On December 2, 2024, the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) issued two new rules further restricting China’s capability to produce advanced semiconductors. One final rule (the “Entity List Updates Rule”) adds 140 entities to the BIS Entity List and assigns 16 entities the new Footnote 5 designation. Concurrently, an interim final rule makes several changes to the Export Administration Regulations (“EAR”), including adding new Foreign Direct Product (“FDP”) rules, adding or modifying several Export Control Classification Numbers (“ECCNs”) on the Commerce Control List (“CCL”), adding new license exceptions, and other revisions.
Interested parties may submit public comments to the interim final rule no later than January 31, 2025.
Entity List Updates
The Entity List Updates Rule added 140 entities to the BIS Entity List. Most of the newly added entities are Chinese entities, but Japanese, South Korean, and Singaporean companies were also added to the Entity List. The Entity List Updates Rule also modifies 14 existing Chinese entities on the Entity List.
According to BIS, it added or modified these entities for being “involved with the development and production of ‘advanced-node integrated circuits’ and/or semiconductor manufacturing items, and/or have supported the Chinese government’s Military-Civil Fusion Development Strategy.” The EAR’s definition of “advanced-node integrated circuits” was modified by the concurrent interim final rule discussed below.
Additionally, nine of the newly added entities and seven of the modified entities have been given the new Footnote 5 designation related to a new FDP rule, discussed in further detail below.
Foreign Direct Product Interim Final Rule
The concurrently published interim final rule contains several revisions to the EAR related to advanced computing items and semiconductor manufacturing equipment under the lengthy title of “Foreign-Produced Direct Product Rule Additions, and Refinements to Controls for Advanced Computing and Semiconductor Manufacturing Items” (“FDP IFR”). The lengthy title complements the lengthy FDP IFR, which also consists of multiple changes in addition to those related to the new FDP rules. Various aspects of the FDP IFR are discussed briefly below.
New FDP Rules
The FDP IFR adds two new FDP rules, both related to advanced computing and semiconductor manufacturing equipment. The FDP rules of the EAR apply to foreign-made products, including those without any U.S.-origin content, that are the “direct product” of U.S.-origin software, technology, plants, or major components of a plant (i.e., equipment essential for production). Under the EAR, a “direct product,” is defined as “the immediate product (including processes and services) produced directly by the use of technology or software.”
Footnote 5 FDP Rule
The FDP IFR adds the Entity List FDP rule: Footnote 5 as 15 C.F.R. § 734.9(e)(3) of the EAR (“Footnote 5 FDP Rule”). Like the other Entity List FDP rules that BIS added over the past few years, the Footnote 5 FDP Rule’s end-user scope is triggered when there is involvement of a specially designated Entity Listed party, specifically where there is knowledge that:
- The foreign-produced commodity will be incorporated into any part, component, or equipment produced, purchased, or ordered by any Entity Listed entity with a Footnote 5 designation; or
- Any Entity Listed entity with a Footnote 5 designation is a party to any transaction involving the foreign-produced commodity (e.g., as a purchaser, intermediate consignee, ultimate consignee, or end-user).
The product scope of the Footnote 5 FDP Rule applies to foreign-produced commodities that are:
- Described in specified Category 3 ECCNs: 3B001 (except 3B001.a.4, c, d, f.1, f.5, g, h, k to n, p.2, p.4, r), 3B002 (except 3B002.c), 3B903, 3B991 (except 3B991.b.2.a through 3B991.b.2.b), 3B992, 3B993, or 3B994; and
- Meet one of the following conditions:
- The direct product of U.S.-origin technology or software described in specific Category 3 ECCNs; or
- Is either:
- Produced by any complete plant or major component of a plant that is located outside the United States, when the complete plant or major component of a plant itself is a direct product of U.S.-origin technology or software that is specified in certain Category 3 ECCNs; or
- Contains a commodity produced by any complete plant or major component of a plant that is located outside the United States, when the complete plant or major component of a plant itself is a direct product of U.S.-origin technology or software that is specified in certain Category 3 ECCNs.
Semiconductor Manufacturing Equipment FDP Rule
The FDP IFR adds a second FDP rule to the EAR at 15 C.F.R. § 734.9(k): the Semiconductor Manufacturing Equipment FDP rule (“SME FDP Rule”). The destination scope of the SME FDP Rule is met when there is knowledge that the foreign-produced item is destined to Macau or a destination in Country Group D:5, which includes China and other U.S. arms embargoed countries.
The product scope of the SME FDP Rule applies to foreign-produced items specified in ECCNs 3B001.a.4, c, d, f.1, f.5, k to n, p.2, p.4, r, or 3B002.c that are:
- The direct product of technology or software subject to the EAR and specified in 3D992 or 3E992; or
- Meet one of the following conditions:
- Is produced by any complete plant or major component of a plant that is located outside the United States, when the plant or major component of a plant itself is a direct product of U.S.-origin technology or software that is specified in certain Category 3 ECCNs; or
- Contains a commodity produced by any complete plant or major component of a plant that is located outside the United States, when the complete plant or major component of a plant itself is a direct product of U.S.-origin “technology” or “software” that is specified in certain Category 3 ECCNs.
The FDP rules of the EAR are notoriously difficult to navigate and require companies often unfamiliar with U.S. export control laws to classify not only their foreign-produced item but also any U.S.-origin technology, software, or equipment used in the production of the foreign item. The two new FDP rules added by the FDP IFR will undoubtedly lead to additional compliance burdens for foreign companies participating in the semiconductor ecosystem.
Advanced-Node Integrated Circuit Definition
The FDP IFR revises the EAR definition of “advanced-node integrated circuit,” which impacts some of the new revisions from the FDP IFR. The revision relates to the definition of dynamic random access memory (“DRAM”) integrated circuits. The new definition provides that “advanced-node integrated circuits” are integrated circuits that meet any of the following criteria:
(1) Logic integrated circuits using a non-planar transistor architecture or with a production technology node of 16/14 nanometers or less;
(2) NOT AND (NAND) memory integrated circuits with 128 layers or more; or
(3) DRAM integrated circuits having:
(i) A memory cell area of less than 0.0019 µm; or
(ii) A memory density greater than 0.288 gigabits per square millimeter.
New and Modified ECCNs
The FDP IFR also adds certain ECCNs. The new ECCNs include:
- 3A090.c: High-Bandwidth Memory (“HBM”) having a memory bandwidth density greater than 2 gigabytes per second per square millimeter. BIS’s control of HBM is related to the use of HBM for advanced artificial intelligence (“AI”) models. These controls seek to slow China’s attempts to indigenize advanced AI chip production.
In addition to the new ECCN for specified HBM, the FDP IFR creates new License Exception HBM, which authorizes certain exports, reexports, and transfers (in-country) of certain HBM items controlled by ECCN 3A090.c where the terms of the license exception are met.
- 3B993: Specified semiconductor manufacturing equipment.
- 3B994: Semiconductor manufacturing equipment that enables “advanced-node integrated circuit” production.
- 3D992: Software for the development or production of commodities specified in 3B001.a.4, c, d, f.1, f.5, k to n, p.2, p.4, r, or 3B002.c and other specified software.
- 3D993: Software for the development or production of commodities specified in 3B993 and other specified software.
- 3D994: Software for the development or production of commodities specified in 3B994 and other specified software.
- 3E992: Technology for the production or development of commodities specified in 3B001.a.4, c, d, f.1, f.5, k to n, p.2, p.4, r; and 3B002.c
- 3E993: Technology for the development or production of commodities specified in 3B993.
- 3E994: Technology for the development or production of commodities specified in 3B994 and other specified technology.
Some of the new ECCNs control items previously not controlled on the CCL while others constitute a rearranging of other ECCNs. The FDP IFR also includes modifications to several ECCNs, including 3B001, 3B002, 3B991, 3B992, and 3D002. Companies involved in the semiconductor and advanced computing industries should review the new and revised ECCNs to determine if their products, software, or technology are now controlled on the CCL, have changed ECCNs, or are subject to new controls under the EAR.
New License Exception Restricted Fabrication Facility
The FDP IFR also adds new license exception Restricted Fabrication Facility (“RFF”), which allows certain items, including certain semiconductor manufacturing equipment, to be exported, reexported, exported from abroad, or transferred (in-country) to certain fabrication facilities that are subject to end user-based license requirements but that are not currently producing “advanced node integrated circuits.” License Exception RFF may allow fabrication facilities to obtain legacy equipment to produce non-“advanced-node integrated circuits.” License Exception RFF is only applicable to license requirements for specific Entity Listed entities and does not overcome destination-based license requirements or end-use based license requirements.
New Red Flags
The EAR contains “Know Your Customer” Guidance and Red Flags in supplement no. 3 to part 732. The FDP IFR adds eight new red flags to assist exporters, reexporters, and transferors. Some of the new Red Flags 20 through 27 specifically relate to semiconductor manufacturing equipment (i.e., Red Flags 20, 21, 26, and 27), while others have more universal application (i.e., Red Flags 22 through 25).
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These new rules demonstrate the U.S. Government’s continued position of restricting China’s ability to advance its domestic semiconductor industry. With respect to the Entity List Updates Rule, the revisions should serve as a reminder for exporters and reexporters to continue to conduct denied party screening of all parties to transactions, even where a previous business relationship exists. “One and done” screening is never advisable but poses a particular risk in the dynamic compliance environment of the semiconductor industry.
The FDP IFR is both a regulatorily complex and highly technical rule. The above brief description contains only a portion of the numerous revisions described in the 41-page rule.
This post was originally published on here
