On June 16, 2011, the long-awaited License Exception Strategic Trade Authorization (STA) was published and is now available to export, re-export, and transfer a majority of items subject to the US Export Administration Regulations (EAR) to the enumerated list of low-risk countries. The addition of License Exception STA as section 740.20 of the EAR is an important initial step by the US Department of Commerce’s Bureau of Industry and Security (BIS) toward comprehensive reform of the US export controls system President Obama announced in August 2009.
We previously discussed in some detail the proposed rulemaking on License Exception STA in our Alert of February 4, 2011. Although the Final Rule retains the overall structure and orientation of the Proposed Rule, BIS made a number of significant changes as a result of the interagency review process and public comments, during which 41 comments were filed. Below we summarize these changes, assess their significance, and identify certain compliance challenges exporters must face before relying on License Exception STA.
Changes from the Proposed Rule
Prior to implementing the final rule, BIS solicited public comment formally and informally, and then sought to balance competing public and private interests to maximize the prospects that License Exception STA will be viewed as a successful step in the President’s Export Controls Reform Initiative. The complexity of the rule makes it difficult to assess its efficacy at this early stage, but the end result appears to be a compromise solution that expands the number of items eligible for license-free shipment. The major changes are as follows.
- Shortening the list of eligible countries. One of the more conspicuous changes in the Final Rule is a drastic reduction of the number of “low-risk” countries eligible for License Exception STA, particularly in the second tier. The list of most-trusted countries eligible for the license-free export of higher-controlled items was reduced only from 37 to 36 due to the elimination of Ukraine (which also did not make it into the second tier of STA-eligible countries in the Final Rule). These countries now include: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.
The second tier of countries eligible for license-free exports of items controlled only for National Security (NS) reasons, however, was substantially reduced from 127 to only 8: Albania, Hong Kong, India, Israel, Malta, Singapore, South Africa, and Taiwan. According to one press report citing “a private sector source,” the elimination of 119 countries was done because trade with those countries in controlled items is minimal. See Final STA Rule Imminent, Will Capture More Items And Fewer Countries, Inside US Trade, June 3, 2011. In its responses to comments from the public, however, BIS said that it limited the list of eligible destinations “for foreign policy reasons.”
- Narrowing the scope of the highest-controlled items. A somewhat less visible but critical change is the Final Rule’s significant narrowing of the scope of items ineligible for shipment under License Exception STA to the eight second-tier countries. In the Proposed Rule, BIS identified the 50 highest-controlled ECCNs (such as 1A002, 3A201, 4A001, 5A001, etc.) and stated that it would consider whether items covered by these ECCNs would be ineligible for License Exception STA in whole or in part. In the Final Rule, BIS specified in the exclusion paragraph for each of the 49 applicable ECCNs whether the entire ECCN entry or certain of its parts will be ineligible for license-free shipment to the eight countries. Eleven ECCNs are excluded in their entirety, and the remaining 38 ECCNs only partially. This is significant because BIS had indicated that the process of identifying the highest-controlled ECCNs for License Exception STA would serve to determine the ECCNs that will form Tier 1 (highest-controlled items) in the future stratification of the Commerce Control List (CCL).
Revision of the ECCN notification, consignee statement and consignee notification requirements. Perhaps the most significant changes for exporters considering using License Exception STA are the revisions to paragraph (d) of the rule, which spells out the notification and acknowledgment requirements they must meet. These changes generally ease the compliance burdens, with one notable exception – a log of all exports made pursuant to License Exception STA. Specifically,
- ECCN notification – the Final Rule, unlike the Proposed Rule, does not require that the exporter, re-exporter, or transferor provide the ECCN for each shipment of an item under License Exception STA after the first shipment, if the ECCN provided for the first shipment remains accurate.
- Consignee statement – similarly, the Final Rule does not require a separate prior consignee statement acknowledging its responsibilities under License Exception STA for every shipment.
- Export log – the Final Rule imposes a new recordkeeping requirement that the exporter, re-exporter or transferor keep a log of all shipments under License Exception STA and identify the specific consignee statement associated with every shipment. This log requirement may remind some of the logs required for use of license exemptions under the ITAR.
- Consignee notification – in response to comments in the Final Rule, BIS decided not to require a “Destination Control Statement” in a prescribed form on all export controls documents, but instead requires a more flexible written notification to the consignee that the shipment is made under License Exception STA. This notification may be made by paper documents, fax, or e-mail.
- Notifications for deemed exports – in the Final Rule, BIS also recognized the impracticability of providing and obtaining formal notifications and acknowledgments in cases of in-country transfers of software source code and technology to foreign nationals (“deemed exports”). Instead, BIS requires a one-time written notification to foreign nationals. This notification may be stand-alone or incorporated into another document, such as an employment contract.
Removal of numerous items from eligibility for License Exception STA. BIS made numerous changes to paragraph (a) of the rule, which lists items and categories of items to which License Exception STA does not apply. The most significant of these changes is the addition of items controlled for encryption (EI). Many other changes are of technical nature and cannot be fully described here, but they include: ◦
- emoval of certain pathogens and toxins from eligibility;
- removal of certain gas turbine engine related software and technology from eligibility;
- clarification that reasons for control of Missile Technology (MT) apply to ECCNs 7E001 and 7E002 and therefore make them ineligible; and
- removal of additional crime control items (controlled by ECCNs 0A982, 0A985, and 0E982) from eligibility.
How Does the New Rule Fit in the Export Controls Reform Initiative?
As mentioned above, License Exception STA is a crucial first step in the Export Controls Reform Initiative announced by the Obama Administration in 2009. It appears that the Administration has made significant progress toward its reform agenda, in particular by narrowing the list of most-sensitive items that will be included in the future Tier 1 (items subjected to highest controls) of the Commerce Control List. It is not certain whether the Administration will have the last word on the reform of the export controls system, as the Chair Ileana Ros-Lehtinen (R-FL) and Ranking Member Howard Berman (D-CA) of the House Foreign Affairs Committee have drafted competing bills on export controls reform envisioning less comprehensive overhauls of the system. In light of this, it is perhaps not surprising that BIS rejected calls for further relaxation of controls submitted in public comments on the Proposed Rule.
Even without congressional input the reform will not be problem-free. We understand from statements of BIS officials that, under the Administration’s current reform plans, a large portion of items should be transferred from the United States Munitions List (USML) into a special holding ECCN on the Commerce Control List. From there, the Administration currently intends to transfer those items that will continue to require licenses to special ECCNs on the “Commerce Munitions List.” Based on statements of BIS officials, the current plan is that some or all of those Commerce Munitions List ECCNs will be eligible for License Exception STA. This could greatly increase the use of the exception, which based on the current CCL, is expected to save approximately 3000 licenses (10%) per year. If this comes to pass, License Exception STA could have considerably more utility.
If the formerly ITAR items in the holding ECCN are not moved to the Commerce Munitions List, a BIS official indicated that they would then move to EAR99. Of course, plans are still under development, so this could change.
Some commenters have expressed concern that BIS might be unable to handle the volume of license requests that it is likely to receive once this transfer happens. BIS replied that the transfer “could significantly increase BIS’s workload and, without adequate preparation, could result in backlogs and delays.” It noted that it is “working to develop means for addressing [these] concerns,” but that “[c]oncerns about future transfer of items . . . are beyond the scope of the proposed rule.” In sum, BIS acknowledges but has not yet officially announced a solution to deal with the potential backlog of licensing requests it will receive once items are transferred from the USML to the CCL. License Exception STA may be part of that solution.
What Do Exporters Need to Do to Use License Exception STA?
The good news is that the new License Exception STA is effective immediately on the date of its publication (June 16, 2011). Exporters eager to utilize it, however, have their work cut out for them. License Exception STA is complicated! First, exporters will need to review the Final Rule and assess whether it applies to their products and intended destinations. Second, they will need to determine whether its benefits outweigh the additional compliance burdens. As noted above, the mandatory notifications and acknowledgments required to use License Exception STA include:
- Requirement to furnish ECCN – exporters, re-exporters, and transferors must furnish the ECCN at least once for each item shipped under License Exception STA.
- Prior consignee statement – exporters, re-exporters, and transferors must obtain a statement in the prescribed form from the consignee at least once prior to shipping each item. In this statement, the consignee must acknowledge its compliance obligations in the prescribed form. The exporter must keep the prior consignee statement in its files along with a log of all shipments under License Exception STA identifying the specific prior consignee statement associated with each shipment.
- Notification to consignee of STA shipment – the exporter, re-exporter, or transferor must notify the consignee in writing that the shipment is made pursuant to License Exception STA. This may be accomplished by fax or e-mail as well as paper documents.
- Requirement for releases of software source code or technology within a single country (deemed exports) – a party that makes a deemed export of software source code or technology must notify the recipient of the items of the restrictions upon further release of the software source code or technology. This notification must be in writing and both the party making the deemed export and the recipient of the deemed export must retain a copy.
Compliance with the conditions of License Exception STA will require diligent attention to these substantial documentary and record-keeping requirements. Those planning to export pursuant to this rule will need to do more than draft various notifications and certifications. They must ensure that the new mandatory notifications are incorporated into the appropriate documents and communications made in conjunction with the exports. Sales staff, human resources, and compliance professionals will need to be trained to follow the notification and certification requirements consistently and keep meticulous records, and to make the substantive determinations as to eligibility to use the exception.
In exchange for the substantial liberalization of export controls represented by License Exception STA, BIS set high expectations for exporters. Meeting these expectations will require heightened compliance efforts and an initial investment in integrating the new rule into your company’s existing compliance processes. But the reduced licensing burden offers significant benefits to those companies positioned to navigate and employ License Exception STA. That benefit may be substantially increased if the Administration is successful in its plan to move many ITAR controlled parts and components to a “Commerce Munitions List.”