On 11 April 2019, the US Department of Commerce Bureau of Industry and Security (BIS) issued a Final Rule (84 FR 14608) adding fifty companies to the Unverified List (UVL). The UVL is a list of foreign persons or entities, who are parties to a transaction involving a US export, re-export or in-country transfer of US goods or technology, and whose “bona fides” or legitimacy the BIS has not been able to confirm through an end-user check. Thirty-seven of the fifty companies added are Chinese mainland, six are from Hong Kong SAR, and one Indonesian designation appears to be a subsidiary of a Chinese state-owned enterprise (SOE). The newly-designated Chinese entities are mostly universities, institutes, engineering and technology companies and logistics companies. Some of the UVL subjects are well-known in China and not lacking in bona fides. Trade actions are being used more and more under the current US Administration and the subjects of the actions are often Chinese entities.
What is the UVL?
The UVL can be found at Supplement No. 6 to Part 744 of the Export Administration Regulations (EAR). The UVL contains names of foreign persons and entities who have been involved in an export, re-export or in-country transfer of items subject to the EAR and for whatever reason could not be verified as a reliable actor. BIS performs end-use checks, which can be a pre-license check or a post-shipment check. The end-user may be contacted via mail or phone or other means to verify the end-user information, the export and the end-use. If BIS cannot confirm the end-user data, then the bona fides of the person or entity, specifically the person’s or entity’s legitimacy and reliability relating to the end-use and end-user of the item subject to the EAR, is called into question. According to BIS, “[t]he inability of foreign persons subject to end-use checks to demonstrate their bona fides raises concerns about the suitability of such persons as participants in future exports, re-exports, and transfers (in-country) of items subject to the EAR and indicates a risk that such items may be diverted to prohibited end-uses and/or end-users.” Accordingly BIS adds them to the UVL. The persons or entities are placed on the UVL and not placed on the Entity List, because there is only a suspicion and not harder evidence of a breach or potential breach of US export control laws. The suspicion can be the product of an incomplete check—for example, a receptionist refuses the call, an ill-informed sales person refuses to confirm certain information, or an address on the BIS-submitted documents omits a key detail and letters seeking confirmation for the end-use check are repeatedly returned or unanswered.
The problem with being placed on the UVL is that the subject entity is no longer able to avail itself of license exceptions for receiving US exports, re-exports, and transfers (in-country). Even shipments that do not involve items subject to license under the EAR require the exporter to obtain and maintain a record (UVL Statement) from the person or entity listed on the UVL whenever they engage in a transaction with the exporter. Exporters who see the entity on the UVL may be skeptical of the legitimacy of the person or entity as a trading partner and end-user. An exporter may also be concerned about its reputational risk if it engages in transactions with an entity on the UVL. Thus, the UVL listing has a chilling effect on trade for the person or entity placed on the List.
Getting Off the List
If you are on the UVL, you can apply to BIS for removal pursuant to 15 CFR 744.15(d). In requesting removal, the foreign person or entity shall convincingly demonstrate to BIS the bona fides of the person or entity as a participant in transactions involving US exports, re-exports and transfers. The Deputy Assistant Secretary for Export Enforcement will render a decision removing the person or entity if BIS is satisfied with the legitimacy and reliability of the person or entity as a party to future transactions involving items subject to the EAR. KWM can help you to apply and advocate for removal.
Staying Off the List
Too often Chinese parties are caught by these types of US regulations simply because they have not prepared and trained staff internally to anticipate these inquiries. There is a natural tendency of staff to reject calls, ignore English letters, or refuse to confirm or deny information when asked. Companies with significant trade involving US-origin goods should have a designated team in the purchasing department that manages the company’s involvement in these transactions. Calls, letters, or other inquiries on any trade issue should be immediately directed to this designated person or team. That person or team should have sufficient training or understanding of the issues that can arise under US and other foreign laws. By managing the process, you can ensure a positive outcome and the continued success in your business.
If you find yourself the subject of US sanctions or other trade restrictions or want to avoid these pitfalls, please call us. We have a bilingual team in New York with experience representing Chinese companies that can help you navigate these US-related issues.