Managing Foreign Direct Product Rule Compliance

Ask any group of experienced export compliance managers what they view as the most complex sections of the EAR, and you're sure to get several who point to BIS's various Foreign-Direct Product Rules ("FDPRs"). While BIS has long controlled certain items that are made using US software, hardware, and technology, we have recently witnessed – through the proliferation of FDPRs – a dramatic expansion of US export controls jurisdiction over a wide array of non-US items. The complexity of the rules, and their seemingly ever-evolving nature, can create challenges for non-US companies seeking to comply with the EAR, creating significant enforcement risks for certain transactions. Below is a high-level overview of the FDPRs and steps export compliance managers can take to identify and mitigate the risk of a violation.

What do FDPRs control?

In a nutshell, the various FDPRs control the export ortransferfrom abroad of nonUS origin items that are created with hardware, software, ortechnology subject to US jurisdiction. The concept is not new, but with its expansion comes complexity, with the precise scope of coverage changing depending on the applicable FDPR rule. The EAR currently contain a whopping nine separate FDPRs.

How to spot items subject to FDPRs

Each of these FDPRs have different criteria. It can be helpful to think of those criteria in two parts, each of which must apply before an item is subject to a given FDPR:

(1) The product scope: Each FDPR has a set of criteria for determining whetherthe product itself would fall within its scope.

Be sure to keep up with any changes, as this is an evolving area and the rules on which you are basing your assessment today may change.

These include – but are not limited to – things like:

• The ECCN of the item you are exporting
• The ECCNs and HTS numbers of the software or technology that have gone into making the items you are exporting
• The ECCNs and HTS numbers of the software and technology that have gone into making the plant – or even just a "major component" of the plant – that manufactures the items you are exporting

(2) The end-use/user scope: Different FDPRs may apply depending on the destination, end-use, and/or end-user.

• There is the "original" FDPR, which focuses on NS-controlled items destined for country groups D:1, E:1, and E:2, plus others relating to 9X515 and "600 series" items destined to certain country groups.
• There is a very broad FDPR targeting exports to certain Entity List entities of any items (regardless of ECCN) produced with a wide range of technology, software, or a plant or "major component" of a plant that are subject to US jurisdiction if there is "knowledge" of certain types of involvement by targeted entities.
• There are some product-focused FDPRs in relation to certain supercomputing and advanced computing items going to various destinations, including China and Macau.
• And then there are FDPRs targeting Russia, Crimea, Belarus and Iran.

Approaches for compliance

Given the complexity of the rules, it is important to take a methodical approach to compliance by reviewing the precise scope of any FDPR that might apply. Several terms, such as "direct product", "major component", and "essential equipment" can be challenging to apply to a given factual situation and should be carefully considered.

Also, be sure to keep up with any changes, as this is an evolving area and the rules on which you are basing your assessment today may change. Review BIS's guidance and seek input where necessary. Confirm that your compliance policy and training program adequately account for FDPR considerations.

Finally, give yourself some lead time whenever possible. Determining whether an FDPR applies is often not a quick task, and typically requires input from various people within your own company as well as third parties, such as the manufacturer of the equipment in your plant. BIS has published a "model certification" for FDPR compliance purposes, which can help elicit necessary information from business partners. Start early, and document and retain your methodology and conclusions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.