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Exports – New Incentives, Old Rules

Export Control Reform Initiative Needs Review, Possible Changes, Report Says

Wednesday, May 31, 2017
Sandler, Travis & Rosenberg Trade Report

The Export Control Reform Initiative undertaken by the Obama administration has “tilted the balance more toward increasing exports and trade at the expense of controls and national security,” according to a recent report from the Institute for Science and International Security. The report does not call for a reversal of the reforms but offers a number of recommendations to “repair weaknesses in the system.”

The ECR Initiative planned to create a single export licensing agency, merge commodity control lists into a single list, adopt a common information technology system for exports, and move most export enforcement efforts under the purview of a single agency. These reforms were presented as an effort to fix overregulation of the most innocuous items and allow allies to obtain needed items more easily while more tightly regulating the most sensitive goods.

These objectives were never fully achieved due to a shortage of time and a lack of congressional support for carrying out a bureaucratic restructuring of this scale, the report states, but several important and impactful reforms did occur. For example, a substantial part of the initiative involved an “elaborate bureaucratic and time-intensive process” of moving thousands of items usable in military systems and equipment from the U.S. Munitions List to the Commerce Control List, making them more readily available to longtime U.S. allies as well as to some countries of governance or transshipment concern. On the other hand, the previous administration “appears to have devoted little effort to developing enhanced protection of the items remaining on the USML,” which may have made it easier for U.S. adversaries to obtain sensitive parts and components to outfit their military and other sensitive programs.

In response, the report makes a number of recommendations, including the following.

- conduct a “serious review” of issues such as whether the freer availability of goods usable in military equipment has damaged national security objectives (the report argues that it has) and whether such goods are remaining with legitimate end-users, being misused in countries favored by export control reforms, or being sent onward to “proliferant states”

- review the new harmonized definitions in the USML and CCL of goods that are “specially designed” for use in a sensitive piece of equipment, which are controversial and may have weakened enforcement efforts

- strengthen and broaden the role of the Export Enforcement Coordination Center (e.g., to coordinate pre- and post-shipment verification performed by the various export agencies)

- advise federal prosecutors that strong criminal enforcement of trade control violations is a national priority and encourage prosecutions of violations not involving traditional U.S. adversary countries or countries of transit concern

- address the increased overlap of authorities between the Commerce Department’s Office of Export Enforcement and the Department of Homeland Security’s Homeland Security Investigations (e.g., by folding the criminal enforcement sections in OEE into HSI, as originally envisioned under the ECR Initiative)

- direct the Bureau of Industry and Security to evaluate and, if necessary, reform its voluntary self-disclosure process to operate more like the one maintained by the State Department’s Directorate of Defense Trade Controls, which is “viewed as more lenient toward accidental violations … but levying harsher penalties for egregious or repeat violators”

- continue efforts by the Defense Technology Security Administration to institute more integrated government IT platforms for export administration and licensing

- investigate and halt any DOC issuance of general EAR 99 export licenses without first investigating whether the goods are subject to the USML

- work to establish watch lists for major nuclear, missile, and military technologies based on existing control lists and proliferant state smuggling efforts and distribute them to relevant companies

- assess whether exporters are still having difficulties determining the export control status of goods under the new system and make any practical changes necessary

- perform an in-depth sampling and assessment of former USML goods’ status, locations, and end uses, including statistics on license or exception denials, close calls in exporting to unauthorized end users, and the use of pre- and post-shipment and end-use checks and related results

- conduct a thorough examination of the end uses of license exception STA goods processed since 2011

- consider whether to implement comprehensive export control legislation and finish the implementation of the ECR Initiative, or update the Export Administration Act and eliminate the current annual renewal requirement

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