On March 15, 2011, the Department of State (State) published a Proposed Rule in the Federal Register amending the International Traffic in Arms Regulations (ITAR), which addresses two very real frustrations faced by exporters of defense articles. The changes, which are part of the President’s Export Control Reform effort, relate to: 1) exports of replacement parts and components for previously exported end-items subject to the ITAR; and 2) defense articles incorporated into end-items, where the end-items would not otherwise be considered defense articles, modifying the “see through” rule. State will accept comments on this proposed rule until April 14, 2011.
Replacement Parts and Components
As part of its proposed rule, State adds a new section to Part 123, “Licenses for the Export of Defense Articles” to provide a license exemption for the export of replacement parts and components that meet certain criteria. (22 C.F.R. § 123.28) The purpose of the new exemption is to “streamline the flow of parts and components and to eliminate redundancy in licensing,” as well as to eliminate “burdensome requirements for additional licenses for licensed end-users and end-uses for systems and components already vetted in earlier licenses.” The proposed exemption eliminates the requirement for a specific license for the export of parts and components for use with systems that were approved in a previous license, essentially recognizing that it is probably not a high value-add to require licenses for the exportation of wiring harnesses for use in an aircraft, vessel, tank, etc., where State has already approved the exportation of the tank.
The proposed exemption authorizes exports of replacement parts or components (as defined in the ITAR) if certain specific requirements are met. These requirements include, but are not limited to:
- The exporter and the foreign government end-user must be the same parties as those approved under the original export authorization for the end-item;
- The replacement parts or components being exported do not upgrade the capability of the end-item as originally exported, with the exception of enhancements or improvements in reliability or maintainability only; and
- The type, amount, and frequency of the exports are the reasonable and consistent type and amount that would be expected for the number of enditems the foreign government has in and do not exceed the threshold for congressional notification.
Of course, the proposed exemption also includes certain administrative requirements that will have to be met. When using the exemption, the exporter will be required to:
- Be in possession of a purchase order from the foreign government end-user;
- Cite the license number of the previously authorized export in its Automated Export System (AES) filing at the time it exports the replacement parts or components; and
- Retain records and support documentation, including copies of the underlying license and the purchase order, and provide copies of these to the Port Director on request.
Incorporated Articles, aka the “See Through” Rule
The other main focus of the proposed rule relates to State’s treatment of incorporated articles, or defense articles that have been embedded into an end-item where the enditem would not, absent the incorporation of the defense part, be subject to the ITAR. Commonly known as the “see through” rule, this interpretation has caused significant headaches (and penalties) for exporters for years.
A proposed new Section 126.19 sets forth conditions under which an ITAR license would not be required for the export or re-export of a defense article – a part or component – where that component has been incorporated into an end-item that is “subject to the Export Administration Regulations (EAR).” To ensure uninterrupted controls, this proposed new exemption will not go into effect until the Department of Commerce amends the EAR to coordinate those controls with this change to the ITAR.
This new exemption will only be available for a defense article (part or component) that has been incorporated into an end-item and not for defense articles (parts or components) incorporated into assemblies. Because an assembly could potentially be incorporated into a military or defense end-item, the exemption has been drafted more narrowly to reduce the risk of diversion into an unauthorized end-item.
Exporters will need to comply with several conditions in using the proposed exemption, including:
- The end-item would be “rendered inoperable, for purposes of intended applications or enhanced capabilities for which the defense article was incorporated into the end-item” by its removal;
- No development or production data could be transferred with the defense article; and
- The incorporation of the defense article could not provide, or be related to, a military application.
- Under this exemption, an ITAR license would still be required for the export of defense articles that are spare, or replacement parts or assemblies containing defense articles.
The proposed exemptions are not a perfect or complete solution to seemingly nonvalue- add controls under the ITAR. For example, suppliers of replacement parts or components (as opposed to licensed exporters of defense end-items) will not be able to export under these exemptions. They should, however be able to deliver parts to their customers in the United States, who will then be able to use the exemption in Part 123. In addition, it is not clear whether identifying the original license used for an export could create problems in AES if a license is expired or with excess decrementation of that license. Assuming that these issues will be addressed, however, the proposed exemptions appear to be reasonable and welcome changes.