On July 1, 2014, the US Department of Commerce, Bureau of Industry and Security (BIS), and the US Department of State, Directorate of Defense Trade Controls (DDTC), published parallel final rules to transfer articles from Category XI (Military Electronics) of the United States Munitions List (USML) to new classifications on the Commerce Control List (CCL). These rules, to take effect on December 30, 2014, are part of the US Government’s ongoing export control reform (ECR) initiative. We previously advised on the initial implementation of ECR and the structural changes that it brought about in the US export control system. Also as part of ECR, on May 13, 2014, BIS and DDTC issued interim final rules to move articles from Category XV (Spacecraft) of the USML to the CCL. BIS and DDTC issued the spacecraft rules in “interim final” form because they require additional time for analysis and industry input in order to finalize them. BIS will accept comments on the spacecraft rules until November 10, 2014.
The BIS rule creates four new “600 series” ECCNs in Category 3 of the CCL, each one covering product groups A (commodities), B (test equipment), D (software) and E (technology), to control certain military electronics and related test, inspection and production equipment and software and technology currently controlled by USML Category XI and that are transitioning to the CCL. These new ECCNs also control computers, telecommunications equipment, radar and avionics “specially designed” for military use, as well as parts, components, accessories, and attachments “specially designed” therefor, and related software and technology to the extent that they are not enumerated in revised Category XI. BIS indicated that it is including such items within the scope of the new “600 series” that corresponds to USML Category XI, rather than creating new “600 series” ECCNs in CCL Categories 4 (computers), 5 (telecommunications), 6 (radar), and 7 (avionics). BIS, however, has included cross references in these CCL categories to alert readers that ECCN 3A611 may control such items. Each new “600 series” ECCN is described more specifically below.
- ECCN 3A611, paragraph .a, controls electronic “equipment,” “end items,” and “systems” “specially designed” for military application that are not enumerated in either a USML category or another “600 series.” Paragraph .x controls “parts,” “components,” “accessories,” and “attachments” that are “specially designed” for a commodity controlled by ECCN 3A611 or for an article controlled by USML Category XI, and not enumerated or described in a USML category. Paragraph .y contains 35 subparagraphs that control specified parts, components, accessories and attachments for commodities in any “600 series” ECCNs.
- ECCN 3B611 controls test, inspection, and production end items and equipment “specially designed” for the “development,” “production,” repair, overhaul, or refurbishing of items controlled in ECCN 3A611 or USML Category XI or controlled by another “600 series” ECCN.
- ECCN 3D611 controls software “specially designed” for the “development,” “production” operation, or maintenance of commodities controlled by 3A611 or 3B611 other than software for 3A611.y.
- ECCN 3E611 controls “technology” “required” for the “development,” “production,” operation, installation, maintenance, repair, overhaul, or refurbishing of commodities or software controlled by ECCN 3A611, 3B611 or 3D611.
All items in these ECCNs (except paragraphs .y) are subject to national security (NS Column 1), regional stability (RS Column 1), antiterrorism (AT Column 1), and United Nations (UN) controls. Items in the .y paragraphs are subject only to antiterrorism (AT Column 1) controls. Licenses will generally be required to export and reexport the items contained in the new ECCNs to most destinations. However, License Exception Strategic Trade Authorization (STA) will authorize exports and reexports to the 36 US-allied countries listed in EAR section 740.20 if: (1) the end user is the US Government or the armed forces, police or a similar agency of a government of one of the 36 countries, or (2) the items are for the development or production of an item in one of the 36 countries or the United States that will ultimately be used by the government agencies described in (1) or by a person in the United States.
Unlike items on the USML, the items contained in the new 600 series ECCNs created by this rule maybe eligible for the EAR’s “de minimis” provisions. Specifically, foreign-made items incorporating de minimis levels of controlled US content or components in these new Series 600 ECCNs can be excluded from the EAR’s licensing controls, depending on the end country destination. Under the EAR regime prior to the implementation of ECR, if such foreign produced items did not contain either 10% to 25% of controlled US-origin content, the items would not be subject to the EAR’s reexport jurisdiction. The new ECR rules provide no de minimis exception for foreign-made items that incorporate any US-origin 600 series item when destined for countries subject to US arms embargoes set forth in Country Group D:5, which notably, includes the People’s Republic of China. Consequently, if a foreign produced item has any 600 series content and is destined for such countries, it will require a reexport license (which will be subject to a strong presumption of denial) and the STA exception discussed above cannot be used. This is similar to the “see-through” policy that DDTC currently applies under the ITAR. However, the de minimis threshold for reexports of foreign made articles integrating 600 series items destined to all countries other than those listed in Group D:5 is 25%, and, where needed, there is no presumption of denial for the reexport license application.
The DDTC rule revises USML Category XI, covering military electronics, to describe more precisely the articles warranting control on the USML.
- Paragraph (a) is revised by adding various subparagraphs to specifically enumerate the articles controlled. Manufacturers and exporters should carefully evaluate and consider the technical parameters set forth for the controlled items.
- Paragraph (b) continues to be a catch-all control for “Electronic systems or equipment, not elsewhere enumerated in … [the ITAR], specially designed for intelligence purposes that collects, surveys, monitors, or exploits the electromagnetic spectrum (regardless of transmission medium), or for counteracting such activities.”
- Paragraph (c) is amended by adding various subparagraphs to specifically enumerate the parts, components, accessories, attachments, and associated equipment controlled.
- Paragraph (x) is added to allow for ITAR licensing of commodities, software, and technology subject to the EAR provided those commodities, software, and technology are to be used in or with defense articles controlled in USML Category XI and are described in the purchase documentation submitted with the application.
The most significant overall aspect of the revised USML category is that it does not contain controls on all generic parts, components, accessories, attachments, and associated equipment (currently captured in paragraph (c)) that are in any way “specially” designed or modified for use with the equipment in paragraphs (a) and (b), regardless of their significance to maintaining a military advantage to the United States. These items are subject to the controls of the new ECCNs that are created by the BIS rule.
For specific industries, the December 2014 changes will mean increased clarity regarding the jurisdiction of some items. Other industry sectors will continue to operate within vague “catch-all” categories, which may warrant the submission of commodity jurisdiction requests. For example, underwater military electronics hardware and equipment and radar systems and equipment are specifically enumerated in the new Category XI(a) with significant technical detail. These “positive lists” provide a significant improvement in the ability of companies operating in these sectors to self-determine the jurisdiction of their items. On the other hand, industries involving electronic surveillance and cyber security continue to operate within a (revised) catch-all definition. Companies operating in the cyber-related industry may deem it prudent to seek DDTC guidance, or otherwise retain professionals to assist with commodity jurisdiction self-assessments, to determine the jurisdiction of their items where, for example, it is unclear whether the items would be considered to be “specially designed for intelligence purposes” and/or considered to be for a purpose that “collect, survey, monitor, or exploit the electromagnetic spectrum.” Due to the pace of change in the cyber sector, the State Department and other agencies involved in ECR may have wanted to maintain a “catch-all” for the sector to avoid creating a bright line and make case-by-case decisions regarding whether specific items should remain controlled on the USML.
The May 13 spacecraft interim final rules from BIS and DDTC put in place significant changes to the USML and CCL (with effective dates in June and November 2014) and modify other important aspects of the controls on spacecraft.
Two-Stage Implementation of List Changes
The DDTC rule removes a number of items from Category XV of the USML, narrows the scope of other entries, and seeks to describe more clearly the articles that will remain under Category XV. The BIS rule creates four new Export Control Classification Numbers (ECCNs) on the CCL to host the items that DDTC is removing from the USML along with others that will shift from elsewhere on the CCL. The four new ECCNs are: 9A515 (spacecraft, ground stations, and specially designed parts, components, accessories and attachments), 9B515 (related test, inspection and production equipment and specially designed parts and components), 9D515 (related software) and 9E515 (related technology), collectively referred to as the “9x515” or the “500 series” ECCNs. These rules do not move all spacecraft with commercial end-uses to the CCL; many such items will remain under Category XV of the USML, particularly those with more advanced capabilities. The US Government has focused on capability and application rather than end-use in determining whether ITAR controls are still warranted.
Whereas ECR final rules have generally provided for 180-day transition periods between the dates of publication and the effective dates of the rules, these rules are being implemented in two stages. The first stage, moving controls on radiation-hardened microelectronic circuits from Category XV(d) of the USML, took effect on June 27, 45 days after the rules were published. Those controls have now moved to the CCL under new paragraphs (d) and (e) of ECCNs 9A515, 9D515 and 9E515. In addition, all changes to the EAR contained within this rule, other than the list changes to the CCL itself, took effect on June 27. Those EAR amendments generally modified existing provisions of the EAR to account for the addition of the 500 series and to tailor certain controls specifically for those new ECCNs.
The other provisions of these interim final rules will take effect on November 10, 2014. Certain commercial communications and remote sensing satellites will be removed from Category XV(a). The scope of Category XV(b) will be limited to ground control systems and training simulators specially designed for telemetry, tracking and control of spacecraft in Category XV(a), which notably continues to control sub-orbital, Earth orbital, lunar, deep space, and planetary spaceflight, or in-space human habitation. Category XV will also have a new paragraph (x), covering commodities, software and technology subject to the EAR used in or with Category XV defense articles, to allow DDTC to authorize activities related to such items that are otherwise under the jurisdiction of BIS.
Furthermore, DDTC has revised Categories XV(f) and IV(i) to include under the definition of “defense services” assistance in the integration of a satellite or spacecraft to a launch vehicle and assistance in launch failure analysis, regardless of the jurisdiction, ownership or origin of the satellite or spacecraft and regardless of whether technical data is used. That provision was previously included in the proposed revision to the definition of defense services, but DDTC has instead decided to include it within the specific USML categories.
Also on November 10, the remaining 500 series ECCNs will be added to the CCL in order to accommodate the items moving off the USML. The new ECCN 9A515.x, which will replace Category XV(e), will be structured similarly to the .x paragraphs in the 600 series, in that, with a few exceptions, it will be a catch-all for parts, components, accessories and attachments specially designed for items in 9A515 or Category XV and not identified in another paragraph of 9A515 or in Category XV. Items that are currently EAR99 should not be swept into 9A515.x, because BIS removed the “space-qualified” control parameter and replaced it with “specially designed” in order to avoid qualifying EAR99 items for the catch-all paragraph through successful testing for use in space.
BIS also created a .y paragraph in ECCN 9A515 to apply lighter controls on a case-by-case basis to items otherwise falling under 9A515.x but specifically approved for this special treatment through the interagency commodity classification (CCATS) process. Therefore, unlike in many 600 series ECCNs, this .y paragraph will not initially be a list of items. As with .y paragraphs in the 600 series, 9A515.y will be controlled for anti-terrorism (AT) reasons, which does not require a license for most destinations.
Other Important Provisions
The 9x515 ECCNs will be eligible for STA. As discussed above, STA removes the BIS licensing requirement for many transfers to and among countries with friendly relations with the United States, provided that exporters and reexporters can comply with the exception’s conditions. Most spacecraft, ground control systems and related parts, components, software and technology will now be eligible for license-free treatment in transactions meeting the criteria of License Exception STA. This includes most of 9A515, 9D515 and 9E515, and all of 9B515. License Exception STA will be available for those items for destinations in Country Group A:5, which includes US allies and a few other countries with which the United States enjoys good relations. But 500 series items will not benefit from License Exception STA for Country Group A:6, which includes a handful of additional major markets, such as Israel, India, Singapore, South Africa and Taiwan.
The 500 series, like the 600 series, will be subject to significant restrictions on transactions involving China. 500 series items cannot be exported or reexported to China or transferred within China without a license. In addition, as discussed above, BIS provided no de minimis level for foreign-made items that incorporate US-origin items in paragraphs .a through .x of a 500 series ECCN when destined for Country Group D:5 (US arms embargo countries, which includes China), or for foreign-made items that incorporate US-origin items in a .y paragraph of those ECCNs when destined for Country Group E:1 (terrorist supporting countries). Similar to 600 series items, that means foreign-made equipment with any US-origin content of 500 series items will be subject to the EAR and under the regulatory jurisdiction of BIS if reexported to China from another foreign country. With substantial commercial satellite launch activity based in China, these restrictions may continue to complicate foreign manufacturers’ decision to incorporate any US-origin content into their products.
BIS also deleted a provision that had limited the availability of EAR license exceptions for other space-related items that had been on the CCL prior to these new rules. BIS has determined that such a limitation is no longer appropriate because license exceptions are available for 9x515 items. Each ECCN now lists the license exceptions that are available for the items covered.
Because of the delayed effective dates, companies should be mindful of the ECR transition rules. Items exported before the relevant effective date may require different licensing for transactions after the effective date. BIS has stated that its new rules will apply to all items subject to the EAR on the effective date, regardless of their geographic location or when they were originally exported. However, BIS and DDTC have provided for certain transition rules that may facilitate compliance during those jurisdictional changes. See our earlier advisory on the initial implementation of ECR for an overview of some of those transition rules.
Companies entering the regulatory jurisdiction of BIS for the first time may be relieved to know that its licensing regime is often simpler than the DDTC authorization process. Companies regulated by the EAR can apply for a license to cover all of their expected exports to a particular consignee over the life of a license (normally four years). Moreover, the BIS license application itself is simpler than certain DDTC applications, and foreign persons can obtain reexport and retransfer licenses using the BIS system.