On Monday, May 16, 2011, the United States Department of State, Directorate of Defense Trade Controls ("DDTC") issued a final rule amending parts 120, 124, and 126 of the International Traffic in Arms Regulations ("ITAR"). The rule creates a new exemption for the intra-company transfer of unclassified defense articles (including technical data) to dual national and third-country national employees of approved end-users. See International Traffic in Arms Regulations: Dual Nationals and Third-Country Nationals Employed by End-Users, 76 Fed. Reg. 28,174 (May 16, 2011). The rule is effective August 15, 2011.
Prior to the issuance of this rule, if a U.S. entity exported an ITAR-controlled item to a foreign end-user who then wanted to transfer the item to its dual national and third-country national employees, significant restrictions applied to the foreign end-user. The previous policy conflicted with foreign human rights laws and created unnecessary administrative burden, as articulated by an overwhelming majority of commenting parties. The addition of ITAR § 126.18 seeks to address this issue.
The new ITAR § 126.18 creates an exemption for intra-company, intra-organization, and intra-government transfers of "unclassified defense articles, which includes technical data" to "dual nationals or third-country nationals who are bona fide regular employees, directly employed by the foreign consignee or end-user." Despite nearly a third of commenting parties' recommendation, DDTC would not explicitly add defense services to the scope of the exemption. However, it seems that the exemption could still apply "if the contemplated defense service involves defense articles already licensed to the company." DDTC expanded "regular employee" to include workers who have a "long-term contractual relationship" with licensed end-users in § 120.39.
The § 126.18 exemption is subject to the following requirements.
- The transfer must take place within the country where the end-user is located;
- The transfer must be within the scope of an approved export license; and
- The foreign entity must have "effective procedures" to prevent diversion to unauthorized entities or purposes.
The foreign entity must fulfill two conditions to satisfy "effective procedures." First, the host country must approve a security clearance for its employees. Second, the end-user must have a process of screening its employees and requiring them to sign a Non-Disclosure Agreement. This screening must include checking employees for "substantive contacts" with restricted or prohibited countries listed in § 126.1. Records of the screening must be maintained for five years and available to DDTC upon request.