Last May, I had an interesting discussion with my friend and mentor on all things related to export compliance, Paul DiVecchio.

Paul, the principal of the Boston-based DiVecchio & Associates, has provided export compliance consulting services to U.S. exporters for nearly 40 years.

The story he told me is something that might keep export compliance officers up at night, and it has stuck in my head ever since.  Now that I have this blog, I’d like to share some of the highlights of our discussion.  You can also see his original account in American Shipper.

Background

The Trump Administration has long been concerned about the Chinese company Huawei, a maker of advanced 5G networks.  It has accused the company, among other things, of stealing U.S. technology and posing an espionage threat.

In May 2019, BIS placed Huawei on the EAR’s Entity List after determining that “there is reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States.”  It also placed 68 of Huawei’s  non-U.S. affiliates on the list, citing the same concern.  As a result, U.S. companies seeking to export items to Huawei or one of these affiliates will face additional license requirements with fewer exceptions available for export, reexport, and transfers.

This poses a major challenge for U.S companies doing business with Huawei, especially rural telecoms that rely on it for parts and equipment and exporters that sell it microchips and other specialized parts  (e.g., Intel, Qualcomm, and Broadcom).  Perhaps less obviously, it also created a severe headache for compliance officers due to the botched way in which the rule change was published.

The Confusion

Suppose you are an export compliance officer with a U.S. company that exports microchips to Huawei and several of its non-U.S. affiliates.   It is the morning of Tuesday, May 21, 2019.  You sit down with your coffee and start your morning routine.  After catching up on email, you diligently check the Federal Register and notice the following:

You draw three conclusions from this.  First, the Final Rule adding Huawei and 68 of its non-U.S. affiliates to the Entity List was published earlier today.  Second, this rule became effective about four business days ago, on May 16th.  Third, you potentially have a huge mess on your hands because, during the interim period between these two dates, your company has continued to export items to these entities without obtaining necessary licenses or exceptions. Even accounting for a savings clause, which exempts items that were en route aboard a carrier to a port of export or reexport as of the effective date of the Final Rule, you are still on the hook for items that were placed aboard a carrier after the effective date.

In other words, the instant you find about the new rule (on the same day that is published) you have already been in violation for several days.  Now, it is possible that you read the Prepublication Notice, which went out on May 16.  As Paul writes, however, “most exporters do not refer to the public inspection postings of Federal Register notices — or for that matter even know these exist.”

Moreover, even if you had read the earlier notice, you would have been confronted with a confusing array of ambiguous dates and language.

As Paul notes:

  • “Even if the exporter’s compliance manager had reviewed the public inspection notice of the Entity List additions, he or she could have read the statement on the second page, “Effective Date: This rule is effective [INSERT DATE OF DISPLAY ON THE PUBLIC INSPECTION LIST].” That would signal to the exporter that enforcement of the rule would actually start at midnight on Tuesday [May 21] and that his or her exports en route to Huawei through that actual publication date in the Federal Register are still in compliance.”
  • “BIS did not highlight on its website the effective date of the restriction, May 16, for the addition of Huawei and its 68 overseas affiliates, until Friday [May 17], in essence 24 hours later than the public inspection notice’s release. At the same time, the agency’s website posting incorrectly referenced the Federal Register notice (which will be officially published Tuesday [May 21]) and did not correctly identify the Federal Register public inspection.”
  • “As of 7 a.m. EST Monday [May 20], the BIS Entity List posted on the Export Administration Regulations (EAR), under Supplement No. 4, part 744, had not been updated with Huawei and its 68 affiliates.”
  • “The Consolidated List on the BIS website, which is used by many export compliance staff to conduct their restricted party screening, also had not been updated by the agency as of 7 a.m. Monday [May 20].”
  • “During the scramble to figure out exactly when enforcement of the Huawei additions to the Entity List [took effect], the various third-party restricted parties screening vendors did not update their databases until various times on Friday, almost one day after the date of restriction.”
  • “In essence, you had to know that you could not release from your shipping dock exports to Huawei or any of the company’s 68 affiliates on the Entity List no later than 11:59 pm. EST on May 16. Otherwise, you would be in violation. (You would have had to know that the posting to the Federal Register public inspection was made at 4:15 pm EST on May 16. In essence, you would have had seven hours and 44 minutes to know about the posting — 45 minutes prior to the end of the workday — in order to get the shipment off of your dock or you would be in violation of the EAR.)” [emphasis added].

Even the most seasoned and diligent export compliance officer would find this situation baffling and infuriating.  Or, in Paul’s words, he or should would be “mad as hell.”

Lessons

It is clear that BIS drastically mishandled the rollout of the new rule, creating confusion, stress, and uncertainty as a result.  This is of course a pretty big problem for an industry that relies on predictability and transparency of federal regulations to enhance business opportunities and avoid violations.  I will not speculate as to how or why this happened, though I have some ideas (I am sticking with my no political commentary rule, and that is all I will say for now…).

But there are some lessons for people working in export compliance.  First, make a habit of keeping up with prepublication notices.  Although this situation is (and hopefully will remain) an outlier, something similar could very well happen again, and it is crucial to understand the differences and interplay between prepublication notices and official publications of final rules in the Federal Register.  It might also help to set up some targeted Google Alerts (for instance, “Huawei + Entity List), and refine the search terms regularly.  Second, export compliance officers should invest time cultivating and maintaining good relationships with BIS officials.  It is tough to say how much this would have helped in this particular situation, but it is always good to have a clear line of communication when you need to clear up ambiguity.  And third, always keep meticulous records of your compliance efforts.