On October 17, 2023, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) released two interim final rules (collectively, the “October 2023 IFRs” available here and here) amending the Export Administration Regulations (the “EAR”) to further strengthen export controls on advanced computing items, semiconductor manufacturing equipment, and items that can support end uses related to the development and production of supercomputers, advanced-node integrated circuits and semiconductor manufacturing equipment. The long-awaited October 2023 IFRs come more than one year after BIS issued rules on October 7, 2022 (the “October 2022 IFR”) targeting China’s advanced computing and semiconductor sectors and update, expand and clarify those rules in several key ways. Our previous blog post on the October 2022 IFR can be found here. BIS also issued a final rule adding two Chinese entities and their affiliates (13 Chinese entities in total) involved in the development of AI-capable advanced computing chips to the Entity List with a footnote 4 designation (the “Entity List FR”).
According to the BIS press release and the preambles to the October 2023 IFRs and the Entity List FR, the latest changes are intended to address the national security and foreign policy concerns in countering China’s military-civil fusion strategy and the development of advanced or frontier AI capabilities that can lead to improved weapons of mass destruction (WMD) and advanced conventional weaponry while minimizing unintended impact on trade flows.
The updates and clarifications in the October 2023 IFRs are extensive and also include BIS responses to the many comments on the October 2022 IFR that provide noteworthy guidance and interpretation on several topics, including quite expansive jurisdictional interpretations with respect to semiconductor supply chains in the context of the end-use controls of EAR § 744.23 and the scope of the Entity List Foreign-Direct Product (“FDP“) rules. A detailed review of all the comments is beyond the scope of this post, but should be a priority for all US and non-US participants in the semiconductor and supercomputer industries.
The October 2023 IFRs take effect on November 17, 2023 (except for a temporary general license which is effective on October 25, 2023). Note that BIS is seeking public comments on certain topics that have not been fully addressed by the October 2023 IFRs, including with respect to access to cloud/infrastructure-as-a-service (IaaS) to develop AI foundation models and deemed exports/reexports. The comment period ends on December 18, 2023.
The earlier October 2022 IFR focused on: (i) item-based and end-use-based controls for certain advanced computing integrated circuits (“ICs”), commodities incorporating such advanced ICs, and supercomputers; and (ii) item-based controls for certain semiconductor manufacturing equipment (“SME”) and end-use-based controls related to the development and production of SME. The October 2023 IFRs expand and clarify these through an Advanced Computing/Supercomputing IFR (the “AC/S IFR”) and a Semiconductor Manufacturing Equipment IFR (the “SME IFR”).
II. Key Changes in the October 2023 IFRs
- Changes to Technical Parameters and Expansion of ICs Controlled Under ECCN 3A090
The AC/S IFR creates a new structure and updates the technical parameters used for identifying items controlled under ECCN 3A090 to ensure ICs for AI training are controlled. Structurally, the revised 3A090 replaces former paragraphs .a.1 through a.4 with a simplified paragraph .a (for the most powerful data center ICs) and a new paragraph .b (covering additional, less powerful but still advanced ICs that could be used to train large-scale AI systems). Substantively, the revised entry removes “interconnect bandwidth” as a technical parameter and adds “performance density” as a new parameter. These changes are intended to counter workarounds to the former controls involving the use of a larger number of smaller data center AI chips containing the same power as one restricted chip.
Most importantly, the AC/S IFR (i) excludes certain non-datacenter ICs from control (e.g., certain high end gaming chips) and (ii) replaces bits x TOPS with “Total processing performance” (“TPP”) values, defining clear, objective criteria that can be used to calculate the “TPP” value. The AC/S IFR further refines the scope of control through the addition of new notes to 3A090 and revisions of the technical notes.
- Affirmative Identification of Items that “Meet or Exceed the Performance Parameters of 3A090 or 4A090” Under New .z ECCN Paragraphs and Related Export Clearance Requirements
The October 2022 IFR used the catch-all criteria “or identified elsewhere on the CCL that meet or exceed the performance parameters of ECCNs 3A090 or 4A090” in describing the scope of certain controls (e.g., § 742.6(a)(6)). BIS received comments raising concerns that this type of language is confusing, creates potentially dual ECCNs, and makes compliance burdensome.
To address these concerns, the AC/S IFR creates new .z paragraphs for nine ECCNs to affirmatively capture items that BIS has determined have performance characteristics or functions that meet or exceed the relevant performance parameters. The nine ECCNs are 3A001.z, 4A003.z, 4A004.z, 4A005.z, 5A002.z, 5A004.z, 5A992.z, 5D002.z, and 5D992.z.
The AC/S IFR also requires exporters to identify .z items at the “items” level classification in the electronic export information filing in the Automated Export System and, in certain cases, on the commercial invoice for export clearance.
- Semiconductor Manufacturing Equipment – Removal of ECCN 3B090, Transfer of Entries Into and Expansion of ECCNs 3B001 and 3B002
The SME IFR removes ECCN 3B090. Controls on SME formerly under ECCN 3B090 are expanded and placed under ECCNs 3B001 and 3B002 (with a view to these being controlled multilaterally in the future). A number of additional types of SME and equipment for manufacturing SME are now controlled, including: certain equipment designed for silicon (Si), carbon doped silicon, silicon germanium (SiGe), or carbon doped SiGE epitaxial growth; certain equipment designed for coating, depositing, baking or developing photoresist formulated for “EUV” lithography; semiconductor wafer fabrication cleaning and removal equipment; and inspection equipment designed for “EUV” mask blanks or “EUV” patterned masks, amongst others. These revisions to ECCNs 3B001 and 3B002 also prompted conforming changes to ECCNs 3D001, 3D002, and 3E001. For software and technology related to newly controlled SME described under 3B001, Regional Security (RS) and National Security (NS) controls have been added. The newly controlled equipment and related software/technology have been determined by BIS only to be used (with limited exceptions) for fabricating logic ICs with non-planar transistor architecture or with a “production” ‘technology node’ of 16/14 nanometers or less. Companies should carefully review the new and revised ECCNs.
The SME IFR states that BIS licenses for equipment classified under ECCN 3B090 remain valid until expiration, unless suspended or revoked. At the same time, exporters are required to list the new ECCNs on any export clearance documentation filed after November 17, 2023.
- 0% de minimis Level for Certain Foreign-Made Lithography Equipment
The SME IFR provides that there will be no de minimis level for certain foreign-made lithography equipment (and specially designed parts) that are now classified under ECCN 3B001.f.1.b.2.b when destined for use in the “development” or “production” of “advanced-node integrated circuits” (“Advanced-node ICs“), except if the country from which the foreign-made item was originally exported also controls the item (currently only Japan). This means that otherwise any amount of US origin content will make a foreign-made lithography equipment subject to the EAR under this ECCN.
- Expanded Jurisdictional Country Scope for the Advanced Computing FDP Rule
The AC/S IFR broadens the country scope with respect to the advanced computing FDP rule to Country Group D:1, D:4, and D:5 countries that are not also specified in Country Groups A:5 or A:6 (currently, countries that fall within both Country Groups D:1, D:4, and D:5 as well as Country Groups A:5 and A:6 include only Cyprus and Israel). The country group for this rule is further expanded to be worldwide when the foreign-made direct product is for an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country.
- Model Certificate Available For All FDP Rules
The AC/S IFR clarifies that the model certificate published in the October 22 IFR and which appears in supplement no. 1 to part 734 of the EAR may be used for all FDP rules. The AC/S IFR clarifies that the model certificate may be provided by anyone in a supply chain and flows both forward and backward in a supply chain (e.g., from the exporter, reexporter, or transferor to another entity in the supply chain or from a consignee back to an exporter, reexporter, or transferor).
- Expansion of Licensing Requirements from China and Macau to D:1, D:4, or D:5 countries
The October 2023 IFRs expand the list of countries for which licenses are required for National Security (NS) and Regional Stability (RS) reasons. This is apparently intended to close a loophole in exports to offshore affiliates of Chinese/Macau companies.
Specifically, under the revised controls in §742.4 and §742.6, a license requirement now extends to:
- the export, reexport, and transfer (in-country) of certain (including the newly-controlled) SME and related software and technology classified under certain paragraphs of ECCNs 3B001, 3B002, 3D001, 3D002, and 3E001 to or within Macau or a D:5 country (all the countries in Country Group E, as well as others including Afghanistan, Belarus, China, Iraq, Libya, Syria, Russia and Venezuela);
- the export of 3E001 technology (for 3A090) developed by an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country from abroad originating in either Macau or a D:5 country to any destination worldwide excluding any destination also specified in Country Groups A:5 or A:6, if the technology is the direct product of software subject to the EAR and the export is for the production of commodities identified in ECCNs 3A090, 4A090, and the new .z ECCNs; and
- the export, reexport, and transfer (in-country) of certain items classified under ECCNs 3A090, 4A090, the nine new .z ECCNs and related software and technology to or within a D:1, D:4, or D:5 country, excluding destinations also specified in Country Groups A:5 or A:6.
Applications that involve transactions falling under categories (i) and (ii) above will be reviewed consistent with license review policies in EAR § 744.23(d), except applications will be reviewed on a case-by-case basis if no license would be required under part 744 of the EAR rule. For applications falling under category (iii) above, if the items are for Macau or a D:5 country, then the applicable license review policy is a presumption of denial; if the items are for non-D:5 countries, the applicable license review policy is generally a presumption of approval, unless to an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country, in which case the applications will be reviewed under a presumption of denial policy.
Consistent with the October 2022 IFR, the license requirements above do not apply to deemed exports/reexports (although BIS seeks comments on this.)
- Expansion of End-Use Licensing Requirements in EAR § 744.23
The AC/S IFR expands the scope of the end-use controls in EAR § 744.23 by adding two new advanced computing end-use controls under new EAR § 744.23(a)(3) that impose a license requirement on:
- The export, reexport, and transfer of advanced computing items subject to the EAR and identified in ECCN 3A090, 4A090 or one of the new .z paragraphs to or within any country that is not a D:1, D:4, or D:5 country (excluding any destination also specified in Country Groups A:5 or A:6) (i.e., where a license would normally not be required) where there is knowledge that the item is destined for an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country; (this is apparently intended to close a loophole to capture foreign affiliates of Chinese companies purchasing restricted ICs for operating cloud servers or data centers outside China); and
- The reexport and transfer (in-country) from/within Macau or a D:5 country of 3E001 technology developed by an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country and that is subject to the EAR under the Advanced Computing FDP rule where there is knowledge that the technology is for the production of commodities or software specified in ECCNs 3A090, 4A090 or one of the .z ECCNs.
The AC/S IFR also expanded the country/destination scope of the supercomputer end-use controls and Advanced-node IC end-use controls to Macau and any D:5 country (not limited to China).
The SME IFR further reorganizes and simplifies the end-use controls adopted in the October 2022 IFR. The changes are shown in the below table included in the SME IFR.
We note the following key takeaways from the changes to § 744.23 :
- BIS has made no substantive changes to the supercomputer end-use controls in new paragraph (a)(1). The only update is the expansion of the destination scope discussed above.
- Regarding Advanced-node IC end-use controls in new paragraph (a)(2), the text used to describe the IC production facility has been updated to be clearer and more flexible. Specifically, the phrase “a semiconductor fabrication facility……that fabricates ICs” has been changed to “a facility……where production of Advanced-node ICs occurs” (“Advanced IC Production Facility”). According to the SME IFR, this change is meant to retain BIS’s focus on specific facilities at IC production locations that have multiple production lines at different technology nodes.
- The SME IFR also creates a new paragraph (a)(5) that excludes “back-end” production steps (e.g., assembly, test, or packaging activities that do not alter the technology node) from the scope of “production” activities as that term is used in the Advanced-node IC end-use controls.
- Regarding the SME end-use controls in new paragraph (a)(4), the SME IFR narrows the product scope to non-EAR99 items subject to the EAR and narrows the end-use scope to use for the development or production of “front-end IC production” equipment and certain 3B items. According to BIS’s response to Topics 27 and 28 in the SME IFR, the limitation to “front-end IC production equipment” allows the export, reexport, or transfer (in-country) of items for use in the development or production of masks and reticles in the specified ECCNs for fabricating ICs that are not Advanced-node ICs.
- Clarification and Updates to the “US Person” Activity Restrictions
The October 2023 IFRs reformat, revise and clarify the US Person restrictions under EAR § 744.6(c), incorporating guidance provided by BIS under FAQs issued since the October 2022 IFR, as follows:
- Expanding the country scope of the US person restrictions to include not only China and Macau but also all D:5 countries when the US person knows that the item will be used in the “production” or “development” of ICs at a facility of an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country.
- Easing restrictions on certain natural US persons employed by or working on behalf of (the latter term evidently a reference to independent contractors) a company headquartered in the United States or an A:5 or A:6 country and not majority-owned by an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country.
- Adding new red flag examples and additional due diligence requirements expected of US persons, building upon the BIS FAQs following the October 2022 IFR. US persons are required to review at least publicly available information, capability of items to be provided, proprietary market data, and end-use statements to assess whether the item is for the development or production of Advanced-node ICs at a facility of an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country.
- Clarifying that “production” (now used instead of “fabrication”) does not include back-end steps such as assembly, test, or packaging that do not alter the IC technology level and that a “facility” where only “development” activities occur would not be caught.
- Clarifying that “servicing” includes installation of items not subject to the EAR that you know will be used at a facility involved in the “development” or “production” of Advanced-node ICs or specified SMEs.
- Clarifying that the restrictions do not apply to:
- administrative and clerical activities;
- activities that do not directly relate to the prohibited end-uses;
- dealing in information or software that would otherwise be excluded from the jurisdiction of the EAR (e.g., “published” software); and
- law enforcement and intelligence operations of the US Government.
In short, US persons are prohibited from knowingly shipping, transmitting, or transferring (in-country), facilitating these activities, or providing services in connection with the following items, end-uses, or end-users:
- “Development” or “production” of Advanced-node ICs. To or within China or Macau, any item not subject to the EAR that you know will be used in the development or production of ICs at an Advanced IC Production Facility of an entity headquartered in either China or Macau;
- Category 3 items for “development” or “production” of Advanced-node ICs. To or within China or Macau, any item not subject to the EAR and classified under Product Groups B, C, D, or E in Category 3 of the CCL that you know will be used in the development or production of ICs at an IC production facility of an entity headquartered in either China or Macau, but you do not know whether that facility is an Advanced IC Production Facility; or
- Semiconductor manufacturing equipment. To or within either Macau or a D: 5 country, any item not subject to the EAR and classified under certain 3B ECCNs, regardless of the end use or end user.
No license exceptions apply to these prohibitions. The AC/S IFR creates new sections to supplement no. 2 to part 748 of the EAR with guidance on how to apply for a license under the US person restrictions.
License applications will be reviewed with a presumption of denial for Macau and D:5 countries, except activities involving a foreign-made item not subject to the EAR that performs the same function as an item subject to the EAR which will be reviewed with a presumption of approval. All other applications will be reviewed with a license review policy of case-by-case.
- New Temporary General Licenses (“TGLs”)
The October 2023 IFRs create two new TGLs as follows:
- The AC/S IFR creates a new TGL to minimize the impact on supply chains for advanced computing items.
This AC/S IFR TGL overcomes the new RS controls in EAR § 742.6(a)(6)(iii) to authorize the export, reexport, and transfer of certain otherwise controlled items to or within D:1, D:4, or D:5 countries (excluding countries also specified in Country Group A:5 or A:6) where the recipient is located in Macau or a D:5 country but is not headquartered in and whose ultimate parent entity is not headquartered in Macau or a D:5 country to continue or engage in integration, assembly, inspection, testing, quality assurance, and distribution of items covered by the product scope of the TGL, provided for the ultimate end use outside of a D:1, D:4, or D:5 country (excluding countries also specified in Country Group A:5 or A:6) by entities that are not headquartered in or whose ultimate parent company is not headquartered in Macau or a D:5 country.
The AC/S IFR TGL does not overcome the license requirements triggered by the involvement of a party on the Entity List or the Military End-User List or knowledge of any other prohibited end-use or end-user (with some exceptions under §744.23).
The AC/S IFR TGL is valid for two years and expires on December 31, 2025.
- TGL – Less Restricted SME “parts,” “components,” or “equipment” overcoming the end-use license requirements described in new EAR § 744.23(a)(4) in some situations (Supplement No. 1 to Part 736 (d)(1)).
This SME TGL authorizes the export, reexport, or transfer (in-country) of (i) non-EAR99 items subject to the EAR and controlled only for AT reasons, (ii) to manufacturing facilities in a D:5 country or Macau, (iii) for the development or production of parts, components, or equipment of certain Category 3B ECCNs specified in EAR § 744.23(a)(4), provided (iv) at the direction of companies headquartered in the United States or an A:5 or A:6 country and not majority-owned by an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country.
According to the SME IFR, this TGL is intended to give SME manufacturers in the United States and A:5 and A:6 countries additional time to identify alternative sources of supply outside of restricted countries or to obtain BIS licenses to continue manufacturing front-end IC production equipment.
The SME TGL cannot be used for the indigenous development or production of Category 3B tools or parts in a D:5 country or Macau at the direction of an entity headquartered in, or whose ultimate parent entity is headquartered in, either Macau or a D:5 country. This TGL also does not overcome the license requirements triggered by the involvement of a party on the Entity List or the Military End-User List or knowledge of any other prohibited end-use or end-user.
The SME TGL is effective immediately, valid for two years and expires on December 31, 2025.
- Creation of New License Exception Notified Advanced Computing (NAC) for Certain Non-Datacenter ICs
The AC/S IFR creates a new License Exception NAC (at EAR § 740.8) authorizing exports, reexports, and transfers of (1) certain less powerful but still advanced ICs under the new ECCN 3A090.b and (2) certain 3A090.a commodities that are not for data centers but do have a TPP of 4800 or more. License Exception NAC cannot be used for ECCN 3A090.a data center ICs and, with limited exceptions, is generally not available for transactions that are subject to a license requirement under Parts 744 or 746 of the EAR or for transactions involving a “military end-use/user”.
For exports and reexports (excluding in-country transfers) to Macau or a D:5 (arms embargoed) country, prior notification of 25 calendar days must be provided to BIS via STELA prior to the first export or reexport. Notification requirements do not apply for transfers (in-country) within D:1 or D:4 countries. This notification requirement is intended to enable the US Government to collect information about the export of less advanced ICs. BIS will publish a further notice when STELA is ready to accept License Exception NAC notifications.
- Other License Exception Changes
The October 2023 IFRs make commodities classified under ECCNs 3A991.p and 4A991.l eligible for License Exception Consumer Communications Devices (CCD), add eligibility for License Exception TMP for temporary exports of advanced computing items under 3A090 and 4A090 for inspection, test, calibration and repair, make other adjustments to various license exceptions related to the new .z ECCN paragraphs, amongst other changes.
- New Definitions For “Advanced-Node ICs” and “Extreme Ultraviolet”
The SME IFR introduces two newly defined terms: “advanced-node ICs” and “extreme ultraviolet”.
- “Advanced-node IC” is defined to mean ICs that meet the same criteria announced in the October 2022 IFR and codified in the former EAR § 744.23(a)(2)(iii)(A) through (C). The SME IFR clarifies the meaning of “technology node” referenced in the definition and the calculation method for DRAM ICs by adding notes to the definition.
- “Extreme Ultraviolet (EUV)” is defined to mean electromagnetic spectrum wavelengths greater than 5 nm and less than 124 nm.
These two terms are used in the US person restrictions in § EAR 744.6, the end-use controls in EAR § 744.23, and various ECCNs.
- KYC Compliance Guidance
In response to comments to the October 2022 IFR, the AC/S IFR adds five new red flags to the “Know Your Customer” Guidance in supplement no. 3 to part 732 of the EAR to help the public ensure compliance with the new rules. These include a red flag for knowledge of future intent to develop or produce restricted supercomputers or advanced ICs. Additional due diligence may be required to address and resolve these red flags before proceeding with a transaction.
III. Entity List FR
BIS added two Chinese entities and their affiliates (13 Chinese entities in total) to the Entity List with a footnote 4 designation for their involvement in the development of large AI models and AI chips for defense purposes.
The Entity List FR includes a savings clause that exempts shipments from the new license requirements associated with the Entity List party that were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on October 17, 2023, pursuant to actual orders.
Despite some simplifications, the new restrictions remain extensive, highly complex and technical. Companies in the advanced computing, semiconductor manufacturing equipment and supercomputer sectors should carefully review the new October IFRs to assess the impact on their operations. We will continue to monitor developments and are available to answer questions.