Export Control Reform – A 60 Day Snapshot

By: Jenny Hahn, President,  FD Associates, Inc.

Revisions to the ITAR and the EAR, as a result of Export Control Reform (ECR) are changing the way U.S.exporters of systems, parts, components, accessories and associated technical data and services arerequired to evaluate and license equipment, technology and services for their international business  transactions.

On October 15, 2013, the State Department issued the first of these significant reforms with revisions toCategory VIII of the U.S. Munitions List (USML) for aircraft and related parts, technical data and services. Other changes are scheduled to come into effect on January 6.

The revised Category VIII includes a so-called “positive list” of articles requiring ITAR authorization priorto export. These revisions make it clear which systems, parts, components, accessories and associatedequipment remain under Category VIII due to the sensitivity of the aircraft, system and or component.The revised Category VIII includes systems that were previously classified under different USML categories, such as integrated helmets incorporating optical sights or slewing devices, previouslyclassified under Category X, or Fire Control Computers controlled under Category XII. Gas propulsionengines, including engines for military aircraft, naval vessels and military vehicles have been moved to a new Category XIX.

Prior to making any export, exporters of military aircraft, parts, components, accessories and associated equipment must now review the positive USML category VIII or XIX for their article or service, to determine if ITAR licensing is required. If the article is not specifically enumerated on the revised USML Category, or captured by the new term “specially designed”, then the item is transferred to the Commerce Control List (CCL) of the Export Administration Regulations (EAR) in a new series of ExportControl Classification Numbers (ECCNs) under 9A610 or 9A619. In a few limited situations the articles may be captured elsewhere on the CCL.

60 days have passed since the effective date of implementation on October 15 and it’s a good time to review how companies have been impacted. At first blush, many exporters involved solely in the export of aerospace parts, components and accessories, have found the positive revisions to the USML Category VIII have largely transferred their items to the CCL 600 series ECCNs. In general, our observation is the 80/20 rule comes into play with 80 % of the transactions involving parts and components, no longer subject to the controls of the ITAR.

Terrific, but what does that mean for your company if your item is not ITAR? Contrary to a misheld perception that there are no controls in place, articles captured under the EAR in the 600 series ECCN entries of 9A610 or 9A619, generally requires licenses to all destinations, unless an exception to obtaining a license (License Exception), is available.

Aerospace Companies with items transitioned to the EAR from the ITAR must do a full analysis of ECCN 9A610 or ECCN 9A619 to determine a) if the article meets the technical parameters/criteria of the ECCN,and b) whether a license is required for the export transaction. In some instances, exports may be able to occur immediately under a License Exception once the company conducts its due diligence review. What does this entail?

  1. Confirmation of the specific ECCN classification of the part/system. A U.S. exporter can self-classify the ECCN after determining the article is no longer subject to the ITAR.
  2.  Review of the ECCN “Reasons for Control” to determine if the ECCN allows for use of License Exceptions “STA” (Strategic Trade Authorization) or “LVS” ( Low Value Shipment: $1500 or less, being the most common value).
  3. If License Exception STA can be used, is the export to one of the 36 “STA” eligible countries specified in EAR Part 740.20, and does the transaction meet all of the parameters of the License Exception. For example, the exporter must notify the foreign consignee in writing of the ECCN, and in addition to the country being included in EAR Part 740.20, the ultimate end user must be a foreign government, or the goods must be returned to the U.S. Further, there must have been prior licensing approval either by DDTC or BIS of the parties involved in the transaction. Additionally, the foreign consignee must execute a statement prior to the export, acknowledging compliance to all elements of the STA License Exception which includes among other things, flow down of STA restrictions for retransfers of the US articles to additional foreign parties and US Government access to foreign consignee records.
  4. If you or your consignee cannot meet all of the criteria called out in STA, LVS or any of the other permissible License Exceptions (i.e. TMP, RPL, GOV) you will be required to obtain a license from the BIS for the export.
  5. As always, in any export transaction, you should obtain a detailed end-use/end-user statement before applying for a license or using a License Exception under the EAR, and you should conduct a full due diligence review of all the parties to the transaction including verifying that none of the parties are listed on any of the multiple US government denied party lists.

Our initial assessment is that for many US exporters of items transitioned to the EAR from the ITAR and classified as ECCN 9A610 or 9A619, approximately 80% have been eligible to use license exception STA and do not need a license from the Department of Commerce.

While use of EAR license exceptions offers US exporters and their foreign consignees’ significant advantages, like everything related to exports, the devil is in the details and the company records and documents must be fully compliant with all aspects of the EAR in using these License Exceptions. Companies using STA should also anticipate a possible audit by the US government.

Questions? Contact FD Associates for assistance in navigating the changes to the ITAR and the EAR applicable to your products and services, classification support and if the items are classified as EAR under either ECCN 9A610 or 9A619, assistance in determining if you are eligible to export under License Exception STA or LVS, or any of the other eligible License Exceptions and establishing the required procedures/records.

January 6 brings revisions to USML Categories VI, VII, XIII and XX….are you ready?

ITAR Consent Agreements – Why Raytheon, Meggitt And Aeroflex Got Fined In 2013

By: Jenny Hahn, President, FD Associates, Inc.


As Meggitt, Aeroflex and Raytheon have learned this year in a costly way, when it comes to export compliance, often the devil is in the details. All three of these corporations have entered into consent agreements with the Department of State due violations of the ITAR and have received multimillion dollar fines (ranging from $8M to $25M). While some of the violations related to significant matters such as misclassification of articles subject to the ITAR, the majority of the violations involved failures to properly administer agreements or licenses.  Some examples:

  •  Failure to obtain a Non-Disclosure Agreement by a foreign sublicensee to an ITAR agreement for the transfer of technical data from the foreign licensee to the sublicensee. This failure caused the retransfer by the sublicensee to other non-approved foreign parties
  •  Providing services and technical data after the expiration of the agreement
  •  Failure to renew an expiring agreement within 60 days of the expiration date
  •  Failure to provide annual sales reports for MLAs and Warehousing Distribution Agreements
  •  Failure to reference an agreement authorization in a related hardware license (DSP5)
  • Failed to provide DOS with executed amendments within 30 days
  • Failure to return equipment temporarily exported on DSP73 licenses prior to expiration
  • Using an unauthorized freight forwarder
  • Failure to return expired licenses
  • Failure to notify DOS of the status of the execution of the agreement
  • Failure to novate agreement s to reflect a change in ownership

For each ITAR license or agreement, you should have an internal plan assigning responsibility for the management of the license, that includes vetting exports of hardware and technical data for compliance with scope;  monitoring collection of signatures on agreements and amendments; obtaining all required  non-disclosure agreements and sales reports and submitting required  reports or documents to the State Department;   maintaining records of all exports of hardware,  technical data and defense services. Hardware exported under a temporary license (DSP-73) should be monitored for return in accordance with license provisos and expiration.

Audits of these administrative and non-administrative obligations should be part of your internal compliance program.  If you need assistance with developing an internal audit plan, call FD Associates!

Use Of EAR License Exception STA – Are You Ready??

By: Jenny Hahn, Vice President , FD Associates, Inc.

Prior to the implementation of Export Control Reform (“ECR”), the Bureau of Industry and Security (“BIS”), in June 2011, amended the Export Administration Regulations (“EAR”) to add a new License Exception for the export of certain highly controlled commodities and technology to a potential total number of 44 countries under specified conditions. 

License Exception Strategic Trade Authorization (“STA”), afforded exporters and reexporters, the ability to make exports under STA, so long as the export meets all of the provisions of use specified in the EAR at Part 740.20, and the Export Control Classification Number (“ECCN”) for the commodity or technology cited License Exception STA in the entry.

Use of STA provides exporters and reexporters the ability to make exports/reexports to countries specified in paragraphs c.1 and c.2 of Part 740.20 of the EAR. No longer is a license required to make an export to one of the STA countries, however, the rigorous requirements imposed for the use of License Exception STA could cause a novice exporter or foreign reexporter, not fully conversant in the EAR or requirements of using license exception STA, to not be fully compliant with all the requirements of the EAR. 

Perhaps due to the complexity of License Exception STA, the BIS has been following up with US industry on its use and compliance with License Exception STA. Since 2012, BIS has sent formal requests for documents to exporters that have utilized License Exception STA to verify their compliance to EAR for these export transactions.

 How does BIS know what License Exceptions exporters have used? Simply by pulling the information the exporter or its agent has filed in the Automated Export System (AES) record filed at the time of export. 

On October 15, 2013, the initial wave of ECR commenced with ECCN 9A610 and related ECCNs established for certain military aerospace platforms, systems, subsystems, parts, components, production, test and inspection equipment, software and technology, and ECCN 9A619 and related ECCNs established for certain military gas turbine engines, parts and components, production, test and inspection equipment, software and technology transferred off the ITAR’s US Munitions List to the Commerce Control List under the EAR. As part of the ECR Initiative, exporters were able to take advantage of a “license free zone” to 36 of the 44 countries provided by License Exception STA in Part 740.20.c.

ITAR exporters that had never exported EAR highly controlled goods were now treading in unfamiliar territory, as generally, most ITAR exemptions are not as complicated as those required for use of License Exception STA. Thus the potential for mistakes are greater. BIS has continued its practice of sending inquiries to exporters that use License Exception STA as the export authority and now has a larger field of exporters to verify the export has been made correctly. 

The question is: ARE YOU STA READY? Do you understand your obligations and has your company set up the required procedures necessary to ensure compliance with this complicated License Exception? Let’s review them now, so that when BIS sends you the request for verification of compliance, you won’t panic but will confidently be able to respond in 30 days or less.

In this article, I will focus on exports of 600 series ECCNs hardware, that are eligible to use License Exception STA to 36 countries listed in Part 740.20 (c)(1).

Prior to undertaking the export of a 600 series part, component or system, software or technology, you must undertake the following actions. 

  1. Classify your hardware to the subparagraph level in the CCL;
  2. Read the ECCN carefully at “License Exceptions” and confirm the License Exception STA exclusions DO not apply to your export;
  3. Confirm your transaction involves export/reexport to only the 36 countries listed under License Exception STA (740.20 (c)(1);
  4. Confirm your end user is a government (armed forces, police, paramilitary, law enforcement, customs, correctional, fire, or a search and rescue agency) of one of the 36 countries or the hardware is being returned to the United States; 
  5. Confirm the end use is for one of the following: “development,” “production,” operation, installation, maintenance, repair, overhaul, or refurbishing of the hardware;
  6. Confirm all the parties in your transaction have been previously approved by either a Department of State license or Department of Commerce license (this means the USG has had an opportunity to vet these parties previously);
  7. Confirm all the parties in your transaction have been previously approved by either a Department of State license or Department of Commerce license (this means the USG has had an opportunity to vet these parties previously); 
  8. Advise the foreign consignee in writing of the specific ECCN applicable to the parts, subsystem or system they will receive via license exception STA; 

Obtain a written statement from the foreign consignee prior to any export confirming their understanding of the requirements for use/reexports under STA pursuant to EAR Part  740.20 (“Prior Foreign Consignee Statement”):      

  • The consignee is aware of the ECCN and that the parts will be exported via License Exception STA;
  • Has been informed of the ECCN by the US exporter; 
  • Understands the items being exported are exported pursuant to License Exception STA may not be reexported pursuant to License Exception APR;
  • Agrees not to export, reexport or transfer to any destination, use or user prohibited by the EAR;
  • Agrees to provide copies of the Prior Foreign Consignee Statement and all relevant export and reexport documents to the USG, if requested;
  • Agrees and understands that 600 series parts may only be transferred to persons or governments who are nationals of the 36 countries: 
  • Confirms that the  ultimate end user is a government of one of the 36 countries or return to the USG; or
  • Confirms that The end-use use is for “development,” “production,” operation, installation, maintenance, repair, overhaul, or refurbishing of the hardware for ultimate end use by a government of the 36 countries or the United States or return to a US person;
  • Confirms that the foreign consignee has been provided a copy of the DOS or BIS authorization for the end use and the parties (if the US exporter does not have such authorization).
  • Agrees to permit a USG end user check, if requested.

  Be sure to note that if your transaction involves the export of hardware designated Major Defense Equipment and the contract value is $25M or more, License exception STA is not eligible for use. BIS will still request a copy of the contract in their request for documents to substantiate compliance. This element of BIS’ request seems out of place since the License exception cannot be used.

In addition to the Prior Foreign Consignee Statement, your customer must be aware that the receipt of the hardware via License Exception STA, will impose on them the same obligations to notify any/all eligible recipients of the commodities pursuant to STA, of the ECCN and obtain a Prior Foreign Consignee Statement before any retransfer of the equipment in its original form. 

As you can see there are many steps for use of STA, applicable not only to US exporters but also to your customers who may also wish to take advantage of this License Exception. 

As always, the devil is in the details. Are you ready to respond to the BIS, in the event of an inquiry? Do your records demonstrate your compliance? As you know, exporters are required to maintain export records for a period of 5 years from the date of export or known reexport, so it is important that you have in place the correct procedures for use before starting to use STA.

Need help with understanding the requirements of the STA? Or any aspect of the EAR or the new 600 series rules? Contact FD Associates for assistance, 703-847-5801 or info@fdassociates.net

[1] 740.20 (C)(1) 36 Eligible Destinations
Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, & United Kingdom.

Designating The Correct USML Category XI Sub-subparagraphs On DSP License Submissions

By: John Herzo, Senior Associate, FD Associates, Inc.

On December 29, 2014 the Department of State posted an announcement to its webpage regarding the designation of USML category sub-subparagraphs on future DSP license submissions for the newly revised USML Category XI Military Electronics that went into effect on December 30, 2014 due to Export Control Reform.  The changes to this USML Category were significant and in order to make this Category a positive list of enumerated items, numerous sub-subparagraphs were added to the Category (a sub-subparagraph is a section that includes a Roman numeral, e.g., Category XI(a)(3)(v)). The December 29th guidance relates to situations where a defense article meets the criteria for multiple sub-subparagraphs of USML Category XI and how to correctly reference them on a DSP submission.

If your defense article meets the criteria of multiple sub-subparagraphs you should:

  •      Choose the predominant sub-subparagraph as the primary entry for the USML Category Block (DSP-5 Block # 11; DSP-61 Block # 13; and DSP-73 Block # 14)

The Department of State in its announcement warned of potential “Return Without Action” if the incorrect sub-subparagraph is used in the USML Category Block of the application.  Of more concern, the Department of State warned of potential significant delay as designation of an incorrect sub-subparagraph may not be detected until after the technical review of the DSP submission by the staffing points (DOD, RSAT, DRL etc) has been completed.

If you have any questions regarding these requirements please contact us.

New US Drone Export Policy Strengthens Control On Military Drones

By Keil J. Ritterpusch, Esq., Senior Associate, FD Associates, Inc.

In February 2015, the U.S. Department of State announced a “new policy” pertaining to the export of military drones, that a number of news outlets have hailed as a lifting of restrictions on the export of military, armed drones – referred to by industry as Unmanned Aircraft Systems (“UAS”). Concurrent with the Department of State release of its policy, the U.S. Department of Commerce signaled the near-term publication of regulatory changes in the Export Administration Regulations (“EAR”) regarding the export licensing of small non-military UAS. The two announcements are part of an overall Obama Administration policy to regulate the export of UAS in a manner consistent with national security objectives, without over-regulating UAS that are less-sensitive.

The Department of State policy announcement was widely distributed, being posted on the State Department website on February 17, 2015 (http://www.state.gov/r/pa/prs/ps/2015/02/237541.htm), and followed up with an off-the-record conference call with various State Department stakeholders and invited US industry on February 18. Meanwhile, the Department of Commerce announcement was made at an export controls conference held by the Association for Unmanned Systems International (“AUVSI”) on the same day.

Both policy changes announced by the Obama Administration have been highlighted by the media as a lessening of export controls on UAS. However, the Department of Commerce’s informally announced regulatory change is the only UAS policy modification that will likely result in a reduction in exporting requirements.

Department of State UAS Policy

Examining the specific language in the Department of State fact sheet on the “new” UAS policy, it is clear that the policy truly amounts to an increase in the regulatory requirements for the export of military UAS, not a decrease or a signal that armed UAS will be easier to sell in the international marketplace by US firms. Specifically, the new UAS policy requires that: “sales and transfers of sensitive systems [shall] be made through the government-to-government Foreign Military Sales program”. Armed Reapers were already approved for export to the United Kingdom and sales of sensitive military UAS to other allies in Europe have likewise been approved recently. So, the approval for the export of military UAS is not new. However, the fact that “sensitive systems” will only be exportable under the FMS program is new.

In addition to the FMS requirement for the sale of armed UAS and sensitive systems, the fact sheet further provides that “each recipient nation [shall] be required to agree to end-use assurances as a condition of sale or transfer”, whether the military UAV is for use for military purposes or not. Also, “end-use monitoring and potential additional security conditions [shall] be required”. The final piece of the new UAS export policy requires end users to expressly agree in writing to “principles for proper use” of military UAS.

The fact sheet offers the following guidelines regarding the “proper use” of military UASs:

  • “Recipients are to use these systems in accordance with international law, including international humanitarian law and international human rights law, as applicable”;
  • “Armed and other advanced UAS are to be used in operations involving the use of force only when there is a lawful basis for use of force under international law, such as national self-defense”;
  • “Recipients are not to use military UAS to conduct unlawful surveillance or use unlawful force against their domestic populations”; and
  • “As appropriate, recipients shall provide UAS operators technical and doctrinal training on the use of these systems to reduce the risk of unintended injury or damage”.

While obtaining end user assurances of “proper use” should be a straight-forward process enforcing the actual “proper use” of military UAS will be a very difficult thing to accomplish.

Department of Commerce UAS Regulatory Changes

At the AUVSI conference on February 17, the Department of Commerce advised attendees that it will be revising its regulations in the near term in order to reflect changes in the Waasenaar Arrangement – a multilateral missile control regime agreed to by its 41 member nations, including the U.S. – that were agreed in December 2014 by Waasenaar member nations. Specifically, in December the Waasenaar members agreed to liberalize restrictions on commercial UAS in recognition of the proliferation of drone technology and the over-control of small drones.

Per the Department of Commerce officials at the AUVSI conference, the ECCN 9A012 of EAR will be revised to lessen the reach of this ECCN, which currently covers the export of all non-military UAS that have autonomous flight control capability or the ability to fly outside the line of sight of a human operator. ECCN 9A012 requires a license for the export of all such UAS to every country except Canada. The way that 9A012 is currently written, even hobbyist and toy UAS are captured if the UAS has autonomous flight control or the ability to fly beyond an individual’s light of sight.

The proposed ECCN 9A012 revision will clarify that non-military UAS with a flight endurance of less than 30 minutes are not controlled. Furthermore, Commercial UAS with a flight endurance between 30 minutes and an hour will only be subject to an export license requirement if the units can fly in wind gusts of 25 knots or greater.  Non-military UAS with the capability of flight for one hour or more will remain subject to licensing requirements currently in place under ECCN 9A012.

Implications for the Future of UAS Exports

Although it is not directly addressed in the Obama Administration’s new UAS export policy directly, whether in the fact sheet or in public statements made by US Government officials, FD Associates believes that the strengthening of controls on the export of military UAS and the loosening of controls on the export of small, less capable non-military UAS signals a policy shift that is aimed at applying the “right” controls on UAS technology based on the analysis of real national security concerns posed by the proliferation of UAS technology worldwide. We feel that the current regulatory and policy changes when coupled with Export Control Reform open the window for companies to file Commodity Jurisdiction (“CJ”) cases to move the control of their unarmed, “military”–capable UAS from the ITAR to the EAR.

We are disappointed that the new policies do not address the major ambiguity in the ITAR due to the lack of a definition of “military” UAS. As the new policies are apparently aimed at the “right” controls being placed on UAS exports, it would have been an apt time for the U.S. Government to address the ambiguity. This ambiguity was addressed in the DTAG plenary session in 2014 by key UAS stakeholders, and DDTC has advised the stakeholders to file CJs. Now that the Department of State is requiring end user certifications of “proper use”, nation state assurances regarding end use, and end use monitoring, it is a good time for UAS manufacturers to file CJs regarding their UAS that do not contain sensitive military communications, military tracking or telemetry information, or ITAR sensors unless these components can be replaced with commercial equivalent. Many dual-use UAS have been traditionally captured as unarmed “military” UAS on the ITAR due to their extensive use in military applications, rather than their particular functionality.

ITAR 126.18 – Foreign Licensees Dual And Third Country National Employee’s

By: Jenny Hahn, Vice President, FD Associates, Inc.

In 2011, the ITAR was amended to address concerns from US foreign partner nations concerning violation of  their privacy laws, as a result of questions raised by US companies related to the nationality of persons assigned to work on ITAR programs and receive ITAR regulated data or hardware. The Arms Export Control Act, which is implemented though the ITAR, requires that transfers to all countries/persons/parties be authorized. The AECA looks at the nationality of the individual and deems nationality to pertain to both birthplace and citizenship. Prior to 2011, unless expressly enumerated in a license or agreement, the AECA/ITAR limited release of hardware or technical data by the foreign party to only employees with birth place and citizenship of the licensed country or countries.

With the implementation of ITAR 126.18, August 15, 2011, foreign licensees (or sub-licensees) are no longer required to provide the nationality (or in some instances) the individual employees names, to US companies, in order for them to work ITAR programs or have access to ITAR technical data or hardware, provided the foreign licensee implements certain measures, including vetting employees for “eligibility” to prevent diversions.  The obligation to vet employees for eligibility pertains to all ITAR authorizations, however it is generally only articulated in ITAR agreements (Technical Assistance Agreements and Manufacturing License Agreements).

What does this mean for foreign licensees?

Foreign licensees/sub-licensees must screen any dual or third-country dual national employee involved in any program or activity controlled and licensed under the ITAR for substantive contact with any ITAR sanctioned country specified in ITAR 126.1 for the risk of diversion. Certain exclusions to the screening exist:

  • Bona fide regular employees (ITAR 120.39) from countries specified in § 124.16 (NATO, Australia, EU, New Zealand & Switzerland) for foreign partners located in countries identified  in § 124.16 do not require screening;
  • Bona fide regular employees holding a security clearance issued by the host government do not require screening.

What does screening look like?

Foreign licensees/sub-licensees must ask questions of any third country/dual national employee involved in any ITAR program to adequately evaluate if the employee undertakes activities that pose a risk of diversion, such as:

  • Regular travel to ITAR 126.1 proscribed countries;
  • Recent or continuing contact with agents, brokers, and nationals of such countries including government officials;
  • Continued demonstrated allegiance to such countries such as being a member of the military forces;
  • Maintenance of business relationships with persons from such countries;
  • Maintenance of a residence in such countries;
  • Family contacts in a prohibited destination, where family members are connected to the prohibited destination government
  • Receiving salary or other continuing monetary compensation from such countries.

Once adequately screened, all screened employees assigned to ITAR programs must complete an ITAR Non- Disclosure Agreement prior to being granted access to any ITAR controlled technical data or hardware.

Lastly, the foreign licensee must have in place effective procedures e.g. Technology Control Plans, to prevent diversion to destinations, entities or purposes not authorized by the applicable ITAR license or agreement or other ITAR authorization to ensure compliance with the ITAR.

Export Control Reform

Beginning October 15, 2013, Export Control Reform has transferred certain categories of items on the US Munitions List and related technical data to the EAR’s Commerce Control List (CCL) under the so-called 600 series and 515 series Export Control Classification Numbers (ECCNS). On October 31, 2013 the Department of Commerce released a policy statement to permit  foreign licensees that receive any 600/515 series hardware and technology to avail themselves of the same procedures and authorizations allowed by  ITAR 126.18, when allowing any third- country/dual national employees to have access to ECCN 600/515 series data or hardware. The Department of Commerce also requires the same screening protocols by the foreign parties.

Should I ask my foreign customers about employees used on my ITAR or EAR 600/515 series programs?

The provisions of the ITAR no longer require you to ask your foreign partners about their employee base. However, as in any export compliance situation, be it related to an ITAR Technical Assistance Agreement or a Department of Commerce, Bureau of Industry and Security (BIS) license, you should make sure that your foreign licensee understands fully the nuances and requirements of the provisions of ITAR § 126.18.   We recommend wherever possible, this type of information be discussed in detail and followed up in writing with your foreign licensee(s).

Questions? Contact your FD Associates consultant for assistance.

Obama Administration Recommends Removal Of Cuba As A State Sponsor Of Terrorism

By Keil J. Ritterpusch, Esq., Senior Associate, FD Associates, Inc.

On April 14, 2015, President Obama told Congress that he recommends that Cuba be removed from the various U.S. Government lists of State Sponsors of Terrorism (“SSOTs”).  The recommendation followed a review by the U.S. Department of State over the past six months regarding Cuba’s support for international terrorism.  In making the recommendation, the White House stated:  “After a careful review of Cuba’s record, which was informed by the intelligence community, as well as assurances provided by the Cuban government, the Secretary of State concluded that Cuba met the conditions for rescinding its designation as a State Sponsor[1].

Congress has forty-five days from April 14 to review the removal of Cuba as an SSOT.  However, there isn’t any indication that Congress will block the removal.  If Congress takes no action, Cuba will automatically be removed as an SSOT under the Export Administration Act of 1979 (“EAA”), the Foreign Assistance Act of 1961 (“FAA”), and the Arms Export Control Act (“AECA”)[2]

Removing Cuba as an SSOT will authorize the Obama Administration to expand the scope of items that are permitted to be exported to Cuba and reduce the restrictions that U.S. persons have in engaging in financial transactions with Cuba.  It should be noted, however, that removing Cuba as an SSOT is merely an important first step in restoring diplomatic relations with the communist nation.

The U.S. Arms Embargo on Cuba enacted by the Cuban Liberty and Democratic Solidarity Act of 1996 (also called the “Helms-Burton Act”) will remain in place despite the removal of Cuba as an SSOT.  The Helms-Burton Act includes significant restrictions on trade and financial transactions with Cuba that are separate and distinct from the consequences of Cuba being an SSOT. The U.S. Arms Embargo on Cuba can only be lifted if Congress passes new legislation to remove the embargo.

Despite the continued operation of the U.S. Arms Embargo on Cuba, the removal of Cuba as an SSOT will immediately permit (among other things):

  • The Department of Commerce to allow a wider range of exports of dual-use items on the EAR, without the requirement to notify Congress in advance of the issuance of export licenses  -- though formal amendment of the EAR by the Department of Commerce will be required first;
  • The provision of certain foreign assistance and humanitarian aid by the Federal Government to Cuba, though such assistance must be consistent with the standing Helms-Burton Act; and
  • U.S. citizens to pursue legal claims against Cuba and persons in Cuba in U.S. federal courts.

The removal of Cuba as an SSOT will also eliminate certain disclosure requirements in connection with filings with the U.S. Securities and Exchange Commission (“SEC”) and will permit companies to conduct business in Cuba without violating State laws that prohibit investment in SSOTs.

In conclusion, while the removal of Cuba as an SSOT is an important political maneuver that is likely to ultimately result in expanded trade with Cuba, the U.S. Arms Embargo on Cuba remains in place.  As a result, persons looking to sell goods to Cuba need to carefully consider all of the legal implications of sale before engaging in transactions with Cuba.

[1]The EAA is the legal authority for the Department of Commerce’s Export Administration Regulations (“EAR”). While Congress allowed the EAA to lapse in 2001 and has not taken any steps to cure the lapse, the EAR has been maintained by way of the emergency powers granted to the President by the International Emergency Economic Powers Act of 1977 (“IEEPA”).

[2] The AECA is the legal authority for the Department of State’s International Traffic in Arms Regulations (“ITAR”).

Teledyne Lecroy Agrees To Pay $75,000 Civil Penalty For Unauthorized Exports Of EAR Items Worth $16,000 To Chinese Entity On Bis Entity List

By Keil J. Ritterpusch, Esq., Senior Associate, FD Associates, Inc.

On June 16, 2015, Teledyne LeCroy, Inc. of Chestnut Ridge, New York (“Teledyne LeCroy”) entered into a Settlement Agreement with the United States Department of Commerce’s Bureau of Industry & Security (“BIS”) related to two violations of the Export Administration Act of 1979, as amended, (“EAA”) that occurred in 2010.

The Settlement Agreement is related to a Charging Letter issued by BIS regarding two violations of the EAA by the predecessor of Teledyne LeCroy, LeCroy Corporation, who BIS alleged knowingly exported oscilloscopes controlled for export under Export Administration Regulations (“EAR”) Export Control Classification Number (“ECCN”) 3A292.d, an ECCN controlled for nuclear non-proliferation and anti-terrorism reasons, to an organization listed on the Entity List set forth at Supplement No. 4 to Part 774 of the EAR, without an export license: Beihang University of Aeronautics and Astronautics (“BUAA”) of Beijing, People’s Republic of China, also known as Beihang University or BUAA.

This case is interesting for a few reasons: (1) the value of the penalty ($75,000) compared against the value of the unauthorized exports (just under $16,000) and (2) the violations happened before Teledyne Technologies Incorporated (“Teledyne”) acquired LeCroy Corporation in 2012.

 Civil Penalty Nearly Five Times the Value of the Products Exported

The facts of this case are illustrative for exporters of the potential costs associated with failure to adequately screen international transactions (end users and consignees) against the various debarred party lists published by the United States Government.

In this case, BIS established that LeCroy Corporation had knowledge that the ultimate end user of the oscilloscopes, BUAA, was listed on the BIS Entity List and thereby prohibited from receiving U.S. exports, except with an export license from BIS. BUAA was added to the Entity List on May 14, 2001 (66 Fed. Reg. 24264). Pursuant to the Federal Register Notice adding BUAA to the entity list, an export license is required to export any item on the EAR to BUAA and, “export license applications will be considered on a case-by-case basis to determine whether the export would make a material contribution to the proliferation of missiles. When an export or reexport is deemed to make a material contribution, the license will be denied.”
LeCroy Corporation exported the oscilloscopes without applying for and receiving the required export license, despite knowing that BUAA was on the Entity List.

Generally, exports of ECCN 3A292 oscilloscopes, transient recorders, and “specially designed” parts and components only require export licenses for export to Iraq, Israel, Libya, and Pakistan, as well as the countries for which a trade embargo exists (e.g., Cuba, Iran, North Korea, and Syria). A license is not required for export to end users or for end use in China, unless: (1) the items being exported are “digital oscilloscopes and transient recorders, using analog-to-digital conversion techniques, capable of storing transients by sequentially sampling single-shot inputs at greater than 2.5 giga-samples per second” and are for “military end use” in China, per Section 744.21 of the EAR or (2) the end user is a prohibited party, as was the case with BUAA. In the Teledyne LeCroy case, we do not have sufficient information to indicate whether the oscilloscopes met the requirements of EAR Section 744.21 or were for “military end use”. However, LeCroy Corporation had knowledge that the oscilloscopes were for end use by BUAA. Therefore, LeCroy Corporation needed to obtain an export license for the shipments.

Beyond the failure to apply for an export license, BIS found that LeCroy Corporation failed to properly complete the Shipper’s Export Declarations (“SEDs”) in connection with the two export shipments from 2010. Rather than listing BUAA as the ultimate consignee on the SEDs, LeCroy Corporation listed Beijing Tianhua International Co., Ltd. (“Beijing Tianhua”) as the “ship to” party. LeCroy acknowledge that Beijing Tianhua was the intermediate consignee based on end user statements received from BUAA for the transaction.

These are the only facts stated in the Charging Order, the Settlement Agreement, and the Charging Letter explaining the violations by LeCroy Corporation that were imputed to Teledyne through the acquisition of LeCroy Corporation two years after the violations occurred. It is interesting that nowhere in the Charging Order, the Settlement Agreement, or the Charging Letter is there any explanation as to why BIS was imposing a civil penalty nearly five times greater than the value of the exports. None of the documents go into any detail regarding the calculation of the civil penalty in this case. Perhaps this is because Teledyne LeCroy agreed to work with BIS after BIS issued the charging letter and quickly arrived at the Settlement Agreement value with BIS.

It should be noted that BIS has published at Supplement No. 1 to Part 766 of the EAR, “Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases”. Supplement No. 1 to Part 766 of the EAR provides exporters with very useful information on what it considers in arriving at civil penalty determinations in enforcement actions. Beyond what is provided in Supplement No. 1 to Part 766 of the EAR, it should be noted that pursuant to the International Emergency Economic Powers Act (“IEEPA”), the maximum amount for administrative (i.e, non-criminal) penalties for export violations is the greater of $250,000 or twice the amount of the unauthorized transactions. Likewise, although this case does not involve a finding of criminal liability, the maximum penalty for criminal, willful violations of the EAR is the greater of $1,000,000 or five times the value of the unauthorized transactions.

The general factors considered by BIS in establishing penalties for violations of the EAR are listed in Section III, Subsection A of Supplement No. 1 to Part 766 of the EAR, and they are: the degree of willfulness, the destination involved, related violations, multiple unrelated violations, timing of settlement, and related criminal or civil violations.

Mitigating factors are listed in Section III, Subsection B of Supplement No. 1 to Part 766 of the EAR, and they include: the filing of a voluntary self-disclosure, the effectiveness of the company’s export compliance policy, the isolated nature of the violation, whether the export would have been licensed, the degree of assistance provided to BIS in the investigation, the degree of harm created by the violation, and the level of export compliance competency held by the violator at the time of the export violation.

Aggravating factors are also listed in Section III, Subsection B of Supplement No. 1 to Part 766 of the EAR, and they include the deliberate attempts to hide or conceal the violation, a serious disregard for export compliance responsibility, the significance of the export violation due to the sensitivity of the item exported, the value of the unauthorized exports was high, multiple violations of export law and regulation, and the lack of a system-wide export compliance program despite conducting routine exporting.

Examples of possible aggravating factors in the instant case include: the export to a denied party, potential nuclear end-use, potential efforts to hide who the end user was, and a failure to disclose the unauthorized export. As noted above, none of the documents released that pertain to this case discuss in any way how or why the $75,000 civil penalty was imposed. Thus, we must assume there was no mitigation by the taking of steps that demonstrated a willingness to improve the export compliance program.

 Voluntary Self-Disclosure Under the EAR and Successor Liability

We believe, based on our experience with BIS’s Office of Exporter Enforcement (“OEE”), that had Teledyne performed the appropriate pre-acquisition due diligence of LeCroy Corporation, it is possible that they would have discovered the violation before the acquisition and could have mitigated this outcome. If Teledyne had discovered the violation and required either LeCroy Corporation or Teledyne LeCroy to file a voluntary self-disclosure to BIS (before or immediately after the acquisition), Teledyne LeCroy could have avoided having to pay as large a civil penalty in this case.

Along these lines, as referenced above, the filing of a voluntary self-disclosure is a key mitigating factor that BIS examines when arriving at civil penalty determinations.  With respect to voluntary self-disclosures Section III, B. of Supplement No. 1 to Part 766 provides:

“All voluntary self-disclosures meeting the requirement Section 764.5 will be afforded ‘great weight’, relative to other mitigating factors not designated as having ‘great weight’.  Voluntary self-disclosures receiving the greatest mitigating effect will typically be those concerning violations that no BIS investigation in existence at the time of the self-disclosure would have been reasonably likely to discover without the self-disclosure.”

As discussed above, the willful nature of the violations in question, coupled with the fact that BIS was not likely to have issued a license for the export of the oscilloscopes to BUAA led, in our opinion, to the issuance of a civil penalty nearly five  times the value of the items exported.  However, we also believe, based on the language in Supplement No. 1 to Part 766 of the EAR and our practice history, that had Teledyne or Teledyne LeCroy taken action independently and self-reported the violations of the EAR, they could have lowered the civil penalty, and possibly avoided the civil penalty altogether.

 Successor Liability Responsibilities

It is clear from this case that successor liability is alive and well at BIS.  Successor liability involves the application of responsibility for past export compliance under the EAR and the International Traffic in Arms Regulations (“ITAR”) on companies that acquire other companies or assets of other companies where there was a violation of the applicable export rules by the company that was acquired -- or pertaining to the assets that were acquired -- before the acquisition.  Successor liability provides that the acquiring company picks up complete legal responsibility for the export violations of the acquired company or assets as though the acquiring company committed the violations on its own.

The export violations at issue in this case happened more than two years before Teledyne acquired LeCroy Corporation.  Based on the language in the Charging Order, the Settlement Agreement, and the Charging Letter, it does not appear that Teledyne or Teledyne LeCroy voluntarily self-disclosed the violations by LeCroy Corporation in 2010 pursuant to Section 764.5 of the EAR.

It is not known whether Teledyne performed export due diligence on the LeCroy Corporation before the acquisition, and, if so, whether Teledyne had knowledge that LeCroy Corporation had made unauthorized exports to China.  It is also unknown whether Teledyne conducted a post-acquisition audit the identified the violations at issue.

The fact that there is no statement regarding the knowledge possessed by Teledyne of the export violations of the LeCroy Corporation underscores the nature of successor liability.  The acquiring company assumes liability for the export compliance of the acquired company without any ability to disclaim liability because of a lack of knowledge or involvement with the violation by the acquiring company.  Rather, the acquiring company is treated under the EAR and the ITAR as if the acquiring company had committed the violations directly.

 Export Compliance Lessons Learned

There are two critical “lessons learned” for exporters arising out of this Teledyne LeCroy case.

The first is that every company that actively exports EAR or ITAR-controlled items needs to employ a restricted party screening tool that actively verifies whether any party to an export transaction is prohibited from receiving U.S. exports and whether there are any specific licensing requirements for exporting to or through a foreign party.  Any entities that are questionable hits on the restricted party screening should be reviewed by key export compliance personnel before proceeding with an export involving the party.

The second critical lesson is that companies acquiring other companies that are involved with exporting need to conduct due diligence, pre- and post-acquisition, on the companies they acquire.  A comprehensive review of the prior five years of export activities is expected by the U.S. Government agencies involved with export control.

A review of export transactions for the preceding five years and a run of foreign end users and intermediary consignees by Teledyne may have uncovered the unauthorized exports by LeCroy Corporation, which violations Teledyne could have mitigated fairly easily.  Teledyne could have required LeCroy Corporation to self-disclose before the acquisition or required LeCroy Corporation to place a certain amount of money in an escrow account to cover the cost of any export violations by LeCroy Corporation that were imputed to Teledyne in the future.

[1] The EAA is the legal authority for the Department of Commerce’s Export Administration Regulations (“EAR”).  While Congress allowed the EAA to lapse in 2001 and has not taken any steps to cure the lapse, the EAR has been maintained by way of the emergency powers granted to the President by the International Emergency Economic Powers Act of 1977 (“IEEPA”).

[2] None of the documents released related to this case expound on how BIS established that LeCroy Corporation knew that BUAA was a denied party on the Entity List.

[3] Interestingly, Beijing Tianhua was added to the Entity List after these transactions occurred, on December 12, 2013 in relation to their efforts to support BUAA.

Expiration Of “Grandfather” Period For Category VIII/XIX

By Odyssey E. Gray, III, Associate, FD Associates, Inc.

Not sure what your licensing obligations are for ITAR licenses and agreements that contain items that transitioned as a result of Export Control Reform? USML Category VIII (Aircraft and Related Articles) was the first USML Category revised under President Obama’s Export Control Reform (“ECR”). The goal of ECR is to strengthen national security while fostering the competitiveness of key U.S. manufacturing and technology sectors through revision of the International Traffic in Arms Regulations (“ITAR”) and Export Administration Regulations (“EAR”). The ITAR and EAR continue to undergo revisions. The revisions to date has resulted in the movement, or “transition,” of a majority of parts and components “specifically designed” for defense articles off of the ITAR and onto the EAR. Today, if an item is regulated by the ITAR, it will be enumerated in the specific US munitions list category or be caught by terminology of “specially designed parts and components therefor”. If not on the USML, the item will fall to the jurisdiction of the Commerce Department and be enumerated on the Commerce Control List (“CCL”), unless released from control under the “Specially Designed” definition/provisions for release.

Under ECR, the transition rules provide a two year “Grandfather” period for which existing DDTC licenses or agreements may continue to be used. The revised category VIII and new category XIX (and corresponding 600-series ECCNs 9X610 and 9X619) went into effect October 15, 2013. Thus, the Grandfather period for USML Category VIII/XIX expires October 14, 2015. The Department of State then published an extension to this date on October 9, 2015. The Department of State has now authorized all DSPs to remain in effect until expiration. Exporters should refer to the Department of State notice at http://www.pmddtc.state.gov/index.html.

Any agreements which only have transitioned items must also be replaced with an EAR authorization (license or license exception) after three years instead of the original two years as stated on October 3, 2013.

If, however, the items in questions are integrated into a defense article, the defense services now remain authorized but the agreement must be amended prior to October 14, 2016, to reflect the transitioned items using USML VIII(.x) or XIX(.x). Agreements with both transitioned and non-transitioned items must also be updated by October 14, 2016 to reflect USML changes.

For agreements with other USML categories in addition to USML VIII/XIX, the last USML category with items to transition to the EAR controls the grandfathering requirement. For example, if an exporter has items listed on a TAA that has USML category VIII items and also USML category XI items, the TAA grandfather period is extended until December 29, 2017, i.e., the end of the grandfather period for USML category XI.

DSP-61s and DSP-73s are not affected by the Grandfather period as these authorizations are valid to expiration whether containing only transitioning items or containing both transitioning and non-transitioning items.

For exporters now evaluating their obligations, you must first do the analysis of export jurisdiction and once you have verified EAR, then verify the Export Control Classification Number (“ECCN”) under the EAR. Not all items transitioned for USML category VIII were captured by the new ECCN 9X610 or 9X619. The “Specially Designed” rules released some items to EAR99 or another ECCN such as 9A991. As the exporter, once you have verified your ECCN, you must evaluate what export authority you will need to facilitate the export; a license, a license exception or “NLR” designation for export of the transitioned commodities. To accomplish this, exporters must determine the applicable ECCN down to the specific subparagraph for the item(s) and review the controls (NS, RS, etc.) associated with the item. Then a review of the country chart is necessary to determine if a license is required. Because of the existence of the prior DDTC license, depending on the country, license exception “STA” may be applicable. Other license exceptions may also be available.

For questions or support in navigating these time sensitive requirements, contact your FD Associates consultant.

Are you ready?

If your items are in other USML categories, here are some key dates

USML Category Effective Date of Revision Grandfather
IV 7/1/2014 6/30/2017
V 7/1/2014 6/30/2017
VI 1/6/2014 1/5/2017
VII 1/6/2014 1/5/2017
IX 7/1/2014 6/30/2017
X 7/1/2014 6/30/2017
XII 12/30/2014 12/29/2017
XV 11/10/2014 11/9/2017
XVI 7/1/2014 6/30/2017
XVII 10/15/2013 10/14/2016
XX 1/6/2014 1/5/2017
XXI 10/15/13 10/14/2017