Published in the Daily Bugle, April 19, 2024
In this business, language precision is critical. Synonyms aren’t interchangeable as words carry connotation; how different would Specially Designed be if instead of “peculiarly” it relied on “properties weirdly responsible for achieving or exceeding”?
Connotates can carry different tones – swap “smug” for “proud” when describing your date and see how the evening ends[1]. The subjects of this missive are “avoid” and “evade.” Avoiding taxes is entirely legal, by contributing to charity or utilizing appropriate deductions, to name a few. Heck, the USG even hawks tax-exempt bonds. On the other hand, tax evasion is a federal crime under 26 U.S.C. § 7201. The IRS understands the difference, just as Customs, which differentiates between duty evasion vs. avoidance.
This brings us to the April 4th interim final rule on additional export controls on advanced computers, semiconductors, and semiconductor manufacturing equipment. The intent of the recent spate of computer/semiconductor rules is clear – keep advanced computers and the means of semiconductor production out of D:5 countries (Read: China)[2]. The rules are convoluted because they seek to control mundane and ubiquitous items at one end of a long and wide supply chain, based on an eventual end use/user. Accounting for all possible eventualities makes drafting regulations challenging, hence serial correction and clarification rules.
The rule preamble contains “Clarifications to BIS Responses to Certain Public Comment Topics”, and this is where it gets disturbing. In the four Topics discussed, BIS states that structuring transactions or the supply chain to avoid a license requirement is prohibited without a license. Let that sink in – actions to be compliant with the law are themselves non-compliant.
Catch-22 – A license is required in cases where a license is not required.
Two scenarios – (1) The analysis shows the U.S. de minimis content is below the threshold. Or, (2) the analysis shows you’re 2% over the limit, so you change suppliers to reduce the US content. No license is required in the first case, but it is in the second. I like managing company compliance operations based on luck.
What happens if you drop below the de minimis threshold because a supply chain manager switches from a US supplier to a non-US supplier to save a few euros, or to get a better delivery time? According to the preamble commentary, that would seem to be just fine. Of course, how do you manage that in any business bigger than a sole proprietorship?
A client can ask me if a particular transaction requires a license under 744.23. I can answer Yes or No. In the first case, it’ll require filing a license request, waiting months, and it might be denied after that time. If they ask me how to avoid that cost and delay, under this interpretation my response would be “I can’t tell you, or you’ll need a license. Make sure you don’t review the regulations (as that would impart “knowledge”), and restructure the transaction based on provable ignorance. Come back to me with your guess and I’ll review it again.”
Not bad if you’re on an hourly rate. But not optimal for business.
This is not evasion – the wrongful avoidance of a law or statute. We know and understand evasion – misrepresenting country of origin or performance characteristics, straw buyers to obscure end users, or just plain lying.
This is text in a preamble, and preamble text is not regulation. Preamble text signals how BIS interprets the words and will enforce them. The regulatory language says you don’t need a license, but we want you to come in for a license anyway.
I don’t do Policy – that’s the job for Government. As a Compliance Professional[3] my job is to ensure the company/client is operating within the law. That’s why I’m so exacting[4] about word choice. If the USG wants to stop the flow of these items, it is their prerogative, and I’ll stand up and salute the regulation, and do my best to comply with it.
But if that’s what the USG wants to do, then own it. If the aim is to have companies comply with both the Letter and Spirit of the law, then update the Letter to accurately reflect the Spirit. Yes, that’s hard work, but that goes along with being able to make laws. A policy punishing exporters for lawfully following the regulations sets a bad precedent, even if it’s for a good reason.
It’s possible BIS’s response was inadvertent imprecise language. Fine, but it still needs clarification.
In my opinion, BIS should clarify that structuring/restructuring a transaction to evade the need for a license is a violation, but structuring/restructuring a transaction, adhering to the regulations, that avoids the need for a license, is not a violation nor a licensable act.
If BIS intends to expand the “knowledge” standard such that structuring/restructuring a transaction such that it no longer meets the general prohibition of 744.23 is itself prohibited, then update 744.23 to explicitly state it. And be prepared for the issues that come with regulating the intent of compliance.
It’s an Interim Final Rule, which means comments are accepted, but no later than April 29. BIS has to review and respond to comments. Maybe you don’t live in the semiconductor world, but remember the FDPR and Huawei – if successful, what other areas could this expand to? It’s short notice, but I suggest that if you have concerns, express them.
In the meantime, Capt. Yossarian and I are going out for drinks.
Got J&C questions? – please reach out to me at ArtOfJC@arinovis.com
[1] Hint: One gets a drink thrown in your face.
[2] And Macau! The EAR would be 10% smaller if they just stuck Macau in D:5.
[3] I’ve got both a certificate and a hat to prove it!
[4] Versus, say, finicky or fussy.