On 24 May 2013, the Departments of Commerce and State issued important proposed changes to U.S. satellite export controls. These changes are expected to reduce significantly the administrative and licensing burdens associated with the current export control regime. In particular, commercial satellites and related items would be transferred to the Commerce Department’s less restrictive export control regulations and exports to many U.S.-allied countries would be eligible for license exceptions. However, current restrictions on exports and reexports of commercial satellites and related items to arms-embargoed countries, including China, will remain in place. Accordingly, companies need to assess carefully the full effect of these proposed rules on existing and future operations.
The proposed rules would transfer most non-military satellites, including commercial communications satellites (COMSAT) and related parts, components, and services from the State Department’s International Traffic in Arms Regulations (ITAR) to the less restrictive “dual-use” controls under the Commerce Department’s Export Administration Regulations (EAR). These proposed rules follow the enactment on 3 January 2013 of the National Defense Authorization Act for Fiscal Year 2013 (NDAA), which restored the president’s authority to transfer COMSATs and other non-military satellites to the EAR. U.S.-origin COMSATs have been controlled as defense articles under the ITAR since 1999. The proposed rules also are part of President Obama’s broader Export Control Reform (ECR) effort, which includes transitioning from the ITAR to the EAR certain items that the president determines no longer warrant the strict controls imposed by the ITAR. Copies of the Federal Register notices are available here (State Department) and here (Commerce Department).
As outlined below, the proposed rules would:
- amend Category XV of the ITAR’s United States Munitions List (USML) to cover a more narrowly defined list of satellites (primarily military, intelligence, and certain remote sensing satellites) and related ground systems, components, parts, software, and technical data;
- revise the definition of “defense service” to more precisely describe the services that warrant control under the ITAR, including furnishing assistance related to satellite launch failure analysis; and
- amend the EAR to address how items previously controlled under USML Category XV would be controlled on the EAR’s Commerce Control List (CCL).
Given the remaining procedural steps that will need to be completed, the revisions to the satellite export controls likely will not become effective until mid-2014 at the earliest. Nonetheless, both U.S. and non-U.S. companies currently engaged in ITAR-controlled satellite activities will need to assess the benefits and limitations of these proposed rules on their businesses. Public comments regarding the proposed rules may be submitted until 8 July 2013.
Department of State Proposed Rule
Changes to Category XV
Currently, virtually all U.S.-origin satellites, including COMSATs, are controlled as defense articles under the ITAR. As a result, COMSATs and other non-military spacecraft have been among the only dual-use items subject to the same strict export controls as major U.S. weapons systems.
The State Department’s 24 May proposed rule would significantly narrow the scope of USML Category XV to cover only:
- certain spacecraft, including satellites, with specified missile tracking capabilities, remote sensing satellites, satellites with classified components, and certain other satellites with specified technical characteristics;
- ground control systems and training simulators specially designed for telemetry, tracking, and control of satellites controlled under Category XV;
- Global Positioning System receiving equipment that is military-related or meets certain other technical parameters (such equipment eventually will be moved to a revised USML Category XII);
- space-related parts and components meeting certain technical parameters;
- technical data and defense services directly related to defense articles controlled under Category XV; and
- classified technical data directly related to certain satellite-related items being transferred to the CCL and defense services using such classified technical data.
Category XV also would be revised to allow the State Department to license the export of commodities, software, and technical data subject to the EAR, provided such items are used in or with Category XV defense articles. This authority, however, would be available only when the license would cover both ITAR and EAR items.
Defining “defense service”
The State Department’s proposed rule also addresses changes to the regulation of technical assistance and “defense services” across all industries, including specific provisions applicable to the satellite industry. The proposed rule would narrow the scope of the defined term “defense service” by further specifying the types of activities that constitute a defense service and by providing examples of activities that do not constitute a defense service. The proposed rule is a further revision, based in part on public comments, to a proposed rule originally published in April 2011.
The proposed rule would revise the definition of the term “defense service” to cover a narrower scope of activities, including:
- furnishing of assistance to a foreign person, wherever located, for the integration of an item that is on the USML or subject to the EAR into an end item or component that is on the USML, regardless of origin;
- furnishing of assistance to a foreign person in the tactical employment (not basic operation) of a defense article, regardless of whether technical data is transferred; and
- furnishing of assistance related to launch failure analysis.
The proposed rule also would exclude from the definition of defense service certain other activities, including:
- use of public domain information to provide assistance to a foreign person in connection with a defense article;
- training in basic-level maintenance of a defense article lawfully approved for export or reexport to an end-user, provided the end-user is not in a country subject to a U.S. arms embargo or is not otherwise an ineligible end-user under the ITAR;
- servicing of an item subject to the EAR that already has been integrated or installed into a defense article; and
- mere employment of a natural U.S. person by a foreign person.
Department of Commerce Proposed Rule
The parallel proposed Commerce Department rule would create new “500 series” Export Control Classification Numbers (ECCN) for spacecraft and related items being transferred to the CCL from USML Category XV. The new ECCNs are:
- 9A515 – spacecraft, including satellites, not enumerated in Category XV of the USML and related hardware;
- 9B515 – test, inspection, and production equipment “specially designed” for the production or development of items enumerated in ECCN 9A515 or USML Category XV;
- 9D515 – software “specially designed” for the development, production, operation, installation, maintenance, repair, overhaul, or refurbishing of items enumerated in ECCNs 9A515 and 9B515; and
- 9E515 – technology “required” for the development, production, operation, installation, maintenance, repair, overhaul or refurbishing of items enumerated in ECCNs 9A515, 9B515, or 9D515.
The proposed rule would subject these “500 series” items to the following provisions under the EAR:
- controls - “500 series” items would be subject to national security, regional stability, antiterrorism, and (in some cases) missile technology controls. Export license applications for “500 series” items destined to China, North Korea, or any country that is a designated state sponsor of terrorism would be subject to a policy of denial.
- de minimis treatment - Foreign-made items that incorporate any amount of U.S.-origin “500 series” items would be subject to the EAR when destined to a country that is subject to a U.S. arms embargo. A foreign-made item that incorporates U.S.-origin “500 series” items destined to a country that is not subject to a U.S. arms embargo would be eligible for de minimis treatment – these items would not be subject to the EAR if the value of all of their U.S.-origin controlled content does not exceed 25 per cent of the foreign-made item’s value.
- license exceptions – Many “500 series” items would be eligible for several license exceptions, including LVS (limited value shipments), GOV (governments and international organizations), RPL (servicing and replacement parts), and STA (strategic trade authorization). Under STA, exporters, particularly COMSAT parts and components manufacturers, would be able to export their products without a license to NATO countries and other allies, provided that all of the conditions for the use of this license exception have been met.
Although these proposed rules represent significant changes to U.S. export controls of COMSATs, a number of steps must be taken before the changes can take effect:
- The proposed rules are subject to a 45-day public comment (ending July 8, 2013), after which the Obama Administration will need to revise the proposed rules based on the comments received and then complete an interagency review process among the Departments of Defense, State and Commerce, the Director of National Intelligence, and other appropriate agencies. (Comments to the State Department should be emailed to DDTCResponseTeam @state.gov with the subject line, “ITAR Amendment-USML Category XV and Defense Services,” and comments to the Commerce Department should be emailed to email@example.com with the subject line, “RIN 0694-AF87.”)
- Before publication, the final rules then will need to be notified to Congress in accordance with Section 38(f) of the Arms Export Control Act. Due to the informal “pre-notification” period, this process is expected to take at least 60 days (but could take longer, particularly if the Administration’s proposed changes meet resistance among key members of Congress).
- Even after the final rules are published, they will not take effect for 180 days.
- Under “transition rules” published separately on 16 April 2013, U.S. exporters will have up to two years after the effective date of the final rules to amend or replace existing ITAR licenses with EAR authorizations for items moving from the USML to the CCL.
Given these required steps, we expect that the removal of COMSATs and related items from ITAR jurisdiction will not take effect until mid-2014 at the earliest.
Implications for the satellite industry
Ultimately, the proposed State Department and Commerce Department rules are expected to reduce significantly the administrative and licensing burdens associated with the ITAR regime. In many cases, companies that now routinely must obtain ITAR licenses and/or agreements to provide COMSATs and related items, services and technical data to foreign persons will no longer be required to do so. Although these items still would be subject to licensing requirements under the EAR, a number of EAR license exceptions will be available for certain exports and reexports to NATO and other U.S.-allied countries.
Nonetheless, U.S. and non-U.S. companies engaged in satellite activities subject to the ITAR will need to prepare for the transition of these items from the ITAR to the EAR.
- Companies will need to assess the implications of some or all their activities becoming subject to the EAR, including whether such activities are eligible for EAR license exceptions, including with respect to hardware, software, source code, and technical data.
- Companies will need to determine the extent to which their activities remain subject to the ITAR. Even after the proposed rules go into effect, companies still may need to grapple with the ITAR – services related to satellite launches and launch failure analysis will remain subject to the ITAR.
- Companies should keep in mind that under the proposed rules the State Department would be authorized to license the export of items subject to the EAR along with items that remain subject to the ITAR, provided such items are used in or with Category XV defense articles.
- Companies will need to review their current list of existing ITAR authorizations and assess the extent to which these authorizations must be replaced with EAR authorizations.
Given the scope of the proposed changes, companies involved in satellite-related activities should track developments closely and would be well advised to begin planning for the transition to the EAR.