Posts Tagged ‘Export Control Reform’

Determining Classification After U.S. Export Control Reform: The reexporter’s guide to determining US export license requirements in a reformed world

Wednesday, August 27th, 2014 by Brooke Driver

2014/08/27

By: Scott Gearity

— originally published in the World ECR…the journal of export controls and sanctions

This article is the second in a series of articles examining how U.S. export control reform impacts non-US firms. In the last installment, we introduced readers to this subject with a step-by-step guide to the application of U.S. export controls outside the U.S. In this and future articles, we will introduce case studies in export control reform and identify answers to common questions.

As U.S. exporters acclimate to the major changes to their country’s export control system, which began to come into effect last year, many non-U.S. firms affected by export control reform are just starting to appreciate what the new rules mean to them.

To illustrate some of the issues facing non-U.S. companies as a result of the U.S. reforms, consider a scenario involving a fictional Belgian aerospace and defense firm, which we will call “EuroAero.” EuroAero is the prime contractor for a fourth-generation fighter aircraft assembled in Belgium. Since the inception of the program, EuroAero has purchased the aircraft canopy actuator from its longtime U.S. supplier California Actuation. The actuator is made to EuroAero’s specifications in order to fit properly and integrate with the other components of the canopy assembly. California Actuation has always obtained U.S. Department of State licenses to authorize the export of the actuators to Belgium and onward to the various governments operating the aircraft.

EuroAero’s legal director calls you into his office. You immediately notice a newspaper clipping about U.S. export control reform on her desk. She says, “I just read this article about the new U.S. export control regulations and I have a few questions: Will these U.S.-origin actuators still be controlled by the Department of State under the International Traffic in Arms Regulations? If not, will they be controlled at all by the U.S.?”

How do you answer her?

Answers

The ITAR now takes a very different approach to controls on aircraft parts and components then it did prior to October 15, 2013, when U.S. reforms began to come into effect. In the past, the U.S. Munition List took a very general, vague approach to controls on these items. A handful of things were identified by name, but virtually any aircraft part could be subject to strict Department of State controls in USML Category VIII(h) if it were “specifically designed or modified” for a military aircraft. (And the U.S. Government never defined what was meant by “specifically designed or modified,” resulting in widely varying interpretations by exporters and reexporters).

Under export control reform, that is no longer the case. Now, there are only two ways in which an aircraft part may be controlled on the USML: either it is (a) “specially designed” for a handful of the most advanced U.S.-origin aircraft types, such as the B-2, F/A-18E/F/G or F-35 or (b) actually identified by characteristics or functions in a specific entry within Category VIII(h). A few examples of these items, which are now enumerated on the USML, are automatic rotor blade folding systems, weapons pylons and air-to-air refueling systems. In some instances, specially designed parts and components of these identified items are also ITAR-controlled.

Now let’s apply these concepts to EuroAero – a Belgian firm procuring a canopy actuator for their modern fighter aircraft. This is an aircraft component, so we review USML Category VIII(h). Since the actuator is made to EuroAero’s specifications for their aircraft, it is highly unlikely that it could be considered “specially designed” for one of the U.S. aircraft types listed in paragraph (h)(1). Next, we turn our attention to the items described in paragraphs (h)(2)-(26). None of these controls mention either canopies or actuators more generally. The probable conclusion – this actuator is no longer controlled under the ITAR. (It is worth noting that it is still possible to have an ITAR-controlled actuator if, for example, that actuator is “specially designed” for an automatic rotor blade folding system.)

The ITAR may no longer control this actuator, but that does not mean that no U.S. export controls apply to it.

To identify the relevant controls, the next step is to review the Commerce Control List within the Export Administration Regulations, in particular the new 600 series Export Control Classification Number 9A610, which was created largely to control military aircraft and related items no longer described on the USML. Some paragraphs of ECCN 9A610 do identify specific aircraft components (e.g. aircrew life support equipment in 9A610.g and certain radar altimeters in 9A610.v), but catch-all paragraph ECCN 9A610.x is now one of the most common classifications for military aircraft parts.

ECCN 9A610.x controls virtually any part, component, accessory or attachment “specially designed” for a military aircraft controlled in USML Category VIII(a) or ECCN 9A610.a, which is not otherwise controlled on the USML or by ECCN 9A610.y. If the canopy actuator is “specially designed” for EuroAero’s fighter jet, ECCN 9A610.x is now the most likely classification. Of course, in practice you would want to confirm this with the actuator manufacturer.

Scott Gearity will be discussing classification for European companies as well as many other important topics at ECTI’s “US Export Controls on Non-US Transactions” seminar in Amsterdam in October 2014.

Reexporting No License Required: The reexporter’s guide to determining US export license requirements in a reformed world

Wednesday, August 27th, 2014 by Brooke Driver

2014/08/27

By: Scott Gearity

— originally published in the World ECR…the journal of export controls and sanctions

This article is the third in a series of articles examining how U.S. export control reform impacts non-US firms. In this and future articles, we will introduce case studies in export control reform and identify answers to common questions.

The Case: Reexporting No License Required

There are many unpleasant aspects to applying the International Traffic in Arms Regulations (ITAR), but determining license requirements is not one of them. If an item is a defense article described by the U.S. Munitions List (USML), exporting it from the U.S. requires a Department of State license perhaps 99 percent of the time (with the remaining one percent permitted by exemption). Outside the U.S., where most ITAR exemptions are unavailable, the proportion of retransfers requiring specific authorization is probably even higher. The basic rule is simple – if the item is ITAR-controlled, expect to need a license. Simple, yes, but also quite burdensome.

Now, enter the Export Control Reform Initiative (ECR). How do the recent U.S. regulatory adjustments affect the license requirements applicable to reexports of items now subject to the Export Administration Regulations (EAR)?

To better understand the answer to this question, imagine a fictional Belgian aerospace and defense firm known as EuroAero. EuroAero has been working diligently with its suppliers to reclassify various U.S.-origin components in its inventory to reflect ECR changes. Among the recently reclassified items are the following:

Part No. Description ECCN
34507 fuel tank 9A610.x
43900 check valve 9A610.y.4
84366 armored truck 0A606.b.1

 

The business team is pursuing opportunities to sell these products in Canada, Poland and Qatar. The team needs to set customer expectations for lead times, and U.S. reexport license requirements are an important factor. Your assignment is to advise them as to which of these items may be shipped No License Required (NLR) to each of the three prospective destinations.

The response:

In contrast to ITAR-controlled defense articles, reexporters may ship many EAR-controlled items NLR. This is true even for items classified in some of the new 600 series Export Control Classification Numbers (ECCNs). The determination mainly depends on the item’s ECCN and the country of destination. NLR is not merely a statement that no specific, advance approval of the Bureau of Industry and Security (BIS) is necessary; it is a reexport authorization in and of itself on par with a BIS license or regulatory license exception.

First, consider the fuel tank classified in ECCN 9A610.x, a common classification for parts specially designed for a military aircraft, but which are not controlled on the USML. The “License Requirements” section of the ECCN tells us that items classified 9A610.x are controlled for four reasons – National Security (NS1), Regional Stability (RS1), Anti-terrorism (AT1) and United Nations (UN) Embargo. By cross-referencing the reasons for control against the EAR’s Commerce Country Chart, we learn that none of these reasons for control apply to Canada, but NS and RS are each applicable to Poland and Qatar. This fuel tank is eligible for NLR reexport to Canada, but not to Poland or Qatar. Parts described by ECCN 9A610.x are highly controlled. In fact, Canada is the only NLR-eligible destination.

The next part in EuroAero’s classification matrix is a check valve with an ECCN of 9A610.y.4. Despite sharing the same base ECCN as the fuel tank classified 9A610.x, the only applicable reason for control for the .y paragraph of ECCN 9A610 is AT1. Referring again to the Country Chart, we note that AT1 controls are inapplicable to all three of the countries of interest. Therefore, the check valve is NLR-eligible for shipment to Canada, Poland and Qatar.

Finally, there is the matter of the armored truck classified in ECCN 0A606.b.1. NS, RS, AT and UN reasons for control all apply to this truck. But, importantly, the NS and RS controls are each of the Column 2 variety, which do not apply to a much larger group of countries than the corresponding Column 1 controls. So the armored truck is eligible for NLR reexport to both Canada and Poland, but not to Qatar.

Three different items – all controlled by new 600 series ECCNs – and in each case subject to a different set of determinations for reexporting without a license.

It is important to remember that NLR eligibility does not necessarily mean that EuroAero can actually make the reexport NLR. Other factors, such as a problematic end-use or an ineligible end-user might intervene. Also beware other EAR restrictions which are not handled by the Country Chart, such as the blanket prohibition on the reexport of 600 series items (including those classified in a .y paragraph) to China.

Top 5 Things Canadian Firms Need to Know About US Export Control Reform

Friday, May 23rd, 2014 by Brooke Driver

2014/05/23

By: Scott Gearity

1. Reform makes exporting transitioned items from the US to Canada especially simple 

A key feature – perhaps the key feature – of Export Control Reform is that many items which were once controlled (or assumed to be controlled) under the International Traffic in Arms Regulations have or will instead come under the scope of the Export Administration Regulations.

One of the major differences between the ITAR and the EAR is in how these two bodies of regulations determine export license requirements. With the ITAR, each export of a defense article requires a license, unless the transaction specifically qualifies for an exemption. By contrast, the most common EAR export authorization is No License Required. The vast majority of EAR-controlled items may already be exported from the US to Canada NLR. With reform, this treatment is extended to include the military items no longer included on the US Munitions List and now classified in 600 series Export Control Classification Numbers. In other words, many military commodities which used to require Department of State licenses for export from the US to Canada (or perhaps qualified for the ITAR’s Canadian exemption) may now be exported for ultimate end-use in Canada without a license.

This is a big change that makes exporting some military items from the US to Canada much easier. But it is also consistent with the longstanding US policy of granting Canada favorable treatment under the EAR. Canada is the only country to which 600 series items in general may be shipped NLR.

2. Reform also means easier movement of transitioned items within Canada

Want to send ITAR-controlled goods across Toronto for heat treatment? Or to Vancouver for testing? What about selling surplus to potential buyers elsewhere in Canada? The State Department may view such actions as retransfers, requiring their approval.

But just as the export of USML to Commerce Control list transitioned items is eased by reform, so is the movement of these items within Canada. In general, as long as a Canadian firm avoids transferring an EAR-controlled item for a problematic end-use or end-user or with knowledge that the other party will reexport the item contrary to the EAR (e.g. to Europe without a license or qualifying license exception), it is possible to retransfer most EAR-controlled goods (including 600 series items) without specific US Government authorization.

3. You might be able to say goodbye to the “see-through rule” 

From the perspective of the Canadian purchaser of US-origin parts and components, another major benefit of ECR is the EAR’s more reasonable approach to determining which Canadian-made products are subject to US reexport controls as a result of their integrated US-origin content. Under the ITAR’s infamous “see-through rule,” burdensome State Department regulations may apply to a Canadian-origin product – any Canadian-origin product (including entirely commercial ones) – based on the incorporation of even a single, minor ITAR-controlled part.

The EAR takes a different approach. The general rule is that reexports of products made in Canada are subject to the EAR only if they incorporate more than a certain proportion of US-origin controlled content (25 percent for most countries or 10 percent for Cuba, Iran, North Korea, Sudan and Syria). For Canadian equipment, software or technology with US-origin 600 series content, this general rule applies as well, with one important exception – when the destination is under US arms embargo (i.e. is included in Country Group D:5) the Canadian product is always subject to the EAR. This does not necessarily mean it requires a Department of Commerce reexport license, but it does mean that if the destination of your product incorporating 600 series content is a place like China, Venezuela or Vietnam, the EAR is relevant to the reexport transaction.

4. US exporters are now (sometimes) required to provide you with ECCNs 

It can be difficult for Canadian purchasers to reliably obtain US export control jurisdiction and classification information from their US suppliers. Those same Canadian companies are sometimes surprised to learn that there has been nothing in the ITAR or the EAR which generally requires US companies to provide that information.

Now, with ECR, there is, at least when it comes to 600 series items. According to EAR §758.6(b), the ECCN “must be printed on the invoice and on the bill of lading, air waybill, or other export control document that accompanies the shipment from its point of origin in the United States to the ultimate consignee or end-user abroad.”

5. Nothing is changing about the ITAR’s Canadian exemption 

Many items are transitioning from the USML to the CCL, but by no means everything. Whether the goods you purchase from the US will move off the USML depends on exactly what they are, though it is already clear that more parts, components and materials are being removed from ITAR control in some areas (e.g. ground vehicles, surface vessels) than others (missiles, explosives & energetic materials).

And what if the items of interest to you remain subject to the ITAR? The status quo applies. Some of those defense articles may be eligible for export to Canada (and retransfer within Canada) under the existing Canadian exemptions at ITAR §126.5. And aside from some minor revisions to mirror the restructuring of the USML, the Canadian exemptions remain essentially unchanged from its pre-ECR state.

A Modest Post-ECR Proposal

Monday, March 31st, 2014 by Brooke Driver

2014/03/31

By: Scott Gearity

A longer and more technical U.S. Munitions List. Dozens of new Export Control Classification Numbers. A 1,588 word Export Administration Regulations definition of “specially designed” (the International Traffic in Arms Regulations manage a definition of the same term in a comparatively brief 987 words). A license exception (STA) with enough limitations and conditions to leave even the most grizzled ITAR veteran fondly recalling her DSP-5-related repetitive stress injury.

All are consequences of the recent revisions to the ITAR and EAR. The Obama Administration’s approach to Export Control Reform is largely succeeding in its aims to refashion the US export control system in a more sensible, more reasonable and less ambiguous direction. But, by this stage, it should be clear to even the not-so-keen observer that riding along with these very real and not to be understated improvements is an unwelcome passenger – increased complexity. Administration advocates for the reform initiative might argue that more complexity is the unavoidable tradeoff for enhanced transparency and flexibility. Many in industry would likely agree that the ECR changes are very welcome overall, and they would be loath to insist upon anything that could upset this steadily accelerating applecart.

No one seriously doubts the necessity of export control regulations. Still, regulatory complexity is unwelcome, regardless of what is being regulated. It increases the cost of compliance. And, as with anything else, when the “cost” of compliance increases, people can be expected to “buy” less of it. There is another, more insidious downside to overly complex regulations. They tend to breed contempt among the regulated. When well-intentioned, intelligent and diligent exporters feel little choice but to rely upon expensive attorneys or consultants to understand and interpret the rules for them, should we be surprised if the exporters develop a sense of cynicism about the regulations? That is a problem, because some strategic trade controls are very important (a category which certainly includes most defense articles described in amended USML categories and many 600 series items). All else equal, simpler rules are better.

If we assume that ECR as presently conceived will continue apace, the question is this – what else can be done to offset the added complexity introduced by the reform process? This is my modest proposal:

BIS should remove from the CCL every commodity, software and technology controlled exclusively for purported “anti-terrorism” reasons. Just get rid of them all.

You have likely encountered the controls to which I refer, which date, in their current format if not all the details, to the major restructuring of the EAR in 1996. These are the ECCNs which capture such advanced technologies as Clinton Administration-vintage PCs (4A994), 737 lavatory faucets (9A991), drugstore-bought disposable waterproof cameras (8A992) and that new Xbox One you just bought your kid (5A992). There are also cell phone antennas (5A991), the stainless steel pipes under your kitchen sink (2B999) and that GPS-enabled wristwatch you wear while jogging after work to offset the eight hours you just spent chained to your desk while painstakingly classifying low-end, mass-produced consumer goods (7A994).

These restrictions might (emphasis on might) have had some real meaning back when the list of countries subject to AT controls (effectively Cuba, Iran, North Korea, Sudan and Syria) was different from the list of countries subject to general export bans (also Cuba, Iran, North Korea, Sudan and Syria), but in today’s environment, they have very limited impact. Anti-terrorism, as an EAR reason for control, fails any regulatory cost-benefit analysis. And nothing is more frustrating (not to mention pointless) than regulations which serve little or no purpose. Does anyone really believe that AT controls do anything to reduce the actual risk of terrorism?

The benefits of giving the CCL the Biggest Loser treatment are clear: (1) fewer ECCNs means quicker, more accurate classifications by exporters; (2) as with ECR, concentrating controls on the more important technologies will improve respect for and compliance with the parts of the EAR which actually matter; and (3) this change will support a more level playing field with U.S. allies, who do not generally include these sorts of commonplace items on their control lists. If BIS is looking for a next act after completing the transition of items from the USML to the CCL, axing AT controls is a good place to start.