Introduction

On October 12, 2016, the State Department’s Directorate of Defense Trade Controls (DDTC) and the Commerce Department’s Bureau of Industry and Security (BIS) published companion final rules to amend Category XII of the United States Munitions List (USML) and move some less sensitive items to the Commerce Control List (CCL). The final rules will become effective on December 31, 2016. The changes are part of the President’s Export Control Reform (ECR) initiative on which we have previously advised. Category XII (Fire Control, Range Finder, Laser, Optical and Guidance Control Equipment) is one of the last categories to be addressed. The final rules come after two sets of proposed rules. They incorporate many of the provisions in the proposed rules, but also make some important changes. (See our advisory on the initial set of proposed rules here.)

The DDTC final rule largely follows the proposed rules by moving to a positive list approach that lays out in detail the types of items to be controlled. This promulgation follows the overall goals of ECR and the approach taken in reforming other USML categories. However, the final rule also creates a new concept of “specially designed for a military end user,” that applies solely to seven paragraphs of amended Category XII. This change arguably introduces a new design intent standard that contrasts with the approach taken by DDTC for the definition of “specially designed” hardware throughout the other USML Categories subject to ECR. Overall, DDTC’s revisions create a more detailed and narrow USML Category XII with many items moving to new or pre-existing Export Control Classification Numbers (ECCNs) on the CCL. The new BIS rule, in addition to integrating items formerly controlled on the USML, institutes enhanced controls for dual-use infrared detection items, and includes revisions to harmonize and simplify regulations regarding certain quartz rate sensors.

DDTC Changes: Positive List

With the exception of the new design intent standard (discussed below), the final rule promulgates a positive list with detailed specifications of the items controlled for most items under Category XII. Although many items have been moved to the CCL, the Category XII list retains a significant portion of the items previously controlled. DDTC acknowledges that “transfer to the CCL … was greater in other USML categories,” but contends that this is because Category XII simply has more items that warrant ITAR control.

Nonetheless, DDTC did actively engage with industry and amend some control paragraphs in the final rule to more clearly remove certain items from the USML. For example, commenters expressed concern that paragraph (c)(6)(iii) (multispectral imaging systems that classify or identify military or intelligence targets or characteristics) could inadvertently control civil or commercial multispectral systems. DDTC accepted this comment, at least in part, and the final rule amends (c)(6)(iii) to control only multispectral systems that provide “automated” classification or identification of military or intelligence targets or characteristics. Similarly, DDTC’s final rule alters paragraph (c)(6)(vi) (signature reduction systems), based on industry comments, to control only systems that reduce optical chain signature for optical augmentation. The change clarifies that certain non-military systems that reduce noise or reflections are not controlled. New “Specially Designed for Military End User” Concept

The newly introduced “specially designed for a military end user” language alters the approach to “specially designed” in other USML categories subject to ECR, and instead controls relevant items based on the intended end user at the development stage. This new control parameter will apply to paragraphs (b)(6), (c)(1)(iii), (c)(3), (c)(4)(ii), (c)(5), (c)(6)(viii)(b), and (c)(7)(ii).

Under the final rule, a “military end user” means “the national armed services, national guard, national police, government intelligence, or reconnaissance organizations, or any person or entity whose actions or functions are intended to support military end uses.” The “any person or entity” clause means the definition will capture a wide variety of actors and DDTC “acknowledges the definition of military end user is broad and intends it to be so.” An item will be deemed “specially designed” for a military end user “if it was developed for use by a military end user or users.” Under the new Note to Category XII, items designed for both military and commercial end users, as well as items designed with no specific end user in mind, are not considered specially designed for a military end user. However, DDTC notes that “contemporaneous documents are required to support the design intent; otherwise use by a military end user establishes that the item is specially designed for a military end user.”

Importantly, items controlled as specially designed for a military end user will not be eligible for the releases under § 120.41(b) because they are “systems” falling under §120.41(a)(1) rather than “parts, components, accessories, attachments, and software” falling under paragraph (b). Therefore, the standard catch-and-release analysis that accompanies most specially designed controls is inapplicable. However, according to DDTC, the “specially designed for a military end user” language will operate “similar” to the §§ 120.41(b)(4) and (b)(5) releases because it excludes items designed for a commercial or civil application or as a general purpose commodity – as long as contemporaneous documentation can be provided.

Many commenters noted, and DDTC has stated, that a design intent standard is more difficult to implement than the positive list approach. However, DDTC stated that earlier attempts to use technical specifications incorporated too many items in the ITAR with widespread commercial and civil applications. The design intent approach has the potential to disadvantage purchasers and subsequent users of an item who may not have access to design documentation, unless manufacturers provide clear jurisdiction and classification information to the marketplace. Probably more significant, the new standard may inadvertently capture products designed for commercial use when the necessary documentation is lacking – this may be a particular problem for items that were designed before this rule was published or when records about development are not available. In an effort to alleviate some of these concerns, DDTC noted that parties may request a commodity jurisdiction (CJ) determination in which DDTC will consider “any relevant information,” as opposed to self-determinations, where only contemporaneous development documentation may be used.

Notably, this design intent standard may not remain. DDTC acknowledges that a positive list approach is preferable and that it has not abandoned developing appropriate control parameters. DDTC will issue a notice of inquiry later to seek public input on parameters that might be used instead of the design intent standard. Companies exporting items or services related to the seven paragraphs falling under this specially designed standard should monitor the situation closely and take advantage of the opportunity to comment if appropriate.

BIS Changes: Integrating Items Formerly Controlled on the USML

The BIS final rule includes new and amended 600 series ECCNs for items no longer controlled under Category XII of the USML after the revisions discussed above. Specifically, the rule amends ECCN 7A611 and creates 7B611, 7D611, and 7E611. The initial proposed rule created two different 600 series controls (6x615 and 7x611), but the final rule consolidates those into a single series (7x611) in order to create a more simplified structure. The removal of items from the USML to the CCL could be beneficial for industry. Some items will become eligible for de minimis treatment if they are incorporated into foreign-made products. Certain items will also become eligible for license exceptions, particularly Strategic Trade Authorization (STA).

Enhanced Controls for Commodities Related to Infrared Detection Capabilities

Due to their sensitive nature, the final rule expands various controls for items related to infrared detection capabilities. For example, additional restrictions have been placed on the use of license exceptions Additional Permissive Reexports (APR) and Strategic Trade Authorization (STA). With regard to APR, the new rule increases the number of items ineligible for § 740.16(b) (reexports to and among specified countries) by adding ECCNs 6A002, 6A003, and 6A990 to the restrictions in paragraph (a)(2). License exception STA has been amended by adding a number of new ECCNs, in whole or in part, to the restrictions in paragraph (b)(2)(x) and adding ECCN 0E987 to the restrictions of paragraph (b)(2)(ii).

In addition, certain technology in ECCNs 6E001 and 6E002 have been made ineligible for most license exceptions. The rule also announces a new licensing policy for some RS Column 1 items by establishing a presumption of denial for license applications to Country Group D:5 for items controlled by 6E001 or 6E002, for the development of focal plane arrays or image intensifier tubes (IIT) described in 6A002 and technology controlled in 6E009.

On a positive note for industry, the de minimis rule (§ 734.4) was amended to make certain infrared commodities controlled by ECCN 0A919, which were previously ineligible for de minimis treatment, subject to the normal 25% de minimis threshold that is applicable to most items. However, the scope of ECCN 0A919 has been broadened to control the reexport of a wider range of infrared detection items.

Due to the sensitive nature of certain cameras with night vision capability, the end-use controls of § 744.9 have been expanded by adding a number of new ECCNs in that section under National Security (NS), Missile Technology (MT), Nuclear Proliferation (NP), Crime Control (CC), Regional Stability (RS), United Nations (UN), Firearms Convention (FC), and/or Anti-Terrorism (AT) reasons for control. The final rule makes other changes to infrared detection controls by creating ECCN 0E987 (technology for firearm optical sighting devices incorporating a focal plane array or IIT). These changes make for a more complex and nuanced control regime.

Removal of Controls for QRS-11 Sensors

The BIS final rule removes a variety of controls for QRS-11 sensors, most notably removing the ineligibility of such sensors for de minimis treatment in §734.4(a)(3). It also removes the RS Column 1 control and reference to such sensors from ECCN 7A994, the restriction on license exceptions in § 740.2(a)(9), and references to such sensors in a number of other ECCNs. The BIS rule notes that “the agencies do not believe that any of the sensors are described on the revised USML.” While some controls remain in place for QRS-11 sensors, these changes should reduce many of them. According to BIS, specific sensors may be captured by either a 600 series ECCN or other CCL ECCNs.

Abandonment of Previously Proposed Worldwide RS Control

The May 2015 proposed rule included a new worldwide RS control for dual-use items. That provision was largely removed in the February 2016 proposed rule, which limited the new worldwide RS control to certain military technology in ECCN 7E611.a. The final rule completely abandons the proposed worldwide RS control by removing it from ECCN 7E611.a as well.

Conclusion

The final rules issued by DDTC and BIS depart from the goals of ECR in some unique and important ways, and impose a complex regime of controls. Manufacturers, exporters, and brokers operating in this space should pay close attention to the new rules and may face challenges understanding and complying with the amended regulations. With the announcement of the final rules for Category XII, only a handful of USML categories have yet to be revised under ECR.