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The exemption however will come with several criteria that must be met; first and foremost the US government must ensure that the companies (both parent and wholly-owned or controlled in fact entities companies) have “effective regime in place to comply with export controls.” The grant of ICT would also be restricted to those approved companies and certain ECCN’s that are authorized by BIS. The plan is that BIS will authorize the exception for companies that demonstrate “effective internal control plans, submit annual reports on their use of ICT, and agree to audits by BIS officials as requested.

Companies will be required to submit the following documentation:

• Records of screening, training, and self-evaluation elements of the company’s control plan
• List of the wholly-owned entities and controlled in fact entities that the applicant parent company intends to be eligible users
• List of individuals or groups that have at least 10% ownership interest
• List of ECCN’s of items planned to be exported, reexported or transferred (in country)
• Narrative describing the purpose for which the requested ECCN’s will be used and the anticipated resulting commodities
• Disclosure of relationship with each entity that is intended to be an eligible user and/or eligible recipient
• Signed statement by a company officer of the eligible applicant parent company stating that each entity will allow BIS to conduct audits on the use of the ICT exception

Many are skeptical and believe that the standard for receiving the exemption will not be lenient enough to make the license exemption any easier to use than an ordinary export license. Others fear that when it comes to relaxing export controls on intra-company transfers, the cure is worse than the disease.

More information:

http://edocket.access.gpo.gov/2008/E8-23506.htm

Export Administration Act Section 17(c)

Section 17(c) provides that any product (1) which is standard equipment, certified by the Federal Aviation Administration (FAA), in civil aircraft and is an integral part of such aircraft, and (2) which is to be exported to a country other than a controlled country, shall be subject to export controls exclusively under the EAA and not the AECA. As defined in that legislation, a “controlled country” included members of the (then) Soviet Bloc and other countries subject to national security export restrictions.

The EAA originally lapsed in 1989, was briefly renewed, and lapsed again in 2001. Many of its provisions nonetheless remain in effect through a Presidential Executive Order issued under the International Emergency Economic Powers Act. However, Section 17(c) has not been referenced in the ITAR since 1996, and the Department of State has not consistently applied Section 17(c) in making commodity jurisdiction determinations. The end result of having legislation with an uncertain legal foundation and unpublished agency practices has caused confusion and forced companies to request agency rulings to determine whether State or Commerce has export jurisdiction over a number of components that are used as standard equipment in civil aircraft. The goal of the amendment is to reduce that confusion and clarify which civil aircraft parts and components can be deemed controlled by the EAR without the need to request rul¬ings from the Department of State.

Industry and certain Members of Congress have urged that the scope of the ITAR as applied to civil aircraft parts be clarified, because DDTC’s assertion of jurisdiction over even minor components contained in civil aircraft parts results in the aircraft themselves being regulated as military equipment. The uncertainties created by DDTC’s current policy have caused significant regulatory burdens and operational difficulties for aerospace manufacturers and airlines.

Proposed Clarification to USML Aircraft Component Coverage

The proposed rule would clarify that the EAR applies when an aircraft part or component is (a) standard equipment; (b) covered by a civil aircraft type certificate (including amended type certificates and supplemental type certificates) issued by the Federal Aviation Administration for civil, non-military aircraft (expressly excluding military aircraft certified as restricted and any type certification of Military Commercial Derivative Aircraft); and (c) is an integral part of such civil aircraft. Any such part or component that is not designated as Significant Military Equipment (SME) on the U.S. Munitions List would not require an agency ruling to determine jurisdiction, unless the exporter is doubtful as to whether all three criteria have been met. Where the part or component is designated as SME, a ruling would be required, although the ruling requirement for SME items would not be applicable to parts and components that were integral to civil aircraft prior to the effective date of the rule.

In order to protect its jurisdiction over certain dual-use aircraft engine components developed from military technology after the proposed rule goes into effect, the Department of State would shift all military “hot section” engine components and digital engine controls from their current non-SME designation to SME. Examples of such hot section components include combustion chambers and liners; high pressure turbine blades, vanes, disks and related cooled structure; cooled low pressure turbine blades, vanes, disks and related cooled structure; cooled augmenters; and cooled nozzles. Digital engine controls include Full Authority Digital Engine Controls (FADEC) and Digital Electronic Engine Controls (DEEC).

The proposed Note to USML Category VIII(h) would provide some guidance for determining whether the three proposed criteria for EAR control have been met. The exporter would have to evaluate whether the part or component, without modification, is common to both civil and military applications. The proposed rule provides the following examples of parts and components that DDTC does not consider common to both civil and military aircraft applications: tail hooks, radomes, and low observable rotor blades. The proposed Note would define the first criterion, standard equipment, as “a part or component manufactured in compliance with an established and published industry specification or an established and pub¬lished government specification (e.g., AN, MS, NAS, or SAE).” It also includes as standard equipment parts and components that are manufactured and tested to established but unpublished civil aviation specifications and standards, and provides as examples pumps, actuators and generators. Parts and components would not be considered standard equipment if there are any performance, manufacturing or testing requirements beyond established civil aviation industry or government standards. Mere testing of standard civil parts and components for military requirements would not change the determination, unless the parts or components were designed or modified to meet the military requirement. Finally, the Note defines “integral” as a “part or component that is installed in the aircraft.”

Although the intent of the proposal is to clarify and simplify the current rules, the proposed regulation, as drafted, contains a number of ambiguities and leaves many questions unanswered, and therefore may not accomplish its stated goal. Aerospace industry companies may wish to consider submitting comments providing suggested improvements to the proposed rule to the Department of State by May 12, 2008.

— Thomas M. deButts & Michael J. Noonan

© 2008 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved. Pillsburylaw.com

DSP-73

All license applications will need to be supported by:

• A transmittal letter from the applicant explaining the need for the export and the responsibility of each party to the license. The letter is required, even if all of the information is included in the actual application.
• The application must also be limited to one end-use and it is recommended that the application be limited to a geographic region.

Any replacement/renewal license applications will need to be accompanied by a

• Transmittal letter describing the need for the continued export activity and the current disposition of the article in question
• Complete copy of the precedent license
• Must be received by DDTC 60 days prior to expiration

DSP-61

Any License applications for overhaul/repair and modification/upgrade transactions must now include:

• Request from the foreign owner of the defense articles
• Transmittal letter describing why the temporary import does not meet the exemption, including the full modification and upgrade performed

Any Licenses relating to the temporary imports or foreign-manufactured defense articles for a trade show demonstration:

• Supported documentation from the US entity responsible for the defense article while it is in the US
• Supported documentation showing the US party that is requesting the demonstration

Military exercises at US bases/ranges

• Documentation from foreign government identifying the participation of the foreign country in the exercise
• License must clearly identify the defense articles to be imported and the specific identity of the military exercise
• Must be submitted by a foreign embassy on behalf of its military

Transit to a Third Country/Transshipment Requests for Non-US origin articles

• Documentation to represent the transaction between the foreign entities
• The applicant should only by acting as a freight forwarder, if not, a transmittal letter must be attached explaining the situation

Transit to a Third Country/Transshipment Requests for US origin articles

• An approved General Correspondence letter for retransfer of the defense articles to the new end-user

Replacement/Renewals

• Transmittal letter explaining the need for the continued activity and the current disposition of the subject defense article
• Complete copy of precedent license
• Must be submitted 60 days prior to expiration of license

The main reasoning behind the DDTC requiring so much more information from applicants is the sheer fact that they will not have to search for the information in their past records. If the applications are submitted with all of the above mentioned information they will actually be able to approve license applications in their new 60 day deadline. In essence, the DDTC will now no longer search for related documents involving submissions, now applicants will spend their time creating them and attaching them to their applications.

More information:

• DDTC Agreements Guidelines
• DSP-73 and DSP-61 License Applications – Supporting Documentation Requirements

He also restated that his three highest policy priorities are still:

• Refining BIS’s enforcement efforts; focusing on terrorists, proliferators, and nations with transshipment concern;
• Reforming and updating dual-use export controls to enhance US national security and competitiveness;
• Accelerating and elevating international engagement with the most dynamic high technology markets in the world.

More information:

• BIS News Release

The Enhancement Act amends the current IEEPA by clarifying that civil penalties may be assessed against those who conspire to violate, or cause violation of any license, order, regulation or prohibition of the United States Code. Violators can now be fined up to $1,000,000 and/or up to 20 years in prison for criminal penalties. Criminal liability will also be included, and is described as anyone who “willfully conspires to commit, or aids or abets in the commission of” an unlawful act. Any criminal enforcement actions commenced on or after October 16, 2007 will be subject to the new penalties. Civil penalties will result in a fine amounting to the greater of $250,000 or twice the value of the transaction that is the basis of the violation. Any civil enforcement actions that are pending, meaning a Final Order has not been signed, or commenced on or after October 16, 2007 will be under the new civil penalties.

There are however, five circumstances that will be general exceptions to the IEEPA Enhancement Act. Those practices will include:

• Cases that settle before filing of a charging letter with an Administrative Law Judge, BIS usually charges only the most serious violation per transaction.
• Cases that settle before filing of a charging letter with an Administrative Law Judge BIS may also charge each violation not directly connected to a specific export or antiboycott related transaction which may include conspiracy, evasion, or false statements made to a Special Agent.
• If BIS chooses to file a charging letter with an Administrative Law Judge because of mutually agreeable settlement cannot be reached, then BIS will reserve its right to proceed with all available charges based on th4e facts presented.
• BIS draws meaningful distinctions based upon the relative seriousness of any offense. More serious offenses result in higher penalties for the purposes of settlement discussions.
• BIS affords great weight mitigation of up to a 25% reduction of the amount of penalties to be assessed for the existence of an effective export compliance program in place before the violation and later upgraded.
• For all valid Voluntary Self-Disclosures, BIS gives great weight mitigation that generally results in a reduction of at least 50% of the calculated penalty-and does so after considering the aggravating and mitigating factors in the case.

Mario Mancuso, Secretary of Commerce for Industry and Security, explains that, “The new law provides significant additional support for our cases, which we intend to apply in an equitable, deliberative and rigorous way. Most important, we think the enhancements will better align incentives to improve overall compliance with our regulations.”

More information:

BIS Factsheet: Charging and Penalty Practices (PDF)

BIS news release

In its background preface to the regulation, BIS states that these changes are necessary to bring the Export Administration Regulations into line with the AG Guidelines for Transfers of Sensitive Chemical or Biological Items, which were published in June 2004. The AG guidelines lay out several factors for governments to consider in evaluating potentially sensitive CB exports including the bona fides of the parties to the transaction and the capabilities and intentions of the CB activities of the recipient state. The guidelines do not specify a blacklist of states prohibited from receiving any dual-use CB items nor any sort of hierarchy of scrutiny for different groups of states. The AG guidelines do not even advise governments to distinguish between AG members and non-members in evaluating proposed exports. To their credit, BIS is candid that the new rule “will likely result in an increase in the number of license applications that will have to be submitted to BIS for exports and reexports of equipment and technology”

These are the primary elements to the new regulation:

• It increases the country scope of CB controls on Export Control Classification Numbers (ECCNs) 1A004, 2A226, 2A292, 2B350, 2B351, 2B352, 2E001, 2E002, 2E201, 2E290, and 2E301 by revising each of them to require a license if the country of destination has an “X in CB Column 2. Previously a license was required only for the countries listed in CB Column 3. This is a major increase in the country scope. The old scope, countries in CB Column 3, was limited to countries of particular concern for proliferation of chemical or biological weapons – meaning mostly former Soviet republics, Middle Eastern states, state sponsors of terrorism, plus China, India, Israel, Pakistan, Taiwan, Vietnam and a few others (including the fearsome proliferator and postage-stamp-sized Caribbean federation of St. Kitts & Nevis.)

But with this revision, a license is now required to export any of these items or technologies to every country except those participating in the AG. Excluding the US and the European Commission, the AG has 37 members – consisting of all 25 EU member states plus Argentina, Australia, Bulgaria, Canada, Iceland, Japan, New Zealand, Norway, Romania, South Korea, Switzerland, and Turkey. If your customer is not in one of those countries, a license is required. (Note that CB Column 2 is a superset of CB Column 3 so every country which required a license prior to the new rule still does.)

New to the license required list are five of the top twenty export markets for US merchandise – Brazil (#15), Hong Kong (#13), Malaysia (#16), Mexico (#2), and Singapore (#11). And that does not include the numerous reexports which will now too require a BIS license.

• Changes to the portion of ECCN 1E001 which controls technology related to ECCN 1A004.c chemical protection and detection equipment in order to put it into better alignment with the Wassenaar Arrangement‘s dual-use control list (Word). These alterations increase what 1E001controls, broadening its definition and enlarging the scope of both the CB Column 2 and National Security (NS) Column 1 controls.

• Transfers within a country are now subject to chemical and biological weapons end-use and end-user based controls. A license is required to export, reexport, or transfer (in-country) items subject to the EAR if, at the time of the export, reexport, or transfer, the party responsible for the export, reexport, or transfer knows that the items are intended for chemical or biological weapons activities in or by any country or destination, worldwide. This continues a trend we’ve seen over the past couple years to add in-country transfer controls to various parts of the EAR. This was done previously in the regulation on Iraq and also as part of an amendment to end-use restrictions on rocket systems and unmanned air vehicles.

• Expands the controls on activities by US persons related to the design, development, production, stockpiling, or use of chemical and biological weapons from just those countries suspected of nefarious activities in these dark arts to the entire globe. This brings the US person activity controls into line with the March 30 rule mentioned above, which extended the country scope of end-user/end-use controls catch-all controls on chemical and biological weapons to include all destinations, even AG participants.

Further related to this rule, there is good news and bad news. First, the good news – the regulation includes a savings clause delaying implementation of the new license requirements. Now, the bad news – if your product is not already on dock for loading, on lighter, laden aboard an exporting carrier, or en route to a port of export, it’s too late. The savings clause requires exports or reexports to have been laden by April 29 and to be exported, reexported, or transferred before May 16. Undoubtedly for those of you who now face the prospect of more time wrestling SNAP or snapping up those dwindling supplies of typewriter ribbons to complete 748Ps (and therefore less with your children) this will come as cold comfort. But if savings clause eligibility for deemed exports is a particular concerns, then the situation is a bit cheerier – you have until August 12 to pull together license applications for their foreign national employees involved in the technology at issue.

The resolution: PMDTC published a Federal Register Notice on January 7 indicating that they are likely to grant Commerce jurisdiction in response to submitted CJ ruling requests for the chips embedded in or intended to be embedded into back up commercial avionics. State jurisdiction is retained in all other cases. You must apply for the jurisdiction change in a CJ ruling-it does not come automatically.

Meanwhile, the Bureau of Industry and Security amended the EAR on February 9 to deal with the chip in avionics punted their way. Loose chips (intended for export for use in a back up commercial avionics system) were placed in Export Classification Control Number (ECCN): 7A994 and made subject to Regional Stability (RS) controls subjecting them to licensing requirements worldwide except Canada. It is now the only “994″ level item on the Commerce Control List that we know of with such restrictive licensing. The chips were removed from de minimis eligibility, adding another exception to the rules. Removing de minimis eligibility restricts, in theory at least, any foreign made aircraft flying with the chip on board from entering embargoed destinations, Syria and N. Korea.

But did the rules really solve the problem? Maybe for Boeing, which no longer has a controlled chip on board its 737. Moreover, by removing de minimis eligibility for the chip, Boeing’s foreign competitors are now subject to the same export restrictions as Boeing. But for many other aerospace companies, the rules still place them in a quagmire.

“Why?” you ask. First of all, the rules only cover chip part number QSR11-00100-100/101. This is likely an export compliance first, by the way. As far as we know, there has never been an export control regulations based on a part number, another interesting exception to the rules. A number of the chips at issue are of a different part number, even lower performance versions. These are not covered by the rule and presumptively remain at State. Second, the rule only covers the 100/101 part number chip as used in back up flight controls, not primary flight controls, where the chip is also frequently used. Third, the State Department CJ requirement could allow essentially allows State to add whatever whimsical interpretation or restriction they feel like, and gut the regulation altogether. The end result: many aerospace companies are still totally bogged down in CJ woes surrounding the now infamous chip.

It remains to be seen if the chip silicon has truly gelled at this point even for Boeing. Hill representatives, particularly Reps. Henry Hyde (R-Ill.) and Tom Lantos (D-Calif.), have complained to Secretary of State Collin Powell that PMDTC should have more closely controlled the chip to begin with and in particular complained about the China 737 sales that were made prior to these Notices. State may seek blood by way of an enforcement action against some hapless manufacturer to placate the Hill.

(Editor’s Note: What a bunch of idiots on the Hill and elsewhere. If the Chinese buy a 737 just to get this one chip that has military applications, that is export control success. Paying millions and millions for a complete 737 just to get this chip is what export control is all about. Export controls cannot keep anybody from getting what they want, export controls can only raise the cost of getting the stuff. And in this case they are giving the money to a legitimate company, not to black market technology smugglers. So Congress, why don’t you encourage the Chinese to spend millions and millions to get each chip. That’s much better than the Chinese learning how to make their own, something they have been pretty good at doing. Sometimes you would think that the people in the government and Congress never really sit down and think about this stuff. —JB)

The good news is that export control administrators and embedded bureaucrats are generally pleased by the developments. By trying to solve a messy problem in such a microscopic way, the underlying problem is not really solved, and at the same time the rules become even more complicated and tangled. The chip rules create new exceptions to exceptions to exceptions to the rule. The more confusing the rules, the better the job security for export administrators and the government bureaucracy.

On the one side are the Pentagon and Capitol Hill, under the encouragement of former Office of Defense Trade Controls Director William Lowell, who have managed to use this little defense article chip to wreak licensing havoc among commercial aircraft manufacturers, such as Boeing, Airbus, Cessna and Bombardier, along with a number of US and overseas subcomponent manufacturers who use the chip.  On the other side are a battery of Washington lawyers, lobbyist and, yes, BSA consultants, who work with industry and bask in the golden fees generated by the ensuing regulatory fog.

Somewhere in the middle are confused export compliance folks trying to make sense of the already confounding commodity jurisdiction process.  Also caught a little flat footed is the State Department, who must busy themselves with licensing the movement of thousands of little chips as they constantly export, temporarily import and retransfer themselves in their conveniently mobile $30 million commercial aircraft vessels, including to proscribed and terrorist countries – and all requiring written authorization under the ITAR.

How the heck did we get here?  It all began over ten years ago at BEI Technologies, a chip manufacturer in California, who produced chips which were used for aerospace attitude indication applications.   According to knowledgeable industry sources, the company would sort the high end chips from the lower end chips in the production run, selling only the higher end chips for missile use and marketing the lower end chips for use in commercial back-up avionics.

Under traditional views of commodity jurisdiction determination, if a product is actually used in a commercial end use, the product becomes “dual-use” and subject to the EAR.  If there’s any doubt, the company would apply for a commodity jurisdiction (CJ) ruling.   A key jurisdiction test in ITAR 120.3 states that a defense article is one that “does not have a performance equivalent (defined by form, fit and function) to those of an article… used for a civil application.” A logical reading of the requirement would lead one to believe that if the reverse was true – that if the chip was used (and, in this case, FAA certified) in a civil application — it no longer met the explicit ITAR requirements for designation as a defense article as it now did have a performance equivalent for a civil application.

But a logical reading of the ITAR will never deter some who don’t like the result of a reasonable regulatory interpretation.  They would rather point the finger and accuse a violation, rather than fix the ITAR language into something that creates a more satisfying result.  And so it happened in the case of BEI Technologies. After the chip became incorporated, FAA certified, and widely used on a number of commercial jets, including Boeing and Airbus passenger aircraft, someone in the chip supply chain decided to put in a CJ ruling request for the chip.

By this time, the chip was predominately used in commercial applications, which meets another explicit 120.3 ITAR test that normally warrants EAR jurisdiction.   One could argue that the high performance chip for missiles was not the same as the lower end chip used commercial applications, with one being ITAR and the other EAR. But again, certain Washington ego’s appeared to have a bigger semiconductor to forge, and a decision was made to keep the chip with all its dual use applications ITAR, regardless of the consequences.

And the consequences are huge.  Under the ITAR see through rules, once a part is designated as a defense article then it remains controlled no matter what the higher assembly it ends up in.  So as a result of the chip CJ ruling, a thousand commercial aircraft flying with the chip were now subject to ITAR licensing requirements whenever they crossed a border.

Four licensing officers are now dedicated to commercial aircraft licensing at DDTC as a result of this chip.  But the full force of licensing has yet to hit State.  Should all commercial airlines and operators flying with the chip on board be registered with DDTC as exporters of defense articles as required by the ITAR?   Should every flight on the JFK-Heathrow route be licensed, never mind all international routes, as is required by the ITAR?  Should all the commercial aircraft and parts brokers start registering and obtaining approval for the commercial aircraft sales activities around the world, as is required by ITAR Part 129?  Should political contributions, fees and commissions for the sale of commercial aircraft containing the chip be reported to State, as required by ITAR Part 130?  Imagine all the potential voluntary disclosures!  The licensing and regulatory permutations are endless.

The State Department thus far has conveniently overlooked most of these permutations by attempting to control the first sale of new commercial jets with the chip, not each daily cross border flight, and try to get foreign airline customers to agree not to fly the jets to terrorism supporting countries.  Special and difficult licensing waivers must be obtained for the proscribed countries like China.   A larger trade war also looms: Airbus is already accusing State of giving Boeing unfair licensing advantages by granting licensing waivers for recent China proscribed country deliveries of 737′s that contain the chip, while not affording Airbus similar treatment.  In short, the chip debacle threatens to swamp the State Department in a resource burn better utilized for more meaningful protections of national security.

Some export administrators are wondering what to do with the traditional views of aircraft commodity jurisdiction of parts.  There are many thousands of aircraft parts with commonality between defense and commercial aircraft. The Pentagon has in fact pushed this parts crossover for years in an attempt to hold procurement costs down.   But should a bracket or a gasket used on an F-16 now be licensed or CJ’d for all 777 uses?   Unfortunately, at a recent Defense Trade Advisory Group meeting, Deputy Assistant Secretary of State Lincoln Bloomfield seemed to insinuate that DDTC intends to broaden its inquiry beyond the chip into other parts traditionally viewed as EAR controlled.

What should an aerospace or defense company do in the face of all this madness?  Well, State and the Pentagon seem to indirectly be saying that use the traditional CJ analysis for all the low end parts: brackets, o rings and the like. The traditional analysis is certainly supported by the actual language in the ITAR.  But at a certain undefined point of sensitivity, only known to a handful of people at the Pentagon and State, companies must instead let the government decide ITAR jurisdiction at their complete discretion.  The problem: no one has an idea where the sensitivity point lies, and it is not embodied in any regulation.

As a result, the chip case therefore threatens to create a thousand ad hoc and subjective methods of looking at sensitivity in the commodity jurisdiction process.  The likely result is that industry and the bureaucracy will burn up tremendous energy attempting to sort out jurisdiction and licensing on thousands of inconsequential items at the cost of less oversight of the truly significant.   Unfortunately, the Washington players have become so hopelessly entrenched in their competing positions that, at this time at least, the battle over the chip will be paid at a steep price of an unclear and unworkable commodity jurisdiction process.

The new Guidelines are substantially more detailed than the old, though the actual MLA and TAA templates look virtually the same.  What’s different is the degree of explanations and clarifications contained in the new Guidelines that were not found in the old. They also contain new sample letters and templates.   A full accounting of all the changes is difficult, but notable changes include:

1. Warehousing and Distribution Agreements dropped from the new Guidelines – The new Guidelines drop templates for Warehousing and Distribution Agreements.  These Agreements were typically used for establishing distribution centers for defense articles outside the United States.  But their actual use has been discouraged for years.  Apparently, DDTC is discouraging their use even more by dropping them altogether from the Guidelines.
2. New Template for Proviso Reconsideration – How many of you have had conflicting provisos on your Agreement?  My personal favorite was an Agreement which had two provisos to the effect of 1) Shipment of hardware by separate license (e.g. DSP-5) is authorized and 2) Shipment of hardware by separate license (e.g. DSP-5) is not authorized.  The new Guidelines offer a suggested format for Proviso reconsideration to deal with those conflicting or impossible Provisos such as these.
3. Dual Nationals Disclosure – The new Guidelines advise that you list the nationalities of all third country nationals and dual nationals that may be employed by your overseas licensee – see section 10.2 of the Guidelines.   This is now an explicit written instruction on what has been provided as informal, and often ignored, verbal guidance in the past.
4. Foreign National Employees in the US – The Guidelines clarify that “most” foreign national employees should be licensed through a DSP-5, not a TAA.   A TAA must be used only when the employee must receive “technical training.”