As export control reform continues to progress, and with a heightened focus on regulatory enforcement, 2014 has already proven to be a year of significant change — and opportunity — for any business or investor with an interest in cross-border commerce. Export-related matters are a central focus of the Obama Administration. Export control reform is one of the President's signature initiatives, as is the National Export Initiative (NEI) which aims to double US exports between 2010 and 20151. The changes set in motion by export control reform, combined with the potential for enforcement action, highlight the importance of understanding and navigating the export control process.
Goals of Export Control Reform
The overarching goal of reform is to make export control rules more user-friendly for businesses while maintaining — or strengthening — controls on the most sensitive products. Other stated objectives for export control reform include:
- Maximizing resources through controlling only those exports that pose a legitimate security threat;
- Introducing flexibility so that the level of control is commensurate with the risks posed by the transaction;
- Enabling interoperability between US and allied military forces; and
- Enhancing the competitiveness of US-made goods — and ensuring continued US production of controlled goods — by making the US export control system easier to navigate for sales to foreign persons.
Mechanics of Export Control Reform
Transition of Items from the USML to the CCL
The structure of export control reform involves transferring items from the US Munitions List (USML), administered by the Department of State, to the Commerce Control List (CCL), which is administered by the Department of Commerce. The Department of State, through the Directorate of Defense Trade Controls (DDTC), oversees the manufacture, sale, or brokering of defense articles and defense services that are included on the USML. DDTC administers a registration and licensure regime for these activities pursuant to the International Traffic in Arms Regulations (ITAR). The Department of Commerce, through the Bureau of Industry and Security (BIS), oversees the export of commercial items that also have military application — so called "dual-use items." BIS administers this system pursuant to the Export Administration Regulations (EAR). Both the ITAR and the EAR include exceptions to obtaining export licenses, but as a practical matter, the controls imposed by the ITAR are typically more stringent and less flexible than the EAR, making the ITAR a more challenging matter for compliance.
Thus far, items from eight of 21 USML categories have been transferred from the USML to the CCL, including:
- Aircraft and gas turbine engines (USML Categories VIII, XVII, XXI, and XIX), effective October 15, 2013;2and
- Surface vessels, ground vehicles, materials and miscellaneous articles, and submersible vessels (USML Categories VI, VII, XIII, and XX), effective on January 6, 2014.3
Transfers to the CCL from the USML are placed in a new '600 series' of Export Control Classification Numbers (ECCNs), which are codes that identify the CCL category for particular goods, commodities, or technologies. Many items in the 600 series can take advantage of the Strategic Trade Authorization (STA) license exception, which applies to exports of certain items on the CCL to 36 US allies, including NATO countries (except Albania) plus Argentina, Australia, Austria, Finland, Ireland, Japan, South Korea, New Zealand, Sweden, and Switzerland.4 In order to take advantage of the STA license exception, items in the 600 series are subject to special rules — such as the requirement that "the purchaser, intermediate cosignee, ultimate cosignee, and end user have previously been approved" on a BIS- or DDTC-issued license.5 BIS explains that this extra layer of verification is needed because products in the 600 series remain "military items."6
As part of export control reform, the USML also is being updated to enhance its clarity. In response to what many view as its uncertain or ambiguous descriptions of various items, export control reform also entails the introduction of more objective criteria to determine whether an item is covered by the USML.7
Next Steps for Export Control Reform
The Administration aims to complete its overhaul of the USML in 2014. Some of the major milestones of this process include:
- On January 2, 2014, the Departments of Commerce and State announced that some military training equipment, energetic materials, personal protective equipment, shelters, articles related to launch vehicles, missiles, rockets, military explosives, and related items (Categories IV, V, IX, X, and XVI) will be transferred to the CCL effective July 1, 2014.8
- By the summer of 2014, 13 of the 21 categories of products on the USML will either have been transferred to the CCL or will remain on the updated USML. (The next USML categories up for review include satellites, electronics, and chemicals.)
- Beginning in the summer or fall of 2014, the Departments of Commerce and State — along with the Department of Defense — plan to develop a shared internet portal and export license application.
As part of what would be the next and final phase of export control reform, the Administration also envisions seeking legislation to consolidate the export control functions of the Departments of State and Commerce, effectively integrating DDTC and BIS. However, significant political and practical hurdles would have to be overcome for this to be accomplished, and many believe that these reforms may not take place until after 2014.
New ITAR Definition for "Specially Designed"
One of the major goals of export control reform is to eliminate ambiguity surrounding the term "specially designed," which is a characteristic that can cause an item to be listed on the USML or CCL. When determining whether products are listed on the USML or CCL, not only must companies compare their goods to items on the lists, but they also must consider whether their products are "specially designed" for certain purposes.9 In the past, this subjective inquiry was further complicated by the divergent meanings of "specially designed" as used in the EAR and the ITAR.10
On October 15, 2013, regulations issued by the Department of State and the Department of Commerce entered into effect to help clarify and harmonize the meaning of the term "specially designed" where it appears in both the USML and the CCL.11 The new rules stipulate the criteria under which certain items, commodities, and software are "specially designed." In addition, both the DDTC and BIS have made "Decision Tools" available on their websites to help identify products that are "specially designed" on the CCL or the USML.12
New Rules for Brokers
The Department of State also recently published a new interim final rule governing brokers' activities under the ITAR.13 The action follows years of criticism that compliance with the regulations was unduly difficult because of their sweeping scope and ambiguous language as to who is a "broker" within the meaning of the regulations.14
The new interim final rule — which entered into effect on October 25, 2013 — clarifies that a foreign person located outside of the US only falls within the definition of 'broker' if the person is "owned or controlled by a US person" and engages in brokering activities. However, under the interim final rule it is not clear whether foreign persons who are not brokers would need to register if engaged in conduct covered by the new definition of 'brokering activities.'15 The definition of 'brokering activities' is important because only persons engaging in those activities are required to register. The interim final rule carves out a number of activities from the definition of 'brokering activities,' including an exception for "activities performed by an affiliate ... on behalf of another affiliate." The Department of State will have the opportunity to address whether foreign persons who are not brokers must register if engaged in 'brokering activities' when it releases the final rule.
Recent Enforcement Actions
Continuing a multiyear crackdown on export control compliance, BIS has already announced two enforcement actions in 2014.
- On January 3, 2014, the Assistant Secretary of Commerce for Export Enforcement issued a Temporary Denial Order (TDO) rescinding the export privileges of five individuals and companies -- 3K Aviation Consulting and Logistics (also known as 3K Havacilik Ve Danismanlik SAN. TIC. LTD. ST.); Huseyin Engin Boluca; Adaero International Trade, LLC; Recep Sadettin; and Pouya Airline (also known as Pouya Air) for 180 days.16 These entities' export privileges were denied after BIS was told that 3K Aviation planned to re-export controlled, US-made aircraft engines from Turkey to Iran in the very near future. The TDO was issued "to prevent an imminent violation of [the] EAR."
- On January 17, 2014, Amplifier Research Corporation reached a $500,000 settlement with BIS for illegally exporting domestically-produced, controlled amplifiers to China, Hong Kong, Korea, Malaysia, Singapore, Taiwan, and Thailand. The penalty was suspended because the company has cooperated with BIS and filed a voluntary self-disclosure in 2011. As part of the settlement, the corporation is required to hire an outside auditor to evaluate its export compliance program. In January 2013, a former employee of Amplifier Research was sentenced to forty-two months in prison and his BIS export privileges were suspended for ten years over the violations.17
- On February 24, 2013, BIS announced a $115,000 settlement with California-based Intevac, Inc. for five EAR-related infractions, such as the disclosure of controlled blueprints and drawings to a Russian national working at company headquarters as an engineer, and the dissemination of technology to Intervac's Chinese subsidiary without approval. The release of the information to the Russian national constituted a "deemed export" because the disclosure was made to a foreign person in the United States.18
These actions come on the heels of BIS' largest ever civil penalty ($50 million), which was issued on November 23, 2013 against Weatherford International Ltd.
While US export control reforms are designed to benefit businesses by allowing less stringent controls on some exports and making the regulations easier to understand, the changing regulatory landscape can result in short-term uncertainty which is amplified by the heightened enforcement focus. Within this environment, businesses would be well served to closely monitor policy and regulatory developments.