BIS

Watch Out for STA!

DS_STAAs recently released by OMB, the Export Control Reform (“ECR”) Task Force published a final rule correcting and adding clarifications to thirteen previous rules amending the Export Administration Regulations (“EAR”). [F/N 1] Among other things, the latest correction rule corrects an August 18, 2014 correction rule that incorrectly changed requirements for the new Strategic Trade Authorization (“STA”) license exception at 22 CFR 740.20. [F/N 2]  In other words, the August 18, 2014 rule was an “incorrect correction rule” that the latest correction rule seeks to correct.

Similar to other correction rules, this latest in the long line of ECR correction rules illustrates how over-complications and uncertainties caused by ECR confuse government and industry experts alike. [F/N 3] The latest rule also highlights how continued changes to license exception STA create significant compliance risks for companies that dare to rely on the exception.

What is STA?

Like other EAR license exceptions, license exception STA permits the export of EAR-controlled items otherwise requiring a license when all aspects of the transaction fall within the scope of the exception and the exporter complies with all conditions governing use of the exception.

The scope of STA is limited to exports, re-exports and in-country transfers of eligible items to eligible countries that meet all the conditions of EAR Section 740.20. The transaction must not be subject to limitations on the use of exceptions provided at EAR Section 740.2 and must not involve a prohibited end use or prohibited end user, as described at EAR Parts 744 and 746. In addition, the Department of Commerce reportedly maintains a non-public list of STA-ineligible end users.

The conditions for use of STA require the exporter to notify each consignee in writing of the correct export control classification number (“ECCN”) for every item being exported, re-exported, or transferred under the authority of STA; obtain a signed “Prior Consignee Statement” from consignees that contains text of the specific paragraphs stated at Section 740.20; maintain logs that connect specific prior consignee statements to each export, re-export, or transfer under STA; notify each consignee in writing of each item exported, re-exported, or transferred under the authority of STA (i.e. state what specifically is being sent under the authority of the exception) with each export, re-export, or transfer under STA; comply with special reporting requirements for exports of any items under STA that are subject to Wassenaar Arrangement semiannual reporting requirements at EAR Section 743.1; properly report all exports under STA to the U.S. Government using the Department of Commerce’s Automated Export System (“AES”); maintain records of compliance with all STA conditions and of related export activities; and produce copies of such records to the Department of Commerce or its designee upon agency request. Additional requirements apply to exports, re-exports, and transfers of technology and source code under STA. All these requirements for use of STA create significant compliance burdens that often exceed the burden of obtaining a license.  Because of this, many companies decide not to use the exception.

The use of license exception STA instead of another otherwise applicable license exception or a license is entirely optional. [F/N 4] However, companies that decide to rely on STA must ensure they comply with every STA requirement because inadvertent violations of STA requirements are subject to fines of $250,000 or twice the value of a transaction per export, whichever is greater; knowing violations are subject to criminal prosecution; and the risk that any violations of STA requirements will be detected is extremely high because the Department of Commerce audits companies that export under STA.

Government audits of STA compliance are commonplace and consist of written demands from the Department of Commerce for documents and information that prove a company did not violate STA requirements in a particular shipment (i.e., Commerce places the burden on companies to prove they did not violate STA). [F/N 5]  In 2014, the Department of Commerce reported that fourteen percent of these audits resulted in findings that a company failed to comply with STA requirements for exports of “non-600 series” ECCN items, with referrals to the Department of Commerce Office of Export Enforcement. [F/N 6]

Keeping up with STA

The latest ECR correction rule constitutes the thirteenth amendment to license exception STA since its initial implementation in June 2011. The twelve previous amendments changed both the scope and requirements of STA. [F/N 7] These constant changes to STA require companies to map compliance processes around a constantly moving target.

In addition, despite the constant amendments to STA over the last three years, requirements for use of the exception are still not clearly stated in the regulations. For example, Section 740.20 does not presently describe the specific formats for written notifications to consignees identifying ECCNs and the items being exported, re-exported, or transferred under the authority of STA. This lack of clarity leaves the sufficiency of documents necessary to comply with STA requirements open to inconsistent agency interpretations that vary from established industry practices.

The constant changes to STA have also created considerable confusion within the U.S. Government. As a result, for months, the STA “Decision Tool” available on the Department of Commerce’s website was out of date and the Department of Commerce version of Section 740.20 differed from the version maintained by the U.S. Government Printing Office.

Should Companies Rely on STA?

ECR relies on use of license exception STA to justify its transfer of thousands of items from Department of State to Department of Commerce jurisdiction. This is why the ECR Task Force encourages exporters to use STA and actively promotes use of the exception at seminars and other industry outreach. However, although STA has been around since 2011, relatively few companies actually use it because it is often much simpler to obtain a license than to comply with all the STA requirements. In fact, based on Department of Commerce statistics, more people will read this blog on the date of its posting than will use STA in a typical month. [F/N 8]

As noted above, the use of STA is optional and companies remain free to use other applicable license exceptions or to obtain a license. Accordingly, considering all the constant changes to the scope and conditions for use of STA, the difficulty in meeting STA documentation requirements, and the fact that the Department of Commerce regularly audits companies using STA and may impose significant fines for inadvertent violations, companies should think twice before attempting to use the exception.

*   *   *

[F/N 1] “Corrections and Clarifications to the Export Administration Regulations,” 27 Fed. Reg. 77862 (December 29, 2014).

[F/N 2] Ibid. at 77863 (“Section 740.20(d)(2). BIS is correcting a provision of the EAR that was previously amended by two final rules appearing in the Federal Register on June 5, 2014 (79 FR 32612) and on May 13, 2014 (79 FR 27417), and was again amended in an August 18, 2014 (79 FR 48660) final rule that made correcting amendments to these two final rules. One instruction in the August 18, 2014 rule was incorrect because it did not specify that the two sentences at the end of paragraph (d)(2) to be revised were at the end of the introductory text of paragraph (d)(2), which resulted in the wrong two sentences being revised. Because of the incorrect instruction, the two sentences in paragraph (d)(2)(viii) were revised instead of the intended last two sentences of the introductory text of paragraph (d)(2). This final rule corrects paragraph (d)(2) to accurately reflect the revision intended by the August 18 rule and to add back into the EAR paragraph (d)(2)(viii) that was not intended to be revised or removed in the August 18 rule.”).

[F/N 3] See e.g., “Amendment to the International Traffic in Arms Regulations: United States Munitions List Category XI (Military Electronics), Correction, and Other Changes,” 79 Fed. Reg. 77884 (December 29, 2014); “Clarifications and Corrections to the Export Administration Regulations (EAR): Control of Spacecraft Systems and Related Items the President Determines No Longer Warrant Control Under the United States Munitions List (USML),” 79 FR 67055 (November 12, 2014); “Amendment to the International Traffic in Arms Regulations: Revision of U.S. Munitions List Category XV; Correction,” 79 FR 66608 (November 10, 2014); “Corrections and Clarifications to the Export Administration Regulations; Correction,” 79 Fed. Reg. 48660 (August 18, 2014); “Amendment to the International Traffic in Arms Regulations: Third Rule Implementing Export Control Reform; Correction,” 79 Fed. Reg. 36393  (June 27, 2014); “Corrections and Clarifications to the Export Administration Regulations; Conforming Changes to the EAR Based on Amendments to the International Traffic in Arms Regulations,” 79 Fed. Reg. 32612 (June 5, 2014); “Revisions to the Export Administration Regulations: Military Vehicles; Vessels of War; Submersible Vessels, Oceanographic Equipment; Related Items; and Auxiliary and Miscellaneous Items That the President Determines No Longer Warrant Control Under the United States Munitions List; Final Rule; Correction,” 79 Fed. Reg. 0022 (January 2, 2014); “Amendment to the International Traffic in Arms Regulations: Continued Implementation of Export Control Reform; Correction,” 79 Fed. Reg. 0026 (January 2, 2014); “Revisions to the Export Administration Regulations: Initial Implementation of Export Control Reform; Correction,” 78 Fed. Reg. 61,744 (October 3, 2013); “Amendment to the International Traffic in Arms Regulations: Initial Implementation of Export Control Reform; Correction,” 78 Fed. Reg. 61,750 (October 3, 2013).

[F/N 4] “Export Control Reform Initiative: Strategic Trade Authorization License Exception,” 76 Fed. Reg. 35287 (June 16, 2011) (“For exports, reexports, and transfers where STA is relevant, its use is optional. Parties may use other license exceptions that authorize a planned transaction or apply for a license if they prefer to do so.”).

[F/N 5] The Department of Commerce regularly sends letters to companies exporting under license exception STA, demanding copies of specific documents and information to confirm compliance STA requirements; See “Non-600 Series STA Compliance Review Process,” Department of Commerce presentation released at 2014 BIS Update; See also Transcript of Statement by Kevin Wolf, Assistant Secretary of Export Administration, 2014 Conference On Export Controls and Policy, p. 7 (“Sure of course there’s a trade-off with respect to using STA in that for the benefit of not having the need for individual licenses and the delay associated with that, we will be doing monitoring and following checks to insure that you’re complying with the conditions.”).

[F/N 6] Ibid.

[F/N 7] See “Revision to the Export Administration Regulations: Controls on Electronic Commodities; Exports and Reexports to Hong Kong,” 79 Fed. Reg. 76867, 76872-73 (December 23, 2014); “Corrections and Clarifications to the Export Administration Regulations; Correction,” 79 Fed. Reg. 48660, 48661 (Aug. 18, 2014); “Wassenaar Arrangement 2013 Plenary Agreements Implementation: Commerce Control List, Definitions, and Reports; and Extension of Fly-by-Wire Technology and Software Controls; Final Rule,” 79 Fed. Reg. 45288, 45296 (Aug. 4, 2014); “Corrections and Clarifications to the Export Administration Regulations; Conforming Changes to the EAR Based on Amendments to the International Traffic in Arms Regulations; Final Rule,” 79 FR 332612, 2624 (June 5, 2014); “Revisions to the Export Administration Regulations (EAR): Control of Spacecraft Systems and Related Items the President Determines No Longer Warrant Control Under the United States Munitions List (USML); Final Rule,” 79 Fed. Reg. 27418, 27436 (May 13, 2014); “Revisions to the Export Administration Regulations: Military Vehicles; Vessels of War; Submersible Vessels, Oceanographic Equipment; Related Items; and Auxiliary and Miscellaneous Items That the President Determines No Longer Warrant Control Under the United States Munitions List; Final Rule,” 78 Fed. Reg. 40892, 40911 (July 8, 2013); “Revisions to the Export Administration Regulations Based on the 2012 Missile Technology Control Regime Plenary Agreements,” 78 Fed. Reg. 42430, 42434 (July 16, 2013); “Implementation of the Understandings Reached at the 2012 Australia Group (AG) Plenary Meeting and the 2012 AG Intersessional Decisions; Changes to Select Agent Controls,” 78 Fed. Reg. 33692, 33695 (June 5, 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. 22660, 22718 (April 16, 2013); “Wassenaar Arrangement 2011 Plenary Agreements Implementation: Commerce Control List, Definitions, New Participating State (Mexico) and Reports,” 77 Fed. Reg. 39354, 39368 (July 2, 2012); “Export and Reexport License Requirements for Certain Microwave and Millimeter Wave Electronic Components,” 77 Fed. Reg. 1017, 1018 (Jan. 9, 2012); “Implementation of a Decision Adopted Under the Australia Group (AG) Intersessional Silent Approval Procedures in 2010 and Related Editorial Amendments,” 76 Fed. Reg. 56099, 56101 (September 12, 2011); “Export Control Reform Initiative: Strategic Trade Authorization License Exception,” 76 Fed. Reg. 35276, 35287 (June 16, 2011).

[F/N 8] See “STA Compliance and BIS Reviews,” Department of Commerce presentation released at 2014 BIS Update (showing average of 64 STA users a month for the period January 2013 to May 2014).

___________________

*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 December 26, 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

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