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First Final Rules Under Export Control Reform Initiative Issued by State and Commerce Departments

Tuesday, April 16, 2013
STR Client Advisory

The Obama administration today took a historic step in its effort to improve national security, improve interoperability with foreign partners and bolster the U.S. defense industrial base as part of the Export Control Reform Initiative. The Commerce Department’s Bureau of Industry and Security and the State Department’s Directorate of Defense Trade Controls issued final rules that, effective Oct. 15, will significantly revise three categories on the U.S. Munitions List by transferring certain goods to the Commerce Control List, which provides typically more liberal rules on exports and reexports of purely commercial items as well as those that have both commercial and military applications. Additional such rules affecting other USML categories are expected to be issued in the near future, and companies that may be affected by these changes should act now to verify if and how their products and technologies may be affected. Sandler & Travis Trade Advisory Services is conducting a webinar on export regulatory requirements on April 17 that will include a discussion of these new rules.

The DDTC final rule issued today amends the International Traffic in Arms Regulations with respect to USML categories VIII (aircraft and related articles), XVII (classified articles, technical data and defense services not otherwise enumerated), and XXI (articles, technical data and defense services not otherwise enumerated). It also creates a new Category XIX covering gas turbine engines and associated equipment.  The BIS final rule creates ten new 600 series export control classification numbers to accommodate the items being transferred from the USML, which include aircraft, gas turbine engines, related parts, components, accessories, attachments, software and technology. Policies for handling licensing and other issues both before and after the 180-day transition period are provided.

Both rules also provide the long-awaited definitions for the term “specially designed” under the ITAR and the Export Administration Regulations. In addition, the BIS rule establishes a new process whereby exporters and reexporters may request formal BIS confirmation that a part, component, accessory, attachment or software is not specially designed.

Companies are urged to take the following steps in response to these new regulations.

- Review your product lines and the contents of the new regulations to evaluate whether any of your items will shift from the USML to the CCL.

- If so, determine your new CCL classifications, reasons for control and licensing requirements under the EAR.

- Take stock of your current ITAR licenses and authorizations and develop strategies for timely obtaining the appropriate EAR authorizations within the timeframes specified under the DDTC final rule. While EAR license exceptions may now be available for activities that previously required authorization under the ITAR, in many cases these exceptions will impose additional administrative requirements on exporters and reexporters. As a result, if your activities have previously been exclusively subject to the ITAR, you need to become informed on the requirements of the EAR, both substantive and administrative. 

- Take prompt steps to revamp your export compliance policies and procedures to reflect the EAR requirements, to document those new processes in writing, and to provide EAR compliance training to personnel who may be only familiar with ITAR requirements.

It is important to note that other final rules covering different USML and CCL categories will be issued over the coming months. As a result, companies that may not be affected by today’s final rules should nonetheless adopt the internal review and compliance strategies outlined above to assess how and if they may be impacted by future changes.

Specific provisions of the BIS and DDTC final rules include the following.

Revision of USML Category VIII (Aircraft and Related Articles). The DDTC final rule narrows the scope of Category VIII and moves certain gas turbine engines to the new USML Category XIX. Generic parts, components, accessories and attachments specifically designed or modified for aircraft (regardless of their significance to maintaining a military advantage for the U.S.) will no longer be controlled by Category VIII. Under the BIS final rule these items will be placed in the new 600 series controls in Category 9 of the CCL. However, generic articles that are specially designed for certain U.S.-origin aircraft will contain to be controlled in Category VIII.

Definition of “Specially Designed.” Under both final rules, determining whether an item is specially designed will require a two-step analysis referred to as the “catch-and-release” approach. First, an item may be specially designed if (1) as a result of development, it has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics or functions described in the USML or CCL, or (2) it is a part, component, accessory, attachment or software for use in or with a defense article. If the answer to either statement above is “yes,” then the second part of the analysis requires a determination as to whether any of the five enumerated exclusions will prevent the item from being considered specially designed under the ITAR or EAR, as appropriate.

Transition Plan. There will be 180-day transition period between the publication of the final rule and the effective date of the transition of the affected items to the CCL. During this period export license applications for items moving from the USML to the CCL will be accepted by both DDTC and BIS, but BIS will not issue approved licenses until the applicable effective date.

Licensing Policy. Licenses for items transitioning to the CCL that are issued prior to the effective date of the final rule (and that do not cover items that will remain on the USML) will be valid until they expire or are returned by the license holder or for two years from the effective date of the final rule, whichever occurs first. Mixed licenses (i.e., covering both transitioning and non-transitioning items) will be valid until they expire or are returned by the license holder. All license applications, including amendments, received after the effective date for items transitioned to the CCL that are not identified in an (x) paragraph entry (see below) will be returned without action with instructions to contact BIS. Companies have the option of applying for BIS licenses for export/reexport of newly transitioned items if they do not want to continue using their ITAR authorizations; however, they must return their ITAR authorizations to the DDTC after the BIS license has been obtained.

New USML (x) Paragraphs. A new “(x)” paragraph will be added to the USML categories to allow for DDTC licensing of EAR items that are to be used in/with defense articles and are described in the purchase documentation submitted with the application. 

TAAs, MLAs, WDAs. ITAR agreements such as technical assistance agreements, manufacturing license agreements and warehouse distribution agreements only covering transitioning items that are issued before the final rule’s effective date will be valid for two years. After the two-year period ends, any ongoing activity under such an agreement must comply with the EAR requirements.  Mixed agreements (i.e., containing both transitioning and non-transitioning items) that are issued prior to the effective date of the final rule will remain valid until they expire (unless they require an amendment) or for two years from the effective date of the final rule, whichever occurs first. In order for an agreement to remain valid beyond two years, an amendment must be submitted for the CCL items using the new (x) paragraph described above.

Commodity Jurisdiction Determinations. Previously issued commodity jurisdiction determinations for items deemed to be subject to the EAR will remain valid. However, previously issued CJ determinations for items deemed to be USML but that will transition to the CCL will be superseded by the new rules.

DDTC Registration. Under the ITAR, manufacturers, exporters and brokers of defense articles and services are required to register with the DDTC. If all of a company’s products, technical data or services will transition from the USML to the CCL, already registered companies must notify the DDTC in writing that they no longer need to be registered as they will not be in the business of manufacturing, exporting or brokering USML items or services. However, they must maintain their registrations until the effective date of the final rule. Registrants who determine they will no longer be required to register, and who have registration renewal dates that occur after publication of the final rule but before its effective date, may request to have their registration expiration dates extended so as not to be charged an additional registration fee.

If you have specific questions on these new regulations or any other aspect of the Export Control Reform initiative, please contact:

Melissa Miller Proctor

Donna L. Bade

Anu Gavini

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