Last week, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) rescinded its Framework for Artificial Intelligence Diffusion, or AI Diffusion Rule, an interim final rule published in January that was to go into effect on May 15. The rescission of the AI Diffusion Rule reflects a significant shift in how the U.S. government intends to address the export of advanced artificial intelligence (AI) technologies, moving away from broad-based licensing structures toward more tailored, risk-based controls.
Alongside the rescission, BIS issued a series of guidance documents clarifying its current priorities in preventing the diversion and misuse of AI technologies and advanced computing integrated circuits (ICs), particularly in relation to countries of concern such as China. A replacement rule is expected in future.
Rescission of the AI Diffusion Rule and Policy Realignment
As discussed in a previous Insight, the AI Diffusion Rule aimed to regulate the global dissemination of advanced AI models and high-performance computing ICs. The primary objective was to prevent the misuse of U.S.-origin AI technologies in activities that could threaten national security, such as military applications, weapons development, cyber operations, and mass surveillance.
Key provisions of the Framework included new license requirements for certain advanced computing ICs, new license exceptions to facilitate low-risk transactions with trusted partners, and a foreign direct product rule to extend U.S. export controls to certain foreign-produced AI items derived from U.S. technology. These measures, which limited the types and quantity of AI technology that could be exported globally, were designed to balance the protection of U.S. national security interests with the promotion of technological leadership and international collaboration.
In its press release announcing the rescission of the AI Diffusion Rule, BIS cited concerns that the Framework imposed unnecessary regulatory burdens on industry, created diplomatic tensions with trading partners relegated to “second-tier” status, and “stifled American innovation.” Rather than imposing the broad-based licensing requirements established in the AI Diffusion Rule, BIS has shifted toward more granular enforcement mechanisms, focusing on enhancing the industry’s ability to self-monitor and comply with existing rules. Prior to the publication of a replacement rule, BIS has issued a set of focused guidance documents addressing discrete areas of concern to assist exporters in identifying diversion risks and complying with existing controls under the Export Administration Regulations (EAR). These three documents include:
- AI Counter-Diversion Guidance
To increase awareness of diversion schemes involving advanced computing ICs, BIS’s industry guidance outlines “red flags” that may indicate efforts to divert restricted computing hardware to unauthorized end-users. These include, but are not limited to:
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- Customers who have no history of purchasing advanced computing ICs prior to October 2022;
- Customers who are vague or evasive about their corporate location or ultimate parent company, especially if located in Macau or China;
- Recipients who appear to have no legitimate need for large scale computing chips;
- Transactions that involve parties with similar addresses to those on restricted lists, including the BIS Entity List or OFAC’s SDN List.
The guidance further identifies several due diligence actions that may help companies determine whether a given party or transaction presents a risk of export control circumvention.
- Policy Statement on Training AI Models
BIS issued this update to clarify that the use of U.S.-origin advanced computing items for the training of AI models related to military, surveillance, or weapons of mass destruction (WMD) applications is a licensable activity, even if conducted outside of the United States, particularly in or for end-users in Country Group D:5 (including China) and Macau. Three examples are provided as instances where a license may be required when there is “knowledge” that the AI model has a WMD or military-intelligence end use or end user:
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- The export, reexport, or in-country transfer of advanced computing ICs subject to the EAR when the exporter has “knowledge” the items will be used by foreign Infrastructure as a Service (IaaS) providers to train AI models for, or on behalf of, entities headquartered in D:5 countries (including China) and Macau.
- In-country transfers involving a change in end-use or end-user when there is “knowledge” that the items will be used to train AI models for parties headquartered in D:5 countries (including China) or Macau.
- U.S. persons providing support, by contract, service or employment, if they have “knowledge” that the activity will assist in training AI models for, or on behalf of, entities headquartered in D:5 countries (including China) and Macau.
The update also notes that foreign entities who have not violated the EAR, but engage in activities contrary to these policies, may be designated on the Entity List.
- General Prohibition Ten (GP10) Guidance
GP10 prohibits proceeding with a transaction when there is knowledge that a violation has occurred or is about to occur. U.S. persons are prohibited from providing support, such as technical services, software, or manufacturing assistance, for the development or production of advanced computing ICs in China if those ICs are made using U.S.-origin technology or equipment that would be subject to the EAR if exported from the United States.
The updated GP10 guidance emphasizes the risks of using Chinese-origin advanced computing ICs, calling out specific Huawei Ascend chips. Advanced computing ICs such as these that are controlled under Export Control Classification Number (ECCN) 3A090, may be subject to GP10 and require BIS authorization. BIS advises parties who may engage in activities related to a Chinese-origin advanced computing ICs classified under 3A090 to verify that 1) the transfer of production technology from the IC’s designer to its fabricator was authorized, and 2) the IC itself was legally exported, reexported, or transferred from the fabricator back to the designer or to any other party. BIS intends to update the list of chips subject to presumption of GP10 restrictions as needed.
Conclusion
The rescission of the AI Diffusion Rule marks a significant shift in how U.S. export controls will be applied to advanced AI technologies. Although the replacement rule has not yet been issued, new materials from BIS provide guidance for those in the AI and semiconductor industry with respect to the application of existing EAR provisions, including restrictions on model training, diversion of advanced computing ICs, and the scope of General Prohibition 10. BIS specifically highlights compliance risks involving Chinese-origin advanced computing ICs developed with U.S.-origin technology.
Cassidy Levy Kent’s attorneys, compliance professionals, economists, and licensed customs brokers have experience assisting clients navigating export controls and sanctions issues. We expect further developments in this space and will continue to provide updates. Please contact us with any questions.