Export Control Reform: Are You Ready for Compliance? Preparing for - - PowerPoint PPT Presentation

Export Control Reform: Are You Ready for Compliance?

Preparing for New Commodity Jurisdiction, Classifications, Licensing Changes and More

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Benjamin H. Flowe, Partner, Berliner Corcoran & Rowe, Washington, D.C. Brandt Pasco, Associate, Kaye Scholer, Washington, D.C.

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Export Control Reform: Are Your Clients Ready for Compliance?

Preparing for New ITAR and EAR Rules, Commodity Jurisdictions, Classifications, and More Changes

August 6, 2013 Ben H. Flowe, Jr., Berliner, Corcoran & Rowe, LLP bflowe@bcr-dc.com Brandt Pasco, Kaye Scholer, LLP brandt.pasco@kayescholer.com

6

ECR Agenda

• Where Have We Been?
• The Current Bifurcated System of ITAR and EAR
• Proposals for Four Singles and Three Phases
• Where Are We Now?
• IT System, Enforcement, Agencies More Similar
• Proposed Rules for Positive USML, Moving Items to EAR
• 600 Series Framework
• New Final Rules for USML Cats. VIII and XIX, CCL 9Y610 and 9Y619; VI, VII, XIII,

XX, CCL8Y609, 0Y606, 0Y617, 8Y620; Other Categories Proposed

• Jurisdictional Analysis and “Specially Designed”
• License Exceptions and AT + PRC
• Transition Rules for ITAR and EAR
• Where Are We Going?
• More Final Revisions to USML and 600 Series
• How to Help Your Clients Prepare and Implement!

6

7

The Current System

Two Primary Regulatory Systems:

• “Defense Articles” controlled by the International Traffic in Arms

Regulations (“ITAR”) and subject to Department of State jurisdiction.

• ITAR controls are based upon broad, often poorly defined categories.
• “Design Intent” and government policy review are key components.
• “Everything else” (with a few exceptions) is subject to the Export

Administration Regulations (“EAR”) and subject to Department of Commerce jurisdiction.

• Tightest controls are on “dual-use” items with military applicability.
• EAR controls are “positive,” generally based on enumerated criteria.
• “Commodity Jurisdiction” determines which system applies.
• Separate Enforcement, IT, Licensing, Lists, definitions.

8

Background on Export Control Reform

• President Bush National Security Policy Directives 55-56 2008 EAR-ITAR Reform –

Faster Processing, Improve CJs, Better Lists, CCL Reform, Etc.

• Nat’l Science Foundation Study 1/2009 – “Export Control System is Broken”
• August 2009, White House Announced Broad Interagency Review of Export Controls

to Identify Ways to Enhance National Security

• December 2009, Presidential Study Directive 8 – 13 Member Interagency Task Force

To Recommend Reforms to State, Commerce, and OFAC

• April 2010, Defense Secretary Gates explained how national security and U.S.

industrial base desperately needed export control reform and he laid out a basic framework.

• Main goals of Export Reform:
• Improve interoperability with NATO and other close allies.
• Reduce incentives for companies to design out U.S. origin items.
• Allow Administration to focus on real priorities for security – Higher Walls Around

Fewer Items.

9

Goals of Export Control Reform

Four “Singularities”/Singles:

• Single, Positive Control List
• “Smaller Yard.” Get away from overlapping, overbroad, and inconsistent control lists.
• Single Primary Enforcement Agency
• “Higher Fences.” More robust enforcement.
• Single IT System
• Single Licensing Agency

Three Phases:

1. “Easy” Admin Reforms – Crypto, ITAR Dual-Nationals 2. “Hard” Admin Reforms – Revising Control Lists, Creating License Exception STA, etc. 3. Legislative and Multilateral Reforms, Single Agency and List (Needs Congress, May Never Come)

10

Why do Clients care? Licensing a “Smaller Yard”

• Vast quantities of items, especially parts and components, are

moving from the ITAR to the EAR

• 74% of Category VII (Military Vehicles) moving to EAR

11

Why do Clients care? Export enforcement and “Higher Fences”

• Export Enforcement Coordination Center (“E2C2”)
• Members include: Departments of Commerce, Defense, Energy,

Homeland Security, Justice, State, Treasury, and the Office of the Director of National Intelligence.

• In 60% of enforcement cases since E2C2 was established, other

agencies had independently developed relevant evidence

• Investigations more coordinated, efficient, effective.
• Things still on the ITAR will get lots of scrutiny
• Intelligence Community support of licensing and enforcement is new
• Penalties can be significant, strict liability civil for most.
• Complex New EAR controls may lead to confusion and violations
• Voluntary disclosures can put past violations in the past

12

Export Reform Achievements To Date

Control List Changes

• DDTC Final Rules to Date:
• April 16, 2013 (effective Oct. 15, 2013) – 78 Fed. Reg. 22740 (Apr. 16, 2013).
• Revised USML Cat. VIII (Aircraft), removing some aircraft and even more parts/components from the USML.
• Created new Cat. XIX (Gas Turbine Engines), consolidating engines previously classified in Cats. IV, VI, VII

and VIII.

• July 8, 2013 (effective Jan. 6, 2014) – 78 Fed. Reg. 40922 (July 8, 2013).
• Revised USML Cats. VI (Surface Vessels and Naval Equipt.), VII (Vehicles), XIII (Aux. Mil. Equipt.), and XX

(Submersibles), removing many items and parts/components from USML.

• BIS Final Rules to Date:
• April 16,2013 (effective Oct. 15, 2013) – 78 Fed. Reg. 22660 (Apr. 16, 2013).
• Created New “600 Series” in CCL to house items moving from USML.
• Made many conforming changes to the rest of the EAR, such as to License Exceptions.
• July 8, 2013 (effective Jan. 6, 2014) – 78 Fed. Reg. 40892 (July 8, 2013).
• Created new “600 Series” ECCNs to house items moving from USML.
• Final rules also announced new definitions for “Specially Designed” and laid out

a number of “Transition Rules.”

Nothing Yet………………………………… Nothing Yet.……………………………….. Nothing Yet………………………………... Proposed Rule (6/18/12)………….… FINAL RULE (7/8/13)…………………... FINAL RULE (7/8/13)…………………... FINAL RULE (4/16/13)……………….… Proposed Rule (7/30/12)………….… Proposed Rule (7/23/12)………….… Proposed Rule (11/28/12)………….. Nothing Yet.……………………………….. Nothing Yet Nothing Yet Nothing Yet Proposed Rule (3/18/13) – ECCN 0Y604 or 9Y604 Proposed Rule (6/18/12) – ECCN 1Y608 FINAL RULE (7/8/13) – ECCN 8Y609 FINAL RULE (7/8/13) – ECCN 0Y606 FINAL RULE (4/16/13) – ECCN 9Y610 Proposed Rule (7/30/12) – ECCN 0Y614 Proposed Rule (7/23/12) – ECCN 1Y613 Proposed Rule (11/28/12) – 3Y611 Nothing Yet I. Firearms………..………...……. II. Guns….……...…………….…….. III . Ammo…………...………………. IV. Missiles.………...………………. V. Explosives……..………………..

• VI. Vessels……………..…………….
• VII. Vehicles……..…………………..
• VIII. Aircraft……..……………………

IX. Training Equipment……….. X. Protective Equipment……. XI. Electronics……………………..

• XII. Sensors…………………………..

USML Category and Rule CCL 600 Series Rules

Export Reform Achievements To Date

Export Reform Achievements To Date

FINAL RULE (7/8/13)………………….. Nothing Yet……………………..…………. Proposed Rule (5/24/13)…………... Proposed Rule (3/18/13)…………... FINAL RULE (4/16/13)………………… Nothing Yet………………………………… FINAL RULE (4/16/13)………………… FINAL RULE (7/8/13)………………….. FINAL RULE (4/16/13)………………… FINAL RULE (4/16/13)………………… FINAL RULE (7/8/13) - ECCN 0Y617 Nothing Yet Proposed Rule (5/24/13) - 9Y515 No Corresponding Rule FINAL RULE (4/16/13)……….. Nothing Yet FINAL RULE (4/16/13) – ECCN 9Y619 FINAL RULE (7/8/13) – ECCN 8Y620 FINAL RULE (4/16/13) FINAL RULE (4/16/13) XIII.

• Aux. Military Equipment....

XIV. Chem/Bio...……………………… XV. Satellites...………………………..

• XVI. Nuclear...………………………….
• XVII. Classified..………………………..
• XVIII. Directed Energy...…………….

XIX. Gas Turbine Engines..………. XX. Submersibles..………………... XXI. Items Not Enumerated....... “Specially Designed”…………......... Transition Rules

See also:

Commerce website - http://beta-www.bis.doc.gov/ State website - http://www.pmddtc.state.gov/ http://export.gov/static/ECR%20Control%20List%20Tracker013113_Latest_eg_main_048264.pdf http://export.gov/static/ECR%20Dashboard%20041613_Latest_eg_main_044971.pdf

USML Category and Rule CCL 600 Series Rules

15

FINAL RULES – The Basics

• Final Rules will be published on rolling basis after Congressional Notice.
• Final Rules go into effect 180 days after publication.
• Items moving from USML will be housed in new CCL “600 Series” ECCNs.
• Licenses still required for export of most items to all destinations except

Canada, BUT CAN SHIP MANY, MAYBE MOST VOLUME, IMMEDIATELY:

• 600 Paragraph .y listed Items NLR Except to AT Countries + PRC
• 600 Paragraph .a-.x
• Certain EAR License Exceptions will be available
• De Minimis rule applies (25% for most countries, 0% to arms embargoed countries),

but remember to classify what is being shipped, end items may have non-600 ECCNs

• WARNING – Although the EAR is less restrictive, and allows more self-

administration than the always-need-a-license ITAR, the EAR is MUCH more complex. Your clients have to be right or risk strict liability penalties.

16

ITAR Basic Framework

• Broad jurisdiction of ITAR 120.3 (specifically

designed, modified, etc.) ceases to exist in current form on Oct. 15.

• New analysis in ITAR 121.1.
• New Order of Review:
• Is the item listed on the USML?

Review USML Categories. If listed, the item is ITAR-controlled.

• USML structure starts with end-items, then systems and specifics in

paragraphs a - g

• “Specially Designed” parts/comps usually end up in paragraph h, but

may also be elsewhere.

• Note that you only apply the definition of “specially designed” if

those words appear in the paragraph you are considering.

• Do not apply it to Categories not yet revised and effective.
• If not on USML, look to EAR Commerce Control List, first to

600 Series and then the rest.

17

New ITAR/EAR Jurisdictional Paradigm

New 120.3 Policy on Designating or Determining Defense Articles and Services on the USML If it meets criteria of defense article (120.6) or defense service (120.9) or provides equivalent performance capability

• Will be determined as such “if it provides a critical military or

intelligence advantage such that it warrants control” under ITAR.

• If not currently on USML, newly determined items will be placed in
• Cat. XXI (misc.) until amend appropriate USML
• Not Defense Article or Service if CJ determines subject to another

agency’s jurisdiction, or released from definition of Specially Designed

• Intended use of an item as military or civilian purpose is not a factor
• 120.3 for government only to determine – not for Self CJ Rubric Now

18

New ITAR/EAR Jurisdictional Paradigm

New CJ Provision 120.4

• Designating an item as Defense Article or Service or Equivalent

Performance is made on case-by-case basis by State Department, taking into account

• Form and fit of the item
• Function and performance capability of the item
• Designating items as having critical military or intelligence

advantages that warrant ITAR control take into account Function and Performance of the item and the nature of controls imposed by other nations, such as Wassenaar Arrangement

19

NEW EAR 600 SERIES – Basic Framework

• Once Final Rules are fully implemented, items removed from the

USML will move to the new CCL “600 Series”

• The 600 Series
• Items moved from USML will be described in CCL 600 Series in as

positive and objective way possible.

• ECCN Paragraph Breakdown:
• a through w = End-items
• x = “Specially designed” parts and components
• y = “Negative List” of “specially designed” parts and components

with little/no military significance. NLR except for +AT countries (Cuba, Iran, N. Korea, Sudan and Syria) + PRC.

• All 600 Series items (other than paragraph .y items) will be subject to

NS-1 and RS-1 Reasons for Control, meaning they will require a license to all destinations but Canada unless a License Exception applies.

20

Example: Revised USML Category VIII (Aircraft)

• Removed some aircraft and most “specially designed” aircraft

parts and components from the USML to ECCN 9Y610.

• More “Positive” list of controlled items now.
• This rule will have biggest impact on licensing because this

category makes up a huge portion of DDTC’s licensing.

• Not all parts and components are decontrolled. Parts “specially

designed” for certain listed aircraft and systems, such as certain fighters, will remain in Category VIII. All other parts and components will move to the ECCN 9Y610.

• Narrowed the types of aircraft subject to the USML and provided

revised definition of “aircraft.”

• Also moved certain engines and parts to the new Cat. XIX.

21

Example: New ECCN 9Y610 (Aircraft)

5 new ECCNs:

 9A610 covers certain aircraft, ground equipment, instrument flight trainers, etc., and certain parts/components of the same.  9B610 covers test, inspection and production equipment, for items in 9A610 or USML Cat. VIII items, and parts/comps thereof.  9C610 covers materials not elsewhere specified for 9A610 items.  9D610 covers software, and 9E610 covers certain listed technology, related to other 9Y610 items. No “use” software or technology.

• 9A610.x covers “Parts, components, accessories, and attachments that

are “specially designed” for a commodity subject to control in this ECCN

• r a defense article in USML Category VIII and not elsewhere specified on

the USML or CCL.”

• 9A610.y covers listed parts, such as aircraft tires, filters, magnetic

compasses, check valves, lavatories, life rafts, etc., subject only to AT controls + PRC,

22

USML Category XIX (Gas Turbine Engines)

• Created new USML Category XIX (formerly empty and reserved) for

gas turbine engines currently classified in Cats. IV, VI, VII, and VIII.

• Removed certain gas turbine engines and many “specially designed”

parts and components from the USML to the 600 Series (ECCN 9Y619).

• More “Positive” listing of controlled items.
• Not all parts/components are decontrolled.
• Certain specifically described parts, such as certain hot section

components, remain on the USML.

• All other parts and components will move to the ECCN 9Y619.

23

New ECCN 9Y619 (Gas Turbine Engines)

5 new ECCNs:

 9A619 covers military gas turbine engines not on the USML, and digital engine controls, certain hot section components, engine monitoring systems, etc. for the 9A610 engines, and certain parts/components of the same.  9B619 covers test, inspection and production equipment., for items in 9A619 or USML Cat. XIX items, and parts/comps thereof.  9C619 covers materials not elsewhere specified for 9A619 items.  9D619 covers software, and 9E619 covers certain listed technology, related to other 9Y619

• items. No “use” software or technology listed.
• 9A619.x covers “Parts, components, accessories, and attachments that are

“specially designed” for a commodity controlled by this ECCN 9A619 (other than 9A619.c) or for a defense article enumerated in USML Cat. XIX and not elsewhere specified on the USML or CCL.”

• 9A619.y covers certain negatively listed parts, such as oil tanks and

reservoirs, oil lines and tubes, fuel lines and hoses, fuel and oil filters, shims, air, fuel, and oil manifolds, etc., subject only to AT +PRC controls.

Federal Register Proposed Rules

• Bombers
• Fighters, fighter bombers, and fixed-wing attack aircraft
• Jet-powered trainers used to train pilots
• Attack helicopters
• Unmanned aerial vehicles (UAV’s)
• Military intelligence, surveillance, and reconnaissance

aircraft

• Electronic warfare, airborne warning, and control

aircraft

• Air refueling aircraft and Strategic airlift aircraft
• Target drones
• Aircraft equipped with any mission systems controlled

under this subchapter; or,

• Aircraft capable of being refueled in flight including

hover-in-flight refueling

• Launching and recovery equipment
• Developmental aircraft and “specially designed” parts,

components, accessories, and attachments therefore developed under a contract with the DoD

• Aircraft components, parts, accessories, attachments,

and associated equipment as follows: ‒ Components, parts, accessories, attachments, and equipment “specially designed” for the following U.S.-

• rigin aircraft: B-1B, B-2, F-5SE, F/A18E/F/G, F-22, F-35

(and variants thereof), F-117, or U.S. Government technology demonstrators

Illustrative list only Reference Federal Register / Volume 76, No. 215 / Monday, November 7, 2011 / Proposed rules, page 68697

USML – Aircraft And Related Articles

USML F-16

Systems/Components/Parts

F-16 Specific USML Items Other Aircraft USML Items

• Assembled engines
• Weapons pylons
• Mission systems
• Bomb racks
• Missile launchers
• Fire control computer
• Radar
• Radar warning receiver
• Radar jammer
• Laser/Missile warning system
• Countermeasures dispensing system
• Aerial refueling receptacle
• Helmet mounted displays/sights
• Aircraft wing folding systems, parts, and components
• Tail hooks and arresting gear, and parts and

components

• Missile rails, weapon pylons, pylon-to launcher

adapters, UAV launching systems, and external stores support systems and parts and components

• Damage/failure-adaptive flight control systems
• Threat-adaptive autonomous flight control systems
• Air-to-air refueling systems and hover-in-flight

refueling (HIFR) systems and parts and components

• UAV flight control systems and vehicle management

systems with swarming capability

Illustrative list only Reference Federal Register / Volume 76, No. 215 / Monday, November 7, 2011 / Proposed rules, page 68697

Commerce “600” Series

Systems/Components/Parts for the F-16

• Wings, Rudder, Fin, Panels
• Fuselage – forward, center, aft
• Cockpit structure
• Forward equipment bay
• Horizontal stabilizer
• Conformal fuel tank
• Cartridge Actuated Device, Propellant Actuated Device

(CAD / PAD)

• Control surfaces, activation and control systems
• Internal and exterior fuel tanks
• Engine inlets and ducting
• Wing box
• Flaperon
• Static structural members
• Exterior skins, fairings, radomes, access doors, leading

edge flap

• Landing gear
• Technology associated with above items

Illustrative list only Reference Federal Register / Volume 76, No. 215 / Monday, November 7, 2011 / Proposed rules, page 68689

“600 Series” “.Y” Parts for F-16

F-16 Specific .y Items Other Aircraft .y Items

• Aircraft tires
• Analog cockpit gauges and indicators
• Hydraulic System Filters
• Check valves
• Hydraulic and Fuel hoses, Fittings, Clips, Couplings,

Nut plates, Brackets

• Cockpit mirrors
• Beacons
• Urine collection systems
• Cockpit panel knobs, Switches, Buttons, Dials
• Audio selector panels
• Check valves for hydraulic and pneumatic systems
• Crew rest equipment
• Ejection seat mounted survival aids
• Energy dissipating pads for cargo (for pads made

from paper or cardboard)

• Filters and filter assemblies for hydraulic, oil, and fuel

systems

• Steel brake wear pads (does not include sintered mix)
• Propellers, propeller systems, and propeller blades

used with reciprocating engines

Illustrative list only Reference Federal Register / Volume 76, No. 215 / Monday, November 7, 2011 / Proposed rules, page 76081 Cockpit gauges and indicators Fuel lines Hydraulics Tires

28

Other Final Rules Effective Oct. 1 5 , 2013

• Minor Rewording of Cat. XVII (Classified)
• Minor Revisions to Cat. XXI
• Covers Items Not Otherwise Enumerated in the USML (formerly Misc. Items)

where newly controlled USML items are to be housed temporarily after determinations to do so and publication from DDTC.

• New ECCN 0Y521 (Effective April 2012)
• CCL analogue to USML Cat. XXI, created in final rule April 2012, in effect.
• Will be used as temporary holding category for items that warrant control on the

CCL but are not yet identified in an existing ECCN, like emerging technologies, while negotiating to multilateralize.

• Once item is added to 0Y521, it will remain there for 1 year unless reclassified

under another ECCN, or BIS issues a new rule extending the classification (for up to 3 years). Otherwise, after a year it will become EAR99.

• RS-1 controls = License to everywhere but Canada, but eligible for License

Exception GOV.

• Only one item so far has been classified here, certain biosensor systems, and

related software and technology. Items will be added via publication in the Federal Register.

29

Similar Rubric for July 8, 2013 Rule

• Category VI Vessels  ECCN 8Y609
• Category VII Vehicles  ECCN 0Y606
• Category XII Auxiliary Military Equipment  ECCN 0Y617
• Category XX Submersibles  8Y620

Devil is in the Details of Each Set of Rules and Application to Facts to Determine Jurisdiction and Classification

30

New “SPECIALLY DESIGNED” Definition

• Major goal of reform is to move away from subjective

jurisdiction determinations based on designed intent and minimize use of “specially designed” as control criterion.

• BUT impossible to completely abandon the term “specially

designed.” It’s used in multilateral export regimes and it’s impossible to enumerate every item that warrants control and cannot always agree on control parameters.

• Until the final rules, the term was not defined (except in the

context of Missile Technology Control Regime, which BIS said did not apply elsewhere).

• Final BIS and DDTC rules each have their own definition, but

very similar and intended to be interpreted consistently.

31

“SPECIALLY DESIGNED,” BRIEFLY

• New definitions based on (1) “peculiarly responsible” for achieving

controlled parameters for end-items, and 2) a “Catch and Release” approach for parts, components, accessories, and attachments.

• The first part of the definitions provides a very broad scope for the

meaning of “specially designed” – the “catch”

• Then the second part of the definitions provides some exclusions from

that scope – the “release”

• Definitions lead the reader through a “decision tree” type of

analysis of yes/no questions that lead to a more objective conclusion as to whether an item is or is not “specially designed.” See BIS Website Tool.

• Simple and straightforward approach, BUT the definition is very

lengthy, with several steps in the interpretive process.

32

“SPECIALLY DESIGNED” In a Nutshell

• (a) the “catch” is that (1) an end-item “has properties peculiarly responsible” for

achieving the performance levels, characteristics, or functions described in the relevant ECCN of USML entry; or (2) parts, components, accessories, or attachments are “for use in or with” a USML or CCL item.

• (b) the “release” is the exclusion of insignificant and othr items like:
• Items in an entry that does not contain “specially designed” or determined to be EAR99 in a

CJ or interagency cleared CCATS.

• Fasteners, washers, spacers, insulators, grommets, bushings, springs, wires, solder
• Items with the same function and capabilities, and equivalent form/fit as item that is EAR99
• r controlled for AT reasons only.
• Items developed for use both with items on the USML/CCL and items that are EAR99 or

controlled for AT reasons only

• Items developed as general purpose items, where there’s no knowledge of use in or with a

particular type of commodity

• Items developed for use in or with items controlled on the CCL for AT reasons only, or

EAR99, or exclusively for use with EAR99 items. See backup slides for more details on Specially Designed

33

EAR LICENSE EXCEPTIONS

• Big advantage of EAR classification is the use of License Exceptions.
• EAR License Exceptions that MAY be available:
• RPL – export of 600 Series parts for repair, under certain conditions
• LVS - $1500 for most 600 Series items
• TMP – temporary export to U.S. person’s sub/affiliate/facility abroad
• GOV – exports for/on behalf of U.S. Gov’t
• TSU – export of certain technology
• STA – certain exports to 36 countries (new Country Group A:5)
• Some EAR License Exceptions are changing to align them more

closely with ITAR exceptions. E.g., GOV will be available in certain circumstances for exports to non-governmental end-users, such as contractors, acting on behalf of government end-users.

34

License Exception STA

• Will allow export/re-export of eligible 600 Series items to 36

countries (new Country Group A:5), essentially NATO and other close allies, and some to A:6, provided:

• ECCN authorizes use and item not also controlled for EI, SS, SL, MT, or CW

Reasons; AND

• For ultimate end-use by a government of such country;
• For ultimate use by U.S. Government;
• For return to the U.S.; OR
• If U.S. Govt. has otherwise authorized use of STA; AND
• Properly documented and all conditions satisfied (additional requirements

for 600 Series items); AND

• Non-U.S. parties must have been previously approved on a BIS or DDTC

license.

• STA interactive tool on BIS website.

35

License Exception STA - EAR 740.20

Conditions for use of STA

• Provide ECCN to consignee.
• Obtain written consignee statement where consignee makes

certain specified acknowledgments.

• Notify consignee that export is made under STA (identify

which items are under STA if not the whole shipment). (Tip: use commercial invoice.)

• Technology or Source Code Notification must:
• either expressly inform the recipient that the EAR imposes limits on

further disclosure or must be in the form of an agreement which limits further disclosure in accordance with EAR;

• be in writing and a copy retained by exporter; and
• provide that the restrictions on disclosure do not expire.

36

License Exception STA – EAR 740.20

“600 Series” and STA - Limitations

• STA can be used for export/reexport of “600 Series” items

destined to persons in the U.S. or Country Group A:5, IF:

• Ultimate end user is the USG or a specified government agency in

A:5.

• For the development, production, operation, installation,

maintenance, repair, overhaul, or refurbishing of an item in an A:5 country or the U.S. and that will ultimately be used by the USG, a person in the US, or a specified government agency in A:5; OR

• The USG has issued a license that otherwise authorizes the use of STA

in some other circumstances.

• AES Filing Required. All STA Users Audited to date.

37

TRANSITION RULES

• BIS Licenses will be extended to 4 years to match DDTC licenses.
• Certain EAR License Exceptions are changing to align them more closely

with the analogous ITAR rules, such as License Exception TMP, GOV, and TSU.

• Some dual license authority discussed later.
• CJs ruling that an item was ITAR-controlled are superseded by ECR rules

transitioning the item to the CCL.

• No need for new CJ unless you have some doubt. If you are certain item

has transitioned, find the new classification in the 600 Series.

• Submit CCATS if you need help or reassurance with classification.
• CJs ruling that an item was EAR-controlled can be relied upon (nothing

moving back to ITAR) except items classified in an -018 ECCN (meaning it was on the Wassenaar Arrangement Munitions List) ), which will have moved to the 600 Series

38

TRANSITION RULES – Licenses

• DDTC will have licensing authority for items now “Subject to the EAR” if:
• Items will be used in or with defense articles, and
• Are described in purchasing documents submitted with application.
• Current DDTC license including ONLY transitioning items
• Valid until the license expires, returned by the license holder, or for 2 years from

the effective date of the applicable final rule, whichever comes first.

• Current DDTC license including BOTH transitioning and non-transitioning

items

• Valid through expiration date.
• Evaluate pros and cons of continuing to use existing DDTC licenses rather

than getting new BIS licenses.

• BIS will begin to accept and review license applications for items

transitioning to CCL, but will not issue any licenses until after the effective date of the applicable final rule. So, if you need a license right away, with no lapse in coverage, apply with DDTC.

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TRANSITION RULES – Agreements

• TAAs, MLAs and Warehousing/Distribution Agreements will be

handled almost the same as licenses.

• Agreements including ONLY transitioning items
• Valid until expired or 2 years after applicable effective date, whichever comes
• first. After that, any ongoing activity must be authorized by BIS.
• Agreements including BOTH transitioning and non-transitioning

items

• Valid until expired or for 2 years after the applicable date, whichever

comes first. May be used beyond 2 years if an amendment is granted.

• For an agreement including items remaining on the USML to remain

valid beyond 2 years, an amendment must be submitted to authorize the transitioned CCL items, provided the CCL items will be used in/with defense articles and are described in purchasing documents.

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What Should Clients Do to Prepare – Monitor Developments and Plan Ahead

• Review new Final Rules carefully. Tip: Read backwards.
• Review Proposed Rules and submit comments as appropriate.
• Form a team to implement and assign responsibilities and deadlines.
• Develop timelines/milestones for internal implementation and

external communication. For example:

• Reclassify affected items by X date
• Revise product matrix by X date
• Revise compliance procedures by X date
• Prep local training by X date and perform trainings by Y date

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What Should Clients Do to Prepare – Classifications

• Re-evaluate affected products’ jurisdiction and classification.
• Revise product classification matrix, include License Exception

eligibility, as applicable.

• Obtain CJ and CCATS rulings as necessary.
• Revise compliance policies and procedures.
• Master new definition of “Specially Designed.”
• Apply definition to products, software, and technologies.

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What Should Clients Do to Prepare – Licensing

• Register for SNAP-R.
• Options
• Give up ITAR Licenses and Agreements and drop ITAR registration;

Submit BIS license applications that will be needed on or shortly after

• Oct. 15.
• Use grandfathered DDTC Licenses until they expire and later if still

some items on ITAR.

• Measure twice, cut once! Don’t give up ITAR authorizations until

sure they are not needed.

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What Should Clients Do to Prepare – Documentation

• Design Documentation
• Change product development process to ensure documentation of

whether items are “specially designed.” Contemporaneous supporting docs required to show when product developed for commercial/non-600 Series applications to escape “specially designed.”

• Such “contemporaneous documents” may include:
• Concept design information
• Marketing plans
• Declarations in patent applications
• Contracts/other agreements or statements from customers, such as end-user

statement

• What is your normal design process documentation?
• Prepare/modify template documents for:
• STA Consignee Statements,
• Destination Control Statements,
• End-User Statements,
• Invoice Templates with ECCN.
• Contract clauses.

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What Should Clients Do to Prepare Training & Resources

• Conduct local training in new rules and new procedures.
• Evaluate adequacy of existing resources for a) transition and b)

new responsibility. Hire new people or consultants/counsel if needed.

• Engage with management so they understand steps for

implementation and any additional resource needs.

• Lots of work required for new jurisdiction/classification

determinations, “Specially Designed,” figuring out License Exceptions, use of STA, complicated new EAR rules.

• Counterintuitive – Liberalization, yes, but will require MORE, not

LESS, work from exporters for: a) transition, and b) going forward as exporters take the place of DDTC and DoD Licensing Officials.

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What Should Clients Do to Prepare – Supply Chain

Strategize on implementation with supply chain – Suppliers, Distributors and Customers:

• Notify customers, distributors, brokers, servicing persons, others

downstream, of changing classifications and new requirements.

• Request new classifications from upstream suppliers.
• Consider new contract terms and conditions to make clear that

exporters do not bear the risk of suppliers’ jurisdiction or classification errors, and to require suppliers to promptly advise

• f changes.

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What Should Clients Do to Prepare – Implement

• Operationalize new procedures.
• Reprogram automated processes.
• Re-code computer and ERP systems.
• Engage with freight forwarders on classification changes and AES filing.

Questions

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Kaye Scholer

Brandt Pasco (Kaye Scholer LLP’s Washington, D.C. office) – former member of the National Security Council, Export Control Reform Task Force; and Deputy Director for Foreign Finance and Investment, Department of Homeland Security. Brandt also held positions with the Office of the Secretary of Defense, Senate Committee on Foreign Relations, Republican National Committee, Representatives Mark Sanford and Vince Snowbarger, and Senator Nancy Kassebaum. Brandt is an author of the export control reforms implemented by Barack Obama, and the Committee on Foreign Investment in the United States (CFIUS) reforms implemented by George W. Bush. He represents clients in national security regulatory processes, including export control, sanctions, CFIUS, and industrial security.

Brandt Pasco (202) 682-3519

brandt.pasco@kayescholer.com

Berliner Corcoran & Rowe, LLP Export Controls Team

Ben Flowe http://bcr.tv/attorney/benjamin-flowe John Ordway Wayne Rusch Ray Gold Michelle Turner Roberts Jason McClurg Washington DC 202-293-5555 Dan Fisher-Owens San Francisco, California 415-839-9201 http:\\www.bcr-dc.com

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Paragraph (a)(1) “catches” any item that:

• “As a result of development has properties peculiarly responsible for

achieving or exceeding the controlled performance levels, characteristics, or functions described in the relevant USML paragraph.”

• Paragraph (a)(1) is mainly for determining whether an end item or

material is “specially designed.”

• For end items and materials, paragraph (a)(1) is the entire “specially

designed” definition. That is, (a)(1) acts as the “catch” and the “release.” If the end item or material is not “caught” under (a)(1), then the item is NOT “specially designed.”

• “Peculiarly responsible” comes from longstanding Wassenaar General

Technology Note for technology controls.

New Definition of “Specially Designed”

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New Definition of “Specially Designed”

• For parts, components, accessories and attachments, and

software, proceed to part (a)(2).

• Paragraph (a)(2) “catches” any:
• “part, component, accessory, attachment, or software that is for use

in or with a defense article.”

• a very broad catch for parts, etc.
• Paragraph (b) is only used for “releasing” parts, components,

accessories, attachments, or software “caught” by (a)(2).

• A part, component, accessory, attachment or software that meets

the criteria of any part of paragraph (b) (1-5) is “released” from the definition.

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Paragraph (b) Releases:

• “A part, component, accessory, attachment, or software is not

controlled by a USML ‘catch-all’ or technical data control paragraph if it:

• (1) Is subject to the EAR pursuant to a CJ ruling;
• (2) Is, regardless of form or fit, a fastener (e.g., screws, bolts, nuts, nut

plates, studs, inserts, clips, rivets, pins), washer, spacer, insulator, grommet, bushing, spring, wire, or solder.

New Definition of “Specially Designed”

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Paragraph (b) releases a part, component, etc., if it:

• (3) Has the same function, performance capabilities, and the same or

“equivalent” form and fit as a commodity or software used in or with a commodity that:

• (i) Is or was in production (i.e., not in development); and
• (ii) Is not enumerated on the USML;

Translation: If the part has same function, and same/equivalent form/fit as an item used in or with an EAR item, it’s released. Not ITAR. (Thus, you can deliberately choose to develop an item that is not subject to the ITAR, and this is not based on “predominant use.”)

New Definition of “Specially Designed”

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Paragraph (b) cont.

• Paragraph (b) releases a part, component, etc., if it:
• (4) Was or is being developed with knowledge that it is or would be for

use in or with both defense articles enumerated on the USML and also commodities not on the USML; or

Translation: If the part was developed for use with both ITAR- and EAR-controlled items, it’s released. Not ITAR. Note – Exclusion under (b)(4) requires supporting documentation contemporaneous with the development of the item in question.

New Definition of “Specially Designed”

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Paragraph (b) cont.

• Paragraph (b) releases a part, component, etc., if it:
• (5) Was or is being developed as a general purpose commodity or

software, i.e., with no knowledge for use in or with a particular commodity (e.g., a F/A-18 or HMMWV) or type of commodity (e.g., an aircraft or machine tool).

Translation: If the part was developed for general purposes only, for use with no particular thing or type of thing, it’s released. Not ITAR. Note – Exclusion under (b)(5) requires supporting documentation contemporaneous with the development of the item in question.

New Definition of “Specially Designed”

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Note to Paragraph (a)(1)

• An example of a commodity that “as a result of development has

properties peculiarly responsible for achieving or exceeding the controlled performance levels, functions, or characteristics in a USML category” would be a swimmer delivery vehicle “specially designed” to dock with a submarine to provide submerged transport for swimmers or divers from submarines.

• So, even if item is capable of use with a defense article, it is not

captured by (a)(1), unless someone does something during the commodity’s development for it to achieve or exceed the performance levels described in USML entry.

New Definition of “Specially Designed”

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Note to Paragraph (b)

• ‘‘Catch-all’’ paragraph – Means one that does not refer to specific

types of parts, components, etc., but rather controls parts, components, etc., if they were specially designed for an enumerated (i.e., specifically described) item. A ‘‘catch-all’’ paragraph is delineated by the phrases ‘‘and specially designed parts and components therefor,’’ or ‘‘parts, components, accessories, attachments, and associated equipment specially designed for.”

New Definition of “Specially Designed”

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Notes to Para. (b)(3) – Definitions of “Production” and “Development”

1. ‘‘Production’’ means all production stages, such as product engineering, manufacture, integration, assembly (mounting), inspection, testing, and quality assurance. This includes ‘‘serial production’’ where commodities have passed production readiness testing (i.e., an approved, standardized design ready for large scale production) and have been or are being produced on an assembly line for multiple commodities using the approved, standardized design. 2. ‘‘Development’’ is related to all stages prior to serial production, such as: design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, process of transforming design data into a product, configuration design, integration design, layouts.

New Definition of “Specially Designed”

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Notes to Paragraph (b)(3)

3. Commodities in ‘‘production’’ that are subsequently subject to ‘‘development’’ activities, such as those that would result in enhancements or improvements only in the reliability or maintainability of the commodity (e.g., an increased mean time between failure (MTBF)), including those pertaining to quality improvements, cost reductions, or feature enhancements, remain in ‘‘production.’’ However, any new models or versions of such commodities developed from such efforts that change the basic performance or capability of the commodity are in ‘‘development’’ until and unless they enter into ‘‘production.’’ 4. With respect to a commodity, ‘‘equivalent’’ means its form has been modified solely for fit purposes.

New Definition of “Specially Designed”

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Note to Paragraph (b)(4) and (5)

‘‘Knowledge’’ includes not only the positive knowledge a circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person’s willful avoidance of facts.

New Definition of “Specially Designed”

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Application of New Definition of “Specially Designed”

• 1. Two similar sockets (parts of electrical connectors) with

different tail lengths. One tail length for the commercial version and a different length for the military version.

• 2. Two similar guide pins (parts of electrical connectors) with

made of different materials. One material for the commercial version and different material for the commercial version.

Notes

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Notes

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Notes

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Notes

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Notes

Although this presentation may provide information relevant to potential legal issues, it is not a substitute for legal advice from qualified counsel. This presentation is neither created nor intended to address the unique facts or circumstances that may arise in any specific instance. You should not rely nor are you authorized to rely

• n this presentation as a source of legal advice. This presentation does not create any client relationship between you and Kaye Scholer LLP or between you and

Berliner Corcoran & Rowe, LLP.