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Hong Kong surprise

New BIS rule requires exporters to get import license from Hong Kong customers

By: Chris Gillis
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Photo: Songquan Deng/Shutterstock
   In the final days of the Obama administration, the Commerce Department’s Bureau of Industry and Security published a regulation that requires U.S. companies with licensable exports and re-exports to obtain documented proof of import licenses from their Hong Kong customers before the goods can be shipped.
   The agency’s action, which takes effect April 19 to give U.S. companies time to comply, caught many exporters off guard, since most rulemakings proceed with a proposal stage that includes a comment period for the industry. BIS explained in the final rule that such notice and comment is not necessary in this case since the regulations involves "a military and foreign affairs function."
   BIS said this final rule, which was published in the Federal Register on Jan. 19, is necessary to ensure that U.S. licensed exports entering Hong Kong comply with multilateral export control regimes, such as the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, the Missile Technology Control Regime, the Nuclear Suppliers Group, and the Australia Group.
   The items affected by the rule are those controlled for reasons of national security (NS), missile technology (MT), nuclear nonproliferation (NP column 1) and chemical and biological weapons.
   In addition, the agency said the rule will assist in the prevention of diversion of controlled exports from Hong Kong to those countries where certain entities aren’t eligible to receive them. Hong Kong is considered by BIS to be a common destination for the diversion and transshipment of items to China.
   The BIS final rule not only applies to requiring copies of the Hong Kong import licenses, but also Hong Kong government export licenses for when the Hong Kong importer eventually re-exports the items.
   However, BIS said a copy of a Hong Kong import or export license is not required when applying to BIS for an export license.
   “The copy of the Hong Kong import or export license is only necessary prior to shipment of the item to Hong Kong,” the agency said.
   The import licenses are granted to Hong Kong’s importers by the country’s Special Administrative Region. If the shipment doesn’t require an import license, then a statement to that effect from the Hong Kong government must still be obtained by the U.S. exporter.
   “Traders [in Hong Kong] are advised to liaise with their U.S. exporters/manufacturers to prepare for implementation of the rule,” the Strategic Trade Control Branch of the Hong Kong government’s Trade and Industry Department said.
   Otherwise, the Hong Kong government said “there is no change to Hong Kong’s licensing control requirements on strategic commodities.”
For many U.S. exporters, the new rule is just another regulatory burden.
   “Now every time we have an export or re-export shipment to Hong Kong, we have to put it on hold, go to the distributor in Hong Kong and say ‘you need to send us a copy of the import license or proof that it doesn’t require it,’” said Dennis Farrell, director of global trade compliance at Analog Devices. “That takes time, and we don’t recognize any revenue for shipments made through distributors until the distributor ships those goods to its end customer.”

Why are we putting a U.S. rule in place to essentially babysit the Hong Kong government to make sure they enforce their own regulations?

   U.S. exporters will have to maintain copies of the import records in their files, and may be asked to present them to BIS enforcement upon request.
   “We all understand the issue with Hong Kong being a diversion point,” Farrell said. “We also understand that Hong Kong is struggling to keep up with giving out import licenses and then not really enforcing them. But why are we putting a U.S. rule in place to essentially babysit the Hong Kong government to make sure they enforce their own regulations?”
   Doug Jacobson, a Washington D.C. international trade attorney who specializes in sanctions and export controls, said the rule gives the appearance that “BIS is micromanaging the U.S. supplier and Hong Kong importer relationship. Plus, why does this apply only to Hong Kong and not to other well-known transshipment countries?”
   Asked whether the new regulations will be effective at stopping diversions from Hong Kong, Paul DiVecchio, head of export compliance consultancy DiVecchio & Associates in Boston, said “only if it’s enforced effectively and that is questionable.
   “I suspect that the Hong Kong government agency in charge won’t be able to keep up with the pace and the U.S. enforcement agencies won’t have a great deal of incentive to keep up with the oversight or have enough understanding,” he said.
   Meanwhile, DiVecchio warned U.S. exporters will need to ensure that the proper controls are in place within their operations to avoid premature exports from taking place without a copy of the Hong Kong import license.
   The Hong Kong government plans to hold a seminar in Kowloon City Feb. 15 where officials from both the Trade and Industry Department and U.S. BIS will address the new documentation requirements.
   However, regulatory specialists and consultants warn many U.S. exporters aren’t paying close enough attention to this BIS rulemaking.
   “I suspect this will probably catch a number of companies off guard,” Jacobson said.