On July 15, in advance of its 2011 update conference and amid creeping skepticism of export control reform’s chances of success, the Department of Commerce’s Bureau of Industry and Security (BIS), issued an important proposed rule explaining how BIS intends to classify and control items that no longer warrant listing on the United States Munitions List (USML).1 Comments are due September 13, 2011. The proposal is also a response to those in Congress who have demanded more specificity regarding the treatment of “decontrolled” items.
To illustrate how the jurisdictional transfer process would work for items transitioning from the USML (and control under the Department of State’s International Traffic in Arms Regulations (ITAR)) to the Commerce Control List (CCL) (and control under the Export Administration Regulations (EAR) administered by BIS), the July 15 notice includes a series of proposed, revised Export Control Classification Numbers (ECCNs) in the CCL for military vehicles and related items currently listed in USML Category VII and ECCN 9A018. The Administration has indicated that as it proceeds with the reform effort, it will publish a series of simultaneous rules from the Departments of State and Commerce to propose revisions to the additional USML categories and the associated revisions to the CCL.
Specifically, the proposed rule explains key aspects of the transfer process for “militarily less significant” items moving from the USML to the CCL, such as:
- The creation of new ECCNs in a “600” series to establish a de facto “Commerce Munitions List” within the larger CCL, consisting of munitions items already on the CCL and USML items to be transferred to the CCL;
- Proposed initial jurisdictional (i.e., revisions to the “subject to” and de minimis provisions of the EAR) and licensing and license exception policies for items on the Commerce Munitions List; and
- A proposed definition of “specially designed” to be used throughout the EAR/CCL and the revised USML (but not applicable to the USML concept “specifically designed”) and other definitions critical to understanding the 600 series ECCNs.
Questions will continue to linger about the progress and ultimate promise of export control reform, particularly the Administration’s goals of a single control list and single licensing agency, which cannot become reality with Congress passing legislation. However, a clearer vision of the future controls that will potentially apply to parts and components of defense articles, and certain munitions end items, is emerging:
- Parts and components that are not included in the revised USML categories and not described by the new definition of “specially designed” (i.e., certain common hardware items in serial production) would be classified EAR99 and accordingly, eligible for export without a license to nearly all destinations.
- Certain types of specially designed parts and components of end items covered by 600 series ECCNs on the CCL which are specifically enumerated in Paragraph .y of the 600 series ECCN, will be subject only to BIS’s anti-terrorism (AT) reasons for control. This would allow exports without a license to all destinations except Cuba, Iran, North Korea, Sudan and Syria. These paragraph .y parts and components “have little or no military significance” according to the BIS proposal.
- Stricter license policies will apply to end items classified in Paragraphs .a through .w of each CCL 600 series ECCN and to specially designed parts and components of such end items, which are described generically in Paragraph .x of each of the 600 series ECCNs. These end items and specially designed parts and components thereof will be subject to licensing policies based on national security (NS), regional stability (RS), United Nations embargo (UN), and AT reasons for control, meaning a license requirement for all destinations other than Canada will apply. However, BIS proposes to make these items eligible for certain license exceptions, including Strategic Trade Authorization (STA) (but only with BIS pre-approval for end items) and GOV (Governments, international organizations, Chemical Weapons Convention inspections and the International Space Station) but limited to certain end users and also confined to the 36 friendly countries identified in the STA license exception provisions (the STA-36).2
It is clear then, that one significant tipping point of the Administration’s proposed licensing policy is the divide between “specially designed” parts and components specifically enumerated in Paragraph .y of each new 600 series ECCN and those which are caught in the generic, specially designed provision in Paragraph .x. Whether or not BIS chooses to enumerate a particular specially designed part or component for less strict licensing treatment in Paragraph .y, it is certain to be a source of anxiety and dread as additional USML and CCL revisions appear in future Federal Register Notices. Additionally, determinations about the eligibility of end items for license exception STA will be crucial to the promise of meaningful reform. With BIS’ proposed framework in mind, exporters can—and should—begin to consider how reform of the United States control lists might impact their licensing burdens as the Administration moves ahead with its plans to revise all USML Categories and the CCL. Revised Categories VI (Vessels of War and Special Naval Equipment), VIII (Aircraft and Associated Equipment), and XI (Military Electronics) are widely expected to be published next.
The remainder of this advisory provides a summary of key aspects of the BIS proposal to receive and control militarily less significant defense articles on the CCL and offers an updated outlook on export control reform generally.
Creating the Commerce Munitions List
The key component of the BIS strategy to receive and control munitions items is the creation of a de facto “Commerce Munitions List” within the CCL, an approach used in control lists administered by other Wassenaar partners such as Canada. The Commerce Munitions List would be comprised of: (1) munitions items already on the CCL (all presently classified in thirteen existing ECCNs ending in “018” found in CCL Categories 0, 1, 2, 8 and 9); and (2) the USML items to be transferred to the CCL. Both of these types of items would be captured in a new 600 series of entries in the CCL.
The currently applicable controls will continue to apply to the legacy CCL 018 munitions items, meaning the move to the 600 series ECCN will not, according to BIS, result in a higher or lower level of control for items already on the CCL. As noted below, however, such items will become subject to stricter de minimis rules for determining when foreign made items are subject to the EAR.
Each new 600 series ECCN will have three basic parts:
- Controls on “end items” (Paragraphs .a through .w);
- Controls on “parts,” “components,” “accessories,” and “attachments” that are “specially designed” for a specific CCL/USML entry, which will be set forth in Paragraph .x of each new 600 series ECCN and subject to the same reasons for control as the end items in that ECCN (the so-called “generic” provision for specially designed parts and components not called out for less strict licensing treatment in Paragraph .y); and
- Specific types of parts and components that warrant no more than AT-only controls, which will be identified in Paragraph .y of each new 600 series.
Extraterritorial Jurisdiction/De Minimis Rules for the Commerce Munitions List
According to the BIS proposal, items that will be classified in the Commerce Munitions List will be subject to special, stricter rules regarding de minimis calculations. De minimis calculations are used to determine when a foreign-made item incorporating U.S.-origin content is “subject to the EAR.” Instead of subjecting Commerce Munitions List items to the same rules currently in place – generally speaking, a de minimis level of 10 percent “controlled U.S. content3” for transactions involving sanctioned destinations and 25 percent for all other destinations – Commerce Munitions List items will be subject to a 10 percent de minimis level, regardless of the destination.
This particular aspect of the proposal appears to be seeking middle ground between reform opponents wary of losing “see through” jurisdiction for items moving from the USML to CCL and industry voices wanting to supply non-U.S. defense programs without the automatic transfer of U.S. export control jurisdiction to the foreign-made end item. Even with a stricter 10 percent de minimis level, this proposal represents a relaxation of the “see through” jurisdictional rule currently applicable to specially designed parts and components under the ITAR, under which DDTC’s jurisdiction and license requirements follow USML parts and components even after incorporation into a foreign-produced end item (including non-USML end items). EAR’s de minimis rule is used only to determine whether foreign-made items are subject to the EAR, not whether a license is required for a proposed export or reexport. For items that are subject to the EAR, the applicable licensing policy for the foreign-made end item itself is then generally based on the classification of the foreign-made, finished end item and the destination, which means U.S. origin content classified in the 600 series and incorporated abroad into foreign-made items could potentially be reexported under control policies that are less restrictive than those imposed on the 600 series part or component.
Licensing Policies for the Commerce Munitions List
Under the BIS proposal, 600 series ECCNs will generally be subject to NS Column 1, RS Column 1, AT and UN reasons for control. However, there are some critical exceptions to this general licensing approach, as follows:
- For current 018 items that will be moved to the corresponding 600 series ECCN, the “legacy controls” will continue to apply.
- For specially designed parts and components identified in Paragraph .y of any 600 series ECCN, AT-only controls will apply based on the government’s determination that such items do not warrant stricter control.
- A general policy of denial for all 600 series items exported or reexported to destinations subject to a UN arms embargo or a U.S. unilateral arms embargo.
Additionally, 600 series items will be eligible, subject to certain conditions, for several EAR license exceptions, including STA and GOV, which could prove the most useful for exporters.
Eligibility of 600 Series Items for the Strategic Trade Authorization (STA) License Exception
On June 16, BIS published its final rule implementing the STA license exception authorizing the export, reexport and transfer of specified items to destinations posing a relatively low risk of unauthorized uses (one group of 36 countries for more sensitive items, another group of 8 additional countries for less sensitive items controlled only for NS reasons).
As proposed, parts, components, accessories and attachments classified in the 600 series would be eligible for export, reexport or transfer under license exception STA to the STA-36 countries without the need for prior interagency review or BIS authorization. Although such exports, reexports and transfers would nonetheless be subject to certain government end use conditions as described below, the potential availability of STA for exports of specially designed parts, components, accessories and attachments in the 600 series should present a significant benefit for exporters.
End items classified in the 600 series will require a one-time prior authorization from BIS before they may be exported, reexported or transferred under license exception STA.4 The BIS proposal outlines the process through which applicants can request STA eligibility for 600 series end items. An STA eligibility request will be submitted together with an application for a license from BIS to export, reexport or transfer a 600 series end item. The Departments of Commerce, Defense and State will then determine the item’s eligibility based on an interagency analysis of whether the end item provides a critical military or intelligence advantage to the United States or is otherwise available in countries that are not regime partners or close allies, as well as less specific “foreign policy” considerations.
If an STA eligibility request is approved, BIS will send a written notification to the applicant and publish a description of the authorized end item online to inform other exporters of the end item’s eligibility for STA. Once the authorized item is listed on the BIS website, any exporter, reexporter or transferor who otherwise meets the requirements for the use of the STA license exception can rely on STA eligibility for the approved 600 series end item. If an STA eligibility request is denied, the license application that accompanied the STA eligibility request will be reviewed under BIS normal license review processes.5
Moreover, all exports, reexports or transfers of 600 series items must destined at the time of export, reexport or transfer for ultimate end use by the armed forces, police, paramilitary, law enforcement, customs and border protection, correctional, fire, and search and rescue agencies6 of a government for one of the STA-36 countries.
The proposed rule establishes an important difference between license exception STA and license exception GOV, which is also limited under the proposed rule to exports or reexports to STA-36 countries. Specifically, exports and reexports of 600 series items, including parts and components, to nongovernment end users in STA-36 countries are permissible under license exception STA if the end item will ultimately be provided to an STA-36 government for end use by an eligible agency of such government. This allowance for exports to contractors in STA-36 countries who supply their respective governments represents a key distinction between license exception STA and license exception GOV with respect to 600 series items.
New Definition of Specially Designed
BIS restated in the proposed rule that its overall goal is to avoid using design intent as a basis for classification of items on the CCL. However, BIS conceded that Wassenaar list entries (264 of which reference this term) and national security imperatives require that BIS incorporate basket provisions for “specially designed” parts and components not specified elsewhere in the CCL. Indeed, the phrase “specially designed,” and the definition proposed by BIS, will remain particularly important to exporters because, inter alia, Paragraph .x and .y items in each new 600 series ECCN use this phrase, which means it remains critical to determining whether an item is controlled by the Commerce Munitions List (or elsewhere in the CCL). The Department of State’s Directorate of Defense Trade Controls (DDTC) will use the same definition in the revised USML, although the BIS proposed rule makes clear that the definition of “specially designed” does not apply to the phrase “specifically designed” as used throughout the USML.
BIS has proposed to define “specially designed” based on the concept of “peculiarly responsible,” such that items are “specially designed” if they have characteristics “peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics, or functions”7 of the end item. In constructing this definition, BIS may have drawn from the current definition of “required” in Section 772 of the EAR, which also uses the “peculiarly responsible” standard in defining the scope of technology “required” for certain purposes.
Moreover, for parts and components, the BIS proposal provides that an item is “specially designed” if it is a part or component of an item enumerated on the CCL or the USML, and is not itself separately enumerated in a USML subcategory or ECCN that does not have “specially designed” as a control criterion. With respect to such items, the proposed definition provides that they will not be considered “specially designed” if they are:
- A single unassembled part used in multiple civil types of items, such as fasteners, common hardware, springs, and wire;
- An item specifically excluded from control on the USML or the CCL;
- Used as a part or component of an end item in serial production and not enumerated on the USML or CCL (i.e., the end items is EAR99) and the form/fit/function of the part or component is not altered for use in another USML/CCL end item (not EAR99); or
- Parts and components that can be exchanged with an EAR99 or AT-only controlled part on a one-for-one replacement basis without modification.
The incorporation of the “peculiarly responsible” standard into the definition of “specially designed” has potential to decrease licensing burdens on industry, as this standard requires a link between the contribution a part or component makes to the end item and the specific reasons for the end-item’s control. However, the proposed exclusions of certain types of parts and components from the definition of “specially designed” could raise more questions than answers. BIS has indicated it will push for adoption of this definition on a multilateral level, but the definition could benefit from further revision and clarity before it is promoted as an international standard.
What is Next? Anticipated Congressional Response
The proposed rule lays the groundwork for complying with the notification requirements of Section 38(f) of the Arms Export Control Act (AECA). Section 38(f) directs the President to periodically review the items controlled on the USML to determine whether any items no longer warrant such controls and requires that the results of such reviews be reported to Congress at least 30 days prior to removing any items from the USML. As part of the requirement, the President must describe the nature of any export controls to be imposed on the items being removed from the USML. Key congressional players have previously indicated that they would like a better understanding of where the broader reform effort is heading before the Administration provides notice under Section 38(f) of the removal of any items from the USML. To that end, after describing the notification requirements, the BIS proposed rule states that “[t]he purpose of this proposed rule is to describe how items that no longer warrant control on the USML will be controlled by the EAR and its CCL.”
It remains to be seen whether Congress will react favorably to the proposed rule’s description of subsequent controls of transferred items, or whether Congress will react favorably to the first notifications made under Section 38(f) for former USML Category VII items (assuming that BIS and DDTC, at some point, move forward with a final rule on the Category VII revisions and corresponding EAR and CCL revisions). We expect Congresswoman Ileana Ros-Lehtinen (R-FL), the Chairwoman of the House Foreign Affairs Committee, to lead those who remain critical of the Administration’s reform efforts despite her generally supportive attitude toward efforts to transfer generic parts and components to less onerous licensing controls. It is possible that she, or other members of Congress, may take issue with, for example, the Administration’s decision to determine STA eligibility for 600 series end items on a case-by-case basis following the transfer of jurisdiction.
Now that BIS has spoken to the issue, perhaps some in Congress will answer with an indication of how much of its authority — whether grounded in Section 38(f) itself or other sources such as budget and operational oversight — the legislative body will exert in the export control reform process, especially with regard to items moving from the USML to the CCL. The AECA does not require actual approval by Congress prior to transferring items from the USML. However, Congress could increase its oversight of the overall reform process and hold additional hearings. Moreover, both Congresswoman Ros-Lehtinen and Congressman Howard Berman (D-CA), the Ranking Member of the House Foreign Affairs Committee, have introduced separate pieces of export control legislation and have expressed concern that the Administration’s plan is overly ambitious in scope. While the Administration has developed a bill that would achieve the full sweep of its proposed reforms, it has given no indication of whether or when it will push for its introduction. Congressional support for the proposed transition of items to the CCL would certainly increase the chances of fully achieving the transfers, and significant opposition would undoubtedly slow down an already arduous and time consuming regulatory process.