Export Control Reform

Taming the Beast

DS_TheBeastIt has been a month since the Initial Implementation Rule, nicknamed “the Beast” by the Export Control Reform (“ECR”) Task Force, became effective. [F/N 1]  Some industry members were prepared for the changes.  Others are still working with IT professionals, contract managers, and other resources to align compliance programs with changes to export control jurisdiction.

Had the only ECR goal been to increase interoperability with allies, a simple amendment to the Arms Export Control Act to allow country-based exemptions outside of bilateral defense trade treaties would have sufficed.  Congress offered the Administration such an amendment in 2012. [F/N 2]  However, the ECR agenda is an ambitious one, which promises to establish a single control list and a single licensing agency. [F/N 3]

In anticipation of fulfilling the promises of a single list and single agency, ECR has thus far involved the creation of overlapping jurisdiction for the Department of State, new Congressional notification requirements, a new interagency review process, new agency division, and other complexities inherent in aligning the Department of State and Department of Commerce export control lists.

With all the complex changes unleashed by the Beast, now more than ever, the success of ECR relies on senior agency officials delivering on the promise of a single list and single agency.  In the meantime, primary questions for companies working to tame the Beast include the following:

1)  Have any of your items been transferred to the EAR?

ECR is moving category by category through the USML and releasing rules implementing transfers on a rolling basis.  Contrary to the belief of some, initial changes to jurisdiction under the Beast include more than just transfers of certain aerospace items to the Department of Commerce’s Export Administration Regulations (“EAR”).  Many different commodities, software, and technologies have already been transferred and must now be exported under the EAR instead of the Department of State’s International Traffic in Arms Regulations (“ITAR”).  Of course, more list transfers are on the way.

2)  If transferred, what new restrictions apply to your items?

Transferred items are still very much controlled for export.  In fact, items transferred to the new “600 series” ECCNs [F/N 4] are subject to the same U.S. embargoes that they were subject to under the ITAR, which apply to exports to over twenty countries.  The only exception to this restriction is for “.y” 600 series items, which are subject to embargoes on exports to Cuba, Iran, North Korea, Sudan, and Syria (also known as the “E:1” or “T-5” countries) and to China.  These restrictions continue to apply to direct exports of 600 series items as well as to exports of such items following their incorporation into products manufactured abroad, regardless of the percentage content of the whole they comprise.  Industry has begun referring to this new restriction as the “EAR 600 Series See-Through Rule.”

3)  Are any EAR license exceptions available for exports of your items?

A host of EAR license exceptions are set forth at Part 740 of the EAR. One or more of these may be applicable to the export of your item depending on the item’s characteristics and the particulars of the transaction at issue.  Among these is the new Strategic Trade Authorization (“STA”) exception, established by ECR to promote interoperability with allies.  Like most exceptions, STA provides for license-free exports of items when all conditions for its use are met.

Conceptually, STA can provide a big benefit to exporters with government customers in one of the 36 countries considered “STA eligible.”  However, some in industry report that obtaining a license from the Department of Commerce is much quicker and easier than meeting the requirements for use of the STA exception.  Some also report that foreign companies are refusing to complete the consignee statement, one of the many requirements for use of STA.

Companies that decide to proceed under a Department of Commerce license rather than STA should understand that doing so risks the imposition of license conditions that may not have otherwise applied to a transaction if STA was used.  Also, despite the Administration’s promise that use of STA is optional, there are industry reports that the Department of Commerce has been returning license applications without action and advising applicants to use of STA in cases where the agency believes the exception applies.

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Of course, answering the questions above is just the start of what is essentially a retooling process.  Companies must align order flow, technology development, and any other business processes implicated by the new requirements, revise written protocols and compliance programs, and train employees.  So let’s hope all this work pays off and that, in the long run, ECR leaves us in a much better place than where we started.

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[F/N 1] “Revisions to the Export Administration Regulations: Initial Implementation of Export Control Reform,” 78 Fed. Reg. 22,660 (April 16, 2013); “Revisions to the Export Administration Regulations: Initial Implementation of Export Control Reform; Amendment to the International Traffic in Arms Regulations: Initial Implementation of Export Control Reform; Final Rules,” 78 Fed. Reg. 22,740 (April 16, 2013).

[F/N 2] The Foreign Relations Authorization Act for Fiscal Year 2013 (H.R. 6018) proposed to amend the Arms Export Control Act by adding “38(l) SPECIAL EXPORT LICENSING FOR UNITED STATES ALLIES,” which provided:

The President may establish special licensing procedures for the export of replacement components, parts, accessories, attachments, equipment, firmware, software or technology that are not designated as major defense equipment or significant military equipment to the North Atlantic Treaty Organization, any member country of that Organization, or any other country described in section 36(c)(2)(A) of this Act.

The bill passed the House on July 17, 2012 and was pending at the Senate at the time ECR provisions were added to the National Defense Reauthorization Act for Fiscal Year 2013.

[F/N 3] See e.g., The White House Office of the Press Secretary, “White House Chief of Staff Daley Highlights Priority for the President’s Export Control Reform Initiative,” July 19, 2011 (“When completed, the President’s export control reform initiative will result in a single control list, a single licensing agency, a single primary enforcement coordination agency, and a single information technology system.”); The White House Office of the Press Secretary, April 20, 2010 (“The Administration has determined that fundamental reform of the U.S. export control system is needed in each of its four component areas, with transformation to a: Single Control List, Single Primary Enforcement Coordination Agency, Single Information Technology (IT) System, and Single Licensing Agency.”)

[F/N 4] The 600 series ECCNs were formerly referred to by the ECR Task Force as the “Commerce Munitions List.”  However, the Task Force has stopped making this reference because it highlights the creation of a new list (i.e, the opposite direction of the ECR promise of a single list).  Accordingly, it now generally refers to the new list of munitions controlled by the EAR as the “600 series ECCNs.”  This new list is administered by the Commerce Munitions Division, a new division inside the Department of Commerce established by ECR.

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* The above is not intended as an exhaustive list of restrictions that may apply to a particular transaction nor advice for a specific transaction because the specifics of an individual case may implicate application of other U.S. laws as well as foreign laws that carry added or different requirements.  In addition, U.S. export control and sanctions laws are frequently subject to change.  Such changes can affect the continued validity of the information above, which is based on U.S. law existing as of November 15, 2013.  For these reasons, assistance from a qualified attorney competent to advise on such matters is highly recommended.

Matthew A. Goldstein is an International Trade Attorney in Washington D.C. licensed to practice in the District of Columbia.  He can be reached at (202) 550-0040 and Matthew@GoldsteinPLLC.com.

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