Export Control Reform

What Industry Asked For?

DS_MourningEARThe Department of State recently posted minutes and presentations from the January 16, 2014 Defense Trade Advisory Group (“DTAG”) meeting. [F/N 1] As noted in a previous DTL post covering the meeting, topping the agenda was a DTAG working group presentation on the potential negative impacts and unintended consequences of the President’s Export Control Reform Initiative (“ECR”). [F/N 2]

Among other things, the minutes include the following Administration response to a public attendee comment that, for some transactions, “companies have to search more than one FRN to see what has changed in their product(s)”:

“Complexity introduced by changing a system. Industry says it was a huge burden. It asks us to get to a more tailored system, which is eventually more complex.” [F/N 3]

The problem identified by the attendee is significant because, as noted in the DTAG presentation, the new rules are too voluminous for compliance professionals to read. Because of this, many only read the rules effecting their products. However, the Administration has embedded important information in rules on an ad hoc basis, which makes it difficult to know which sets contain changes impacting company operations.

The Administration representative’s response to the attendee’s question implies how export control regulations are complicated by the very nature of what they regulate. Part of this stems from a tension within the regulations between complexity and over-broadness of the controls – i.e., simple regulations tend to control a broader scope of items than complex regulations. However, reform does not necessarily equate to more pages of complex rules, exceptions, definitions, and explanations.

The Administration could have introduced legislation to establish a single licensing agency five years ago at the start of ECR. It could have also sought Congressional amendment of the Arms Export Control Act to permit a country-based exemption in the International Traffic in Arms Regulations (“ITAR”) for exports of parts, components, accessories, attachments, equipment, firmware, software, and technology to U.S. allies. These early options would have vastly simplified both the approach to reform and the resulting changes to the regulations. They would have also avoided many of the unintended consequences caused by ECR.

Nevertheless, instead of change through legislation, the Administration decided to structure reform around implementation of the Strategic Trade Authorization license exception in the Export Administration Regulations (“EAR”) and transfers of inherently military items of lesser national security concern from the ITAR U.S. Munitions List to the EAR Commerce Control List.

Industry did not request the transfer of inherently military items to the EAR. Nor did it request the creation of overlapping export licensing jurisdiction, the new EAR “see through” rule, the complex definition of “specially designed” or the other complexities created by the Administration in its approach to reform. In other words, industry requests for change are not responsible for the complexities that have come to characterize the post-ECR U.S. export control system. As noted by the DTAG presentation:

“[ECR has] [r]educed the burden of the ITAR, but transferred to complexity under the EAR by creating a new section of the EAR.” [F/N 4]

Today, ECR list transfers create the lion’s share of unnecessary complexity in the EAR. They also create many inadvertent consequences because the transfers unmoor military items formerly subject to the ITAR from conceptual underpinnings of relevant legislative authorities that assume different lists for military and commercial items. The DTAG minutes reflect this continued problem in DTAG discussions on the disconnect between military items transferred to the EAR, otherwise subject to the Foreign Military Sales (“FMS”) Program, and EAR provisions that exclude FMS items from EAR control. [F/N 5] Other legislative and regulatory disconnects are illustrated by the Administration’s need to impose Congressional notification requirements in the EAR and creation of the new EAR “see through” rule for certain military items transferred to the EAR. Such disconnects, and the Administration’s response to them, create even more complexities that industry never asked for.

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[F/N 1] See Defense Trade Advisory Group (DTAG) page, available at http://pmddtc.state.gov/dtag/index.html

[F/N 2] See DTL post on “ECR and ITAR Country-based Exemptions,” available at https://defensetradelaw.com/2014/02/17/ecr-and-itar-country-based-exemptions

[F/N 3] “Plenary Session Minutes,” January 16, 2014, at p. 12, available at http://pmddtc.state.gov/dtag/index.html

[F/N 4] “Export Control Reform – Unintended Consequences,” January 16, 2014, at slide 24, Defense Trade Advisory Group (DTAG) page, available at http://pmddtc.state.gov/dtag/index.html

[F/N 5] Plenary Session Minutes at p. 10; see also 15 C.F.R. Section 734.3(b)(1)(vi) (“Items that are subject to the EAR that are sold, leased or loaned by the Department of Defense to a foreign country or international organization under the FMS Program of the Arms Export Control Act pursuant to a Letter of Offer and Acceptance (LOA) authorizing such transfers are not “subject to the EAR,” but rather, are subject to the authority of the Arms Export Control Act.”).

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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 May 1, 2014. 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.