Posts Tagged ‘Reexport’

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.

Steps to Reexporting Success: 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 first in a series of articles that will look at how US controls apply outside the US and how export control reform impacts non-US firms.

In my experience helping those tasked with keeping non-US firms compliant with the US regulations as an instructor with the Export Compliance Training Institute, I have found it helpful to break down this challenging subject matter into bite size pieces. Consider this an introduction to analysis under the Export Administration Regulations outlining the steps a reexporter should work through to reach US reexport decisions.

Step 1: Who are you?

In this step, as well as the two to follow, it quickly becomes clear that complying with US export controls outside the US is not merely equally as challenging as it is within the US, but it is actually even more perplexing. There are several issues US firms never have to consider which are crucially important to a non-US company.

The first question to face when considering US controls on activities outside the US centers on understanding what additional restrictions, if any, may apply to a firm based on who or what it is and how it is organized. While most US reexport controls apply similarly to both US and non-US persons, another layer of regulation may apply to US persons and, somewhat less frequently, foreign subsidiaries of US companies.

Anyone who reexports a US-origin item is, from the perspective of the US Government, subject to the jurisdiction of the Export Administration Regulations or other applicable US rules. As will be explored further, a non-US-origin item with certain amounts of types of US-origin content may also be subject to US jurisdiction. In any case, if the item is subject to US regulations, the regulations may require a license for reexport. All of this applies more or less equally to both US and non-US entities.

On top of these baseline controls, the EAR proscribes US persons from participating in certain proliferation-related activities. Office of Foreign Assets Control sanctions regulations prohibit transactions with embargoed countries, specially designated nationals and others. Subsidiaries of US companies may not generally trade with Cuba or Iran. These are just a few examples to illustrate how understanding an organization’s ownership and control structure is important. Inside the US, these issues are of little relevance since any entity operating in the US is subject to the full breadth of US law.

Step 2: Sensitive US Content

If the commodity, software or technology to be reexported is of US-origin, and it will be reexported on its own, skip to Step 4. Otherwise, continue with Step 2.

Under the EAR, some US-origin content is considered so sensitive that incorporating it into a non-US-origin item always subjects the non-US item to US jurisdiction (i.e. it is not eligible for de minimis – a concept to be reviewed in Step 3). Fortunately, only a handful of items are deemed “sensitive.” These include specific aircraft commercial standby instrument systems, particular semiconductors and interconnect devices and certain types of encryption, among others. So, a non-US-made assembly incorporating a “sensitive” item automatically becomes subject to the EAR, even if that is the only US-origin part. Of course, as will be explored in the subsequent steps, being subject to the EAR does not necessarily mean that a reexport license is required.

Of particular note to buyers of US-origin military equipment, ECR introduced a new category of “sensitive” content – 600 series items. 600 series items are those controlled in XX6XX Export Control Classification Numbers (e.g. ECCN 9A610) and which were, for the most part, previously controlled on the US Munitions List. Non-US items that incorporate 600 series US-origin content are always subject to the EAR, but only when destined for a destination in Country Group D:5. Among the countries in this group are China, Venezuela and Zimbabwe. Importantly, when such non-US items are destined for a country not in Country Group D:5, the 600 series content is not considered “sensitive.”

If the non-US-made item to be reexported incorporates “sensitive” US-origin content, skip to Step 4. If not, continue with Step 3.

Step 3: US Content De Minimis

Most non-US products will not contain any “sensitive” US content, but there is still a way in which a product nonetheless may be subject to the EAR. If a non-US item contains US content, and that content is not “sensitive,” then the reexporter should determine if the US content is “de minimis.” If the US content is de minimis, the non-US-made item is not subject to EAR reexport controls. If the content is not de minimis, the non-US-made item is subject to the EAR.

And yes, your sneaking suspicions are correct. The upshot of de minimis is that the US claims authority over all sorts of things and know-how made or developed outside the US, based solely on the fact that they contain US parts, software code or technology. Of course, the US Government might put it differently: “look at all these things with US components which we reasonably and generously do not claim jurisdiction over!”

What are the details? For a non-US-origin product to be subject to the EAR when reexported to any destination, the value of its incorporated US content must be greater than 25 percent. If the value of the incorporated US content is greater than 10 percent, but no more than 25 percent, the non-US product is only subject to the EAR when reexported to destinations in Country Group E:1 (presently Cuba, Iran, North Korea, Sudan and Syria).

Only controlled US content must be considered when calculating de minimis. Put somewhat differently, it is only necessary to include the US content in the calculation if the reexport of that US item to the country of destination is ineligible for No License Required and License Exception GBS. So, many types of US hardware and software controlled at a low level will have no effect on de minimis calculations for most countries.

In all of these cases, a fair market value standard is applied. This will often be the sale or purchase price, particularly in an arm’s length transaction. Making de minimis decisions requires the reexporter to obtain accurate valuations and classification details from its suppliers. It is up to the reexporter to make its own de minimis determination (with the exception of technology, which requires a report to the Bureau of Industry and Security, followed by a thirty day waiting period before relying upon the calculation).

If the non-US made item has de minimis US-origin content, stop here. The reexport is not subject to the EAR. If the non-US-origin product has greater than the de minimis level of US content, proceed to the next step.

Step 4: Export Classification

In reaching Step 4, it has been established that an item is subject to the EAR for one of these three reasons:

  • The item is of US-origin.
  • The item is of non-US-origin and incorporates “sensitive” US-origin content.
  • The item is of non-US-origin and incorporates greater than the de minimis level of US-origin content.

Once it is clear that the reexport transaction falls under the EAR, the next task at hand is to classify the item being reexported. The EAR control list, formally known as the Commerce Control List, consists of hundreds of Export Control Classification Numbers (ECCNs). Although there is a great deal of overlap between the CCL and multilateral control lists (e.g. Wassenaar Arrangement, Missile Technology Control Regime, etc.), the CCL describes many items not on the multilateral lists. Should the reexporter be unable to find an item on the CCL, that item is likely classified EAR99. EAR99 can be viewed as a basket category which captures anything subject to the EAR, but not elsewhere listed on the CCL – a unique feature of the US export control system.

While reexporters are generally not required to document classification and license exception determinations, or to place classification information on shipping documents, documenting reexport decisions will help mitigate fines and penalties should an inadvertent licensing error occur. Always require US suppliers to provide classification information in writing. While a reexporter may still be held liable for unauthorized reexports based on faulty US supplier ECCNs, this is potentially a significant mitigating factor if the reexporter can demonstrate the due diligence they undertook to get the decision right.

Part of export control reform is the creation of new ECCNs, known as the 600 series, to control items formerly subject to the ITAR. For example, ECCN 9A619.a controls certain military gas turbine engines “specially designed” for a military use, but which are not controlled by the ITAR in USML Category XIX. A thorough understanding of this new, defined term “specially designed” is essential to accurate classification decisions.

Solid classification is a critical step. An erroneous ECCN determination can quickly escalate into a violation, because it easily leads to incorrect licensing decisions.

Step 5: Is this item eligible for No License Required?

Another unusual aspect of the US system is that reexports of many of the commodities, software and technologies on the control list do not trigger a license requirement. Just because something is described by the CCL, it does not mean that a license or even a license exception (the US equivalent of the general or open licenses seen in other jurisdictions) is necessary. This is why the next step is to ask if the item being shipped is eligible for reexport No License Required.

To determine if an item is eligible for reexport NLR, it is necessary to know two things – the country of destination and the classification of the item. Then look to the reasons for control, which are found in the header to each ECCN. The reason for control should indicate a two letter symbol, such as “CB”, “AT” or “NS.” The reason for control will also specify a column number next to this symbol, such as CB Column 1 or NS Column 2. Next cross reference these reasons for control against the Commerce Country Chart found in Supplement No. 1 to Part 738 of the EAR. Find the intended reexport destination on the chart and match it to the specific columns which indicate the reason(s) for control related to the particular ECCN. If there is no “X” in any of these columns for the country in question, that item is eligible for reexport to that country NLR, as long as a catch all control does not apply (reference Step 7 below). If there is one or more “X” in any applicable reason for control column associated with the country of destination, NLR is not available.

Items classified EAR99, which have no applicable reasons for control, may typically be reexported NLR except to Cuba, North Korea and Syria. Some EAR99 reexports to Iran and Sudan are also NLR-eligible.

If the reexport is eligible for NLR, skip to Step 7. If not, proceed with Step 6.

Step 6: Is there a license exception?

It might be logical to assume that if NLR does not authorize a reexport, a license would be required. But that is not what the EAR says. Before applying for a license, consider if a license exception may be available. A license exception is a built-in regulatory authorization which permits certain exports, reexports or transfers without need to obtain advance approval from BIS. The appeal is obvious – no need to wait and no uncertainty for the reexporter. Just tick the boxes and make the shipment.

Unfortunately, it is not quite that simple. Some things are flat out ineligible for any exceptions (for example, most items controlled for missile technology reasons). And each exception comes with its own set of limitations and conditions. In some cases, these are minimal constraints, but in others, they are quite onerous.

To take an example of one of the simpler authorizations, License Exception GBS permits reexports Country Group B, as long as the ECCN for the item states “GBS: Yes.” This can be quite useful, as Country Group B includes about 80 percent of the world’s countries. Qualification for License Exception GBS and some others are driven primarily by the ECCN – i.e. the ECCN states if it is possible to use the exception. Others, such as those intended for replacements (License Exception RPL) or temporary shipments (License Exception TMP) are more driven by the particulars of the situation than by ECCN (though classification may still be relevant).

Step 7: Is there a catch-all control?

Just when you thought you might be able to reexport NLR or under an exception, there is one final gauntlet – catch-all controls. These are limitations which impose a license requirement where one would not necessarily exist otherwise.

If a catch all control applies, you may not proceed with any transaction involving any item subject to the EAR. For example, US origin items may not be reexported to a prohibited party, certain embargoed destinations, for proliferation-related end users and uses or to parties who may divert the products contrary to the EAR. You may not use NLR or a license exception if any catch all control applies.

Export Control Reform Surprises for Reexporters

Thursday, March 27th, 2014 by Brooke Driver

2014/03/27

By: Scott Gearity

For the unfortunate souls beyond the borders of the United States tasked with complying with the U.S. Government’s bewildering web of regulations on non-U.S. transactions, President Obama’s Export Control Reform (ECR) initiative sure must have seemed like a godsend when it was announced in 2010. Clearer control lists! More reasonable licensing polices!

And, to be fair, there is a lot to like about the reality of ECR. But in the midst of all the excitement (OK, let’s be realistic, mild interest), it would be easy for a reexporter to overlook a number of surprises:

  • Oh, wait, our suppliers still need to get licenses?…Yes, this may very well be true. To get a product to you, you may find that your U.S. vendors will simply switch from applying for licenses from the Department of State’s Directorate of Defense Trade Controls (DDTC) to applying for licenses from the Department of Commerce’s Bureau of Industry and Security (BIS). Just because something is no longer controlled under the International Traffic in Arms Regulations (ITAR) does not necessarily mean that it may be exported from the U.S. license-free.
  • Oh, wait we still need licenses?…You might. Many items remain controlled as defense articles on the U.S. Munitions List, subject to the usual burdensome ITAR retransfer requirements. And most of the things moving to BIS jurisdiction under the reform process will continue to be strictly controlled, necessitating licenses for most reexports under the Export Administration Regulations (EAR), which are nearly as extraterritorial in their application as our old friend the ITAR.
  • Ah, yes, about the EAR…You need to learn about it now. In all likelihood, your organization was handling EAR-controlled hardware, software or technology in the past, but in many places focused on ITAR controls and the EAR took a back seat. With ECR, the EAR now controls more items, including many previously subject to the ITAR.
  • China? Nope…ECR changes basically nothing about U.S. export control policy toward China. This was entirely deliberate. The status quo reigns.
  • License Exception STA is a pain in the neck…You may have heard of a “license free zone” for many of the formerly ITAR items now subject to BIS jurisdiction. To the extent that this exists, it is authorized by License Exception STA. But this exception comes with so many caveats and compliance requirements that your U.S. suppliers may just throw up their hands and apply for a license instead. On top of that, in the Asia Pacific region, only three countries are eligible destinations – Australia, New Zealand and South Korea. Anywhere else and STA does you no good at all.
  • It’s time to dust off your knowledge of Latin…Under the ITAR, nearly any defense article remains ITAR-controlled indefinitely, even once incorporated into a higher-level assembly inside or outside the U.S. (sometimes called the “see-through rule”). With the EAR, there is no general see-through rule, but there is a complex set of rules known as de minimis which determine whether a non-U.S.-origin item with U.S. content is subject to U.S. reexport rules. As always, purchasing export controlled goods from the U.S. is a caveat emptor situation if there ever was one.
  • What’s an import certificate?…It is time to find out because you may be hearing from U.S. suppliers who request one with your purchase order. The EAR sometimes requires U.S. exporters to obtain an import certificate from the consignee prior to submission of an export license application. This document would be issued by the non-U.S. government.

Relaxation is not the same thing as simplification.

In many ways, ECR is making the U.S. regulations clearer and more sensible. But the tradeoff for those benefits is sometimes greater complexity. In other words, it is essential now more than ever to receive comprehensive training on the current state of U.S. export controls compliance if you plan to do business with the United States.