On July 15, 2011, the US Department of Commerce, Bureau of Industry and Security (“BIS”), published a proposed rule at 76 FR 41958 regarding several potential updates to the US export controls framework. The proposed rule is part of a broad-based review of the US export control system. The rule aims to streamline, standardize and simplify export procedures and cooperation between the different US agencies responsible for export control licensing and enforcement. A pivotal part of this effort is the revision of the United States Munitions List (“USML”) and Commerce Control List (“CCL”) into an aligned, positive and tiered single control list. BIS is accepting comments on the proposed rule until September 13, 2011.
Highlights of the proposed rule include:
- A framework to facilitate the transfer of certain items currently controlled by the USML to the CCL;
- A new definition of “specially designed” to accommodate the transition of items from the USML to the CCL, and to clarify the use of that term in the CCL;
- A new classification category to hold emerging technology and USML items moved to the CCL;
- A procedure for applying the new license exception Strategic Trade Authorization (“STA”); and
- The transfer of USML Category VII to the CCL as a pilot for subsequent transfers.
The proposed rule is highly detailed. Below we provide a high-level summary of the changes that BIS has proposed:
- Transfer of items from the USML to the CCL: The proposed rule would create a new regulatory structure for the movement of items from the USML to the CCL, as a result of USML revision, that still warrant control by the US Government. Specifically, the rule would add a new control series to the CCL (“xY6zz”). The purpose of the new “600 series” is twofold: (1) control most items from the USML that were transferred to the CCL; and (2) consolidate the 13 existing Wassenaar Arrangement Munitions List (“WAML”) entries (currently under “xY018”). According to BIS, this proposal would essentially create a “Commerce Munitions List.” The 600 series would allow for identification, classification and control of current USML items that are not classified under an existing Export Control Classification Number (“ECCN”) for any reason other than anti-terrorism ("AT"). Classification of an item in the 600 series would be an intermediate step to the eventual creation of a single dual-use and munitions control list.
- The 600 series ECCN would generally be controlled for National Security Column 1 (“NS 1”) reasons. Thus, a license would be required to export or reexport items controlled under these ECCNs to all countries except Canada. Items that were on the CCL prior to the creation of the 600 series, but move into it after the implementation of the proposed rule, will retain the reasons for control to which those items were subject prior to the creation of the new ECCN. The rule would also create a new paragraph ".y" of a 600 series entry (e.g., ECCN 0A606.y) for items that would require a license for certain military end uses in the People’s Republic of China. All 600 series items would be subject to a general policy of denial when destined to a country subject to a US arms embargo.
- The proposed 600 series would also capture Wassenaar Arrangement Munitions List (WAML) and former USML end items that are not identified in the revised USML and do not exist in another ECCN. Generic “parts,” “components,” “accessories and attachments” moved from the USML would be added to the CCL using a similar structure to the 600 series. Other positively identified “parts,” “components,” “accessories and attachments” that are directly related to end items would be listed next to the end item to which they are most directly related. Generic “parts,” “components,” “accessories and attachments” would be classified under the“600 series “x” subparagraph if they were “specially designed” for an end item in that 600 series ECCN or a defense article in a corresponding USML category.
- The rule also proposes that current xY018 ECCNs (WAML entries) be moved to the appropriate 600 series ECCNs to create a de facto Commerce Munitions List. This proposal is intended to facilitate exporters searching relevant ECCNs and the applying a consistent licensing policy for former USML items.
- The rule proposes four changes to part 740, aimed at addressing the movement of items from the USML to the CCL, including: (i) restricting the availability of license exceptions for 600 series items for countries subject to a US embargo; (ii) revising the Servicing and Replacement of parts and equipment (“RPL”) to add “600 series” items; (iii) creating an interagency process through which License Exception STA would be granted (see further discussion below); and (iv) expanding the EAR’s “Know Your Customer” Guidance and Red Flags (one flag would refer to License Exception STA and the other to the 600 series). The rule would also create reporting requirement for certain exports of items classified in the 600 series.
- The rule proposes restricting de minimis applicability for the 600 series items. Foreign-made items falling under the new series would be subject to 10 percent de minimis rule for US origin content, instead of the less restrictive 25 percent de minimis rule.
- Adopting a single definition of “specially designed” and other definitional changes: In its proposed rule, BIS states that the goal of eliminating design-intent based controls as part of a transition a positive USML list is not feasible. The “specially designed” parameter is found hundreds of times in the current CCL, and also is used in the multilateral regimes’ control list upon which most of the CCL is based. Instead, the rule proposes a new, single definition of “specially designed” to apply throughout the EAR and the ITAR. Under the proposed rule:
- “A 'specially designed' item, other than a 'part' or “component,” is an item that is enumerated on the CCL and, as a result of 'development,' has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics, or functions of the referenced item identified in the CCL”;
- “[a] 'specially designed part' or 'component' is a 'part' or 'component' of an item ‘enumerated’ in a category of the CCL”;
- “…an item is not considered 'specially designed' if it is separately ‘enumerated’ in an USML subcategory or an ECCN that does not have 'specially designed' as a design criterion”; and
- “[i]tems … not so ‘enumerated’ for purposes of this definition” are not considered “specially designed” in the CCL if they belong to four general categories of “parts or components,” as outlined in the proposed rule. The categories include: (i) a single part used in multiple types of civil items; (ii) an item specifically excluded from control in either control list; (iii) an unaltered part of an end-item not enumerated in either control list; and (iv) a part that can be identically exchanged with an EAR99 or AT-only controlled part, without modification to the part’s form, fit and function.
In addition to revising the “specially designed” term, the rule proposes adding and/or revising several other definitions to aid in aligning the USML and CCL lists.
- Creation of ECCN 0Y521: The proposed rule would add a new, miscellaneous ECCN to the CCL for temporary classification of items that are deemed by the departments of Commerce, Defense, and State to warrant control but which are not yet assigned an ECCN (e.g., emerging technology not yet classified). This is similar to the USML Category XXI (Miscellaneous Articles). Items classified under the new ECCN would require a license to all countries except Canada, and would be eligible only for License Exception GOV, if applicable criteria are met. Items classified under ECCN 0Y521 would be re-classified under a different ECCN, removed from the CCL, or affirmatively extended under 0Y521 within one year of their placement in that category
- License Exception STA: In June 2011, BIS published a final rule (76 FR 35276) establishing the STA License Exception. It authorizes export, reexport and transfer (in-country) of specified items to destinations that pose relatively low risk of unauthorized uses or diversion. The proposed rule would create a framework for applying the license exception STA to the new 600 series “end items” (but not to “parts, components, accessories, or attachments”) through an interagency review process. Determinations regarding the eligibility of items for use of the STA exception would be required to be made within 39 days.
- Category VII Transfer: This rule proposes the transfer of certain items from USML Category VII (Tanks and Military Vehicles) to the CCL as a pilot. The Category VII items would be moved to the following five ECCNs included in the proposed rule: 0A606, 0B606, 0C606, 0D606, and 0E606. Additionally, § 770.2(h) “Interpretation 8: Ground Vehicles” would be updated to reflect the revised, “positive” Category VII of the USML and the proposed addition of the five new ECCN entries.
Overall, the proposed rule represents a major effort in the modernization of export controls. It sets forth a clear framework for transferring USML items to the CCL, proposes a single definition for “specially designed” items, a new classification for emerging technologies, a procedure for applying the new License Exception STA, and demonstrates how the transfer of items from the USML to the CCL will take place.