In a notice published in today’s Federal Register, BIS has withdrawn the safe harbor and red flag rules that BIS proposed in October 2004.

Under those proposed rules, BIS would have increased the number of red flags from 12 to 23. “Red flag” is a term used by BIS to signify an indication that an export transaction has a high probability of diversion from an authorized end-use, such as an order placed for supercomputers by a bakery in Addis Ababa. The rules also proposed a “safe harbor” that set up a procedure whereby BIS could clear a transaction with “red flags” and the exporter would not be liable if, indeed, the bakery in Addis Abbaba transshipped the supercomputers to North Korea. Finally, the rule expanded the knowledge standard for liability for export violations.

The most interesting part of the withdrawal is BIS’s not-so-tacit admission that it would have taken BIS so long to resolve “red flag” questions that exporters would be better off simply applying for a license for the transaction:

A number of commenters criticized the safe harbor proposal, stating that it was too complex and lengthy. Several predicted that few, if any, firms would be inclined to use it. Some suggested that submitting a license application for the transaction would be simpler and probably faster than waiting to see if BIS approved of the manner in which the party resolved the ‘‘red flags.’’

Also surprising is that, judging from Scott Gearity’s detailed account of BIS’s Update 2006 Conference, which took place on October 16 and 17, no one from BIS breathed a word that the rules would be withdrawn the very next day on October 18. Nor has BIS updated its website to reflect the withdrawal. Of course, no one ever likes admitting a mistake.

At yesterday’s Export Update Conference conducted by BIS, Christopher Padilla, Assistant Secretary for Export Administration, announced that BIS was planning to expand its new concept of Validated End Users, or VEUs, beyond the proposed China catch-all regulations to other countries. Mr. Padilla suggested that the first such country might be India. While Mr. Padilla’s enthusiasm, as a newly-minted Assistant Secretary, is understandable, it still seems hard to see why BIS is talking about expanding the VEU process this early in the game.

A number of obstacles to the VEU program are apparent on its face, particularly as further elaborated last Friday when BIS posted on its website a “Supplemental Guidance” to the proposed China rules. That Supplemental Guidance reiterates that any company seeking to be accredited as a VEU will need to agree “to on-site compliance reviews by representatives of the U.S. Government.”

It is far from certain that China, India or other countries will countenance these on-site compliance checks by U.S. government officials. Some countries are often a little touchy about this sovereignty business. Other countries may not really care to assist the U.S. enforce its own export laws. China, for example, has not permitted either Commerce’s in-country post-shipment verifications for individual shipments by Commerce or the analogous “Blue Lantern” checks conducted by State.

The Supplemental Guidance also indicates that a VEU application would need to list all ECCNs down to the subcategory level that would be exported to the VEU . The VEU application would also be required to provide a description of the intended use of each particular item. To the extent that the VEU application requires such detail, it is not demonstrably easier than an individual license application, and thus it is unlikely that this would be an attractive option to exporters or end-users.

My (unsolicited) advice to BIS: you might want to get the VEU program working in China (or anywhere else for that matter) before revealing grandiose plans to expand it throughout the world.