When Export Practices Cross the Line: Hidden Foreign Corrupt Practice Act (FCPA) Violations can Hurt You

By: Stephen Wagner

Your company exports and ships its products all over the world through a small, local third-party logistics provider.  The export manager at the shipping company, who is a close personal friend, has been handling your company’s products for years and has been doing a perfect job.  The products arrive at your foreign customer locations on-time, without problems, and you just pay the invoices for the shipping costs without question.  In fact, international shipping is the one part of your company’s operations at which you have never needed to take a second look.

Until today…  Today two special agents from Homeland Security Investigations (HSI) arrived at your office to ask about your company’s export activities.  They were vague about the nature of the investigation, but asked a lot of questions about your shipping practices.  As they were leaving, they handed you a subpoena for five years’ of export records.  You started gathering your documents together and now, reviewing your export shipping invoices for the first time in years, you see line items and charges for a “Customs Clearance Fee” in certain countries and an “Import Commission” in other countries.  When you called your friend at the shipping company to ask about these charges, he said that the receiving shipping companies in these countries must pay these fees “so your products can sail through customs.”

What are you really seeing, when you look at these charges?

Depending on the exact nature of these payments, you may end up seeing federal criminal charges.

The Foreign Corrupt Practices Act, as amended (15 U.S.C. §§ 78dd-1, et seq.) (“FCPA”), was enacted in 1977 and makes it illegal for U.S. companies (including their foreign affiliates) to make payments to foreign government officials.  The “anti-bribery provisions” of the FCPA prohibit “any offer, payment, promise to pay, or authorization of the payment of money … directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage[.]”  15 U.S.C. § 78dd-1(a).  Additionally, the “accounting provisions” of the FCPA require companies whose securities are listed in the United States to “make and keep books and records that accurately and fairly reflect the transactions of the corporation” and “devise and maintain an adequate system of internal accounting controls[.]”  15 U.S.C. § 78m(b)(2).

Yet the world of international business is not so black and white.  There are myriad court cases, attorney general opinions, and legal theories that seek to define a “foreign official.”  While someone working for a foreign government (like a uniformed foreign customs officer) is clearly such an “official,” what about employees of a nationalized, or government-owned, company?  What about employees of private companies that conduct government functions (such as processing customs paperwork) under a contract with the government?  What about agents, consultants, or lobbyists who “grease” the foreign government processes on your behalf?

Furthermore, recognizing that sometimes payments must be made to foreign government officials just to move paperwork along or obtain routine approvals, the anti-bribery provisions of the FCPA contain an exception for “facilitating payments.”  This narrow exception applies to payments made for non-discretionary actions, like processing customs paperwork or import permit applications; actions which would take place even without the payments, but would probably take much longer to occur.

Therefore, looking at your company’s “Customs Clearance Fee” or “Import Commission,” several critical questions arise:  who is being paid, and for what?

Even if you think you have found the logical answers to these questions, you will need to consult with your company’s general counsel or a qualified outside attorney, because you may not be able to interpret these answers correctly.  Indeed, sometimes the law does not apply logically to the way businesses operate, and sometimes the language used in the statutes and regulations can be ambiguous or subject to multiple interpretations.  For example, if you think the “fee” or “commission” would qualify as a facilitating payment, the U.S. government’s FCPA Guidance warns, “while the payment may qualify as an exception to the FCPA’s anti-bribery provisions, it may violate other laws, both in Foreign Country and elsewhere.  In addition, if the payment is not accurately recorded, it could violate the FCPA’s books and records provision.”

And you cannot stop your investigation with just these “fees” and “commissions,” because no federal government investigation will stop there either.  Many exporters may pay intermediaries to obtain business in foreign countries.  Whether these payments to “middlemen” are labeled as “sales commissions” or “distribution fees” or “licensing payments,” they may all still be bribes as that term is interpreted by enforcement agencies under the FCPA.

As an example of how broadly the FCPA can be interpreted, in May 2014 a federal appeals court ruled in the case of United States v. Esquenazi (752 F.3d 912 (11th Cir. 2014)), that the FCPA’s definition of “foreign official,” which includes “any officer or employee of a foreign government or any department, agency, or instrumentality thereof,” also includes officials working for “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”  Esquenazi, 752 F.3d at 925.  Therefore, if your company is doing business with a foreign state-owned or state-controlled business, certain payments to officials of that foreign company could be illegal under the FCPA because such businesses can be interpreted as being “instrumentalities” of the foreign government.

It is also important to note that FCPA enforcement is expected to be on the rise in 2015.  Violations of the FCPA can result in criminal and/or civil charges from the U.S. Department of Justice (DOJ) and (if your company is a “reporting company” under the Securities Exchange Act of 1934) civil or administrative cases from the U.S. Securities and Exchange Commission (SEC).  While enforcement actions by these two agencies had been relatively stable over the last three years, there has been a recent uptick in the number of potential FCPA violations reported to the U.S. government.  This is due in large part to stronger anti-corruption laws and enforcement measures around the globe, which is increasing corporate awareness of anti-bribery issues.  As companies are reporting more to the enforcement agencies, actions under the FCPA should increase as well.

And the stakes in FCPA compliance measures and enforcement actions can be enormous.  For 2014, the average value of monetary resolutions in government FCPA enforcement actions against corporations was over $150 Million.  And those are just the fines and penalties.  On the compliance side the costs can be staggering for businesses as well.  In one well publicized case, Walmart self-reported possible FCPA violations to the DOJ and SEC after a New York Times investigation.  According to filings with the SEC, Walmart is now spending between $10 Million and $35 Million per quarter for its “global [anti-bribery and anti-corruption] compliance program and organizational enhancements.”  In its fiscal 2014 Global Compliance Program Report, Walmart reported it had spent an overall total of $439 million in legal fees and other costs associated with the on-going investigations of alleged FCPA violations, and to revamp its global compliance protocol.

While smaller companies may not have the breadth of operations (and the financial resources) of Walmart, having an effective and robust FCPA compliance program is just as critical.  A combination of a strong, written program together with its robust use and periodic audits can help prevent exactly the type of situation that has befallen the company in the scenario above.  Moreover, an effective FCPA program can be a critical factor in mitigating possible penalties in any FCPA enforcement action that may arise.

So what does this mean for your company?  In the short-term, you should conduct an immediate self-assessment to check foreign transactions for both export violations and FCPA violations.  It is common for a company lacking in FCPA internal controls to also be lacking in effective export controls and vice versa.  (You also need to have legal counsel carefully review all of the responsive subpoena documents for possible export and/or FCPA violations.)  In the long-term, your company must become more vigilant with respect to FCPA issues.  Your company’s overall compliance program must address anti-corruption and anti-bribery programs, just as company contracts with foreign entities or with respect to export-related operations should contain standard provisions requiring FCPA compliance.

DDTC Looking for Comments Regarding Amendments to Parts 120, 122, 124, 125 & 126

By: Danielle McClellan

The Department of State wants to clarify requirements for the licensing and registration of US person providing defense services while in the employ of foreign persons. They also want to clarify when these same persons may be covered under existing DDT C authorizations previously issued to their employers and affiliates, and when they are instead obligated to apply for their own license or agreement prior to engaging in the provisions of the defense service.

Comments regarding the following proposed rules will be accepted until July 27, 2015

FOR FURTHER INFORMATION CONTACT: Mr. C. Edward Peartree, Director, Office of Defense Trade Controls Policy, Department of State, telephone (202) 663-1282; email DDTCResponseTeam@state.gov. ATTN: Regulatory Change, U.S. Persons Employed by Foreign Persons.

The Department of State’s full plan can be accessed here.

For the reasons set forth above, Title 22, Chapter I, Subchapter M, parts 120, 122, 124, 125 and 126 are proposed to be amended as follows:

PART 120–PURPOSE AND DEFINITIONS

1. The authority citation for part 120 continues to read as follows:     . . . .

2. Section 120.39 is amended by revising paragraph (a)(2) to read as follows:

Sec.  120.39  Regular employee.

(a) * * *

(2) An individual in a long term (i.e., 1 year or longer) contractual relationship with the company where the individual:

(i) Works at the company’s facilities;

(ii) Works under the company’s direction and control;

(iii) Works full time and exclusively for the company;

(iv) Executes nondisclosure certifications for the company; and

(v) Where the staffing agency that has seconded the individual (if applicable) has no role in the work the individual performs (other than providing that individual for that work) and does not have access to any controlled technology (other than where specifically authorized by a license).

3. Section 120.40 is amended by removing the Note and adding Note 1 and Note 2 to read as follows:

Sec.  120.40  Affiliate.

Note 1 to Sec.  120.40: For purposes of this section, “control” means having the authority or ability to establish or direct the policies or operations of the firm with respect to compliance with this subchapter. Control is rebuttably presumed to exist where there is ownership of 25 percent or more of the outstanding voting securities if no other person controls an equal or larger percentage.

Note 2 to Sec.  120.40: A registrant may establish a control relationship with another entity via written agreement such that the entity then becomes an affiliate in accordance with section. The registrant may include such an affiliate on its registration, in accordance with this subchapter and subject to DDTC’s disallowance. If an affiliate listed on a registration ceases to meet the requirements of this section, the registrant must immediately remove the affiliate from its registration and notify DDTC pursuant to Sec.  122.4(a) of this subchapter.

4. Section 120.43 is added to read as follows:

Sec.  120.43  Natural person.

Natural person means an individual human being, as distinguished from a corporation, business association, partnership, society, trust, or any other entity, organization or group.

PART 122–REGISTRATION OF MANUFACTURERS AND EXPORTERS

5. The authority citation for part 122 continues to read as follows:…

6. Section 122.1 is amended by revising paragraph (a) and adding a note to paragraph (a) to read as follows:

Sec.  122.1  Registration requirements.

(a) Any person who engages in the United States in the business of manufacturing, exporting, or temporarily importing defense articles or furnishing defense services; and any U.S. person who engages in the business of furnishing defense services wherever located, is required to register with the Directorate of Defense Trade Controls under Sec. 122.2. For the purpose of this subchapter, engaging in such a business requires only one occasion of manufacturing or exporting or temporarily importing a defense article or furnishing a defense service. A manufacturer who does not engage in exporting must nevertheless register. (See part 129 of this subchapter for requirements for registration of persons who engage in brokering activities.)

Note to paragraph (a): Any natural person directly employed by a DDTC-registered person, or by a person listed on the registration as a subsidiary or affiliate of a DDTC-registered U.S. person, is deemed to be registered.

Sec.  122.2  [Amended]

7. Section 122.2(a) is amended by adding a comma between the words “registrant” and “or” in the third sentence.

8. Section 122.4 is amended by revising paragraph (a)(2)(v) to read as follows:

Sec.  122.4  Notification of changes in information furnished by registrants.

(a) * * *

(2) * * *

(v) The establishment, acquisition, or divestment of a U.S. or foreign subsidiary or other affiliate who is engaged in manufacturing defense articles, exporting defense articles or defense services, or the inability of an affiliate listed on the registration to continue meeting the requirements in Sec.  120.40 of this subchapter;

or

PART 124–AGREEMENTS, OFF-SHORE PROCUREMENT, AND OTHER DEFENSE SERVICES

9. The authority citation for part 124 continues to read as follows:  . . . .

10. Section 124.1 is amended as follows:

a. Add two sentences at the end of paragraph (a).

b. Revise paragraph (b).

The addition and revision read as follows: Sec.  124.1  Manufacturing license agreements and technical assistance agreements.

(a) * * * The provision of defense services by a natural U.S. person may be authorized on a Form DSP-5. Natural U.S. persons employed as regular employees of a foreign subsidiary or affiliate listed on the registration of a U.S. person may receive authorization to provide defense services via an agreement between the registered U.S. person and the foreign subsidiary or affiliate, provided the registered U.S. person accepts responsibility for, and demonstrates ability to ensure, the natural U.S. person’s compliance with the provisions of this subchapter.

(b) Classified Articles. Copies of approved agreements involving the release of classified defense articles will be forwarded by the applicant to the Defense Security Service of the Department of Defense.

11. Section 124.17 is added to read as follows:

Sec.  124.17  Exemption for natural U.S. persons employed by foreign persons.

(a) A natural U.S. person employed by a foreign person may furnish defense services to and on behalf of the foreign person employer without a license if all of the following conditions are met:

(1) The employer is located within a NATO or EU country, Australia, Japan, New Zealand, and/or Switzerland, and the defense services are provided only in these countries;

(2) The end user(s) of the associated defense article(s) are located within NATO, EU, Australia, Japan, New Zealand, and/or Switzerland;

(3) No U.S.-origin defense articles, to include technical data, are transferred from the U.S. persons to the employer without separate authorization;

(4) No classified, SME, or MT technical data is transferred (even if separately authorized) in connection with the furnishing of defense services; and

(5) The U.S. person furnishing the defense services maintains records of such activities and complies with registration requirements in accordance with part 122 of this subchapter.

(b) [Reserved]

PART 125–LICENSES FOR THE EXPORT OF TECHNICAL DATA AND CLASSIFIED DEFENSE ARTICLES

12. The authority citation for part 125 continues to read as follows:  . . . .

Sec.  125.4  [Amended]

 

13. Section 125.4 is amended by removing and reserving paragraphs (b)(2) and (b)(12).

PART 126–GENERAL POLICIES AND PROVISIONS

14. The authority citation for part 126 continues to read as follows:  . . . .

15. Section 126.6 is amended by revising paragraph (c) introductory text and adding paragraph (c)(7) to read as follows:

Sec.  126.6  Foreign-owned military aircraft and naval vessels, and the Foreign Military Sales program.

(c) Foreign Military Sales Program. A license from the Directorate of Defense Trade Controls is not required if the classified or unclassified defense article or defense service to be transferred was sold, leased, or loaned by the Department of Defense to a foreign country or international organization under the Foreign Military Sales (FMS) Program of the Arms Export Control Act pursuant to a Letter of Offer and Acceptance (LOA) authorizing such transfer (permanent or temporary), which meets the criteria stated below:

(7) Natural U.S. persons employed by foreign persons may provide defense services to and on behalf of their employers without a license if all of the following conditions are met:

(i) The defense services are provided in support of an active FMS contract and are identified in an executed LOA;

(ii) No U.S.-origin defense articles are transferred from the U.S. person to the employer, without separate authorization;

(iii) The provision of defense services is not to a country identified in Sec.  126.1;

(iv) No classified or SME technical data is disclosed (even if separately authorized) in connection with the furnishing of defense services; and

(v) The U.S. person furnishing the defense services maintains records of such activities and complies with registration requirements in accordance with part 122 of this subchapter.

2 Regulations…1 Destination Control Statement

By: Danielle McClellan

On May 22, 2015 the Directorate of Defense Trade Controls and the Bureau of Industry and Security proposed rules that would change the EAR destination control statement to read the same as the ITAR destination control statement. Many exporters have shipments that contain both EAR and ITAR goods which creates issues when deciding which statement should be included…or if both statements should be included. The goal of this proposed  rule is to make exporter’s lives a bit easier…something we don’t see very often—but then again this is only a proposed rule.

To a certain extent, BIS already fixed the dual DCS problem for shipments containing both EAR and ITAR items.  BIS previously revised 758.6(a) of the EAR to state that using the ITAR DCS constitutes compliance with the EAR DCS requirement for shipments containing both EAR and ITAR items.  The proposed rules, if implemented, would go beyond this BIS quick fix for mixed shipments to a single DCS for all exports.

The Department of State Federal Register notice can be accessed online here.

The BIS Federal Register notice can be accessed online here.

CCL Revisions from Wassenaar Meeting

By: Danielle McClellan

The Bureau of Industry and Security (BIS) issued a final rule on May 21, 2015 that revises the Commerce Control List (CCL) to implement changes made to the Wassenaar Arrangement’s List of Dual-Use Goods and Technologies.

Wassenaar Participating States agreed to new controls on spacecraft equipment and technology for fly-by-wire/flight-by-light systems and revised the text for the controls of machine tools and military utility and finber laser components in optical equipment. Changes involving the deletion of obsolete controls relating to vessels and UAVs have also occurred. The new rule revises 42 ECCNs and adds one ECCN while removing another. The General Technology Note was also amended as well as adding License Exception CIV to 3 ECCNs for Anisotropic plasma dry etching equipment and related software and technology.

CHANGE CHEAT SHEET:

  • Revises:  0A606, 1A613, 1C002, 1C007, 1C008, 1C010, 1E002, 2B001, 3A001, 3A002, 3A991, 3B001, 4D001, 4E001, 5D001, 5E001, 5A002, 6A001, 6A003, 6A004, 6A005, 6C005, 6D003, 7A003, 7D004, 7E004, 7E001, 8A001, 8A002, 8A620, 8E002, 9A001, 9A003, 9D003, 9A004, 9A010, 9A012, 9B001, 9B010, 9D003, 9D004, and 9E0032
  • Adjusts 0D521 and 0E521 controls on flight controls
  • Adds  9D005
  • Removes 4D002
  • Revises because of the Foreign Availability Assessment: 3B001, 3D001, and 3E001

FOR FURTHER INFORMATION CONTACT: Sharron Cook, Office of Exporter Services, Bureau of Industry and Security, U.S. Department of Commerce at 202-482-2440 or by email: Sharron.Cook@bis.doc.gov.

 

For technical questions contact:

  • Categories 0, 1 & 2: Michael Rithmire at 202-482-6105
  • Category 3: Brian Baker at 202-482-5534
  • Categories 4 & 5: ITCD staff 202-482-0707
  • Category 5 (Satellites): Mark Jaso at 202-482-0987 or Reynaldo Garcia at 202-482-3462
  • Category 6 (optics): Chris Costanzo at 202-482-0718
  • Category 6 (lasers): Mark Jaso at 202-482-0987
  • Category 6 (sensors and cameras): John Varesi 202-482-1114
  • Category 8: Darrell Spires 202-482-1954
  • Categories 7 & 9: Daniel Squire 202-482-3710 or Reynaldo Garcia 202-482-3462

Fiji or Bust!

By: Danielle McClellan

On May 29, 2015, the Department of State revised the International Traffic in Arms Regulations (ITAR) to withdraw the previous policy of denying the export of defense articles and services to Fiji. Fiji’s acting government honored its longstanding pledge to hold democratic elections and the United States as well as 14 other countries have characterized these elections as being credible.

The Department of State has determined that it is in the best interest of US foreign policy, national security, and human rights concerns to lift the denial of exports of defense articles and services to Fiji.

FOR FURTHER INFORMATION CONTACT: Mr. C. Edward Peartree, Director, Office of Defense Trade Controls Policy, Department of State, telephone (202) 663-2792; email DDTCPublicComments@state.gov. ATTN: Regulatory Change, Exports to Fiji.

Tips on Maintaining a High Automated Export System (AES) Compliance Rate

(Source: Global Reach Blog)

Have you wondered what it takes for your company to maintain a high AES compliance rate? The following tips can help.

(1) Maintain contact with your AES client representative

If your company has unresolved fatal errors and has been assigned a Data Collection Branch AES Fatal Error Team client representative to monitor them, work with the representative.  The client representative will send you an  . Best practice shows that by working with your Data Collection Branch AES representative to resolve and/or suppress any unresolved fatal errors in a timely manner, your company will be better enabled to maintain a high AES compliance rate.

(2) Check the shipment date 

Ensure that predeparture shipments are filed before the reported departure date according to the FTR 30.4(b). This will prevent “shipment filed late” compliance alerts from negatively affecting your company’s compliance rate. Specifically, if your company has a high number of compliance alerts this will have an impact on your compliance rate. Always verify that the departure date you report is correct.

(3) Check your contact information

Make sure that the Data Collection Branch has the most current AES administrator contact information for your company. AESDirect filers can update their contact information by logging into their account and non-AESDirect filers must contact the Data Collection Branch to request that their information be updated in the internal AES participants database.

If you are an AESDirect filer, you can update your contact email address by performing the following steps:

  • Log in to the account administrator’s AESDirect account at aesdirect.census.gov
  • Locate the Account Maintenance section. Click on the Update Account Profile link. (Only available under account administrator’s account)
  • Review the information currently on your profile. If changes are required, click on Update Account Profile. Click Continue.
  • Enter your current information. Click Continue.
  • Enter the new email address again in the “Confirm E-mail” field under the Administrator’s section. Make sure to scroll down to the bottom of the form and complete all fields. Click Continue.

For more information on maintaining your account.

If you encounter problems updating your AESDirect account profile information, contact the AESDirect Technical Help Desk at (877) 715-4433 or by e-mail at boc-support@tradegate2000.com.

If you are not an AESDirect filer, please perform the following steps:

  • Contact the Data Collection Branch on 1-800-549-0595, Menu Option 1 and provide your Filer ID to one of our AES client representatives so they may update your profile information.
  • Once the current contact information is updated, the new contact will start receiving the monthly AES Compliance and Fatal Error Reports. Please monitor your inbox closely to ensure that you receive the reports in the future. This will prevent your company from having any undeliverable or unattended AES Compliance and Fatal Error Reports.

For more information

For additional best practices, check out the AES best practices manual here.

If you have additional questions or concerns, please contact the ITMD call center at 1-800-549-0595 and choose menu option 1 for the Data Collection Branch

Proposed Revisions to EAR & ITAR Definitions

By: Danielle McClellan

The Directorate of Defense Trade Controls (DDTC) and the Bureau of Industry and Security (BIS) are seeking comments regarding their respective proposed rules to revise the following terms based on the claim that they are seeking clarity in the rules and consistency between the two export regulations.   In fact, the proposals, if ever implemented, would significantly change the rules.  In addition, the proposals would return the ITAR “public domain” to it pre-December 1984 approach requiring prior government authorization before ITAR technical data could be put in the public domain.  While it is not clear whether DDTC will be able to return public domain to its pre-1984 approach, if it were able to do so it would make it dramatically different from the EAR publicly available, despite US Government claims that it is seeking to harmonize ITAR public domain and EAR publicly available.

ITAR Definitions to be updated:

  • Defense article
  • Defense service
  • Technical data
  • Public domain
  • Export
  • Reexport or retransfer

ITAR Definitions to be created:

  • Required
  • Technical data that arises during, or results from, fundamental research
  • Release
  • Retransfer
  • Activities that are not exports, reexports, or retransfers

EAR Definitions to be updated:

  • Technology
  • Required
  • Peculiarly responsible
  • Proscribed person
  • Published
  • Results of fundamental research
  • Export
  • Reexport
  • Release
  • Transfer
  • Transfer (in-country)

In addition to these definition updates and new definitions to be created, DDTC is also proposing to creating new sections which will detail the scope of licenses, unauthorized releases of information, and the “release” of secured information as well as revising the sections on “exports” and “technical data” via foreign communications infrastructure.

The comment period ends for both the State Department and BIS proposed changes on August 3, 2015.

BIS Comments:

Comments may be submitted to the Federal rulemaking portal (http://www.regulations.gov). The regulations.gov ID for this proposed rule is: [BIS-2015-0019]. Comments may also be submitted via email to publiccomments@bis.doc.gov or on paper to Regulatory Policy Division, Bureau of Industry and Security, Room 2099B, U.S. Department of Commerce, Washington, DC 20230. Please refer to RIN 0694-AG32 in all comments and in the subject line of email comments. All comments (including any personally identifying information) will be made available for public inspection and copying.

DDTC Comments:

Email: DDTCPublicComments@state.gov with the subject line, “ITAR Amendment–Revisions to Definitions; Data Transmission and Storage.”

Internet: At www.regulations.gov, search for this notice by using this rule’s RIN (1400-AD70). Comments received after that date may be considered, but consideration cannot be assured. Those submitting comments should not include any personally identifying information they do not desire to be made public or information for which a claim of confidentiality is asserted because those comments and/or transmittal emails will be made available for public inspection and copying after the close of the comment period via the Directorate of Defense Trade Controls Web site at www.pmddtc.state.gov. Parties who wish to comment anonymously may do so by submitting their comments via www.regulations.gov, leaving the fields that would identify the commenter blank and including no identifying information in the comment itself. Comments submitted via www.regulations.gov are immediately available for public inspection.

To assist in the creation of public comments, DDTC has created a chart of the proposed regulatory text side-by-side from the ITAR rule and Export Administration Regulations rule (80 FR 31505) from the Bureau of Industry and Security. Click here to read. In addition, it has posted a Fact sheet on Revisions to Definitions Proposed Rule.

“ITAR Control of Public Speech”

By:  Matthew A. Goldstein, Esq., matthew@goldsteinpllc.com, 202-550-0040

(Source: Defense Trade Law Blog. Reprinted by permission.)

The State Department released a Federal Register notice yesterday proposing to amend definitions for “public domain,” “fundamental research,” “defense services,” and “technical data” under the International Traffic in Arms Regulations (“ITAR”). [FN/1] Among other things, the notice explicitly confirms that the State Department imposes a prepublication approval requirement on public speech under the ITAR.

The State Department requirement operates as a prior restraint on free speech that applies to all would-be publishers of ITAR technical data. It applies to print and electronic news media outlets, movie and television entertainment industries, public libraries, publishing houses, trade show venues, and conference organizers. It also applies to persons who post information to blogs, electronic bulletin boards, company websites, and other online public forums.

Notice of the prepublication approval requirement comes as a surprise to many trade compliance professionals who reasonably believed any such requirement was removed in 1984 when the State Department deleted a former footnote thought by some to impose a general prepublication approval requirement. [FN/2] Indeed, the Federal Register notice removing the former footnote even cited First Amendment concerns. [FN/3]

The controversial nature of public speech under the ITAR is nothing new. Since 1978, the Justice Department repeatedly warned the State Department, the White House, and even Congress, that subjecting public speech to ITAR control raises serious constitutional concerns under the First Amendment. [FN/4] Federal courts directly addressing the issue agreed and have had little difficulty holding that the ITAR is unconstitutional as applied to public speech.

In Bernstein v. U.S. Dep’t of State, 945 F. Supp. 1279 (N.D. Cal. 1996), a federal district court held the State Department’s application of the ITAR to public speech involving cryptographic computer code was unconstitutional under the First Amendment. When the government shifted control over the computer code at issue from the State Department to the Commerce Department, the plaintiff challenged relevant Export Administration Regulations (“EAR”) controls and the federal court struck down control of public speech under the EAR as well. See Bernstein v. U.S. Dep’t of State, 974 F. Supp. 1288 (N.D. Cal. 1997). This decision was later upheld by the Ninth Circuit Court of Appeals. See Bernstein v. United States Dep’t of Justice, 176 F.3d 1132 (9th Cir. 1999).

There is only one publicly known case of the State Department seeking to enforce the prepublication approval requirement following the Bernstein line of cases. This recent case, which involves an online publisher named Defense Distributed, has resulted in a lawsuit against the State Department and its employees for civil rights violations. [FN/5]

The State Department’s imposition of the prepublication approval requirement is also contrary to the results of a study performed by an Federal Advisory Committee Act industry working group, which found that imposing a prepublication approval requirement through export controls would serve little purpose, be ineffective, and adversely impact research and development in the United States. [FN/6]

The working group also observed that technology of likely concern to national security is normally restricted by the business community as proprietary information and/or classified by the government; that there are already many laws protecting technical information of concern from theft or other unauthorized use; and that the impact of publications on national security is minor compared to the burdens imposed on government and industry by a prepublication approval requirement.

The State Department will accept public comments to the proposed rule until August 3, 2015. However, considering the Department’s refusal to heed the Justice Department’s warnings, it is unlikely to change its decision to impose the prepublication approval requirement. Still, absent a court order enjoining the State Department from imposing the requirement or Congressional intervention, the public comment process may offer the last line of defense against State Department censorship of the Internet and other public forums.

————-

[FN/1] See 80 Fed. Reg. 31525, 31528 (June 3, 2015) (“Paragraph (b) of the revised definition explicitly sets forth the Department’s requirement of authorization to release information into the ”public domain.” Prior to making available ”technical data” or software subject to the ITAR, the U.S. government must approve the release through one of the following: (1) The Department; (2) the Department of Defense’s Office of Security Review; (3) a relevant U.S. government contracting authority with authority to allow the ”technical data” or software to be made available to the public, if one exists; or (4) another U.S. government official with authority to allow the ”technical data” or software to be made available to the public.”).

[FN/2] See former Footnote 3 to Section 125.11 (1980). Copy available from author at matthew@goldsteinpllc.com

[FN/3] See 49 Fed. Reg. 47,682, 47,683 (December 6, 1984) (“Concerns were expressed, for example, on licensing requirements as they relate to the First Amendment to the Constitution. The revision seeks to reflect these concerns . . .”).

[FN/4] See 1997 Report on the Availability of Bombmaking Information,” U.S. Department of Justice Report to Congress, http://cryptome.org/abi.htm; “Revised Proposed International Traffic in Arms Regulations (ITAR),” U.S. Department of Justice Opinion Memorandum, July 5, 1984. https://app.box.com/s/utb41cwfhorh55463ufw; “Constitutionality of Proposed Revisions of the Export Administration Regulations,” U.S. Department of Justice Opinion Memorandum, July 28, 1981. http://www.justice.gov/olc/opiniondocs/op-olc-v005-p0230.pdf; “Constitutionality of the Proposed Revisions of the International Traffic in Arms Regulations,” U.S. Department of Justice Opinion Memorandum, July 1, 1981. https://app.box.com/s/x1urxgds1km6tw34qh5v; “Constitutionality Under the First Amendment of ITAR Restrictions on Public Cryptography,” U.S. Department of Justice Opinion Memorandum, May 11, 1978. https://app.box.com/s/r0xidb6z9m6x4uze5uqi

[FN/5] See Defense Distributed v. U.S. Department of State et al., Case No. 1:15-cv-00372 (W.D. Texas, May 6, 2015), copies of pleadings available at www.goldsteinpllc.com; the author is co-counsel for Plaintiff in this action.

[FN/6] See “Feasibility of Controls on Publication of PGUTI,” Department of Commerce Materials Technical Advisory Committee, September 5, 2014. Copy available here.

ECCN 1C352 Removed to Implement Australia Group November 2013 Decisions

By: Danielle McClellan

The Bureau of Industry and Security (BIS) is implementing a few minor changes to the Commerce Control List (CCL) in order to adopt recommendations that were recommended during the November 2013 Australia Group (AG) intersessional implementation meeting.

Effective June 16, 2015, BIS has published a final rule in which the AG “List of Animal Pathogens for Export Control” has been merged with the AG “List of Biological Agents for Export Control.”  There is now a single common control list for these items now known as the AG “List of Human and Animal Pathogens and Toxins for Export Control.” This change does not affect any of the controls on these items.

CHANGE CHEAT SHEET: ECCN 1C352 has been removed and added to ECCN 1C351. The following sections have been changed to reflect the removal of ECCN 1C352 from the CCL:

  • Section 740.20
  • CB Column on the Commerce Country Chart
  • Section 742.2(a)(1)(i) 
  • Supplement No. 1 to part 742 paragraph (3), (9)(ii), (9)(iii) and 12
  • Section 752.3 paragraph (a)(2)

In addition to this minor change this rule amends the CCL entry that controls chemical manufacturing facilities and equipment to reflect changes to the AG “Control List of Dual-Use Chemical Manufacturing Facilities and Equipment and Related Technology and Software” which revised controls on certain valves, casings (valve bodies) designed for such valves, and preformed casing liners on such valves. This rule also adds a Technical Note clarifying how the terms “multi-seal” and “seal-less” are used with respect to the controls on pumps.

Send comments regarding this collection of information, including suggestions for reducing the burden, to Jasmeet Seehra, Office of Management and Budget (OMB), by email to Jasmeet_K._Seehra@omb.eop.gov, or by fax to (202) 395-7285; and to the Regulatory Policy Division, Bureau of Industry and Security, Department of Commerce, 14th Street & Pennsylvania Avenue NW., Room 2705, Washington, DC 20230.

FOR FURTHER INFORMATION CONTACT: Richard P. Duncan, Ph.D., Director, Chemical and Biological Controls Division, Office of Nonproliferation and Treaty Compliance, Bureau of Industry and Security, Telephone: (202) 482-3343, Email: Richard.Duncan@bis.doc.gov.

Changes to DDTC Paper Applications

By: Danielle McClellan

DDTC is in the process of modernizing its infrastructure; the newest change will directly impact paper applications. At this time, the ELLIE Net system allows users to track paper applications such as General Correspondence (GC) Letters and Applications for Permanent/Temporary Export or Temporary Import of Classified Defense Articles and Related Classified Technical Data (DSP-85). Going forward ELLIE Net will be retired and users will no longer have the ability to access the system to track their paper applications.

DDTC is urging users to include a valid email address on all paper applications so that DDTC can send an email with the application number to users. DDTC will use this transition period to work out any problems with the interim process.

Information:  http://www.pmddtc.state.gov/documents/WebNotice_PaperApplications.pdf