Export Control Reform

ITAR Amendments Undermine Key DoD Acquisition Goal

DS_DoDDollarAt a defense industry conference held yesterday in Washington, D.C., a senior U.S. Defense Department acquisition representative discussed Defense Department plans to recruit innovators from the commercial sector to help U.S. military technologies keep pace with technological advances abroad. [F/N 1]

As previously discussed on DTL Blog, [F/N 2] the Defense Department acquisition community’s goal of greater commercial industry collaborations with the Defense Department is nothing new. However, recent amendments to the International Traffic in Arms Regulations (ITAR) undermine this goal.  These amendments subject electronics and certain other items and technology developed with a dollar or more of Defense Department funding to ITAR control regardless of their significance to military applications. [F/N 3]

ITAR control requires commercial companies to obtain State Department authorization before exporting controlled articles or disclosing controlled technical data to foreign persons in the U.S. or abroad. State Department authorization, in turn, depends on approval from the Defense Technology Security Administration (DTSA), a Defense Department unit that employs technology security policies that are often contrary to the Defense Department acquisition community’s goal of attracting wider commercial industry participation.

Companies can seek release from ITAR control by filing a written commodity jurisdiction request with the State Department. However, the commodity jurisdiction process is plagued by delays and procedural inadequacies.  In addition, the key arbiter on the new standard for commodity jurisdiction established by other recent changes to the ITAR is DTSA. [F/N 4]

Ironically, the Defense Department’s own hand in attempting to control too much under the ITAR undermines its key acquisition goal by forcing commercial companies with technologies not otherwise subject to ITAR control to chose between accepting Defense Department funds or more freely pursuing global development and commercialization activities. Considering the red tape, auditing requirements, narrow profit margins, and other burdens involved in doing business with the Defense Department, the likely choice by many of these companies seems clear.  In fact, as noted by a recent U.S. Senate Staff report:

“…in many areas (such as I.T. and advanced manufacturing) the commercial world leads the government world in developing and applying advanced technology. However, because of the required, detailed auditing and regulations (even at the subcontract level); and the shutting-out of the world market, due to export controls (e.g. if a commercial item is subcontracted on an export-controlled end item; then, the subcontracted item cannot be exported) as a result, many top-level commercial firms consciously avoid doing defense business. So, the DOD loses their technological leadership and low-cost focus.” [FN 5]

*   *   *

[F/N 1] See Sandra I. Erwin, “Pentagon Fears Losing Edge as Enemies Build Up Arsenals,” National Defense Magazine, March 17, 2015, available at http://www.nationaldefensemagazine.org/blog/Lists/Posts/Post.aspx?ID=1776

[F/N 2] See “High Cost of the Magic DoD Dollar,” available at https://defensetradelaw.com/2014/06/09/high-cost-of-the-magic-dod-dollar

[F//N 3] See e.g., “Amendment to the International Traffic in Arms Regulations: Revision of U.S. Munitions List Category XV,” 79 Fed. Reg. 27,180 (May 13, 2014); “Amendment to the International Traffic in Arms Regulations: Third Rule Implementing Export Control Reform,” 79 Fed. Reg. 34 (January 2, 2014); “Amendment to the International Traffic in Arms Regulations: Continued Implementation of Export Control Reform,” 78 Fed. Reg. 40922 (July 8, 2013); “Amendment to the International Traffic in Arms Regulations: Initial Implementation of Export Control Reform,” 78 Fed. Reg. 22740 (April 16, 2013); The notes to USML paragraphs implementing these new “Magic DoD Dollar” provisions provide a limited exception that may provide some relief to the Defense Department acquisition community. For example, the note to USML Category VIII(f) states that paragraph (f) “does not control aircraft and specially designed parts, components, accessories, and attachments therefor… identified in the relevant Department of Defense contract or other funding authorization as being developed for both civil and military applications.” However, whether the Defense Department will implement sufficient processes to effectively integrate the exception into the Defense Federal Acquisition Regulations and actual government contracting practices has yet to be seen.

[F/N 4] See 22 C.F.R. §§ 120.3(b), 120.4(d)(3) (setting forth a standard for commodity jurisdiction that focuses on defense articles and defense services that provide “a critical military or intelligence advantage…”).

[F/N 5] “DEFENSE ACQUISITION REFORM: WHERE DO WE GO FROM HERE? A Compendium of Views by Leading Experts,” Staff Report to the Permanent Subcommittee on Investigations United States Senate, Committee on Homeland Security and Government Affairs, October 2, 2014, pp. 73-74 (footnotes omitted).

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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 March 18, 2015. 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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