Candidate must ensure that the international business activities of all ViaSat operating units are conducted in full compliance with all relevant US Government regulatory requirements.  This must be accomplished concurrent with providing the highest level of customer service to our internal and external customers, and in a manner that ensures program objectives are fulfilled.

We are seeking a dynamic candidate, who can “think outside the box” and can direct an Import/Export program with a real team approach and the ability to deliver timely compliant solutions to import/export issues.

Outstanding communication and issue resolution skills are required.  Must also be proficient in Microsoft Office as well as an excellent working knowledge of the ITAR.

Required.  Extensive knowledge of the ITAR, EAR and OFAC Regulations.  Outstanding communication skills both written and verbal.  Ability to prepare TAA’s, MLA’s, Dept of State export licenses, AES filings, and any other specific required documentation called for in an Import/Export environment

US Citizenship Required

For more information and to apply, go to www.viasat.com/careers and search job requisition number: 4846

The U.S. Department of Justice and the New York District Attorney’s Office, together with the Office of Foreign Assets Control and federal and state bank regulators, have brought a number of cases in 2009 – 2010 against foreign financial institutions that clear dollar transactions through the United States involving prohibited entities and individuals under U.S. sanctions regulations. In the past, banks not subject to U.S. jurisdiction have generally avoided penalties under these regulations. The U.S. Government, however, has widened its enforcement to target financial institutions outside the U.S. for allegedly “causing” U.S. persons to violate U.S. sanctions regulations.

Deferred Prosecution Agreements and Settlements
Under deferred prosecution agreements, U.S. Department of Justice (DOJ) and New York District Attorney’s Office (NYDA) bring charges by filing a criminal information but agreeing not to prosecute the charges, provided the defendant complies with certain requirements outlined in the settlement. The requirements frequently include stipulating to the facts constituting the alleged violations, paying a monetary penalty, and instituting compliance procedures to prevent future violations. If the defendant abides by the terms of the agreement for a specified period, the charges are dismissed. Failure to comply with the agreement allows the DOJ and NYDA to proceed against the defendent on the basis of their prior stipulated facts.

Lloyds TSB Bank Plc. (Lloyds). Lloyds’ January 2009 deferred prosecution agreements with the DOJ and NYDA included a $350 million payment to settle allegations that Lloyds allowed Iran and Sudan to access U.S. financial institutions in violation of U.S. sanctions regulations and New York criminal law. Lloyds internally “stripped” customer names, bank names, and addresses from SWIFT payment messages to allow them to pass undetected through filters at U.S. correspondent banks. Had the messages contained transparent data concerning the parties, the U.S. correspondent banks would have been required to reject or block the transactions in compliance with U.S. sanctions regulations.

As part of the settlement, Lloyds agreed to employ an independent pre-approved consultant to review and report on five years of transactions. In addition, Lloyds agreed to comply with the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking. In return, the DOJ deferred prosecution for two years and will subsequently dismiss the charges provided Lloyds remains in full compliance with the terms of the settlement.

In December 2009, Lloyds entered into a separate settlement with the Office of Foreign Assets Control (OFAC) agreeing to a $217 million fine, which was credited against the previous payment, and agreed to conduct annual reviews for two years of its policies and procedures and a “statistically significant” review of payments cleared through the United States.

Australia and New Zealand Bank Group, Ltd. (ANZ). In its August 24, 2009 OFAC settlement, ANZ paid $5.75 million to settle allegations of violations of the Sudanese Sanctions Regulations and the Cuban Assets Control Regulations. OFAC alleged that between 2004 and 2006, ANZ illegally processed 31 transactions through U.S. correspondent accounts totaling in the aggregate approximately $106 million. ANZ allegedly manipulated the SWIFT messages “stripping” them of any reference to Sudan or Cuba. ANZ’s actions concealed the identity of the sanctions targets and impeded U.S. financial institutions from identifying the restricted transactions.

OFAC agreed to mitigate the penalty based on three predominant factors. First, although ANZ did not voluntarily disclose the violations, ANZ cooperated in conducting an extensive review of the transactions and brought to OFAC’s attention additional transactions of which OFAC was not aware and which ANZ did voluntarily disclose. Second, ANZ promptly initiated a remedial policy. ANZ re-engineered its operating model to enhance its ability to identify and resolve operational gaps and weaknesses. ANZ agreed to continually audit its compliance model to ensure that future transactions that would be in violation of OFAC’s regulations are not processed by or through U.S. financial institutions. The Australian Prudential Regulation Authority also agreed to monitor the results of ANZ’s internal review. Third, ANZ had not been subject to an OFAC enforcement action in the five years preceding the transactions at issue.

Credit Suisse AG (Credit Suisse). On December 16, 2009, DOJ, NYDA and OFAC announced a record-breaking $536 million settlement with Credit Suisse. The settlement documents alleged Credit Suisse’s involvement in thousands of concealed financial transactions with OFAC target countries processed through U.S. correspondent banks. Credit Suisse allegedly developed procedures to instruct clients on how to structure transactions and Credit Suisse altered payment paths and “stripped” payment messages of any reference to the target countries.

In addition to the fine, the settlement subjects Credit Suisse to a cease and desist order and requires implementation of a transparent global regulatory compliance program. The compliance program must include training for Credit Suisse employees on OFAC-related issues, an audit program designed to test for compliance, and an annual review of the compliance program by qualified personnel.

ABN Amro Bank N.V. (ABN AMRO)/Royal Bank of Scotland (RBS). In 2006, ABN AMRO agreed to a cease and desist order with OFAC and the Board of Governors of the Federal Reserve System. ABN AMRO was assessed a $40 million penalty, which also satisfied a concurrent $30 million FinCen penalty. The violations, which were voluntarily disclosed, involved ABN AMRO’s overseas branches, which removed references to entities in which Libya or Iran had an interest before forwarding wire transfers, letters of credit and U.S. dollar checks to ABN AMRO branches in New York and Chicago. This 2006 settlement, however, did not address criminal penalties.

On May 4, 2010, ABN AMRO, which had since been acquired by RBS, entered into a deferred prosecution agreement with DOJ agreeing to forfeit $500 million in connection with a two-count criminal information. Specifically, ABN AMRO waived indictment on one count of violating the Bank Secrecy Act and one count of conspiracy to defraud the U.S. by violating the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA).

The 2010 deferred prosecution agreement details a much broader pattern of violations. The factual statement accompanying the deferred prosecution agreement alleges that from 1998 through 2005, ABN AMRO conducted transactions valued at $500 million in violation of IEEPA, TWEA and the Bank Secrecy Act involving targets of U.S. economic sanctions and ignoring OFAC compliance obligations. ABN AMRO removed or altered names and references to target countries from payment messages. The “stripping” procedures allowed the transactions to pass undetected through filters at U.S. correspondent banks, where they would otherwise have been blocked and reported to OFAC. In addition to altering the payment messages, ABN AMRO failed to maintain adequate anti-money laundering procedures and processes.

ABN AMRO provided prompt and substantial cooperation, committed substantial resources to investigate transactions, and agreed to enhance its compliance policy to ensure transparency. In light of ABN AMRO’s remedial actions, DOJ agreed to recommend dismissal of the information in one year provided ABN AMRO continues to fully cooperate.

Policy Trends and Compliance Risks
These cases are a direct result of the United States’ policy to strengthen U.S. sanctions against Iran, as well as other countries, without explicitly requiring foreign financial institutions to comply with extraterritorial U.S. legal requirements. These cases also reflect a growing trend among enforcement agencies to cooperate on sanctions enforcement, bringing to bear not only the threat of higher monetary penalties but also heightened scrutiny from bank regulatory authorities and potential criminal fines and imprisonment. Regardless of the legal merits and possible defenses that may have been available, these institutions evidently decided to settle rather than face consequences that could have been even more serious.

A number of global financial institutions with headquarters outside the United States have adopted their own internal policies to comply with U.S. sanctions regulations as though they were U.S. institutions, judging that the risks of non-compliance and potential adverse impact on their business in the United States outweighed the risks of continuing to engage in business with countries targeted by U.S. sanctions.

The expanded reach of U.S. enforcement to activities that cause U.S. persons to commit violations within the United States presents a serious compliance risk. Financial institutions that clear dollar transactions through the United States must ensure that they comply with U.S. sanctions regulations.

If you have any questions about the content of this advisory, please contact:

Christopher R. Wall, Washington, DC, +1. 202.663.9250, cwall@pillsburylaw.com

Thomas M. deButts , Washington, DC, +1. 202.663.8872, debutts@pillsburylaw.com

This publication is issued periodically to keep Pillsbury Winthrop Shaw Pittman LLP clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice.

© 2010 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved.

BIS announced that is have imposed an administrative $300,000 fine ($275,000 suspended) on Patrick Gaillard, President of Oyster Bay Pump Works of Hicksville, New York.  In 2007, Mr. Gaillard pleaded guilty to criminal charges for the same actions for which BIS just now penalized him.  As a result of his guilty plea, he got 30 days in prison, a $25,000 fine, 3 years of probation, and a $300 special assessment.  But, all in all, it seems like Gaillard got off fairly easy, if you ask me.  But, then again, I am not the guy who spent 30 days in prison.

BIS charged Gaillard and Oyster Bay, in separate charging letters.  This shows that in cases where BIS thinks one person in a company acted intentionally to violate the regulations, BIS will go after that person as an individual in addition to going after the company.

Even though there was one charging for Gaillard and another for Oyster Bay for essentially the same actions.  I will discuss them as if there were one charging letter.  Here are the charges:

Charge 1: Illegally exported microplate processing equipment via Germany to Cuba

Charges 2 & 3:Sold microplate processing equipment (Charge 2) and 3 power supplies (Charge 3) via Germany to Iran.  At least twice Oyster Bay staff told Gaillard the sale required an export license.  Gaillard told his staff to export the items without an export license.  The items were classified as EAR99.

Charge 4:  Sold microplate processing equipment for export to Iran via the UAE.  Initially, a representative of the Iranian buyer approach Oyster Bay to buy the equipment and Oyster Bay said it could not export the items to Iran due to the US embargo.  Then the Iranian rep arranged with Gaillard to export the items to the Iranian company’s trading arm in the UAE for ultimate delivery to Iran.  The US Government seized the items before the export took place.  The items were classified as EAR99.

Charge 5: Destroying and altering records related to Charges 1-3 involving Cuba.  Around the time he learned that the US Government seized the items destined for Iran, Gaillard told his staff to remove references to Cuba from certain document and to destroy other documents related to the Cuba activities.

Charge 6: Destroying and altering records related to Charge 4 involving Iran.  When he learned that the US Government seized the items destined for Iran, Gaillard told his staff to remove references to Iran from certain document and to destroy other documents related to the Iran activities.

According to BIS Gaillard intentionally violated the regulations and tried to destroy and alter documents to cover his tracks.  BIS typically goes after an individual in addition to the company when it thinks an individual has done such things.  In the end, Gaillard got these combined criminal and administrative penalties:  Combined fines of $50,300 (plus another $275,000 suspended penalty if he stays clean), 30 days in prison, and a 3 year period on the Denied Persons List (all of the 3 years on the List is suspended if he stays clean).  Plus Oyster Bay got a $300,000 fine ($275,000 suspended) and 3 years on the Denied Persons List (all of which is suspended).

As I said above, having not spent the 30 days in prison myself, it seems to me that Gaillard got off relatively easy.  The fines certainly could have been higher on him and his company.  Let’s run through some aggravating and mitigating factors to see if we can find any reason for the easy treatment.  This was not a voluntary disclosure, so that mitigating factor does not enter into the equation.  Cuba and Iran normally are aggravating factors.  Intentionally violating the regulations normally is an aggravating factor.  The fact that this was EAR99 stuff and not sensitive is mitigating—but these products are not medical equipment eligible for a relatively favorable license approval policy.  I just can’t figure it out.

Maybe I am just selfish and wish that BIS would have fined the guy a million dollars so export compliance people could tell other people in their company about the harsh penalties imposed on an individual.

Or maybe it’s just my unquenched desire to see an intentional violator tazed in a youtube.com video.

BIS did not say how it learned about these activities.  Wait, a second, what is that I hear?  Is that a whistle blowing?

I don’t know if my first observation should focus on successor liability or the fact that this is another 2B350 violation.  So I will start with a few facts.

Wesco Industrial Products, Inc. of Lansdale, PA agreed to pay a $50,000 in a settlement agreement with the Bureau of Industry and Security resulting from its voluntary disclosure of some relatively harmless exports of ECCN 2B350 valves.  Wesco is the surviving entity of several mergers that occurred in 2008 and is the successor to Neptune Chemical Pump Co., Inc.  The violations all occurred before the merger.

The violations involved these exports of 2B350 relief valves:

• An export of ten valves to Singapore
• An export of two valves to Mexico
• An export of four valves to Hong Kong

It is reasonable to assume the small $50,000 fine is due to the fact that the company did a voluntary disclosure, the violations were due to ignorance, and that the valves ended up in harmless locations.

The lessons are:

1. If you acquire or merge with a company that is has past violations, the resulting entity now owns the violations.
2. Companies who manufacture chemical processing such as valves and pumps still don’t seem to have caught on to the fact that their seemingly harmless products may require export licenses.  There has been a relatively steady stream of violations involving 2B350 valves and pumps.  It makes me feel like taking out an ad in some valve and pump trade journal to shout out:  Don’t let this happen to you.

by Sanjay Jose Mullick

The Obama administration has taken the first step in export control reform by easing the pathway for U.S. companies to export certain encryption items.

The First Export Control Reform

On June 25, the U.S. Department of Commerce’s Bureau of Industry and Security issued new regulations governing export controls on encryption. This rulemaking represents the first formal example of the president’s initiative to reform U.S. export controls by concentrating regulation on the most sensitive items.

The new regulations reflect a recognition that encryption is ubiquitous in today’s high-tech world and cannot be completely regulated. These rules also attempt to address the need for U.S. companies to be able to get to market quickly, to foster the competitiveness of U.S. industry. However, they do not accomplish a complete de-control of encryption, and the prior system will remain in place for many products.

Although the regulations have been published as an interim final rule with a request for comments, they likely reflect the prevailing framework for regulating encryption exports going forward. Let’s take a look at some of the key elements of the new rules and how they will impact exporters.

Company-Based Framework

The new rules move away from a regulatory approach based on disclosure of the technical characteristics of the product to be exported to one focused on the profile of the company that will be making the exports.

Encryption Registration

When President Obama first announced the export control reform initiative, he stated that he wanted to change the export authorization process for encryption items “from 30 days to 30 minutes” and the new rules accomplish that. Specifically, for “less sensitive” encryption items, and for mass market items, the prior requirement to submit a technical questionnaire to BIS for it to conduct a product review has been replaced with one whereby the exporting company submits an online “encryption registration.” The encryption registration consists of contact information, an overview of the company and an identification of what categories apply to the company’s products.

Once the registration is submitted to BIS, the agency immediately issues a registration number, and the company becomes authorized to export encryption products such as local area network products, small routers and mass market items. For these products, companies no longer have to submit a technical questionnaire response with information about the product’s encryption algorithms and no longer have to wait 30 days to obtain authorization to export to key markets such as China and India.

Under the prior rules, it was often a good business practice for companies to make available to their customers, distributors and other business partners the classifications BIS issued pursuant to ENC review requests. This was because when BIS classified a product, other companies could rely on that classification as authority to make their own exports of the product, even if that company had not submitted the classification. Under the new rules, BIS has indicated that an exporter may rely on a producer’s encryption registration (to export that producer’s encryption product) without itself having to file a distinct encryption registration.

Classification Report

The company registration requirement is coupled with a requirement for the company to file an annual self-classification report. The report consists of a listing of the encryption items the company has self-classified and exported. Specifically, the report consists of the following six elements: (i) product name; (ii) model/series/part number; (iii) primary manufacturer; (iv) export control classification number; (v) encryption authorization type, e.g., ENC; and (vi) item type selector, e.g., gateway, modem or virtual private network. The report can be filed by e-mail.

One aspect of License Exception ENC many companies have disliked has been the requirement to file semi-annual reports. Although not a requirement that impinged export authorization, that reporting requirement could pose an administrative burden because it required capturing several information fields for all the applicable transactions, and doing so in a way that they could be retrieved and converted into a spreadsheet. For certain encryption items, that reporting requirement no longer applies and has been replaced with the more streamlined annual self-classification report.

Two Key Developments

Although the general easing of export controls on encryption items is important, there are two developments that are particularly key because they extend the useful scope of License Exception ENC and entirely de-control a class of items, respectively.

Encryption Technology Included

One of the limitations of License Exception ENC had been that, as to several countries, it did not authorize exports of certain “technology” necessary for manufacturing, development or testing of encryption items. This would be relevant, for example, if a company were co-developing a product with a business partner overseas and needed to exchange certain technical specifications on encryption or engage in related technical discussions. Under the prior rule, the commodity and software could be exported under License Exception ENC, but the related technology had to wait for the longer approval of an export license, delaying product development.

The new rules now grant export authorization to items classified as ECCN 5E002 after submission of a classification request, either immediately or after 30 days, depending on the country. In now extending License Exception ENC to encryption technology, this one form of export authorization is enough to proceed with all tracks of product development, i.e., the commodity itself and now also both the related software and technology. Depending on the country, the authorization may not extend to encryption technology for more sensitive items, such as for cryptanalytic items, those with an open cryptographic interface and for “non-standard cryptography” (discussed further below). Notably, the authorization also does not extend at all to certain countries typically involved in offshore manufacture and software development. For example, although India is included, China and Russia are excluded.

Ancillary Encryption De-Controlled

The new rules also entirely release from the encryption controls items where “the primary function or set of functions” is neither (i) information security, (ii) computing, (iii) information storage or transmission, nor (iv) networking, and where the cryptographic functionality is limited to supporting the primary function or set of functions. Such items now include gaming, household appliances, fire alarm systems, inventory management software and business process automation. Exporters should review the entire list carefully to see if it applies to their business.

BIS took a sizable step in this direction in October 2008 when it created the exception for items that perform only “ancillary cryptography.” Although that allowed those products to escape the review requirement, it was somewhat confusing because the products still were classified, e.g., under ECCN 5A002 and required License Exception ENC for export. The new rule allows such products to be classified as EAR99, so long as any other aspect of their functionality does not trigger a specific ECCN.

Limitations of the Changes

Alas, the new rules do not ease the regulatory burden on all encryption products. Upon a closer review, chip manufacturers and software developers may conclude the amended regulations do not provide the benefits they may seem to offer at first glance.

Encryption Components

Still subject to the traditional requirement to submit a one-time product review (now termed a classification request) and to file semi-annual product export reports are certain “encryption components” and “equivalent or related software,” including (i) chips, chipsets, electronic assemblies and field programmable logic devices; (ii) cryptographic libraries, modules, development kits and toolkits; and (iii) application-specific hardware or software development kits.

Depending on the encryption algorithm and key length, this means those involved in supplying OEMs with the encryption elements of even consumer-type items, as well as companies engaged in cross-border development of their own products, generally will still likely have to follow the prior procedure. As before, whether exports are authorized to commence upon registration of the classification request or are subject to the 30-day waiting period will depend on the countries involved.

BIS has also been reluctant to grant mass market treatment to components of mass market end-items, e.g., the chip going into a consumer smartphone as opposed to the smartphone itself. This is because such components may not necessarily be sold in the same way as the final product and, until incorporated into it, they theoretically could be used in other applications.

In the future, perhaps BIS might consider extending mass market treatment to such components and software upon a clear demonstration that they are specially designed to be used exclusively with mass market end-items. For now, however, the new regulations re-affirm that generally encryption components will themselves have to satisfy the tests of large sales volume and general retail availability to be able to qualify for mass market treatment.

Non-Standard Cryptography

Also still subject to the prior review and reporting requirement are encryption commodities, software and components that provide or perform “non-standard cryptography.” That term is defined as “any implementation of ‘cryptography’ involving the incorporation or use of proprietary or unpublished cryptographic functionality, including encryption algorithms or protocols that have not been adopted or approved by a recognized interna­tional standards body… and have not otherwise been published.”

Carving out use of encryption that is published is a fairly significant policy development, but it does not go as far as it may seem.

Previously, a fairly common stumbling block for industry was using publicly available algorithms like Advanced Encryption Standard without recognizing that their incorporation or implementation into proprietary products was deemed to create a new and distinct encryption product requiring ENC review. Focusing controls on “non-standard cryptography” may go a long way toward exempting those end-products from classification and waiting period requirements.

However, use of such algorithms and protocols can still be considered nonstandard cryptography if—though standard themselves—they are being modified or customized in a particular way. Companies will likely have to conduct careful internal review of how they are using encryption before concluding they are not using “nonstandard cryptography.”

These are concepts that are new even to the regulators, so at this stage the full range of their scope and applicability is not entirely clear. Instead, sorting out exactly what fits this criteria can be expected to be a focus of discussion over the coming months.

Restricted Items

License Exception ENC continues to contain a subsection previously called “ENC Restricted,” which covers items such as network infrastructure software, commodities and components. BIS has revised and updated that list and it should be reviewed carefully. It also imposes classification, waiting period and reporting requirements. This subcategory of encryption items is significant because, for certain countries, an export license is required in order to export to governmental customers.

New Regulatory Architecture

In issuing the new encryption regulations, BIS indicated it would continue to review the rules, and certainly the real process of export control reform has only just begun. What these regulations do accomplish is the creation of a new architecture for regulating encryption that recognizes the reality that today encryption is a pervasive technology.

U.S. companies have to be able to develop products, consult with partners and service customers abroad swiftly to be able to compete effectively in a globalized world. At the same time, the speed at which technology can be deployed across borders places a greater strain on the systems that help safeguard national security.

As BIS consults with industry, this new framework should enable it to respond more quickly to market trends by more readily shifting items from a category of greater control to one of lesser control, calibrating the focus of export control resources on higher priority areas.

Sanjay Jose Mullick

International Trade

+1.202.663.8786

sanjay.mullick@pillsburylaw.com

Sanjay Mullick is a Washington-based member of Pillsbury’s International Trade practice, where he advises clients on export issues concerning encryption software and technology and on designing and implement­ing export control compliance programs.

I am old.  I can’t even count the number of times I have heard well intentioned high level government officials tell us that they plan to make significant reforms in the US export control system.  Some government officials have told me that they are going to make the system so transparent and user friendly that they will put consultants like me out of business.

It’s been 26 years for me in this business and numerous government pledges to make things better.  As far as I can tell, I am still here and there is still a huge demand for assistance in dealing with the infinite number of problems that US export controls create for companies who try to comply with the rules.  Yes, this reform could be different.

So, I apologize (for a change) in advance for being the cynic as a good number of my peers spout enthusiastically about Defense Secretary Gates’ call for comprehensive reform to the US export control system.  Reform certainly makes sense.  Comprehensive reform could both promote national security and make compliance a bit easier for companies.

Comprehensive reform is highly unlikely.  Adjustments to certain aspects of US export controls might be the better-than-nothing result we should hope for.  And, changes to the current system that will create a lot of extra work for us without actually improving anything is what we should fear.   (Well, this last scenario will probably be a gold mine for my seminar and consulting businesses.)

On behalf of the Obama Administration, Secretary Gates called on Congress to make sweeping reforms.  There are four pillars of the reform:

1)      Create a single export control list.

2)      Create a single export licensing government agency.

3)      Designate a single agency to coordinate the currently dispersed export enforcement resources.

4)      Create a single, unified IT infrastructure for the US export control system

Items 1 and 2 seem to be the focus of most of joyful exporter discussions.  Item 3 seems to be closely related to item 2, except I guess the licensing agency and the enforcement agency could be separate agencies.  Item 4 is the least talked about and would be a relatively natural consequence of item 2.

I once again apologize in advance. Something I do now that I am old.  Here is my editorial view of the 4 pillars.

Single Control List

The number of export control lists we have is not as big a problem as a) the US imposing severe military product type controls on non-military products such as satellites; and b) the difficulty determining where an item is controlled.

We could get a single list and keep those two problems.  We could have bombs, satellites, and machine tools on the same list.  But if the new single list says that satellites are subject to the same ITAR-type requirements as bombs, we have we gained nothing.  If in the current structure, satellites were moved from the ITAR to the EAR but that move included creating EAR MLAs, TAAs, exclusion from the de minimis rule, etc. for satellites and the US continued to deny all licenses involving countries such as China, the list switch doesn’t benefit satellite companies.

READ THIS:  And, worse yet, unfortunately, a single list could increase the risk that items currently controlled by the friendly EAR rules could be made subject to ITAR type export controls.  Right now, the EAR structure is not set up to impose ITAR type controls on, let’s say, a super duper machine tool.  But if both military and commercial items exist in the same list, that implies that some items will be covered by ITAR type controls and some will be covered by EAR type controls.  So, if that machine tool is covered by regulations that include ITAR type controls, the government could much more easily  apply ITAR type controls to machine tools because the ITAR type controls would be part of the regulations that apply to that single list.

On to problem b):  A significant problem companies face is determining whether an item is controlled by the ITAR’s USML or the EAR’s CCL.  (The fact that companies might not like their commercial items being subject to ITAR-type controls is discussed above.)  For example, let’s say a single list merges renames ITAR Category XI as ECCN 6A881 and Category XII as 6A882 and puts those ECCNs into EAR Category 6.  If the new ECCNs use the words from the former ITAR categories, then the difficulty in figuring out whether something is controlled by 6A881, 6A882 or 6A003 is the same as the current problem of figuring out if something is Category XI, Category XII, or 6A003.

The difficulty in determining jurisdiction/classification is due to the words used in categories XI and XII—these words are sometimes ambiguous and open to interpretation, and perhaps that is a naturally unavoidable problem that a single control list will make neither better nor worse.  But a bigger problem might be the fact that DDTC is willing to say an item is controlled by categories XI or XII even if there are no words in the ITAR that says that item is controlled by either of those categories.  (The ITAR says DDTC can put USML controls on things not mentioned in the USML, and DDTC says the USML is “illustrative” of the things subject to ITAR jurisdiction.)  So, some exporters live in a world where DDTC imposes ITAR controls on a thing not described by the ITAR—that is a world where “white” might mean “black” so some companies live in fear that their product, that they treat under the EAR could be the next “QRS-11 case,” a case where DDTC imposed ITAR controls on a commercial aircraft part, just because it wanted to.  So, some companies err on the conservative side and treat items as being ITAR controlled because maybe DDTC would want to control them.  Since the new regulations that apply to the single list will be able to apply ITAR-type controls to some items and EAR-type controls to other items, the implications of making the wrong classification decision in the single list could be as serious as the current risk associated with making the wrong ITAR vs. EAR jurisdiction determination.

But, at least, if you classify an item as being 6A003 when, in fact, the government thinks it is 6A882, you won’t make the current mistake of getting an EAR license for an ITAR item.  But the new single list rules could still impose an extremely harsh penalty if you export a 6A882 item under the 6A003 rules—say you export a 6A003 item under an EAR-type license exception to China when in fact it is subject to ITAR-type military rules..  The penalties might be described in a different way, but why would we assume that mistake will be subject to lesser penalties?

Single Agency

If there is going to be a single control list, there probably will first have to be a single agency.  Some agency will have to take the lead in combining the control lists and the regulations that go around them.  If that single agency is transparent, customer-service oriented, efficient, and friendly, life will be good.  If that single agency is the opposite, life will be bad.  I won’t make any stereotypical statements about the current State and Commerce department export licensing agency strengths and minuses.

If I am a company who exports only items classified as 9A991 and EAR99, the last thing I want is a single agency and a single set of regulations because I am thinking that things can only get worse than they are now.  If I am a company who makes satellites, maybe I think a single agency can only make things better.  But, ultimately, it is the rules and policies that are the issue, not the number of agencies who administer them.  Sure, at the margin a single agency may improve consistency of interpretation (perhaps) and there might be benefits to the one-stop-shop export licensing agency.  But, it is ultimately the regulations, rules, policies and procedures that are the biggest issue, not the number of agencies involved.

And I didn’t even talk about the fierce turf wars that will be involved in deciding what government department gets to have the single export control agency.  The turf wars make take so long that by the time they are resolved, President Palin won’t favor the single agency idea anyway.

Conclusion

Don’t get me wrong. I support export control reform.  And I know that reforms, if possible, could enhance our national security and make compliance a bit easier for exporters.

Obama’s reform plan is based on good ideas.  I see the biggest challenge as being reforming the rules and policies that underlie the multi-control list and multi-agency structure we have.  So many organization, agencies, and people have a vested interested in the current rules and policies—maybe of those entities and people created the system we have now, and they did it for what they see to be good reasons.  And those entities, even at the lowest level of government, have an enormous capability to prevent real reform, even if the White House supports reform.  (Remember when President Clinton’s Administration announced the Defense Trade Security Initiative and decided to create the special bulk ITAR authorizations (“Global Project,” etc.)  for certain trade with our allies?  DDTC ended up setting up those bulk authorizations in a way that no company wanted to use them.  To prevent the White House from reforming the ITAR, DDTC had to implement the idea, but DDTC maintained the status quo by implementing that reform idea in a way that effectively blocked reform.  We did get the allies maintenance exemption out of that, which was a decent improvement, but not a sweeping reform.)

Export control reform is a great idea.  It is long overdue.  But pardon me for wondering if real reform is possible.  Who among you remember these labels for past reforms:  “China Green Zone,” “The Core List” (and “The Bikini List”), the Defense Capabilities Initiative, and the ever popular “Higher Fences around Fewer Products,” and, of course, the above mentioned “DTSI.”

When I use the word reform, I mean significant and meaningful changes to the current system, not just superficial changes made that result in marginal improvements.  Marginal changes to the system are not reform.  They are adjustments.  Adjustments can be good, and they are certainly possible.

At the end of the day, the White House is going to have to invest a great deal of time, effort and political capital into achieving its objectives, and even more if those objectives end up being beneficial for national security and exporters.  US companies will have to invest a great deal of their resources into this too if they want to get beneficial reform.  I think ultimately, most companies believe they have better places to spend their government relations budgets and ultimately the White House and Congress will decide they have better places to spend their time.  Many of those with vested interests in the current system do not have a better place to invest their time and resources and they are willing to fight a slow war of attrition against reforming what they have created.

I do not think significant reform will happen.

I hear that most people in Washington disagree with me.   Somebody just told me that Washington insiders are convinced real reform will happen.

I rest my case.

For information on submitting agreements electronically please reference the “Guidelines for Preparing Electronic Agreements“.

For additional information and the link to download the required software, go to: http://www.pmddtc.state.gov/documents/IndustryNotice05082010.pdf

Guidelines for Completion of Export and Temporary Import License Applications

When completing any online license application and an individual’s name is required, the middle

name or initial should be provided.

When completing any online license application, only the legal business name is permitted when

listing a party involved in an export or temporary import in the following data fields:

• Source/manufacturer
• Seller
• Consignor
• Freight forwarder
• Foreign consignee
• Foreign intermediate consignee
• End-user.

An applicant must ensure the correct spelling is used when entering the legal business name(s) of any involved party.

Accordingly, the following must not be included in the above mentioned data fields:

• The term “subsidiary” and subsidiary information. For example, “Generic Company a subsidiary of Master Company” should instead read “Generic Company.”
• The phrase “doing business as” or the term “dba” and dba information. For example, “Generic Company d/b/a Detail Name Inc.” should instead read “Generic Company.”
• A geographic or physical location indicator inserted within the company name where it is not part of the legal business name. For example, “Company A (United States) Limited” should instead read “Company A Limited” because Company A Limited is the legal business name of the entity.” Additionally, “Business Class North America” should read “Business Class North America” because that is the legal business name of the entity.
• Additional instructions and inclusive comments. Some examples are:

o “No Name Company, Inc. POC: Jane Doe” should instead read “No Name Company, Inc.”

o “One Uno Company Attn: John Doe President International Affairs” should instead read “One Uno Company.”

o “GreatBuzzness LLC and all others” should read “GreatBuzzness LLC.”

Failure to adhere to these guidelines may result in a delay in review of a license application or a return without action (RWA). For additional guidance or clarification, please contact the DDTC Response Team at (202) 663-1282 or by email at DDTCResponseTeam@state.gov.