E-ALERT | International Trade Controls July 29, 2011
PROPOSED REVISIONS TO THE EXPORT ADMINISTRATION REGULATIONS AND ITS COMMERCE CONTROL LIST TO ACCOUNT FOR ITEMS TO BE TRANSFERRED FROM THE UNITED STATES MUNITIONS LIST On July 15, 2011, the Commerce Department's Bureau of Industry and Security (“BIS”) issued a proposed rule (76 FR 41958) outlining steps for transferring certain items which the President determines no longer warrant control under the State Department’s United States Munitions List (“USML”) to Commerce Department jurisdiction, and identifying an initial group of items from USML Category VII (Tanks and Military Vehicles) for transfer from the USML to the Commerce Control List (“CCL”) of the Commerce Department’s Export Administration Regulations ("EAR"). This proposed rule represents a significant step forward in the Administration’s Export Control Reform (“ECR”) Initiative, which aims to update and enhance the US export control system through the creation of a single, positive export control list, administered and enforced by a single agency, to promote national security and foreign policy objectives while fostering the economic competitiveness of US industries. To this end, the proposed rule creates a framework for making militarily less significant defense articles and generic parts and components for defense articles which do not meet certain technical standards subject to the less stringent CCL and EAR rather than the USML, which is part of the International Traffic in Arms Regulations (“ITAR”). The transfer of jurisdiction would be subject to a Congressional notification process, as required by the Arms Export Control Act. That notification process requires 30 days, although in practice the process may take much longer. In addition, implementing changes would be required to both the ITAR and the EAR if the proposed rule is adopted. As part of the ECR, the USML will be streamlined through a separate process to focus on a smaller number of more important, highly-sensitive military items which are critical to maintaining the US’s military or intelligence advantage. Less sensitive defense articles not identified in the revised “positive” USML would become subject to the EAR and would be eligible for export under the EAR’s more flexible controls, particularly with respect to NATO countries and other allies. In this way, the proposed rule also represents a shift away from the practice of classifying articles based solely on “design intent” (i.e., classifying articles based on whether they were designed particularly for military or commercial use)—which has long been a hallmark of the USML—in favor of classifications based on objective, technical criteria, which has been the general approach of the CCL. The proposed rule also harmonizes certain aspects of the two control lists so that they may eventually be combined into one single control list administered by one agency. Although if adopted, the changes in the proposed rule will streamline and clarify the existing US export control regimes, the changes also could result in some licensing delays and additional administrative burdens resulting from having two agencies involved in the control of the defense trade, as further described below.
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COVINGTON & BURLING LLP Comments on the proposed rule must be received by BIS no later than September 13, 2011. We are glad to assist companies in submitting comments.
PROPOSED CHANGES TO THE EXPORT ADMINISTRATION REGULATIONS AND THE COMMERCE CONTROL LIST Creation of a New “600 Series” of ECCNs The most significant change set forth in the proposed rule calls for the creation of a new series of Export Control Classification Numbers (“ECCNs”), identified by a “6” at the third ECCN character (e.g., 0A601), in each CCL category to house items transferred from the USML to the CCL. Informally referred to as the “Commerce Munitions List” (“CML”), which is a kind of de facto list within the CCL, the “600 series” would essentially create a separate tier of munitions articles to which the Commerce Department could apply a consistent licensing policy based on the military nature of the articles. Scope of the “600 Series” Under the proposed rule, these parts, components, accessories, and attachments removed from the USML would be controlled under either (1) a specific “600 series” entry, (2) a pre-existing ECCN controlled for more than Anti-terrorism (“AT”) reasons, or (3) a new entry at the end of each new “600 series” ECCN controlling “parts,” “components,” “accessories,” and “attachments” “specially designed” for items controlled in that particular ECCN or for defense articles controlled under the USML. (Each of those terms would be defined in the EAR.) Moreover, certain parts, components, accessories, and attachments which are determined to warrant no more than AT controls would be listed in a separate paragraph “y” under each ECCN and would be subject to only AT reasons for control. In addition to items transferred from the USML, the “600 series” would include items listed under existing ECCNs controlling Wassenaar Arrangement Munitions List (“WAML”) items (i.e., ECCNs ending in “018”). For example, items in ECCN 9A018.b (military vehicles and related parts) would be moved to ECCN 0A606 where other former USML military vehicles and related parts would be controlled. Old “018” entries will remain in the CCL for cross-reference purposes for the time being. The “600 series” would also capture certain generic parts, components, accessories, and attachments removed from the scope of the USML, and related technology for those items. To assist the public in understanding the new system, the proposed rule includes a number of sample “600 series” entries setting forth likely candidates drawn from USML Category VII (Tanks and Military Vehicles) for the initial transfer of items to the CCL. Reasons for Control and Licensing Policies for “600 Series” Items Items in the “600 series” would generally be controlled for National Security Column 1 (“NS1”), Regional Stability Column 1 (“RS1”), Anti-terrorism Column 1 (“AT1”) and United Nations Embargo (“UN”) reasons for control. Due to the RS1 control, these items would be subject to a worldwide licensing requirement, except for exports to Canada. Items moved from the USML to the CCL that are controlled pursuant to multilateral control regimes will retain their regime control parameters and reasons for control. Existing ECCNs transferred to the “600 series” will retain their existing CCL reasons for control. “600 series” items also would be subject to a general policy of license denial when destined to a country subject to a U.S. arms embargo.
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COVINGTON & BURLING LLP License Exceptions for “600 Series” Items The proposed rule would restrict the availability of some license exceptions for “600 series” items. However, certain license exceptions would be available to export end-items controlled under the “600 series.” These include TMP (temporary exports), RPL (replacement parts), LVS (limited value shipments), GOV (government end users), and the new Strategic Trade Authorization (“STA”) License Exception. License Exception STA would be available to authorize the export of certain end-items included in subcategory A of the “600 series,” provided the item has been authorized for export under STA in writing by BIS in accordance with a new interagency procedure to be set out in proposed EAR § 740.20(g), and the item is destined for ultimate end-use by specified agencies of one of the 36 STA eligible countries, e.g., armed forces, police, law enforcement, or rescue agencies. The proposed new § 740.20(g) would create an interagency process for handling and reviewing License Exception STA eligibility requests for “600 series” end-items. Under the proposed rule, such eligibility requests must be made in conjunction with a license application for the export, reexport, or in-country transfer of an end-item. The Departments of Commerce, Defense, and State would then assess whether the item would provide a critical military or intelligence advantage to the United States or is otherwise available in countries that are not regime partners or close allies, information that the applicant would be required to furnish with its license application and license exception request. If the item would not provide a critical military or intelligence advantage to the United States or is otherwise available in countries that are not regime partners or close allies, the Departments will determine that STA is available for exports of the item at issue, unless overarching foreign policy concerns are articulated. A consensus between the agencies is required for STA license eligibility determinations. The proposed rule contemplates that the STA eligibility determination would be made concurrently with the license review period, which has been averaging 31 calendar days. “600 series” parts, components, software, and technology also would be eligible for export under several license exceptions, including License Exception STA, but would not have to go through the §740.20(g) STA License Exception authorization process that is required for “600 series” end-items. New Reporting and Recordkeeping Requirements for “600 Series” Items Exporters using license exceptions in connection with exports of “600 series” items would be subject to specific recordkeeping and reporting requirements under the proposed rule. In particular, the proposed rule would impose semi-annual and annual reporting requirements on certain exports of “600 series” items pursuant to the Wassenaar Arrangement (semi-annual reporting) or the United Nations controls on conventional arms exports (annual reporting) under § 743.1 and a new § 743.4. Furthermore, the proposed rule adds recordkeeping requirements in connection with License Exception STA eligibility requests and responses. Application of the EAR’s De Minimis Rule to “600 Series” Items The proposed rule restricts the scope of the EAR’s de minimis exception for exports and reexports of “600 series” items incorporated into foreign-made products – limiting the controlled US-origin content to 10% (below which the item is not subject to the EAR) rather than the generally applicable 25%. However, BIS states that this is an improvement over the current treatment of these items under the ITAR (which has no de minimis exception) and will reduce the incentive for foreign manufacturers to design US-origin content out of their products.
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Creation of a Temporary “Holding” ECCN In addition to the “600 series,” the proposed rule calls for the creation of ECCN 0Y521 to be used as a temporary holding classification for items not elsewhere classified on the CCL and for which the US Government is in the process of determining the appropriate control, including “emerging technology.” (The “Y” in the ECCN would be replaced with an A, B, C, D, or E for the appropriate group into which the ECCN would be placed.) Placing an item within such an ECCN is intended to give the US Government the opportunity to review the sensitivity of the item on a case-by-case basis. Items placed in these holding ECCNs would be subject to almost worldwide licensing requirements (under the RS1 reason for control), and no license exceptions (other than License Exception GOV) would be available for items so controlled. Items could be held in these ECCNs for up to one year initially, with possible extensions up to a maximum of three years. Items will remain under these ECCNs until the retention period expires, the item is reclassified under a different ECCN, or the item is determined by BIS to be EAR99. As this classification is a foreign policy determination rather than a technical classification, the action cannot be appealed under the EAR.
Definition of “Specially Designed” In an effort to harmonize the USML and CCL, the proposed rule includes a new definition for “specially designed” to apply broadly across the CCL and USML, including to parts, components, accessories, and attachments that were “specially designed” for a 600-series end-item or for a defense article remaining on the USML. Although the US Government is trying to move away from using design-intent based control parameters for generic items, the Administration nonetheless recognizes that complete elimination of “specially designed” as a control parameter is unrealistic given the pervasive use of the term in multilateral and US control lists, and the need to have a basket category for controlling militarily less significant items “specially designed” for defense articles transferred from the USML to the CCL, and defense articles remaining on the USML. The proposed rule rejects the current Missile Technology Control Regime (“MTCR”)-based definition of “specially designed,” which focuses on whether items are made for exclusive use in items subject to the MTCR regime, and proposes a lengthy new definition that would apply more broadly to CCL entries and revised USML categories using this term. In general, the rule proposes that a “specially designed” item is one that as a result of “development” has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics, or functions of the item for which it is designed. The term does not apply to a single, unassembled part used in multiple types of civil items (such as a screw, bolt, or nut); parts or components in “serial production” that have not been altered for use in another enditem with an ECCN or on the USML; or parts or components that can be exchanged one-for-one with a non-controlled part or component without impairing the function of the part or component. The proposed definition of “specially designed” also does not control items simply because they could, in theory, be used with the listed item on the USML or CCL. 1 The rule notes, however, that the proposed single definition of “specially designed” would not be limited to items with an exclusive use. In addition, the rule notes that creating a single definition for use on the two control lists would improve the clarity and “positive” nature of the lists, and help define the jurisdictional lines between the two lists.
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Please see § 772.1 in 76 FR 41958 for the full text of the proposed definition of “specially designed.” C&B
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COVINGTON & BURLING LLP The proposed rule also adds ten definitions and revises one other existing definition to clarify the scope of the EAR and aid in the harmonization of the CCL and USML. 2
POTENTIAL ISSUES ARISING FROM THE PROPOSED RULE While the rule generally would clarify and streamline export licensing requirements and processes, the proposed rule could create certain concerns upon which exporters may wish to comment.
Licensing Delays First, the proposed rule could result in a delay in the licensing process for items transferred from the USML to the CCL. The rule states that license applications for “600 series” items are to be reviewed under the Executive Order (“EO”) governing the dual-use item license review process. License decisions are only required to be made within 39 calendar days under this EO, and the average review period in 2011 has been 31 calendar days. In contrast, overall license processing time for USML items by the State Department’s Directorate of Defense Trade Controls (“DDTC”) has been 17 calendar days. Although the proposed rule states that the US Government does not intend for license processing times to increase as items move from the USML to the CCL, it is unclear whether BIS will be able to keep up with the increased licensing activity that likely will result from the movement of many items from the USML to the CCL, coupled with the new License Exception STA eligibility determinations, without additional staffing resources for BIS and other agencies involved in the Commerce Department license review process. Such additional resources may not be available given the government’s current budgetary limitations. The proposed rule could also require exporters to obtain licenses from both the State Department and Commerce Department for a single transaction involving related items, in certain circumstances. In particular, it appears that a large majority of the items to be transferred to the CCL would be parts and components for end-items that will remain subject to the USML. Although some of those parts and components will no longer require a license under the EAR for most destinations (either because they will be only lightly controlled for anti-terrorism reasons or because they will be eligible for license-free shipment under the new License Exception STA to 36 close US allies), some parts and components still will require BIS licensing. In those cases, exporters likely would be required to seek a State license for the end-item and any major components remaining on the USML, and a BIS license for related parts and components shipped separately as part of the same order, such as spares that are not integrated into the end-item. Further, even where STA is available for the parts and components export, there will be an administrative burden in ensuring full compliance. Thus, the shared jurisdiction could potentially impose a significant additional administrative burden on exporters. More broadly, the new bifurcated jurisdiction over defense trade between the State Department and Commerce Department may pose serious compliance challenges for exporters of defense articles, who have generally shaped their compliance policies and trained their personnel to comply with the DDTC licensing requirements and system. The proposed rule will put pressure on companies to rapidly adjust their policies and retrain their personnel in the nuances of the Commerce Department export controls system. For instance, BIS has a “catch-all” rule based on end-use / end-user that applies even to exports and reexports of unlicensed goods; this approach does not exist at DDTC due to the fact that all defense exports are licensed, unless a license exemption is available. Further, the Commerce export licensing regime is in the midst of significant flux; for example, this proposed rule would amend License Exception STA only one month after that license exception went into effect. The new terms are “600 series,” “accessories and attachments,” “component,” “end item,” “equipment,” “facilities,” “part,” “material,” “serial production,” and “system.” The proposed rule also modifies the existing definition of “military commodity.”
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STA License Exception Determinations As explained above, the proposed rule creates an interagency mechanism for exporters to make STA eligibility requests for “600 series” items transferred from the USML. Under the rule, BIS would publish its STA eligibility determinations on its website, making the determination a public outcome available to competitors, and then also publish the determinations quarterly in a new supplement to the CCL. This may raise concerns for businesses with certain proprietary information, particularly because it is unclear what kind of information the public descriptions will include if there is no model number or other equally specific descriptor available for BIS to use, as contemplated by the proposed rule. However, BIS has addressed this issue in the rule by allowing companies to state in their eligibility requests what information they are willing to make public, i.e., by providing BIS with proposed text to describe the end-item in the published eligibility determination. While this procedure may resolve concerns over protection of a business’s proprietary information, it raises separate concerns for exporters who wish to rely on another company’s STA eligibility determination for a particular product. Under the proposed rule, once an eligibility request for a particular end-item has been approved, anyone complying with the requirements of STA is entitled to use the exception for exports, reexports, and transfers of the approved end-item. If the description of the approved end-item is too generic, however, exporters, reexporters, or transferors may have difficulty determining (or may not be comfortable determining) that their items match the description of the end-items approved for export or transfer under STA. It may therefore force companies to seek STA eligibility determinations that are duplicative of already-approved eligibility requests, which would further increase the burden on BIS. In addition, exporters may find it quite burdensome to compile the supporting documentation required in order to obtain a STA eligibility determination. This includes information as to why the item does not provide a critical military or intelligence advantage, information about the item’s availability in countries that are not regime partners and close allies, and information, if known, about how the item is controlled for export purposes by other countries.
Parts and Components for Repair Under certain circumstances, the proposed rule could potentially make more difficult the export of parts and components for repairing end-items. Under the rule, parts and components of USML items may be transferred to the CCL while the item itself remains on the USML. In those cases, the parts, which will be covered under the new “600 series” ECCNs, can be exported under BIS’s license exception RPL. However, the RPL license exception would require that the exported spare parts be one-for-one replacements for parts of an item that had been previously exported pursuant to a license. In contrast, if the parts remained on the USML, they could be shipped under the license exemption in ITAR Section 123.16(b)(2), which does not contain the burdensome one-to-one replacement requirement. That exemption permits the unlicensed export of repair parts if the value of any single transaction is less than $500, provided there are no more than 24 shipments per year to each approved end user. Where spare parts needed for repairs are relatively inexpensive, this rule provides much more flexibility to exporters; but that flexibility would be lost under the proposed rule for those parts that are transferred to the CCL. License Exception STA could ease this impact, but it will not apply to exports of parts to countries not eligible to receive items under the exception.
New Definition of “Specially Designed” The rule proposes a lengthy and technically complicated new definition of the term “specially designed,” which is both extensively used in the current CCL (264 times) and will be used to describe C&B
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COVINGTON & BURLING LLP many items transferred from the USML into the “600 series” ECCNs. This definition may be difficult for exporters to understand and apply in order to properly classify their transferred products. Although this definition is intended to clarify the scope of items controlled under particular provisions of the CCL, its length and complexity may ultimately hinder industry understanding of its meaning. There are many defined terms, and ambiguities, to be construed. Thus, it may be too complicated for industry to self-classify their items under this standard, leading to a large number of commodity classification requests. BIS is seeking comment and suggestions on the proposed definition, and is particularly interested in industry feedback on how the definition applies to the products they export, and whether the new definition would cause historically EAR-controlled items to become ITARcontrolled.
Exports of “600 Series” Items to 126.1 Countries Although the proposed rule includes a general policy of license denial with respect to exports of “600 series” items to ITAR Section 126.1 countries (such as the People’s Republic of China (“PRC”)), the EAR’s de minimis rule would allow items containing less than 10% EAR-controlled content to be exported or reexported to § 126.1 countries. Moreover, the EAR approach of classifying the enditem, rather than its components, would enable companies to incorporate “600” series items into their US-origin products, even if the content is well above the 10% level, and export the end-item to § 126.1 countries such as the PRC. (The EAR’s China Rule requiring licensing for certain exports of items subject to the EAR for military end uses in the PRC would seem to afford some protection, in the case of end-items subject to that rule.) BIS has acknowledged this concern, and has stated that if the U.S. Government has concerns about potential incorporation of a particular sensitive item into downstream items and subsequent export to a § 126.1 country, then the item will not be transferred to the CCL. *** Clients may wish to determine the impact of the proposed rule on their operations. We are wellpositioned to assist companies in this effort and in submitting comments to BIS on these, or other, issues.
If you have any questions concerning the material discussed in this client alert, please contact the following members of our international trade controls practice group: Peter Flanagan Corinne Goldstein Peter Lichtenbaum Kimberly Strosnider David Addis Sarah Liebschutz
202.662.5163 202.662.5534 202.662.5557 202.662.5816 202.662.5182 202.662.5673
[email protected] [email protected] [email protected] [email protected] [email protected] [email protected]
This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the subjects mentioned herein. Covington & Burling LLP, an international law firm, provides corporate, litigation and regulatory expertise to enable clients to achieve their goals. This communication is intended to bring relevant developments to our clients and other interested colleagues. Please send an email to
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