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Are You Ready For Export Control Reform?




by:
Mary I. Edquist
Anthony D. Konkoly
McDonald Hopkins LLC - Cleveland Office

 
June 19, 2014

Previously published on June 18, 2014

A new round of changes to export control laws will take effect on July 1, 2014. These changes will affect both how and whether various products, services and technology can be sent to foreign countries and foreign persons. If your company is involved in manufacturing and/or exporting activities, it is important to become familiar with these regulatory changes and assess their potential effect on your transactions, logistical procedures, and compliance requirements.

Certain defense articles, defense services and related technical data previously included in the U.S. Munitions List (USML), are being transferred to the Commodity Control List (CCL). The USML identifies defense articles and defense services subject to the International Traffic in Arms Regulations (ITAR) and the licensing jurisdiction of the State Department’s Directorate of Defense Trade Controls (DDTC), while the CCL identifies so-called “dual-use” or commercial items subject to the Export Administration Regulations (EAR) that are administered by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS).

These export control reforms can have a substantial impact on your business. The amendments could affect which government agency has jurisdiction over your products or services, whether you are required to register with the DDTC, and whether and which type of export license or authorization is required to ship your product or service abroad. Manufacturers and exporters should be aware of these changes and have a plan to adjust their compliance and logistics processes accordingly.

Background

Pursuant to the Export Control Reform initiative launched in 2009, the Obama Administration is revising portions of the ITAR and EAR with the goal of: (1) focusing the government’s export control resources on transactions that pose significant national security, foreign policy or proliferation concerns, (2) facilitating interoperability with U.S. allies and partners, and (3) strengthening the U.S. defense and industrial base by reducing the incentive of foreign buyers to avoid U.S.-origin defense articles and services. As part of this reform process, certain less sensitive items are being transferred from the USML to the CCL, and a number of additional changes are being made to the ITAR and EAR. These export control reform efforts have been occurring gradually, as regulatory changes are rolled out piecemeal.

The first set of amendments took effect on October 15, 2013, revising USML Category VIII (Aircraft), Category XIX (Gas turbine engines), Category XVII (Classified Articles and Technical Data), and Category XXI (Miscellaneous Articles). This first round of amendments also included critical new regulatory definitions and information about the transition of items from State to Commerce jurisdiction. The second set of final rules implementing export control reform took effect on Jan. 6, 2014, and they included revisions to USML Categories VI (Vessels of War and Special Naval Equipment), VII (Tanks and Military Vehicles), XIII (Auxiliary Military Equipment), and XX (Submersibles). After the current round of changes takes effect on July 1, 2014, eight USML categories remain to be reformed; it is anticipated that final revisions to these categories will take effect by the end of 2015.

Regulatory changes taking effect in July

The third round of amendments to the ITAR and EAR taking effect in July revise USML categories IV (Launch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs, and Mines), V (Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their Constituents), IX (Military Training Equipment), X (Personal Protective Equipment), and XVI (Nuclear Weapons Related Articles). Controls are being added under the EAR for items that are either (a) no longer controlled by the USML or (b) that fall within the scope of the Wassenaar Arrangement Munitions List and were not specifically identified on the USML or CCL but were subject to USML jurisdiction, while certain CCL items are being assigned to new Export Control Classification Numbers (“ECCNs”).

Some of the more significant changes that will result from these amendments to the ITAR and EAR are highlighted below.

  • Consistent with prior export control reform changes, a new provision will be added to USML categories IV, V, EX, X and XVI to permit ITAR licensing for commodities, software, and technical data subject to the EAR that are used in or with defense articles in each of these categories.

  • License Exception TMP, covering temporary imports, exports, reexports and transfers, and License Exception BAG, covering baggage, are being revised to add provisions covering the new ECCNs being added to the CCL.

  • A definition for the term “equipment” is being added to Section 121.8(h) of the ITAR.

  • Military explosive excavating devices, formally in Category IV, are being transferred to the jurisdiction of BIS. Items that are related to launch vehicles, missiles, rockets and military explosive devices will be controlled under new ECCNs 0A604, 0B604, 0D604, 0E604, 9A604, 9B604, 9D604, and 9E604.

  • Former “catchall” language that led un-enumerated items to be included in Category V of the USML is being removed, causing a number of propellants, incendiary agents, and explosives to be transferred to the CCL. Four new ECCNs are being created (1B608, 1C608, 1D608, and 1E608) to control energetic materials, while some types of aluminum powder, hydrazine, and derivatives thereof that were previously controlled under USML Category V will be controlled by ECCN 1C111. In addition, certain items are being moved to the more heavily controlled “600 series” ECCNs: equipment for the production of explosives and solid propellants; software for the production of explosives and solid propellants; and commercial charges and devices containing energetic materials.

  • Military training equipment in Category IX that is moving to the CCL includes various types of tooling and production equipment as well as generic parts, components, accessories, and attachments. All military training equipment that is not on the USML will be classified in ECCN 0A614. Trainer aircraft will be classified in either ECCN 9A610.a, USML Category VIII, or ECCN 9A991.

  • Shelters specifically designed or modified to protect against ballistic shock or impact and nuclear, biological, or chemical contamination are being transferred from Category X to the EAR, as are Type III body armor, anti-gravity suits, pressure suits, atmosphere diving suits, equipment for the production of articles in Category X, and generic, non-specific parts, components, accessories, and attachments. Body armor transitioned from the USML will be controlled under ECCN 1A005, while other transferred items will be controlled by the newly created ECCNs 1A613, 1B613, 1D613, and 1E613.

  • Category XVI, which controls nuclear weapons related articles, is being heavily revised to remove the majority of the articles it used to control. However, many of these nuclear weapons articles, technical data, and services will fall under the exclusive export control of the Department of Energy or the Nuclear Regulatory Commission, while certain nuclear radiation detection and measurement devices will be subject to the EAR. Tools that model or simulate the environments generated by nuclear detonations or the effects of these environments on systems, subsystems, components, structures, or humans, will remain on the USML.

The amended regulations are complex and extremely detailed, containing many more changes and nuances than can be fully addressed in the above summary. As such, it is recommended that manufacturers and exporters of products in categories affected by third round of export control reform amendments carefully review the revised rules and license exceptions to determine the effects of reform on their business and ensure that their logistics measures and compliance policies are ready for the rapidly approaching July 1st effective date.

Steps businesses can take to implement changes

There are a number of ways in which companies can make the changes necessary to comply with the amended regulations.

Review your classifications - Companies must review the classification of their products, software, technology and services under to evaluate whether and how the jurisdiction and classification of these items may have changed.

Request formal opinions - If a company is unsure of the applicable government agency that has jurisdiction over a product, technology or service and its appropriate export classification, or if the company wants to rely upon a binding determination issued by the government, they may apply for a commodity jurisdiction determination from DDTC or commodity classification request from BIS.

Address collateral licensing and registration issues - If the jurisdiction and/or classification of a company’s products, services, or technology is changing as a result of the revisions to the ITAR and EAR, the company will need to consider licensing and registration issues resulting from that change, including:

  • The applicability of BIS license exceptions, such as the Strategic Trade Authorization (“STA”)

  • In the case of foreign-made items, whether the de-minimis U.S. content rule contained in Section 734.4 and Supplement No. 2 to part 734 of the EAR can be used to avoid licensing controls

  • Whether the performance of services and employment of foreign nationals are still governed by ITAR controls

  • If registration with DDTC is still necessary

  • Whether changes to Technical Assistance Agreements (“TAA’s”) or Manufacturing License Agreements (“MLA’s”) are warranted

Evaluate your export authorizations - BIS and DDTC have each adopted transition rules governing the issuance and use of licenses, agreements and other authorizations as export control reform efforts continue. The guidelines address options companies have with respect to existing and future export licenses, TAA’s and MLA’s during the transition period. Businesses can pursue various alternatives, from taking advantage of existing authorizations for a limited period of time to filing with BIS for a new license in advance of the effective date of an item’s transfer to the CCL.

Update databases, policies, and training - Companies should amend their classification matrices and sales and shipping databases to reflect any new export classifications so as to ensure their consistent application. In addition, companies should amend their export compliance manuals and procedures to reflect changes in the law and conduct training on new export obligations resulting from export control reform.

Coordinate changes with suppliers and customers - In order to avoid confusion and disruptions in the supply chain, companies should coordinate with their business partners concerning any changes to their export authorizations or procedures. Changes will impact an affected industry as a whole, so coordination and communication with business partners is essential.

The changes that will result from these most recent export control reforms are meaningful and warrant commensurate resources and attention. Transitions are never easy, and can result in confusion, regulatory violations, delays, and tensions. We will continue to monitor changes in the law and are happy to assist with any related questions you might have.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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