1 June 2006

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[Federal Register: May 31, 2006 (Volume 71, Number 104)]
[Proposed Rules]               
[Page 30840-30844]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31my06-25]                         

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DEPARTMENT OF COMMERCE

Bureau of Industry and Security

15 CFR Parts 734 and 772

[Docket No. 050316075-6122-03]
RIN 0694-AD29

 
Revisions and Clarification of Deemed Export Related Regulatory 
Requirements

AGENCY: Bureau of Industry and Security, Commerce.

ACTION: Withdrawal of advance notice of proposed rulemaking.

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SUMMARY: The Bureau of Industry and Security (BIS) has reviewed the 
public comments received in response to the ``Advance Notice of 
Proposed Rulemaking: Revision and Clarification of Deemed Export 
Related Regulatory Requirements'' (ANPR) published in the Federal 
Register on March 28, 2005. The ANPR identified recommendations 
contained in the U.S. Department of Commerce Office of Inspector 
General (OIG) Report entitled ``Deemed Export Controls May Not Stop the 
Transfer of Sensitive Technology to Foreign Nationals in the U.S.'' 
(Final Inspection Report No. IPE-16176--March 2004). This action 
discusses concerns raised by the OIG and summarizes public comments 
received in response to the ANPR. This document also states that the 
current BIS licensing policy related to deemed exports is appropriate 
and confirms that the existing definition of ``use'' adequately 
reflects the underlying export controls policy rationale in the Export 
Administration Regulations (EAR). As such, BIS is withdrawing the ANPR. 
In addition, this action addresses comments on the scope of the

[[Page 30841]]

fundamental research provisions in the EAR.

ADDRESSES: Although there is no official comment period for this 
document, you may submit comments, identified by Docket No. 050316075-
6122-03, by any of the following methods:
     E-mail: publiccomments@bis.doc.gov. Include ``050316075-
6122-03'' in the subject line of the message.
     Fax: (202) 482-3355.
     Mail or Hand Delivery/Courier: U.S. Department of 
Commerce, Bureau of Industry and Security, Regulatory Policy Division, 
14th & Pennsylvania Avenue, NW., Room 2705, Washington, DC 20230, ATTN: 
Docket No. 050316075-6122-03.

FOR FURTHER INFORMATION CONTACT: Alexander Lopes, Director of the 
Deemed Exports and Electronics Division, Office of National Security 
and Technology Transfer Controls, Bureau of Industry and Security, 
telephone: (202) 482-4875 or e-mail: alopes@bis.doc.gov or Marcus 
Cohen, Bureau of Industry and Security, telephone: (202) 482-2440 or e-
mail: mcohen@bis.doc.gov. Copies of the referenced OIG Report are 
available at: http://www.oig.doc.gov/oig/reports/2004/BIS-IPE-16176-03-2004.pdf.
 Public comments received by BIS in response to the ANPR are 

available at: http://efoia.bis.doc.gov/.


SUPPLEMENTARY INFORMATION:

Background

    The Bureau of Industry and Security (BIS) has reviewed public 
comments received in response to the ``Advance Notice of Proposed 
Rulemaking: Revision and Clarification of Deemed Export Related 
Regulatory Requirements'' (ANPR) published in the Federal Register on 
March 28, 2005 (70 FR 15607; comment period extended, 70 FR 30655). The 
ANPR described recommendations contained in the U.S. Department of 
Commerce Office of Inspector General (OIG) Report entitled ``Deemed 
Export Controls May Not Stop the Transfer of Sensitive Technology to 
Foreign Nationals in the U.S.'' (Final Inspection Report No. IPE-16176-
March 2004).
    In its report, the OIG concluded that existing BIS policies under 
the Export Administration Regulations (EAR) could enable foreign 
nationals from countries and entities of concern to access otherwise 
controlled technology. These concerns prompted the OIG to recommend the 
following:
    (1) Base the requirement for a deemed export license on a foreign 
national's country of birth and not on country of citizenship or 
permanent residency;
    (2) Revise the definition of ``use'' in Section 772.1 of the EAR; 
and
    (3) Modify regulatory guidance in Supplement No. 1 to Part 734 
regarding licensing of technology to foreign nationals involved with 
academic research and government-sponsored research projects.
    Adopting certain of the OIG's recommendations would entail 
regulatory changes to the EAR. Accordingly, the ANPR requested comments 
from industry, the academic community, and U.S. government agencies 
involved in research on the potential impact the proposed revisions 
would have on their activities. In response to the ANPR, BIS received 
311 comments from 88 academic institutions (many academic institutions 
submitted more than one comment), 22 companies, 25 trade associations, 
14 individuals, 20 academic associations, 6 law firms and legal 
associations, 4 U.S. national laboratories, 4 U.S. agencies, 3 members 
of Congress, and 2 foreign governments. All public comments received by 
BIS in response to the ANPR are currently posted on the EFOIA page of 
the BIS Web site.
    Based upon a thorough review of the public comments and a review of 
foreign immigration requirements, BIS has determined that the current 
licensing requirement based upon a foreign national's country of 
citizenship or permanent residency is appropriate. The current deemed 
export licensing policy, based on a foreign national's most recent 
country of citizenship or permanent residency, recognizes the 
significance of declarative assertion of affiliation over the mere 
geographical circumstances of birth. BIS has also concluded that the 
existing definition of ``use'' in Section 772.1 of the EAR should 
remain unchanged. The existing definition of ``use'' appropriately 
implements the underlying export control policy rationale in the EAR. 
Finally, BIS intends to expand outreach to help the regulated community 
understand the questions and answers in Supplement 1 to Part 734 of the 
EAR. Moreover, the public should be aware that BIS provides guidance on 
fundamental research on its Web site. (See Deemed Export FAQ's at 
http://www.bis.doc.gov/policiesandregulations/index.htm).

    In sum, BIS is not adopting those recommendations of the OIG which 
would have required regulatory changes to the EAR and, accordingly, is 
withdrawing the ANPR.
    A review of the public comments, as well as BIS's response to the 
recommendations of the OIG and to certain issues raised in the public 
comments, follows.

Scope of Agency Action

    The current review focused on recommendations made by the OIG, and 
was not intended to address broader issues related to the operation of 
the deemed export rule. For example, some comments suggested that the 
deemed export rule should simply be abolished. Others suggested reforms 
of U.S. export control policies that would extend far beyond the deemed 
export rule, while still others questioned the constitutionality of the 
deemed export rule. Such criticisms and suggested reforms were beyond 
the scope of the review of the public comments related to this notice, 
but like all issues of deemed export policy, they will be subject to 
review by the Deemed Export Advisory Committee (DEAC). For further 
information related to the establishment of the DEAC, see the notice 
entitled ``Establishment of Advisory Committee and Clarification of 
Deemed Export-Related Regulatory Requirements,'' published in the 
Federal Register on May 22, 2006 (71 FR 29301).
    All of the public comments received in response to the ANPR, 
including those public comments that raised issues beyond the scope of 
review related to this notice, will be made available to members of the 
Deemed Export Advisory Committee (DEAC). All aspects of the deemed 
export policy will be subject to review by the DEAC.
    In general, the comments focused on the OIG's recommendations 
regarding the proposal that deemed export license requirements be based 
on a foreign national's country of birth and a proposed revision to the 
definition of ``use.'' While few of the public comments received 
directly addressed the OIG's recommendation to revise the regulatory 
guidance in Supplement No. 1 to Part 734 of the EAR, many comments 
indirectly discussed the potential effect of such regulatory 
modifications on fundamental research. The general themes expressed in 
the public comments, as well as BIS's response to the recommendations 
of the OIG and to certain issues raised in the public comments, are 
described in more specificity below.

A. Public Comments Received in Response to the ANPR

Country of Birth
    Almost without exception, the comments stated clear opposition to 
the OIG's recommendation that deemed export licenses be based on a 
foreign

[[Page 30842]]

national's country of birth rather than country of citizenship. (See 15 
CFR 734.2(b)(2)(ii)) Comments from all sources stressed that deemed 
export controls must take into account the integral and critical 
contribution of foreign nationals to U.S. fundamental research.
    Numerous comments expressed concern that excessive and bureaucratic 
requirements will foster a perception among foreign students and 
researchers that the United States does not welcome foreign nationals 
in its high-technology research community. Many comments observed that 
the decrease in the number of foreign nationals in U.S. academic 
institutions and U.S. industry has already been detrimental to the 
economy of the United States. These comments argued that a change in 
the deemed export licensing policy from country of citizenship to 
country of birth would further adversely impact the United States.
    Various comments discussed other methods by which prospective 
foreign national students and employees are screened. Comments from 
both academia and industry noted that their organizations rely on 
existing U.S. visa requirements as a means of guarding against the 
unlawful release of technology. Many of these comments recommended that 
the deemed export licensing policy should operate in conjunction with 
other established systems of screening foreign nationals.
    Comments also expressed concerns related to potential conflicts of 
laws. Some comments noted that if forced to apply a country of birth 
criteria to their employees, companies might run afoul of both U.S. and 
foreign anti-discrimination and privacy laws. Comments from companies 
that operate on a global scale stated that the recommendation by the 
OIG would present formidable legal and operational hurdles.
    Another trend among the comments was a concern about the 
fundamental unfairness of the change recommended by the OIG. Many 
comments suggested that the current deemed export licensing policy 
which focuses on a foreign national's country of citizenship is more 
appropriate because obtaining citizenship demonstrates an affirmative 
declaration of affiliation and loyalty toward a particular sovereign 
entity in ways that the circumstance of a person's birth does not. 
Further, many comments argued that the OIG failed to present any 
evidence to support the recommended change in licensing policy and that 
the envisioned improvements to national security have not been 
persuasively presented.
Definition of ``Use''
    The OIG recommended that BIS revise the definition of ``use'' in 
Section 772.1 of the EAR. The OIG effectively recommended replacing the 
word ``and'' with the word ``or,'' as follows: `` `Use' (All categories 
and General Technology Note)--Operation, installation (including on-
site installation), maintenance (checking), repair, overhaul, or 
refurbishing.'' (Emphasis added)
    The public comments voiced general opposition to this 
recommendation as well. Many comments stated that revising the 
definition with the disjunctive ``or'' would capture too many routine 
operations carried out by students/employees, and thus constitute a 
large (and generally unnecessary) compliance burden on organizations. 
In addition, many comments argued that the OIG failed to proffer any 
evidence to support the recommended change in licensing policy and, 
further, that envisioned improvements to national security have not 
been satisfactorily presented in the OIG's report.
    The general theme among comments from the academic community was 
that the conjunctive reading of the ``use'' definition properly 
reflects the policy rationale that currently underlies the controls on 
the transfer of use technology to foreign national students and 
researchers. These comments argued that the current ``use'' definition 
correctly requires the presence of technology relating to all six 
activities (i.e., operation, installation, maintenance, repair, 
overhaul, and refurbishing) because it is the totality of those 
activities that triggers the requirement for a deemed export license.
    Many comments asserted that by changing ``and'' to ``or'' in the 
definition, mere operation of a controlled item by a foreign national 
would trigger a requirement for a deemed export license. Numerous 
comments stressed that the proposed revision would thus result in a 
large expansion of deemed export license applications submitted to BIS. 
They claim that this will impose a substantial financial and 
administrative burden on their respective organizations and will also 
increase the licensing burden on BIS. While many comments cited the 
number or percentage of foreign nationals in the commenters' 
organizations, the comments generally do not provide the actual number 
of items for which ``use'' technology is controlled within their 
respective organizations.
    Some of the comments from industry suggested that OIG's recommended 
change would have little practical impact. Those comments reflect that 
many companies already interpret the definition of ``use'' in the 
disjunctive and, further, that the current definition could reasonably 
be interpreted to be an illustrative list of activities constituting 
use. As such, they stated that the suggested definition revision would 
have minimal, if any, effect on business operations.
    However, organizations from all sectors appear concerned that a 
change in the definition would restrict the scope of fundamental 
research by capturing more routine activities that are currently not 
subject to the EAR. Many public comments noted that such narrowing of 
the scope of fundamental research would have a chilling effect on U.S. 
research efforts conducted by industry and universities alike.
    In addition, several comments note that although the OIG speculated 
in its report that many academic and Federal laboratories might need to 
seek deemed export licenses, the OIG failed to offer evidence in 
support of this claim. These comments pointed out that the report 
contained no findings that controlled ``use'' technology has been 
illegally transferred to foreign nationals, either in Federal 
laboratories, university facilities, or within industry.
Regulatory Guidance Related to Fundamental Research
    Supplement No. 1 to Part 734 of the EAR provides guidance in the 
form of questions and answers to further elucidate the deemed export 
regulations. In its report, the OIG found two of the answers therein 
may be inaccurate or unclear. The OIG recommended modification to 
guidance (answers to Questions A(4) and D(1), respectively) covering 
the following topics:
    (1) Whether prepublication clearance by a government sponsor would 
void the publishability exemption in the EAR and trigger the deemed 
export rule; and
    (2) Whether a license would be required for a foreign graduate 
student to work in a laboratory.
    A large percentage of public comments addressed the OIG's proposed 
revisions to the answers provided in the deemed export guidance. 
Although less than 2% of the public comments received directly 
addressed the OIG's recommended modifications, a significant number of 
comments discussed the suggested revisions in relation to the possible 
effect such guidance would have on the

[[Page 30843]]

scope of fundamental research as discussed in Section 734.8 of the EAR.
    Only a few of the comments focused on the impact of prepublication 
clearance by a government sponsor as it relates to Section 
734.7(a)(4)(iii) of the EAR. Even within that small number, there was 
no unanimity of opinion. Some agreed with the OIG that research results 
that are subject to prepublication clearance of a government agency are 
subject to the EAR. However, other comments noted that Section 734.11 
should itself be understood as an exemption to the EAR and, as such, 
the answer to Question A(4) is correct as currently stated. Still other 
comments noted that while the answer to Question A(4) is essentially 
correct, slight modification of the answer is required for purposes of 
clarification.
    With regard to the OIG's suggested revision of the answer to 
Question D(1), the comments highlighted a theme of serious concern 
about the effect as it relates to the jurisdictional scope of 
fundamental research. While only a handful of comments addressed 
Question D(1) directly, those that did so noted that the apprehension 
regarding the OIG's revision stems in large part from the OIG's 
proposed change in the definition of ``use.'' It appears that many in 
the research community view the revised answer to Question D(1) as a 
codification that mere operation of a piece of controlled laboratory 
equipment by a foreign national student will trigger the requirement 
for a deemed export license. Thus, comments from all sectors appeared 
to reflect concern that the OIG's recommended modification to the 
guidance in Supplement No. 1 to Part 734 in conjunction with a 
disjunctive reading of the ``use'' definition will either significantly 
erode or abolish the exemption for fundamental research in the academic 
laboratory environment.

B. BIS Response to the Recommendations of the OIG and the Public 
Comments Received in Response to the ANPR

    As a result of the extensive nature of the public comments, BIS is 
establishing a Deemed Export Advisory Committee (DEAC) under the terms 
of the Federal Advisory Committee Act (FACA) (Pub. L. 92-463, 5 U.S.C., 
App. 2). The DEAC will serve as forum to address complex questions 
related to an evolving deemed export control policy. Specifically, the 
DEAC will be charged with reviewing the current deemed export policy 
and determining whether to recommend any changes to that policy. For 
further information related to the establishment of the DEAC, see the 
notice entitled ``Establishment of Advisory Committee and Clarification 
of Deemed Export-Related Regulatory Requirements,'' published in the 
Federal Register on May 22, 2006 (71 FR 29301).
Country of Birth
    While the deemed export rule plays a crucial role in preventing 
foreign nationals from countries of concern from obtaining controlled 
U.S. technology, BIS also recognizes that export controls must take 
into account the integral and critical contribution of foreign 
nationals to U.S. fundamental research. U.S. research institutions play 
a vital role in advancing science and technology for future 
generations. Part of the vitality of the research enterprise is the 
contribution made by foreign national students, faculty, and visiting 
scientists.
    There are substantial concerns associated with the OIG's 
recommendation to adopt the ``country of birth'' of foreign nationals 
as policy for deemed export license determinations. Due in large 
measure to the concerns raised in the public comments received in 
response to the ANPR, BIS has determined that the current licensing 
requirement related to deemed exports is appropriate.
    BIS recognizes that many individuals may have ethnic ties to a 
particular nation, but bear no loyalty towards states where they were 
born. Further, BIS notes that an individual's act of obtaining 
citizenship or permanent residency adequately demonstrates affiliation 
and allegiance to the adoptive nation. Thus, the current deemed export 
licensing requirement, based on a foreign national's most recent 
country of citizenship or permanent residency, recognizes the 
importance of declarative assertion of affiliation over the mere 
geographical circumstances of birth.
    BIS recognizes concerns that may arise in instances where a foreign 
national maintains dual citizenship or multiple permanent residence 
relationships. The deemed export rule accounts for the possibility of a 
foreign national maintaining dual citizenship and specifies that a 
release of technology or source code subject to the EAR to a foreign 
national is ``deemed to be an export to the home country or countries 
of the foreign national.'' (Emphasis added) (15 CFR 734.2(b)(2)(ii)) 
Under existing interpretations of this provision, a home country is a 
country in which a foreign national is a citizen or permanent resident. 
If the status of a foreign national is not certain, exporters can 
request the assistance of BIS to determine where the stronger ties lie, 
based on the facts of the specific case. In response to such a request, 
BIS will look at the foreign national's country, family, professional, 
financial, and employment ties.
    Based upon the recommendations of the OIG, a thorough review of the 
public comments, and a detailed analysis of the deemed export rule and 
its impact on the regulated community, BIS has determined that the 
current licensing requirement based upon a foreign national's country 
of citizenship or permanent residency is appropriate.
Definition of ``Use''
    After thorough review, BIS has concluded that the existing 
definition of ``use'' in Section 772.1 of the EAR should remain in the 
conjunctive. As such, the word ``and'' is appropriate and the 
definition of ``use'' remains unchanged: All six activities in the 
definition of ``use'' must be present to trigger a license requirement. 
Changing ``and'' to ``or'' in the definition, as suggested by the OIG, 
would lead to a situation in which mere operation of a controlled item 
by a foreign national could trigger the requirement for a deemed export 
license. Consequently, BIS has determined that revision to the existing 
definition would result in an expansion of deemed export license 
applications imposing a substantial licensing burden on the regulated 
community, without a corresponding benefit to national security. Hence, 
the definition of ``use'' remains unchanged.
    Moreover, the conjunctive word ``and'' in the current ``use'' 
definition reflects the policy rationale that underlies the controls on 
the release of controlled ``use'' technology to foreign nationals. The 
current ``use'' definition lists all six activities (i.e., operation, 
installation, maintenance, repair, overhaul, & refurbishing) because 
the totality of those activities would provide the foreign national 
with enough knowledge to replicate or improve the performance 
capabilities of the controlled item. As such, all of the activities 
listed in the definition of ``use'' are required to trigger a license 
requirement.
    ``Use'' controls are predicated on Cold War-era reverse-engineering 
concerns. Under the Coordinating Committee on Multilateral Export 
Controls (COCOM), the multilateral organization that cooperated in 
restricting strategic exports (conventional and dual use items) to 
Eastern Bloc (communist-governed) countries, export controls on 
technology were based on the concern that the release of technical 
information to a foreign national of an Eastern Bloc country would 
enable a controlled item

[[Page 30844]]

to be replicated by an Eastern Bloc country. The Wassenaar Arrangement 
(WA), the successor to COCOM, was established to address post-Cold War 
security concerns. However, the Cold War-inspired ``use'' definition 
was adopted by WA without revision and subsequently included in Part 
772 of the EAR.
    The OIG highlighted inconsistent interpretations of ``use'' that 
exist throughout industry, academia, and within BIS. However, a 
regulatory revision of the definition of ``use'' from the conjunctive 
to the disjunctive is not the most appropriate vehicle for resolving 
disparate interpretations. Instead, BIS is clarifying that the 
definition of ``use'' is properly read in the conjunctive. This 
clarification resolves the inconsistency suggested by the OIG Report 
and restates a coherent, bright line rule, which will resolve any 
misunderstanding and increase compliance with the regulations.
Regulatory Guidance Related to Fundamental Research
    As noted in many of the comments, there has been some 
misapprehension as to the scope of the existing regulations as they 
relate to academic and research institutions. While the domain of items 
subject to the EAR is large, it is not infinite. There are four broad 
classes of items that are not subject to the EAR: (1) Items controlled 
for export exclusively by another agency of the U.S. government, (2) 
products such as books, movies, magazines, and recordings; (3) publicly 
available technology and software; and (4) foreign-made items that have 
less than a de minimis percentage of controlled U.S. content.
    Although the OIG Report refers to an ``exemption'' for fundamental 
research, the EAR generally does not refer to items or activities that 
are not subject to the EAR as ``exemptions.'' As outlined in Part 734, 
items and activities are either subject to the EAR or they are not 
subject to the EAR. (See 15 CFR 734.2 & 734.3) In Part 734, the EAR 
addresses the jurisdictional scope of fundamental research and sets 
forth specific parameters and limitations that would take such 
activities and products resulting from fundamental research outside of 
the scope of the EAR.
    Section 734.8 states that the information resulting from 
fundamental research is usually not subject to the EAR if the intent is 
to make the information resulting from the fundamental research 
publicly available. As such, a product of basic and applied fundamental 
research would often be captured within the broader category of items 
that are ``publicly available,'' and thus is not subject to the EAR. 
Such research can be distinguished from proprietary research and from 
research related to industrial development, design, and production, the 
results of which ordinarily are restricted for proprietary reasons or 
specific national security reasons. (See 15 CFR 734.8(a) & 734.11(b)).
    It is essential to distinguish the information or product (which 
may be in the form of a scientific paper or publication that describes 
and/or details the results of the fundamental research) that results 
from fundamental research from the conduct that occurs within the 
context of the fundamental research. While the product of the 
fundamental research is not subject to the EAR because the results of 
that research are intended for publication and dissemination within the 
scientific community, authorization may be required if during the 
conduct of the research controlled technology is released to a foreign 
national.
    The regulated community has expressed concern that the deemed 
export rule is inconsistent with National Security Decision Directive 
189 (NSDD-189). The stated purpose of NSDD-189 is as follows:

    ``This directive establishes national policy for controlling the 
flow of science, technology and engineering information produced in 
federally funded fundamental research at colleges, universities, and 
laboratories. Fundamental research is defined as follows:

`Fundamental research' means basic and applied research in science 
and engineering, the results of which ordinarily are published and 
shared broadly within the scientific community, as distinguished 
from proprietary research and from industrial development, design, 
production, and product utilization, the results of which ordinarily 
are restricted for proprietary or national security reasons.'' 
(Emphasis added) (NSDD-189, section II, Policy)

The description of fundamental research found in Section 734.8 of the 
EAR closely mirrors this section of NSDD-189. Further, the directive 
clarifies that the product that results from fundamental research is 
distinct from the conduct involved in the research itself. NSDD-189 
also distinguishes proprietary research from basic and applied 
research.
    The regulated community has expressed concerns that license 
requirements within the EAR for the release of controlled technologies 
to foreign nationals from countries of concern are in opposition to the 
Administration's stated policy with respect to fundamental research. 
However, NSDD-189 expressly notes that the United States government may 
place restrictions on the release of controlled information. The 
pertinent section of NSDD-189 states as follows:

    ``No restriction may be placed upon the conduct or reporting of 
federally funded fundamental research that has not received national 
security classification, except as provided in applicable U.S. 
Statutes.'' (Emphasis added) (NSDD-189, section II, Policy)

    The Export Administration Act (EAA) and the International Emergency 
Economic Powers Act (IEEPA), the principal statutes authorizing dual-
use export controls, constitute applicable U.S. statutes within the 
meaning of NSDD-189. Pursuant to the EAA, the EAR implement U.S. 
government restrictions related to fundamental research when the 
conduct of the research involves the transfer of controlled 
technologies to foreign nationals. As such, there is no inconsistency 
between the technology controls listed in the EAR and the type of 
restrictions on fundamental research specified in NSDD-189.
    Based on the extensive and varied public comments received, BIS has 
concluded that expanded outreach is required to clarify the guidance 
provided in the questions and answers in Supplement 1 to Part 734 of 
the EAR. Furthermore, as indicated by the findings of the OIG, the 
extensive and varied response to the ANPR, and the number of questions 
and issues that have been raised in recent outreach efforts, it is 
apparent that an expanded outreach program must be supplemented by a 
collaborative effort between BIS and the regulated community to ensure 
that the deemed export policy is consistent with evolving technologies 
and national security concerns.

    Dated: May 24, 2006.
Matthew Borman,
Deputy Assistant Secretary of Commerce for Export Administration.
[FR Doc. E6-8370 Filed 5-30-06; 8:45 am]

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