On April 13, 2011, the US Department of State, Directorate of Defense Trade Controls (DDTC), published a proposed rule (76 Fed. Reg. 20590-20593) to amend the International Traffic in Arms Regulations (ITAR), 22 CFR Parts 120 and 124, to update its control policy regarding defense services, clarify the scope of activities that are considered a “defense service,” and provide certain additional definitions and other conforming changes. DDTC will accept comments on this proposed rule until June 13, 2011.
This proposed rule is a development arising from the President’s export control reform effort, and is intended to enhance support to allied countries, improve efficiency in licensing, and reduce unintended consequences based on current regulations and policy. DDTC presented a draft rule to the Defense Trade Advisory Group (DTAG), an advisory committee, for input and analysis, and which recommended changes which that were published on DDTC’s website on July 7, 2010. The following amendments have been made, with some additional commentary from DDTC in the rule’s Supplementary Information section.
Under the ITAR, any person who furnishes defense services, as currently defined and controlled by the ITAR, to a foreign person located in the United States or abroad (or engages in brokering activities related to defense services) is required to register with DDTC and obtain licenses, authorizations, or approvals from DDTC, or utilize an applicable exemption under the ITAR, prior to performing such defense services. In proposing this new rule, DDTC effectively has deemed the existing definition of defense services to be too broad, covering assistance that does not warrant control under the ITAR. As discussed below, the proposed rule provides some welcome relief and clarity to US industry and non-US parties regarding the types of activities that will require DDTC authorization, as well as certain activities that have explicitly been determined not to trigger ITAR controls.
Summary of Proposed Regulatory Changes
The following is a brief summary of the proposed changes to the ITAR as they apply to the furnishing of defense services to foreign persons. Existing paragraphs §120.9 (a)(1), (a)(2), and (a)(3) have been revised and new paragraphs (a)(4) and (b) have been added to re-define defense services as follows. We have quoted the proposed new provisions for the new definition of “defense services” and offer comments on each provision.
“(1) The furnishing of assistance (including training) using other than public domain data to foreign persons [see §120.16], whether in the United States or abroad, in the design, development, engineering, manufacture, production, assembly, testing, intermediate or depot level repair or maintenance [see §120.38], modification, demilitarization, destruction, or processing of defense articles [see §120.6]; or…”
- DDTC states that this change narrows the scope of defense services to furnishing of assistance (including training) using “other than public domain data.” This apparently would mean that using public domain data to integrate items into defense articles or train foreign forces in the employment of defense articles would no longer be a defense service.
- Consequently, services based only upon the use of public domain data would not constitute “defense services” under the ITAR and would not require a license, technical assistance agreement (TAA), or manufacturing license agreement (MLA).
- However, using data that is “other than public domain data,” including proprietary data or “technology” “subject to the Export Administration Regulations (EAR),” to provide technical assistance will constitute a defense service, based on further DDTC statements.
- DTAG recommended the qualifier “US origin” be added before “technical data,” but DDTC noted that the current definition of technical data in §120.10 is not restricted to US origin data, and that a departure from the existing definition was not warranted.
- The proposed rule apparently would delete the words “operation” and “use” from activities that constitute a defense service, which is a significant change.
“(2) The furnishing of assistance to foreign persons, whether in the United States or abroad, for the integration of any item controlled on the US Munitions List (USML) [see §121.1] or the Commerce Control List (CCL) [see 15 CFR part 774] into an end item [see §121.8(a)] or component [see §121.8(b)] that is controlled as a defense article on the USML, regardless of the origin; or…”
- According to DDTC, this provision controls “integration” of items, whether controlled by the USML or the CCL, into USML-controlled defense articles, even if ITAR-controlled “technical data” is not provided to a foreign person during the integration process.
- DTAG agreed with the addition of “integration” but recommended that a definition of that term be added to distinguish it from “installation.” DDTC declined, stating that, as used, “installation” means “the act of putting something in its predetermined place and does not require changes or modifications to the item in which it is being installed (e.g., installing a dashboard radio into a military vehicle where no changes or modifications to the vehicle are required; connecting wires and fastening the radio inside of the preexisting opening is the only assistance that is necessary).” In other words, installation apparently would not be considered a defense service.
- On the other hand, according to DDTC, “integration” in the sense of a defense service means “the systems engineering design process of uniting two or more things in order to form, coordinate, or blend into a functioning or unified whole, including introduction of software to enable proper operation of the device. This includes determining where to install something (e.g., integration of a civil engine into a destroyer which requires changes or modifications to the destroyer in order for the civil engine to operate properly; not simply plug and play).”
- We note that these explanations for the terms “installation” and “integration” are not included as amendments to ITAR part 120, but rather are provided in the Supplementary Information, so it is unclear whether such terms are defined with the force and effect of law or represent mere guidance by DDTC.
“(3) Training or providing advice to foreign units and forces, regular and irregular, regardless of whether technical data is transferred to a foreign person, including formal or informal instruction of foreign persons in the United States or abroad by any means including classroom or correspondence instruction, conduct or evaluation of training and training exercises, in the employment of defense articles; or…”
- Based on DDTC guidance, this new rule clarifies that training for foreign “units or forces” will be considered a defense service only if the training relates to the employment of a defense article, regardless of whether technical data is involved.
- In DDTC’s view, this definition improves upon the current open-ended wording of the same subsection, which covers “military training of foreign units and forces.”
- DTAG recommended that language in this subsection be changed from “whether or not use of technical data is involved” to “whether or not the transfer of technical data is involved.” DDTC adopted this suggestion.
- DTAG suggested additional definitions of “irregular forces” and “tactical employment.” In particular, DTAG noted that “tactical employment” should mean undertaking support of a military operation to achieve a military strategic goal, combat tactics, i.e., of or occurring at the battlefront, or using or being weapons or forces employed at the battlefront.
- DDTC did not agree, believing that the meaning should be clear based on the rule’s context, but decided to remove the word “tactical” preceding “employment.” Further clarification may be warranted or recommended as part of public comments on this aspect of the new rule.
“(4) Conducting direct combat operations for or providing intelligence services to a foreign person directly related to a defense article.”
- DTAG recommended that the clause “conducting direct combat operations or providing intelligence services for a foreign person” be changed to “conducting direct combat operations of a military function for or providing military intelligence services to a foreign person.”
- DTAG suggested that a definition of “military intelligence” could mean intelligence gathered or learned during a military mission/operation and assessment of risks associated with friendly and enemy courses of action and acts to counter or neutralize identified intelligence threats.
- DDTC did not believe that adding such words was necessary, nor added clarity, because a new clarification in subsection §120.9(b)(5) suffices (see below).
The proposed rule specifies in subpart (b) examples of activities that do not constitute ITAR-controlled defense services, as follows:
“(1) Training in the basic operation (functional level) or ‘basic maintenance’ of a defense article; or…”
- In prior working group presentation, DTAG recommended that DDTC provide definitions necessary to clarify when certain activities are not a defense service because basic operation and basic maintenance is not universally understood by industry. In turn, industry may want to carefully review and provide comments on the definitions formulated by DDTC below.
“(2) Mere employment of a US citizen by a foreign person; or…”
- This exception is somewhat unclear as to its intended scope. Due the use of the word “mere,” it appears that technical assistance or non-public domain technical data provided by a US citizen to his foreign person employer, particularly when such assistance or data involves a foreign-origin defense article, is covered as defense services. Further explanation of the intended scope of this language may be warranted.
- The DTAG advised that “US citizen” in §120.9 (b)(2) be changed to “US person.” DDTC did not concur because it intends to cover individuals, not business entities such as corporations, and the use of “US persons” would have included the latter. By the use of the word “citizen,” rather than “national,” it does not appear as though this exception is applicable to US permanent resident aliens. That would appear to be an unintended consequence and should be corrected.
“(3) Testing, repair, or maintenance of an item subject to the EAR (see 15 CFR 734.2) administered by the Department of Commerce, Bureau of Industry and Security, that has been incorporated or installed into a defense article; or…”
- DTAG recommended adding the words “or installed” after the word “integrated.” DDTC accepted this recommendation, but subsequently changed the word “integrated” to “incorporated.” However, the proposed rule amending the ITAR does not provide for a definition of “incorporated or installed.”
- This language makes clear that if a US person has supplied EAR-controlled equipment to a foreign person for use in a defense end item, the testing, repair or maintenance of the EAR item (despite its use in a defense article) does not constitute a defense service. US persons will need to be careful, however, that in servicing the EAR item, no action is taken with regard to the foreign defense article itself that might constitute a defense service.
“(4) Providing law enforcement, physical security or personal protective training, advice, or services to or for a foreign person, using only public domain data; or…”
- DTAG also suggested adding the words “physical security or personal protective training,” which DDTC accepted.
- If one uses non-public data (which might normally be the case, to the extent any specialized knowledge or experience is shared in the training process) then this exception does not grant much relief. Given that this exception is about law enforcement, physical security, and personal protection, interested parties may want to comment that none of these services should be controlled by the ITAR, regardless of what information is used, provided no assistance is provided regarding the employment of defense articles.
“(5) Providing assistance (including training) in medical, logistical (other than maintenance), or other administrative support services to or for a foreign person.”
- It is unclear how medical services may be covered if they relate to the employment of toxins, vaccines, or protective medicines controlled by the USML.
This new section proposed definitions for “Organizational-Level Maintenance” (or basic level maintenance), “Intermediate-Level Maintenance,” and “Depot-Level Maintenance,” as terms referenced in, and which are important for understanding, amended §120.9. DDTC did not provide specific commentary about the scope of these terms. Industry should carefully consider whether further clarification or revision is warranted.
- Organizational-level maintenance (or basic level maintenance) is the first level of maintenance performed by an end-user unit or organization “on-equipment” (directly on the defense article or support equipment) assigned to the inventory of the end-user unit or organization. Its phases consist of repair, inspecting, servicing, or calibration, testing, lubricating and adjusting equipment, as well as replacing minor parts, components, assemblies and line-replaceable spares or units.
- Intermediate-level maintenance is second-level maintenance performed “off-equipment” (on removed components, parts, or equipment) by designated maintenance shops or centers, tenders, and mobile teams in direct support of end-users units or organizations. Its phases consist of: calibration, repair, or testing and replacement of damaged or unserviceable parts, components, or assemblies.
- Depot-level maintenance is third-level maintenance performed on- or off-equipment at or by a major repair facility, shipyard, or field team with extensive equipment and personnel of higher technical skill in direct support of end-user units or organizations. It consists of providing evaluation or repair beyond unit or organizations capability. Its phases include: inspection, testing, calibration or repair, including overhaul, reconditioning and one-to-one replacement of any defective items, parts or components; and excluding any modification, enhancement upgrade or other form of alteration or improvement that enhances the performance or capability of the defense article.
Finally, DDTC proposes to amend and modify §124.1(a), which covers the approval requirements of MLAs, TAAs, and related agreements. The change removes the requirement to seek DDTC approval if the service or assistance that is being furnished uses public domain data or data otherwise exempt from ITAR licensing requirements, as now outside the scope of defense service under amended §120.9. In §124.1(a), the following sentence would be deleted: “The requirements of this section apply whether or not technical data is to be disclosed or used in the performance of the defense services described in §120.9(a) of this subchapter (e.g., all the information relied upon by the US person in performing the defense service is in the public domain or is otherwise exempt from the licensing requirements of this subchapter pursuant to 125.4 of this subchapter).” In addition, DDTC proposes to delete §124.2(a), as this requirement is no longer applicable, and make necessary conforming changes to §124.2(c).