The New Challenges Of 'Deemed Exports' To China For U.S. Technology Companies And Universities

China, the second largest economy in the world by some measures, is hard for U.S. technology companies and research universities to ignore. China is a huge sales opportunity for U.S. technology industries, including the world's largest cell phone market with over 300 million users. And dramatic labor cost savings for talented employees has drawn many leading firms to locate facilities in China. Tens of thousands of Chinese students are now enrolled at the nation's top universities, and many remain in the U.S. as post-doctoral fellows and faculty members.

Review Export Policies

However, one 'dark lining' in this silver cloud of mutual economic and educational gain is the specter of increased enforcement of U.S. laws regulating the export of technology and software to China. In particular, the increased focus on 'deemed export' regulations makes it essential for U.S. firms and universities employing Chinese nationals to carefully review their export compliance policies and procedures. In short, the laws regulating the physical export of a controlled technology or software to China also apply when an U.S. entity provides a Chinese national in its employ access to that product or information. If a U.S. company or university permits unlawful access without export license, it may jeopardize both itself and the Chinese individuals in its employ. The extent of licensing activity associated with China is reflected in recent BIS reports. In the fiscal year ended September 2004, nearly 400 of roughly 1000 'deemed export' license applications filed by U.S. exporters pertained to proposed disclosures of controlled technology to Chinese nationals.

The explosive growth of the Chinese market increases the challenges as U.S. firms and universities increasingly interact with Chinese nationals. Many U.S. companies, for example, now have a wider range of direct and often fast-moving contact with Chinese nationals, including employees, trainees, consultants, distributors, suppliers, and fabricators. This interaction encompasses non-traditional functions ' R&D, marketing, manufacturing, supply chain management and HR ' whose employees have not been trained to the same extent in export compliance as areas such as sales and shipping. U.S. universities have burgeoning ties to industrial research sponsors who bring to their campuses highly sophisticated new technologies, even as they have growing numbers of Chinese students and Chinese post-docs and faculty members.

Regulating Employees

U.S. firms and universities have long dealt with controls on the physical exports of their products to China. More recently, the Commerce Department's Bureau of Industry and Security (BIS), the Homeland Security Department's Immigration and Customs Enforcement (ICE) and the Justice Department's Federal Bureau of Investigation (FBI) have all enforced the 'deemed export' regulations against companies doing business with China or employing Chinese nationals. Indeed, an informal survey of reported cases from BIS, ICE and the FBI indicates that these agencies effectively tripled their collective rate of cases and convictions from 2004 to 2005.

Under the Export Administration Regulations (EAR), 'technology' is defined as any information necessary for the 'development,' 'production' or 'use' of a controlled product. Technology or software is 'released' for export through:

' Visual inspection by foreign nationals (eg, reading technical specifications, plans or blueprints);

' Oral exchanges; or

' Application under the guidance of persons with knowledge of the technology or software.

A 'foreign national' is any person who is not a U.S. citizen, a person admitted to permanent residence (that is, a so-called 'green card' holder) or a 'protected person' (that is, a political refugee or an asylum seeker). Thus, by definition, any Chinese national working or studying in the U.S. on a temporary non-immigrant visa (eg, F-1, H-1B, L-1, M-1, etc.) would be considered such a 'foreign national' under the EAR, so any exposure of such a Chinese national to controlled proprietary technology or software could potentially be construed by the BIS, ICE or FBI as a 'deemed export.'

There are many common scenarios in today's growing business and technological contacts between the United States and China that may result in a 'deemed export' situation:

' A Chinese graduate student on an F-1 or M-1 student visa doing 'practical training' with an American employer while studying at an American engineering school and being recruited to work by that employer post-graduation;

' A Chinese technical worker hired by a U.S. employer to work in its Chinese facility but sent for training or orientation at the U.S. employer's American headquarters;

' A Chinese sales manager or technical support/service manager from an independent Chinese distributor who needs technical training on a U.S. product before taking over that product line in the Chinese market;

' A Chinese public relations consultant seeking sufficient background to enable a U.S. company to launch its new technology product into the Chinese market at a major Chinese trade show;

' A Chinese supplier of key components to be 'designed-in' to a next-generation model of a U.S. company's product who needs to have proprietary design specifications to be able to develop and manufacture those components;

' A Chinese assembly plant which needs to develop a new assembly line layout and to acquire new robotic equipment to assemble a U.S. company's product and which thus needs the proprietary bill of materials and assembly manual for that product; or

' A potential Chinese customer who wants to test out a U.S. company's product to see if it can perform a specific operation or can provide a particular kind or level of functionality.

For compliance purposes, U.S. companies or U.S. universities with EAR-controlled technology now need to create new pathways so they can apply the same export control analysis and compliance culture to all these varied scenarios in dealing with Chinese persons, just as if they were making a physical export of their controlled product to China. Obtaining a non-immigrant visa by itself is not a sufficient basis for such Chinese individuals to have access to a company's controlled technology or software if the EAR requires an export license for such a 'deemed export' with a Chinese national. (On the other hand, to date, U.S. universities may still be able to rely upon the so-called 'educational information' or 'fundamental research' exemptions to those requirements.) In the past 3 years, the Justice Department has sought criminal indictments against both companies and individuals for 'deemed export' violations. Such legal proceedings may then also jeopardize or destroy an individual's opportunities for immigration and naturalization under today's tougher post-9/11 immigration regulations.

New Pathways Needed

Historically, export control compliance is often focused only in the shipping or sales departments in many companies, and has not been a major concern at all for U.S. universities. There is thus no normal 'pathway' of close coordination and cooperation between the export control manager of a company and other 'non-traditional' functions of a company such as R&D and marketing or between a university compliance manager and its diverse schools and departments. For compliance purposes, U.S. companies or universities with EAR-controlled technology now need to create such new pathways so they can apply the same export control analysis and compliance culture to all these varied scenarios in dealing with Chinese persons, just as if they were making a physical export of a controlled product to China, and to ensure proper licensing or close compliance with applicable legal exemptions.

With China's economy expanding rapidly, U.S. companies and universities should address that country in a robust and dynamic way. In doing so, however, they must also take care to ensure that their past efforts in U.S. export control compliance are extended uniformly to embrace the full range of 'deemed export' situations involving Chinese nationals.

China, the second largest economy in the world by some measures, is hard for U.S. technology companies and research universities to ignore. China is a huge sales opportunity for U.S. technology industries, including the world's largest cell phone market with over 300 million users. And dramatic labor cost savings for talented employees has drawn many leading firms to locate facilities in China. Tens of thousands of Chinese students are now enrolled at the nation's top universities, and many remain in the U.S. as post-doctoral fellows and faculty members.

Review Export Policies

However, one 'dark lining' in this silver cloud of mutual economic and educational gain is the specter of increased enforcement of U.S. laws regulating the export of technology and software to China. In particular, the increased focus on 'deemed export' regulations makes it essential for U.S. firms and universities employing Chinese nationals to carefully review their export compliance policies and procedures. In short, the laws regulating the physical export of a controlled technology or software to China also apply when an U.S. entity provides a Chinese national in its employ access to that product or information. If a U.S. company or university permits unlawful access without export license, it may jeopardize both itself and the Chinese individuals in its employ. The extent of licensing activity associated with China is reflected in recent BIS reports. In the fiscal year ended September 2004, nearly 400 of roughly 1000 'deemed export' license applications filed by U.S. exporters pertained to proposed disclosures of controlled technology to Chinese nationals.

The explosive growth of the Chinese market increases the challenges as U.S. firms and universities increasingly interact with Chinese nationals. Many U.S. companies, for example, now have a wider range of direct and often fast-moving contact with Chinese nationals, including employees, trainees, consultants, distributors, suppliers, and fabricators. This interaction encompasses non-traditional functions ' R&D, marketing, manufacturing, supply chain management and HR ' whose employees have not been trained to the same extent in export compliance as areas such as sales and shipping. U.S. universities have burgeoning ties to industrial research sponsors who bring to their campuses highly sophisticated new technologies, even as they have growing numbers of Chinese students and Chinese post-docs and faculty members.

Regulating Employees

U.S. firms and universities have long dealt with controls on the physical exports of their products to China. More recently, the Commerce Department's Bureau of Industry and Security (BIS), the Homeland Security Department's Immigration and Customs Enforcement (ICE) and the Justice Department's Federal Bureau of Investigation (FBI) have all enforced the 'deemed export' regulations against companies doing business with China or employing Chinese nationals. Indeed, an informal survey of reported cases from BIS, ICE and the FBI indicates that these agencies effectively tripled their collective rate of cases and convictions from 2004 to 2005.

Under the Export Administration Regulations (EAR), 'technology' is defined as any information necessary for the 'development,' 'production' or 'use' of a controlled product. Technology or software is 'released' for export through:

' Visual inspection by foreign nationals (eg, reading technical specifications, plans or blueprints);

' Oral exchanges; or

' Application under the guidance of persons with knowledge of the technology or software.

A 'foreign national' is any person who is not a U.S. citizen, a person admitted to permanent residence (that is, a so-called 'green card' holder) or a 'protected person' (that is, a political refugee or an asylum seeker). Thus, by definition, any Chinese national working or studying in the U.S. on a temporary non-immigrant visa (eg, F-1, H-1B, L-1, M-1, etc.) would be considered such a 'foreign national' under the EAR, so any exposure of such a Chinese national to controlled proprietary technology or software could potentially be construed by the BIS, ICE or FBI as a 'deemed export.'

There are many common scenarios in today's growing business and technological contacts between the United States and China that may result in a 'deemed export' situation:

' A Chinese graduate student on an F-1 or M-1 student visa doing 'practical training' with an American employer while studying at an American engineering school and being recruited to work by that employer post-graduation;

' A Chinese technical worker hired by a U.S. employer to work in its Chinese facility but sent for training or orientation at the U.S. employer's American headquarters;

' A Chinese sales manager or technical support/service manager from an independent Chinese distributor who needs technical training on a U.S. product before taking over that product line in the Chinese market;

' A Chinese public relations consultant seeking sufficient background to enable a U.S. company to launch its new technology product into the Chinese market at a major Chinese trade show;

' A Chinese supplier of key components to be 'designed-in' to a next-generation model of a U.S. company's product who needs to have proprietary design specifications to be able to develop and manufacture those components;

' A Chinese assembly plant which needs to develop a new assembly line layout and to acquire new robotic equipment to assemble a U.S. company's product and which thus needs the proprietary bill of materials and assembly manual for that product; or

' A potential Chinese customer who wants to test out a U.S. company's product to see if it can perform a specific operation or can provide a particular kind or level of functionality.

For compliance purposes, U.S. companies or U.S. universities with EAR-controlled technology now need to create new pathways so they can apply the same export control analysis and compliance culture to all these varied scenarios in dealing with Chinese persons, just as if they were making a physical export of their controlled product to China. Obtaining a non-immigrant visa by itself is not a sufficient basis for such Chinese individuals to have access to a company's controlled technology or software if the EAR requires an export license for such a 'deemed export' with a Chinese national. (On the other hand, to date, U.S. universities may still be able to rely upon the so-called 'educational information' or 'fundamental research' exemptions to those requirements.) In the past 3 years, the Justice Department has sought criminal indictments against both companies and individuals for 'deemed export' violations. Such legal proceedings may then also jeopardize or destroy an individual's opportunities for immigration and naturalization under today's tougher post-9/11 immigration regulations.

New Pathways Needed

Historically, export control compliance is often focused only in the shipping or sales departments in many companies, and has not been a major concern at all for U.S. universities. There is thus no normal 'pathway' of close coordination and cooperation between the export control manager of a company and other 'non-traditional' functions of a company such as R&D and marketing or between a university compliance manager and its diverse schools and departments. For compliance purposes, U.S. companies or universities with EAR-controlled technology now need to create such new pathways so they can apply the same export control analysis and compliance culture to all these varied scenarios in dealing with Chinese persons, just as if they were making a physical export of a controlled product to China, and to ensure proper licensing or close compliance with applicable legal exemptions.

With China's economy expanding rapidly, U.S. companies and universities should address that country in a robust and dynamic way. In doing so, however, they must also take care to ensure that their past efforts in U.S. export control compliance are extended uniformly to embrace the full range of 'deemed export' situations involving Chinese nationals.