President Obama is continuing efforts to make fundamental reforms to the U.S. export control system. The President recently announced a number of important reform developments, including additional details on the restructuring and tiering of the munitions and dual-use control lists, transition to a single IT system for licensing, and creation of an enforcement coordination center. A Fact Sheet, issued by the White House, sets forth a number of these developments.

While the Administration has stated that reform will streamline export control processes and remove licensing requirements for many items, there continues to be much uncertainty regarding the impact of proposed changes on specific companies or industries. The Administration is soliciting input from industry and, as a result, there are opportunities for companies to shape the reform measures before they are finalized.

1. Control Lists and Licensing

According to senior Administration officials, significant progress has been made with regard to restructuring the two primary control lists, the State Department's U.S. Munitions List (USML) and BIS's Commerce Control List (CCL). The current goal is to make these control lists "positive lists," meaning lists that describe controlled items using objective criteria and technical parameters rather than broad and open-ended "catch-all" language.

A. Control List Tiers

The U.S. Government is working on dividing the control lists into three tiers:

Tier 1 - Items in the top tier are those that provide critical military or intelligence advantages to the U.S. and are available almost exclusively from the U.S. or are weapons of mass destruction. Top tier items will generally require a license for all destinations.

Tier 2 - Items in the middle tier are those that provide a substantial military or intelligence advantage to the U.S. and are available mostly from partners and Allies. Middle tier items will be authorized for export to partners and Allies under license exemptions or other authorizations.

Tier 3 - Items in the lowest tier are those that provide a significant military or intelligence advantage but are available broadly. For these less sensitive items, a license generally will not be required.

Use of the tiered system will enable flexibility, with the government able to cascade a product down the tiers over a product's life cycle based on the maturity and sensitivity of the item. If items are not within one of the three tiers, they will not be retained on a control list. With regard to the USML, the current plan is to remove any "catchall" categories for generic "parts," "components," "accessories," and other types of items controlled only because they were "specifically designed or modified" for a defense article. These specifically designed or modified items generally will be moved to the CCL. The "specially designed" language in the CCL also will be addressed and generally will not be used to control items on the CCL unless pursuant to multilateral controls or if there is no reasonable alternative.

B. Addressing Jurisdictional Issues

Another goal of the government is to create a "bright line" between the two current control lists, so that jurisdictional determinations are less complicated and uncertainty is reduced. This will involve deciding whether particular items now ITAR-controlled should become EAR-controlled. The government will look for items to transfer that have only been historically USML-controlled because they have had their form or fit modified, rather than their function, and do not provide a significant military advantage by themselves. Finally, the government would like to "structurally align" the lists (i.e., impose a similar structure on both lists) so that they can eventually be combined into a single list of controlled items.

The government announced that it has actually started restructuring the control lists. The government has completed its review and restructuring of USML Category VII (Tanks and Military Vehicles), turning this category into a positive, tiered list, and moving certain items to their corresponding entries on the CCL. From just this restructuring, 74 percent of the items licensed in that category will be moved to the CCL or decontrolled completely (around 32 percent of the total will be decontrolled completely). Of the 26 percent of items that will remain on the USML, none were determined to be in the highest tier of control.

C. New License Exception

In addition, the government will implement new licensing policies by creating a new Part 740 Licensing Exception that will authorize export and re-export of EAR-controlled items to specified destinations without an individual validated license. As a condition of the Licensing Exception's use, there will likely be imposed end-use restrictions, destination control statements, reporting requirements distinguishing between end-users and distributors, and other recordkeeping requirements. The government noted that the U.S. Bureau of Industry (BIS) and Security would conduct outreach to U.S. companies with a history of exporting to destinations eligible for the new License Exception. These licensing reforms work toward the goal of making export controls more narrowly tailored to specific end uses or users when country-wide restrictions are too broad or narrow.

D. Other Changes and Timeline

Other components of the reform effort will include harmonizing definitions of common terms used throughout the ITAR and EAR, developing a common export license application form, and creating a single list of proscribed persons instead of the various lists used by State, Commerce, and Treasury. All of these reforms fit within the administration's larger goal of protecting the "crown jewels" of American technology by creating fewer, higher-walled barriers around key technology.

In addition, the U.S. Government is currently transitioning to a single IT system for licensing based on the Department of Defense's current licensing system. The Department of State is currently being linked to the Department of Defense's system, and the Department of Commerce will be connected to this system by next year.

The Administration's goal is to begin issuing its proposed revisions to the control lists and licensing policies later this year. In addition, we understand that the Administration is preparing draft legislation to combine the administrative enforcement and licensing activities of BIS, the State Department's Directorate of Defense Trade Controls, and the Treasury Department's Office of Foreign Assets Control into an independent licensing agency.

2. Enforcement

In the area of enforcement, the President signed an executive order creating an Export Enforcement Coordination Center that will seek to improve coordination and enforcement between the difference agencies while eliminating gaps and duplication. The Administration intends to seek legislation to transfer criminal enforcement of the EAR to Immigration and Customs Enforcement (BIS's Office of Export Enforcement currently works directly with the Justice Department to pursue criminal cases).