On August 11 2010 the US State Department issued a proposed rule that, if adopted, would relax the controls associated with the export of defence-related items to non-US entities that employ individuals of various nationalities. Such entities would be required to conduct due diligence on their employees to prevent diversions to countries subject to US defence trade embargoes. Comments on the proposed rule were due by September 10 2010.
Under the International Traffic in Arms Regulations, the export and re-export of US-origin defence articles and related technical data are subject to strict licensing requirements. One of these existing requirements relates to the identification of so-called dual and third-country nationals employed by non-US entities that are otherwise authorised to receive defence articles and technical data. A non-US entity that employs individuals who are nationals of both the country in which the entity is located and another country (ie, dual nationals), and/or individuals who are nationals only of such other countries (ie, third-country nationals), must ensure that the nationalities of these employees are specifically identified in its International Traffic in Arms Regulations export authorisations, such as technical assistance agreements and manufacturing licence agreements.
This requirement has posed significant challenges for non-US entities. In addition to the administrative burden associated with identifying employee nationalities and seeking amended authorisations to cover new employees with different nationalities, this requirement has implicated the human rights laws of close US allies. These countries, including Canada and members of the European Union, forbid employers from enquiring about their employees' nationalities, thereby creating a dilemma for entities in those countries that wish to receive International Traffic in Arms Regulations-controlled items and technical data while complying with both theInternational Traffic in Arms Regulations and their national laws.
Under the proposed rule, the State Department will no longer require the identification of the dual and third-country national employees of non-US entities covered by International Traffic in Arms Regulations export authorisations. Instead, the State Department will require such entities to implement 'effective procedures' to prevent the diversion, from within their organisations, of defence articles and technical data to unauthorised destinations, end uses or end users. The US applicants for International Traffic in Arms Regulationsexport authorisations must also conduct due diligence to prevent such diversions.
The proposed rule specifies that, for a non-US entity, the 'effective procedures' must include either: (i) the receipt of a security clearance approved by the entity's host government that covers the entity's employees; or (ii) the maintenance of a documented technology security plan whereby all employees are screened and required to execute a non-disclosure agreement. Screening must entail the review of each employee to identify any 'substantive contacts' with countries subject to US defence trade embargoes, such as China. Substantive contacts include:
recent or regular travel to such countries;
recent or continuing contacts with agents and nationals of such countries;
continued allegiance to such countries; and
acts otherwise indicating a risk of diversion.
An employee who has substantive contacts with persons from embargoed countries is deemed to present a diversion risk, unless the State Department determines otherwise.
The proposed rule entails some ambiguity for non-US entities, as it does not specify how these entities should go about assessing the diversion risk of their employees. It is unclear, for example, whether these entities should adopt travel policies whereby employees must report all of their business and personal travel. It is equally uncertain whether such inquiries, which may be viewed as intrusive by some employees, will fall foul of human rights laws in countries such as Canada.
US entities may also find the proposed rule ambiguous in certain respects. For example, the proposal does not specify the due diligence measures that must be undertaken by US entities applying for International Traffic in Arms Regulations export authorisations to prevent diversions from occurring within their non-US business partners. The proposal also does not discuss the requirement whereby US entities must seek express authorisation to transfer defence articles and technical data to their own dual and third-country employees located in the United States (eg, employees authorised to work under H-1B visas). The proposed rule does not explain why this requirement would be maintained for US entities, but relaxed for non-US entities.
Companies subject to International Traffic in Arms Regulations requirements should consider whether the changes described by the proposed rule will impact on their compliance processes and procedures. Foreign governments may also wish to assess these proposed changes in light of their human rights laws. As noted above, the State Department accepted comments on the proposed rule until September 10 2010.
For further information on this topic please contact Robert Torresen or Lisa Crosby at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (firstname.lastname@example.org or email@example.com).
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