McCaul Report Calls for Export Control Reform

A report by the House Foreign Affairs Committee highlights shortcomings in the U.S. export control system and calls for reforms, legislative and administrative.   Drawing extensively on the work of former Defense Department Export Control Official Stephen Coonen, the report offers a preview of the reception BIS officials can expect in next week's hearing.

"Both the Trump and Biden administrations, principally from the White House, have rightly begun exerting more control over the Commerce Department’s Bureau of Industry and Security (BIS). However, no administration will be able to fully leverage the power of export controls to protect U.S. national security without Congressional action. Now, Congress must solidify the efforts of successive administrations so our future will be better secured," the authors assert.

Central to the committee's findings is the concern that BIS, under the Commerce Department, has been too lenient in granting licenses for dual-use technology transfers to China, failing to adequately consider the likelihood of military or surveillance use.

"Through the bipartisan Export Control Reform Act of 2018 (ECRA) and recent legislative updates, Congress has given BIS tremendous authority to stop, or at least slow down, technology diversion to the CCP’s military or surveillance state.  Despite Congress passing ECRA and empowering BIS to draft new regulations to address unique features of China’s economy, including MCF, the bureau has not aggressively or proactively done so   Rather, it is maintaining a reactive approach, generally responding only after a crisis occurs."

Reforms 

The report highlights several problems and recommendations:

1. Operating Committee Voting System: The committee suggests adopting a majority vote system for license reviews.

2. BIS Regulations Compliance: Mandate BIS refer license applications to other appropriate agencies, including Defense, Energy, and State, for items that implicate their interests (e.g. Defense reviews items controlled for national security and Energy reviews items controlled for nuclear non- proliferation). 

3. Policy of Denial: recommend that BIS adopt a “policy of denial” or “presumption of denial” license review standard for all licenses to export items controlled for national security reasons to China

4. EAR99 Technologies Review: BIS should reassess technologies designated EAR99 and adjust controls on the Commerce Control List.

5. Entity List and End-User Controls: Apply a presumption of denial for items subject to the EAR for companies on the Entity List, and expand Entity List Coverage.  Unlike the Department of the Treasury Office of Foreign Asset Control’s 50 Percent Rule, BIS typically designates a specific affiliate of a company instead of the entire corporate structure, including subsidiaries and affiliates. Identifying one subsidiary at a time, “ignores the reality that the entire corporate system in the People’s Republic of China (“PRC”) is encouraged—and often mandated—by the PRC government to circumvent U.S. laws.”

6. Military End-User Rule: BIS should adopt a standard definition of a Chinese military company.

7. Plurilateral Export Controls: Drawing on the lessons of the Cold War's Coordinating Committee for Multilateral Export Controls (CoCom), the U.S. should pursue agreements with allies to control specific emerging technologies.

8. Strengthened End Use Checks and Oversight: Address the high “willfulness” standard for criminal prosecutions, improve end-use checks, and enhance oversight. Congress should legislate a new standard for criminal prosecutions to support enforcement actions that deter future evasion or violations. Commerce must renegotiate its end-use agreement with the PRC or impose greater restrictions on exports to China considering the inability to conduct meaningful end- use checks. 

9. Fundamental Research Policies: Reform NSD-189 to address China’s acquisition of technology through fundamental research. "Universities, research institutes, government laboratories and others routinely look to the fundamental research exception in the EAR (§ 734.7) to eliminate export licensing requirements for cross-border activities."   NSD-189 must be reformed by the Biden administration to address China’s acquisition of critical technology and know-how through fundamental research and Congress must put adequate safeguards on fundamental research. 

10. BIS Resources and Personnel: Amend ECRA to allow BIS to charge fees on certain licenses to support enforcement efforts.   "The Bureau of Industry and Security appears not to have prioritized hiring people with the linguistic, technical, or geopolitical expertise needed to carry out its mission."

11. ‘Is Informed’ Letters: Address concerns about BIS’s use of ‘is informed’ letters. "The letters give the appearance of acting without certainty that transfers are in fact being stopped. There is concern that BIS is using these ‘is informed’ letters to prevent other agencies from taking more consequential actions. "

12. Standard-setting activities. In September 2022, BIS issued an interim final rule to authorize the release of items subject to export controls without a license, including to companies on the Entity List, so long as that release occurs in the context of a “standards-related activity.”  Because almost any exchange between two or more entities could be self-classified as a “standards-related activity,” BIS created a dangerous loophole that removes any U.S. government visibility into sensitive technology transfers and undercuts Entity List enforcement. 

Click here to read the report.