can be considered as light penalty, especially compared with Yamaha and Mitutoyo' cases.

(Source: http://www.meti.go.jp/policy/anpo/kanri/topics/keikoku/080808press.pdf)


China encryption regulation can be business?

As it is widely known, China strictly control encryption software. For sales, import, and use of encryption in China is subject to Chinese government review and the license application. Although the product which encrypting is not core function (e.g. Personal Computer, mobile phone etc.) is exemption of this encryption restriction, basically encryption software is subject to control and Japanese companies may face difficulty to bring in and its use in China.

Otsuka Corporatin, the leading IT Solution provider in Japan, launched packaged service for supporting their clients to get appropriate China encryption license.
They tied up with Chinese law firm who help to get encryption license from Chinese authority. (上海市協力律師事務所 http://www.co-effort.com/en/home.asp )

The packaged service fee is depending on the client's needs and case-by-case, its starting price is from JPY700,000 (approx. US$6,500).
For companies who are seriously considering the encryption software business in China, Otsuka's this packaged service may be good options to choose.

(Source: Otsuka Corp: http://www.otsuka-shokai.co.jp/products/chn/pack.html )

CBP Seeks to Ease Concerns on Border Searches of Electronic Devices

A senior U.S. Customs and Border Protection official moved this week to ease concerns about CBP's policies concerning searches of laptop computers and other electronic devices at U.S. borders. Deputy Commissioner Jay Ahern defended the policy and said the agency has specific measures in place to protect business and trade information.

In a document
[http://www.strtrade.com/wti/2008/august/08/search_authority.pdf] dated July 16, CBP "sets forth the legal and policy guidelines within which officers may search, review, retain and share certain information possessed by individuals who are encountered by CBP at the border, functional equivalent of the border, or extended border." These guidelines include the following provisions.

* CBP officers may examine documents, books, pamphlets, and other printed material, as well as computers, disks, hard drives, and other electronic or digital storage devices. These examinations are "a crucial tool" for detecting information in violation of copyright and trademark laws as well as evidence of embargo violations or other import or export control laws.

* In the course of a border search, CBP officers can review and analyze the information transported by any individual attempting to enter, re-enter, depart, pass through or reside in the U.S. without "individualized suspicion." They can also detain documents and electronic devices or copies thereof for a reasonable period of time to perform a thorough border search, either on-site or off-site. During this time information may be shared with other federal agencies or entities to assist with translation, decryption or subject matter analysis.

* If CBP officers determine there is probable cause of unlawful activity, based on a review of information in documents or electronic devices encountered at the border or on other facts or circumstances, they may seize and retain the originals and/or copies of relevant documents or devices.

* If CBP does not have probable cause to seize information after reviewing it, any copies must be destroyed. However, there is no limitation on the authority of officers to make written notes or reports or to document impressions relating to a border encounter.

The policy includes specific provisions governing how CBP handles business information and attorney-client privileged material. CBP officers encountering business or commercial information in documents or electronic devices are required to treat it as business confidential information and to take all reasonable measures to protect it from unauthorized disclosure. And although legal materials are not necessarily exempt from border searches, they may be subject to special handling procedures. Specifically, if a CBP officer suspects that the content of correspondence, court documents or other legal documents that may be covered by attorney-client privilege may constitute evidence of a crime or otherwise pertain to a determination within CBP's jurisdiction, the officer must seek advice from the associate or assistant chief counsel or the appropriate U.S. attorney's office before conducting a search of the document.

Although public concern about this policy has only been expressed fairly recently, Ahern noted in an Aug. 5 posting on CBP's Web site that the policy is in fact not new, that CBP has been searching laptops of those who warrant a closer inspection for years, and that the agency's authority to conduct suspicion-less laptop searches at the border has been upheld by U.S. courts. With respect to specific concerns that the policy could put trade information at risk, Ahern pointed to CBP's track record with the "thousands of commercial entry documents, shipping manifests, container content lists, and details pieces of company information" it receives each day as part of its mission to process entries and screen cargo shipments. "This information is closely guarded and governed by strict privacy procedures," he emphasized, and "information from passenger laptops or other electronic devices is treated no differently."

Nevertheless, some lawmakers are moving to put additional limitations on CBP's search authority. Rep. Zoe Lofgren, D-Calif., introduced July 23 legislation (H.R. 6588) that would prohibit searches of the electronic contents of a laptop or similar device based solely on the government's power to "search at borders or upon entry to the territory" of the U.S.

(Source: www.strtrade.com/wti/register.asp; Copyright 2008, Sandler, Travis & Rosenberg, P.A. Originally published in the Friday, August 8, 2008, issue of ST&R's WorldTrade\Interactive. Reprinted by permission.)


Export Control regulation will be updated to introduce conventional weapon catch-all control

Japanese Ministry of Economy, Trade and Industry (“METI”) will have seminar to public business audiences on August 29, 2008 in Tokyo to make it widely known for planned new export control regulation. The new additional regulation in export control is called “Conventional weapon catch-all control”, which is planned to be effective on November 1st, 2008. This new regulation is introduced to reflect the agreement of Wassenaar in December 2003, which aim to prevent the diversion of conventional arms and sensitive dual-use goods and technology from being used to assist terrorist acts.

According to the METI web site, the summary of planned change of export control is as below.

 Newly list up the restricted country group (as United Nations arms embargo countries) for tighter export control, which are Afghanistan, Democratic Republic of the Congo, Cote d'Ivoire, Iraq, Lebanon, Liberia, North Korea, Sierra Leone, Somalia, Sudan.

 Add up new product list category #15-2 in Export Trade Control Order Attachment List No. 1 and in Foreign Exchange Order Attachment List. The products are consisted by 32 items which are sensitive dual-use items such as carbon fiber, machinery tool, computer and its peripheral (having an APP exceeding 0.5 WT), Jamming equipments, radar, gyroscope, rocket propulsion etc.

 In case the exporter come to know under normal course of business that above mentioned goods or technology in category #15-2 will be exported to United Nations arms embargo countries for the development, manufacturing and use for conventional arms, the export license is required and the exporter needs to submit license application to METI for their review.

 The existing catch-all control regulation of weapons for massive destruction (“WMD”) are still valid and unchanged.

 The “White countries” which adopted major international regime (NSG, AG, MTCR, WA) and have solid export control in place are also exempted of this conventional weapon catch-all scheme. The White Countries are 26 countries, such as Argentina, Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Republic of Korea, Luxemburg, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, United Kingdom, and the United States of America.

 The “Intermediate countries” which are countries other than White countries and United Nations arms embargo counties, are imposed less strict implementation on conventional arms catch-all. For Intermediate countries, such as most of Asean counties, are applicable to this regulation only when they are “Informed” (*) by METI. This will release the exporter from their responsibility to screen proactively the end-user and end-use of business for Intermediate countries.

In short, Japan will have duplicated catch-all control schemes, catch all for WMD and for conventional weapons. In order to narrow the controlled product list for conventional arms catch-all, METI developed new product list category #15-2.

The response of Japanese business society is somewhat mixed emotion. Although they understand the necessity and criticality to make contribution to global security, the new regulation is quite complicated and is likely to make additional burden to business operation such as additional compliance screening of clients, compliant to customs procedure, and training and awareness to employees for new regulation etc. With such a response from industries, Center for Information on Security Trade Controls (“CISTEC”) which is association of exporters in Japan, gave their opinion as representative of Japanese industries to METI that such new regulation is too complicated to effectively implement in day-to-day operation and proposed more simplified alternative regulations and rules.

Until its effective date on November 1st, 2008, some minor modifications of the rule may be in place, but the implementation of this conventional arms catch-all control is inevitable, the traders need to catch up the new regulation and understand its implication to each business to be compliant to the export control law.

(*) “Informed” condition
METI monitor export activities by closely working with Customs, foreign government and other sources. If an exporter has been so informed by METI on a particular export, the exporter must obtain an export license. The “inform” is given when METI considers that the items to be exported may be used for the development, manufacturing, use of storage of WMD and/or missiles. Over 40 “informed” cases took place during the period from April 1st, 2002 to the end of March 2006, according to METI.


Yamazaki Mazak gave up factory set up in India due to export violation concern

Yamazaki Mazak Corp. is a leading machine tools manufacturer in Japan. According to the news articles of Nikkan Kogyo Shimbun (Business & Technology Daily News) on August 5, 2008, Yamazaki Mazak gave up building new factory for machine tools in India. India is considered as one of the countries where the export control is insufficient, thus they may suffer diversion risk of illegal export from India to somewhere third country. The news source imply Yamazaki Mazak failed to get export license by METI for this India project.
As similar case in 2007, MORI SEIKI CO., LTD., another major machine tools company, abandoned the new factory set up in Thailand to be compliant to export control regulation. The candidate machine tools which planned to be produced, had high technical specification needed export license by METI.

Yamazaki Mazak have already searched the land for factory in India, planning to start the production in 2009. The factory was supposed to produce low-end machine tools for India domestic market. There are, however, concerns for being used for military use in India other than illegal re-export to third countries.

In Japanese export regulation, India is not considered as "safe" country. In addition, India is not a member of all the international export control regimes and not implementing export controls as strictly as those in Japan. Japanese METI disclose 26 Indian entities in the proliferation concern list, as they are organizations that may have relationships with WMD and/or missile activities.

From trade compliance perspective, export regulation indeed must be followed.
However, too strict restriction will lose competitiveness of Japanese companies and burdens for business. Especially for India, US government has a very important and a strategic relationship with India and is going to be understood in the broader context of facilitating trade in the foreign policy context. If Japanese government continue to be too strict in implementation to India, it may jeoparadize the long term strategy for trade policy in Japan.


Export violation by Japanese Machine Tool Maker

Police raided Horkos Corp., a machine tool maker in Fukuyama, Hiroshima Prefecture, and a dozen other locations Thursday on suspicion the company illegally exported machine tools convertible for use in the development of nuclear weapons.

The Metropolitan Police Department's Public Security Bureau and the Hiroshima Prefectural Police said they are investigating the possibility the tools may have been exported to the Middle East or North Korea by way of South Korea.

The tools, called machining centers and priced at millions of yen each, are typically used to manufacture automotive components and other devices but are also capable of producing components in centrifuges, the separating devices used to make highly enriched uranium.

They are listed as an export-controlled item by the Ministry of Economy, Trade and Industry in line with provisions of the Foreign Exchange and Foreign Trade Law.

A listed item is required to be approved for export by the trade minister. Horkos is suspected of falsely declaring more than one such machine tool as being of a lower caliber that does not require ministerial authorization for export. The tools are believed to have been been shipped to South Korea in 2004.

The buyer was a general company not involved in weapons development, but the machine tools may have been resold, police said.

Questioned by the MPD, Horkos officials in charge of machining center exports admitted they were aware unauthorized exports were being made, police said.

According to the company's Web site, Horkos was set up in 1940 and generated ¥21 billion in sales in the year to last September. The firm had 665 employees.