RAPTAC / Regulations and Procedures Roundup

The Commerce Department’s Bureau of Industry and Security Regulations and Procedures Technical Advisory Committee held their quarterly meeting Tuesday, with a wary eye towards the year end and potential for a change of regime.

Rules Update

The meeting began with a discussion about the rulemaking flow as the year wraps up.  

"We do have a couple of proposals out." said Hillary Hess, Director, Regulatory Policy Division at BIS.  "We need to get comments on them and see if we'll be able to finalize them or not. Because you know, you don't really know until the comments come in.

"But more generally, I think agencies that want to propose rules like to get them out earlier so that they can check and finalize them before possible personnel changes.

Hess discussed recent activities and ongoing rulemaking efforts by the BIS.  Key points from the discussion include:

Rulemaking Cycle: BIS and other agencies are focusing on finalizing rules ahead of potential personnel changes with the end of the administration. However, Hess noted no strict deadline for these efforts, though personnel consistency is often preferred.

Notable Proposed Rules:

• BIS proposed changes to military and intelligence-related export controls in July and August, addressing new human rights considerations and foreign security end-users.
• An update to the Commerce Control List in early September, referred to as the "quantum rule," introduced new license exceptions and focused on quantum technology.

5. Compliance and Enforcement:

• On September 16, BIS issued a rule refining voluntary self-disclosure processes and adjusting how aggravating factors affect penalties.

6. Data Centers and End-User Programs:

• • BIS introduced a structure on October 2 to expand the Validated End User (VEU) program, originally focused on China and India, to new destinations, with a focus on data centers.

Semiconductor Supply Compliance

Jimmy Goodrich of the RAND Corporation presentation to the RAPTAC meeting emphasized several key areas:

1. RAND’s Research Focus:
• The intersection of technology, national security, and trade.
• Current projects include AI, large language models, semiconductor supply chains, and biosecurity.
• New initiatives include a China Center focusing on non-military aspects of China, such as trade and supply chains.
2. Semiconductor Industry Dynamics:
• The semiconductor market is expected to grow to $1 trillion by 2030 from approximately $550 billion in 2023.
• The industry’s global nature involves complex supply chains with distributors playing a critical role.
• Approximately 36% of semiconductor sales in 2023 were through distributors, who are essential for reaching smaller customers and markets worldwide.
3. Challenges in Export Control and Diversion:
• Regulatory challenges stem from the complexity of distribution channels, where chips often pass through multiple intermediaries across countries.
• The use of gray markets and counterfeit chips complicates compliance efforts. During the pandemic, automakers experienced disruptions due to dependency on such distribution channels.
• The Russia-Ukraine conflict has highlighted the issue of illicit diversion, where chips intended for civilian use have found their way into military applications.
4. Enforcement and Compliance:
• While U.S. enforcement efforts are underway, including by BIS and the Department of Justice, the sheer volume of low-cost, easily obtainable components complicates control efforts.
• Goodrich stressed the limitations of enforcement, suggesting that policymakers focus on developing counter-technologies rather than solely tightening export restrictions.
5. Technology and Future Solutions:
• The application of new technologies, such as big data tools, to enhance end-user screening is promising.
• Goodrich suggested that BIS explore partnerships with private companies and expand its use of software tools already employed by agencies like the Department of Homeland Security.
• He noted the potential of blockchain for tracking transactions but acknowledged practical challenges, particularly for low-cost components.
6. Policy Recommendations:
• Goodrich highlighted the importance of educating policymakers about the complexities of the semiconductor supply chain.
• He encouraged industry engagement with legislators to shift the focus from blaming U.S. companies to finding effective countermeasures against adversaries like Russia.
• He suggested exploring innovative solutions, similar to those used in other industries like pharmaceuticals, to improve visibility and traceability in the semiconductor supply chain.

Goodrich concluded by emphasizing the importance of practical, multi-faceted approaches to tackling the challenges in global trade and supply chains, advocating for a mix of technology, policy, and collaboration.

CSIS on Semiconductor Smuggling

Barath Harithas, from the Center for Strategic and International Studies, presented a detailed analysis on the prevalence and complexity of semiconductor chip smuggling, especially in the context of national security and trade. Key points from his presentation include:

1. Overview of Smuggling:

• Harithas explained the widespread prevalence of smuggling, emphasizing that it is far more sophisticated than typically perceived. The challenge lies in incomplete information about both smuggling operations and chip distribution networks.
• He outlined the need for better understanding of how chips are bought, transported, and evaded through customs, and explored the involvement of companies like UPS and FedEx in screening packages.

2. Chips as a Key Smuggling Target:

• Chips, unlike larger manufacturing equipment, are compact and valuable, making them ideal for smuggling. For instance, high-end chips like Nvidia’s A100 can be hidden in small packages, making detection difficult.
• Smuggling operations often involve networks of shell companies and transshipment through multiple countries, making it hard to trace the origin and destination of smuggled goods.

3. Tactics Used by Smugglers:

• Harithas explored 11 common smuggling tactics, including the use of shell companies, bribing customs officials, concealing chips in other electronic devices, and utilizing private couriers like FedEx and UPS to avoid detection.
• He described how chips are often hidden within servers or disassembled and reassembled to evade customs. Smugglers also use techniques such as mislabeling shipments or inserting chips into legitimate cargo like rice or electronic goods.

4. Challenges for Detection:

• The presentation highlighted the challenges customs officials face in detecting chip smuggling. In countries with limited resources, bribery and insufficient technology make it difficult to identify smuggled goods.
• Harithas noted that while advanced technologies like X-ray systems can help detect hidden chips, their use is limited to wealthier countries.

5. Key Lessons and Policy Recommendations:

• Early Detection: Smuggling becomes harder to detect once it passes through transshipment networks, making early detection at the point of sale or customs critical.
• International Cooperation: U.S. enforcement agencies are overstretched, and Harithas emphasized the need for collaboration with countries that are key transit points for smuggling, such as Southeast Asian nations.
• Improved Intelligence: He advocated for better use of modern analytics and intelligence-sharing networks to detect suspicious patterns in trade and smuggling routes.

6. Recommendations for Addressing Smuggling:

• Limit Smuggling Channels: Harithas suggested narrowing the number of channels through which chips can be smuggled by increasing traceability at the point of sale and enhancing KYC (know-your-customer) checks.
• Specialized Customs Advisors: He proposed deploying small teams of experts to key smuggling regions to assist customs officials with identifying suspicious shipments.
• Modern Technology: He recommended integrating modern analytical tools for real-time monitoring and supply chain analysis, especially in regions with lower detection capabilities.

7. Conclusion:

• Harithas concluded that chip smuggling is increasingly prevalent but not insurmountable. He emphasized the importance of proactive strategies, better infrastructure, and targeted intelligence to reduce smuggling and protect national security.

Hand-Carried Exports

Scot Allen from the Colorado School of Mines spoke to the committee about challenges associated with hand-carried exports and the requirement to file Electronic Export Information (EEI) under U.S. export regulations.

The discussion highlighted complexities, regulatory gaps, and practical difficulties for individuals and organizations involved in such exports. Key points include:

1. Regulatory Inconsistencies for Hand-Carried Exports:

• Allen noted tensions between the Export Administration Regulations (EAR) and Foreign Trade Regulations (FTR) regarding hand-carries.
• Current rules require exporters to identify consignees and file EEI, but in hand-carry situations (e.g., travelers with laptops), these rules are impractical as the traveler retains control of the item, and the item doesn’t enter foreign commerce.

2. Consumer Electronics and Scope of the Issue:

• Many common devices (laptops, smartphones, tablets) fall under Export Control Classification Number (ECCN) 5A992, which is subject to controls for encryption purposes.
• Travelers to countries like China, Russia, and Venezuela often carry these items, creating significant compliance challenges.

3. Complexity for Different Types of Travelers:

• Allen emphasized the difficulties for a broad range of travelers, including business travelers, university personnel, airline staff, and tourists, who may unknowingly need to file EEI.
• The requirement extends beyond U.S. citizens, affecting anyone traveling with controlled devices.

4. Practical Difficulties with EEI Filing:

• Filing EEI is complex, requiring knowledge of AES registration, ECCNs, and an Employer Identification Number (EIN).
• Individuals, such as tourists or international students, often lack the necessary credentials (e.g., EIN or Social Security Number) to comply with filing requirements.

5. Recommendations for Regulatory Clarification:

• Allen suggested clarifying Section 758.1(b)(10) to address hand-carry scenarios, potentially by amending the rule or issuing interpretative guidance.
• Clear exceptions or guidance could alleviate the regulatory burden on travelers carrying consumer electronics.

6. Discussion on Terminology and Implementation:

• Participants discussed the use of the term “hand-carry” and noted it can have broader implications, such as for trade show equipment.
• They recommended distinguishing personal electronics from commercial equipment to avoid ambiguity.
• It was confirmed that consumer devices do not qualify for the "temporary export" (TMP) exemption in many cases, complicating compliance.

7. Proposed Next Steps:

• Allen and his team planned to submit their comment letter to the ongoing military end-user rulemaking process (ID: BIS-2024-0029) to ensure their concerns are addressed.
• The discussion highlighted the importance of regulatory clarity and coordination among agencies to address these issues.

Bill Root on Harmonizing Lists

Trade security institution Bill Root  addressed the complexity and challenges of harmonizing export control lists, focusing on issues surrounding overlapping regulations and the need for a consolidated control list. Key points include:

1. The Challenge of Overlapping Export Control Lists:

• Root highlighted the difficulty of navigating multiple control regimes, such as the U.S. Munitions List (USML), Commerce Control List (CCL), and multilateral treaties (e.g., MCT), which regulate similar technologies.
• He emphasized that this overlap creates confusion and inefficiencies for exporters and regulators, as the same items may appear under different regimes with varying conditions.

2. Call for a Single Control List:

• Root advocated for the creation of a unified export control list, where items would be clearly identified across all relevant regimes.
• This would align with earlier recommendations from President Obama and Defense Secretary Gates in 2010 to streamline export control processes.
• A consolidated list would improve transparency, reduce redundancy, and ensure that stakeholders understand what items are controlled and by whom.

3. Current Efforts and Challenges:

• He cited a recent example involving the removal of supersonic air gas turbine engine technology from one control list while remaining on others, demonstrating the inconsistency that a single control list could address.
• Coordination between agencies, such as the State Department and Department of Commerce, is essential but challenging. Root noted the need for expertise from different regulatory and technical bodies, including TRANSTAC, to manage both the legal and technical aspects of harmonization.

4. Ongoing Engagement and Collaboration:

• Root expressed his willingness to share his working drafts with relevant groups to facilitate progress. He acknowledged the overwhelming nature of the task but stressed that it is necessary to avoid confusion and ensure clarity in export controls.
• Participants recommended that Root collaborate with the regulatory clarity working group of RAPTAC and engage with TRANSTAC, given their technical expertise and focus on harmonizing regulations.

5. Next Steps and Bureaucratic Considerations:

• While the harmonization process involves technical challenges, Root identified bureaucratic hurdles requiring coordination across agencies and international treaties.
• The group acknowledged the complexity of the issue and expressed interest in discussing the bureaucratic aspects further in a closed session.

Root concluded by urging stakeholders to recognize the importance of this undertaking to ensure clear, effective export controls. He encouraged ongoing dialogue and offered to share additional documents through RAPTAC representatives for further discussion and collaboration.

VSD Update from Census

Jessica Mangubat and Kristi Sellers from the Census Bureau provided an overview of regulatory updates, voluntary self-disclosure (VSD) processes, and collaborative initiatives during their presentation to the RAPTAC meeting. Key takeaways include:

1. Regulatory Updates and Clean-Up Rule:

• The Census Bureau is working on a "clean-up rule" to address inconsistencies in the Foreign Trade Regulations (FTR) and provide clearer instructions for reporting goods transiting the U.S.
• This rule aims to standardize the reporting of entry numbers and foreign/domestic indicators in the Automated Export System (AES).
• They are also reviewing whether to eliminate the state of origin reporting requirement based on public feedback.

2. Electronic Export Manifest Collaboration:

• The Census Bureau is working with Customs and Border Protection (CBP) to integrate electronic export manifest data. This collaboration aims to enhance data quality for transportation elements like ports and methods of export, benefiting exporters and improving data accuracy.

3. Routed Export Transactions Rule:

• The Bureau, in collaboration with the Bureau of Industry and Security (BIS), is progressing on the long-pending routed export transaction rule, with "hopes" of a forthcoming proposal.

4. Voluntary Self-Disclosure (VSD) Program Improvements:

• Kristi Sellers outlined efforts to streamline the VSD process through a new fillable form. The form aims to make disclosures easier for companies and more efficient for Census staff.
• They are piloting the form by sending it to select participants for feedback before finalizing and posting it on the Census website.
• The VSD process aligns with the FTR and offers participants the option to submit disclosures through the form or traditional narrative formats.

5. Impact of Corrections and Data Revisions:

• VSDs play a crucial role in correcting data and ensuring compliance, with a focus on revisions made within three years, although corrections can be required for up to five years to meet regulatory obligations.
• In 2023, the Census Bureau handled significant data corrections, including over 7,400 unfiled Electronic Export Information (EEI) disclosures and 13,000 corrections through VSD.

6. Enforcement and Penalties:

• While the Census Bureau focuses on data correction through VSD, penalties and enforcement decisions fall under BIS, CBP, and other regulatory bodies.
• New language has been added to response letters to clarify that the Census Bureau's VSD program may not directly mitigate penalties imposed by other agencies.