, Author at FD Associates, Inc.

Changes To USML Categories VIII And XIX And Their Bookend ECCNS 9A610 And 9A619

By John Herzo, Senior Associate

Odyssey Gray, Associate

Jenny Hahn, Partner

As part of the continuing review of the U.S. Munitions List (“USML”) and the Commerce Control List (“CCL”) 600 / 500 Series Export Control Classification Numbers (“ECCN”) as part of Export Control Reform, on November 21, 2016 the Department of State, Directorate of Defense Trade Controls (“DDTC”) published its Final Rule regarding refresher changes to USML Category VIII which pertains to military aircraft and related articles and USML Category XIX which pertains to military gas turbine engines and related articles and the Department of Commerce, Bureau of Industry and Security (“BIS”) also published its Final Rule related to the bookend changes to ECCN 9A610 for military aircraft transitioned to the CCL and ECCN 9A619 for military gas turbine engines transitioned to the CCL. These changes go into effect on December 31, 2016.

Changes To USML Categories VIII And XIX And Their Bookend ECCNS 9A610 And 9A619 Read More »

DDTC IT Modernization – “Are You Ready?”

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

Change. It’s the universal constant. In all matter of things, change is ongoing, necessary and undeniable. In the world of IT, it is a hallmark of the industry. Technology changes occur daily as individuals, businesses, corporations and Governments seek more efficient and productive ways to do things.

As exporters develop and work towards more efficient processes to better manage, run and execute their activities, the Directorate of Defense Trade Controls (“DDTC”) has sought to do the same.

Step one was to overhaul and update its regulations under Export Control Reform (“ECR”) to more accurately reflect current technology and necessary controls for exporters’ commodities and services in today’s world. This is still ongoing.

The next step is to overhaul and update its processes related to adjudication of all manner of DDTC requests and authorizations. This is reflected in upcoming changes for exporters in how one obtains an ITAR registration, files Commodity Jurisdiction (“CJ”) requests, submits General Correspondence (“GC”) requests and submits requests for export authorization of hardware, technical data and defense services.

DDTC recognizes that its DTrade electronic licensing system is, in today’s world, an antiquated system. As such, there are gaps and shortcomings in its processes which make for additional work by exporters and USG personnel, which, with current technology, can be improved via automation or eliminated altogether.

Over time, different processes have been developed to try to address activities by exporters requiring DDTC authorization. Examining its infrastructure, DDTC understands that in today’s IT environment, these processes prove to be inefficient and unsatisfactory. For example, under the current system, if a company changes addresses, why must an exporter be responsible for printing out a web notice and forwarding this with their shipment? Why doesn’t the system simply update its existing records? What if the exporter does not include the web notice? How many calls and how much time is expended to address this? Or more accurately, how much time is wasted to address this breakdown due to lack of IT modernization?

Thus, DDTC seeks to address these and similar issues with its IT modernization plan to not only benefit exporters, but to improve its own capabilities to better track, manage and control commodities (including identification of parties to transactions), furthering its ultimate mission to protect national security. At the same time, these changes should help to allow industry to operate more efficiently and redirect resources to further engage and develop business opportunities.

IT modernization begins with how exporters interact with DDTC. Therefore, the interfaces between industry and DDTC are changing. DTrade, the use of digital certificates, the Electronic Filing System (EFS), the Electronic Licensing Entry System (ELLIE) and MARY are going away. A web-based, single online interface named the Defense Export and Control and Compliance System (“DECCS”) is coming. This system will feature data collection consolidation, improved security, use of a Government cloud and compatibility with multiple browsers. Instead of digital certificates, users will use a new 2-factor authentication process. Currently, only the ELISA database, the means of tracking requests, will remain unchanged.

How is this IT modernization going to occur? Consolidate and automate. As mentioned previously, one interface for exporters to submit requests. One form for exporters to request acuthorization for different export activities/requests, or notifications. In practice, this will be the use of one form for registrations, mergers and acquisitions; one form for CJs; one form for disclosures; one form for agreements, GCs and license requests and one form for Advisory Opinions.

When will this IT modernization occur? The new form for CJs goes into effect (“live”) November 21, 2016. The new registration form review process is finalizing so the form should be issued in early 2017. The other forms are in various stages of review, however, expectation is issuance and use of all the new forms by April 2017 in the current DTrade system. Overall migration from DTrade to DECCS is slated for June 2017.

How to prepare for IT modernization? Review DDTC’s goals and information related to these proposed changes, similar to the way exporters reviewed changes to the USML for ECR. Exporters can review the new forms on the DDTC website and any related notices and evaluate your internal processes in line with this IT modernization.

If you have questions, ask DDTC, response team or DTrade Help Desk, or contact FD Associates.

Don’t be intimidated. Remember it’s in the Government’s interest that exporters understand the new processes. Remember, it’s not about being new, but being better.

DDTC IT Modernization – “Are You Ready?” Read More »

Updates To The Department Of State’s Agreement Guidelines

By John Herzo, Senior Associate

On August 11, 2016, the Department of State, Directorate of Defense Trade Controls (DDTC) published its latest iteration of the Guidelines For Preparing Agreements (guidelines). DDTC updated the guidelines based on the changes to certain definitions and other sections of the ITAR that were published in the Federal Register on June 2, 2016, which go into effect on September 1, 2016. A majority of the changes to the guidelines are editorial and will not affect an applicant’s submission (DSP-5 vehicle, transmittal letter and agreement) of a proposed agreement/amendment to the Department of State for review.

Firstly, there are no changes to the guidance on how to prepare the DSP-5 Vehicle.

There is only one change required to the transmittal letter. The June 2, 2016 changes to the ITAR deleted the 22 CFR § 124.16 dual/third country national requirements. Therefore, § 124.12(a)(10) of the transmittal letter pertaining to § 124.16 should be deleted.

A summary of the main changes to the guidelines related to the preparation of the proposed agreement/amendment are as follows:

If the applicant wishes to export EAR controlled technology under the proposed agreement the § 124.7(2) section of your agreement must identify that EAR controlled technology will be transferred and will be used in or with the ITAR technical data to be transferred under the agreement.
The U.S. sub-licensing clause has changed slightly due to the addition of the definitions of reexports and retransfers to the ITAR. The U.S. sub-licensing clause should read as follows:

“This agreement authorizes sublicensing to U.S. Persons. Exports, reexports, retransfers or temporary imports by the U.S. sublicensee must be conducted as part of a separate authorization initiated by the U.S. Person.”

As stated above, the June 3, 2016 changes to the ITAR deleted the § 124.16 dual/third country national requirements, therefore the proposed agreement should no longer contain the § 124.16 language
While the § 124.16 language was deleted, the essence of § 124.16 was added to the § 126.18 dual/third country national exemption. It is not a requirement to include any language pertaining to § 126.18 in your proposed agreement/amendment, however FD Associates believes such a reference is a best practice as it puts the foreign licensee(s) on notice that they may utilize the exemption and will provide the foreign licensee(s) with information regarding the requirements of the exemption, which they are allowed to use.
Included with the changes to authorizing dual/third country nationals was the removal of DDTC’s consideration of country of birth when dual/third country national authorization is vetted by DDTC via § 124.8(5) (Option 2 from the guidelines). When determining nationality, DDTC will now consider all countries in which a foreign person has held or holds citizenship or holds permanent residency.
Lastly the verbatim § 124.8(5) language (USG clauses) was changed and should read as follows:

“The technical data or defense service exported from the United States in furtherance of this agreement and any defense article which may be produced or manufactured from such technical data or defense service may not be transferred to a foreign person except pursuant to §126.18, as specifically authorized in this agreement, or where prior written approval of the Department of State has been obtained.”

All changes to current agreements pursuant to the changes to the ITAR and the guidelines do not have to be made until the applicant submits its next major amendment to DDTC.

DDTC will accept new agreements with the required changes prior to September 1, 2016, the date of implementation of the changes to the ITAR. Any agreement/amendment submitted without any of the required changes after August 11, 2016, but before September 1, 2016 will be reviewed by DDTC. In such instances the applicant will be required to make the required changes to the agreement/amendment prior to execution pursuant to Provisos to the agreement/amendment. Starting on September 1, 2016 all agreements/amendments must be submitted to DDTC in accordance with the changes to the ITAR and the guidelines.

Updates To The Department Of State’s Agreement Guidelines Read More »

DDTC Rescinds Notice From May 6, 2016 Regarding The Use Of The Current Version Of The DSP-83

By John Herzo, Senior Associate

June 8, 2016 - Effective IMMEDIATELY any expired DSP-83 forms the Department of State receives with export license applications will be processed. In addition, any client who received a proviso directing the upload of a new DSP-83 form as part of the condition to make exports is advised by the department of State that they may disregard the proviso by citing the June 8, 2016 notice.

The Department of State strongly urges all companies to use the latest DSP-83 form on their website.

DSP-83 Form Change

In November of 2015 the Department of State updated the DSP-83 Non-transfer and Use Certificate required for applications involving the permanent export of Significant Military Equipment. There were no changes to the wording of the form, the only change made was the extension of the expiration date until May 31, 2018 on the bottom of the form. At that time the Department of State published a web notice that stated that earlier versions of the form would be rejected after review by a licensing officer as the DTrade system cannot reject a submission based on the expiration date of supporting documentation.

The Department of State continued to receive expired DSP-83 forms as supporting documentation with DTrade submissions. In the interim in March 2016, DDTC published a revised DSP-83 form which updated the expiration date at both the top of the document and the bottom. Due to its obligation to accept only non-expired forms, on May 6, 2016 the Department of State issued a web notice which identified the following:

Any license application pending with DDTC using an unexpired DSP-83 form (prior to DDTC revision) will be processed as normal;
Any license application in process with the prior DSP-83 form will be processed as normal, but will require completion of an updated DSP-83 form by all parties before July
1, 2016; which must be uploaded to DTrade;
Beginning on May 14, 2016, the Department of State will not accept license applications using the expired DSP-83 form, unless the applicant submits a formal letter signed by the
Empowered Official with the application stating that the applicant understands that it must obtain new DSP-83 forms prior to DDTC approval of the license application. Any license application that does not contain a new DSP-83 by July 1, 2016 will be Returned Without Action;
Starting on July 1, 2016 all license applications submitted with an expired DSP-83 will be Returned Without Action by the Department of State.

Got questions, contact your FD Associates’ consultant!

DDTC Rescinds Notice From May 6, 2016 Regarding The Use Of The Current Version Of The DSP-83 Read More »

DOJ Issues Guidance On Pursuing Individual Accountability For Corporate Wrongdoing

By Keil J. Ritterpusch, Esq., Senior Associate

In a memorandum and accompanying speech in September 2015, U.S. Deputy Attorney General Sally Quillian Yates, the Department of Justice (“DOJ”) announced a major new initiative designed to target and pursue “accountability from the individuals” who “perpetrate corporate wrongdoing.” The memorandum is published at http://www.justice.gov/dag/file/769036/download.

This DOJ memorandum provides insight into a new initiative within the Obama Administration for the investigation of wrong-doing by corporate entities, with the aim of pursuing investigations and civil and criminal actions against individuals within companies who are responsible for corporations committing violations of U.S. laws and/or regulations, including the Arms Export Control Act (“AECA”), the International Traffic in Arms Regulations (“ITAR”), the Export Administration Act (“EAA”), the Export Administration Regulations (“EAR”), the Office of Foreign Asset Control (“OFAC”) Regulations, and the Foreign Trade Regulations (“FTR”). While the DOJ memorandum does not expressly pertain to export compliance activities of companies, the memorandum applies generally to any law enforcement activity that may involve the DOJ or law/regulatory enforcement personnel, including personnel working for the Departments of State and Commerce, U.S. Customs and Border Protection, and the U.S. Census Bureau.

Specifically, the DOJ memorandum provides six specific policy instructions to DOJ attorneys, both in Washington D.C. and the U.S. Attorneys’ Offices, on the investigation and resolution of criminal and civil enforcement matters involving corporations and their employees. The memorandum applies to alleged violations of any U.S. law or regulation by corporations and the pursuit of actions/investigations against key employees of the corporations. Media reports described the memorandum as the first major policy announcement by the new Attorney General, Loretta E. Lynch.

As a foundational matter, the DOJ memorandum acknowledged the substantial challenges to pursuing individuals who “perpetrate corporate wrongdoing.” Deputy Attorney General Yates further stated in a speech regarding the policy: “These cases can present unique challenges for DOJ’s agents and attorneys: there are complex corporate hierarchies, enormous volumes of electronic documents, and a variety of legal and practical challenges that can limit access to the evidence we need.”[1] Deputy Attorney General Yates further explained that “In modern corporations, where responsibility is often diffuse, it can be extremely difficult to identify the single person or group of people who possessed the knowledge or criminal intent necessary to establish proof beyond a reasonable doubt. This is particularly true of high-level executives, who are often insulated from the day-to-day activity in which the misconduct occurs.”

The DOJ memorandum cites the following six steps in pursuit of individual corporate wrongdoing:

Where a corporation’s continued cooperation is necessary post-resolution, the “plea or settlement agreement should include a provision that requires the company to provide information about all culpable individuals and that is explicit enough so that a failure to provide the information results in specific consequences, such as stipulated penalties and/or a material breach.”

Any such release of criminal or civil liability must be due to “extraordinary circumstances” and must be “personally approved in writing by the relevant Assistant Attorney General or United States Attorney.” There may also be exceptions for approved Departmental policies such as the Antitrust Division’s Corporate Leniency Policy.

If, at the conclusion of the investigation, a decision is made not to bring civil claims or criminal charges against individuals, the reasons for that decision must also be memorialized and approved by the U.S. Attorney or relevant Assistant Attorney General.

Implications of the DOJ Policy

While the DOJ memorandum is not binding law, it is a source of practical guidance for DOJ attorneys and law enforcement agents and will involve several changes to the U.S. Attorneys’ Manual and other Departmental guidance. It remains to be seen how significant a change these policy directives will have on individual prosecutions and corporate civil and criminal resolutions.

However, one thing is clear: DOJ is trying to send a message to the public and to agents and prosecutors across the country that punishment and deterrence of unlawful conduct will not be served unless individuals, as well as companies, are held accountable for corporate wrongdoing.

We view the memorandum as reflecting a significant change in DOJ policy for civil cases, though not as much in criminal cases. This makes the new policy particularly pertinent in civil agency, law enforcement, and DOJ enforcement of cases involving civil/regulatory matters.

Deputy Attorney General Yates specifically declared in her speech announcing the new policy that the memorandum represents a “substantial shift from our prior practice,” providing that “we’re not going to let corporations plead ignorance.” Yet the memorandum reflects practices that are already employed by numerous DOJ components and U.S. Attorneys’ offices, and reflects prior DOJ guidance, such as a September 2014 speech by Criminal Division leadership declaring that “Voluntary disclosure of corporate misconduct does not constitute true cooperation, if the company avoids identifying the individuals who are criminally responsible. Even the identification of culpable individuals is not true cooperation, if the company fails to locate and provide facts and evidence at their disposal that implicate those individuals.”[2]

In regulatory cases, the memorandum appears to have a pronounced effect. Its apparent prohibition on the release of individual liability within corporate settlement agreements may complicate the negotiation and execution of corporate resolutions. In certain civil settlement agreements, for example, DOJ has agreed to release employees from at least civil liability. Yet the new guidance would appear to mark a shift in this practice, providing that “absent extraordinary circumstances, the United States should not release claims related to the liability of individuals based on corporate settlement releases,” and that any such releases must be personally approved in writing by the relevant Assistant Attorney General or U.S. Attorney.

The memorandum may also produce increased civil enforcement action against present and former company employees, even if the individual has few resources to satisfy any demand, judgment, or claim for payment.

It appears that “purely civil” corporate investigations may become less likely, and that clients ought to consider whether and how criminal prosecutors may become involved in such investigations. As noted above, the guidance requires civil and criminal attorneys to be in “routine” communication with one another throughout an investigation. The major lasting impact of these policy changes may in fact be increased civil enforcement, as opposed to additional individual criminal guilty pleas.

As the Deputy Attorney General acknowledged in her speech: “Less corporate cooperation could mean fewer settlements and potentially smaller overall recoveries by the government. However, individuals facing long prison terms or large civil penalties may be more inclined to roll the dice before a jury. Therefore, we could see fewer guilty pleas.

Implication for Regulatory Investigations

Only time will tell as to how the DOJ policy will affect investigations in regulatory matters, particularly in export compliance matters. There is clear direction from the Departments of State and Commerce and the Census Bureau for parties who have violated the ITAR, the EAR, or the FTR to self-disclose their violations. However, although stipulated in the regulations to name the parties involved, it has not industry practice to name the individual persons within the company who were involved with unauthorized conduct under the relevant regulations. With this new DOJ policy, though, it appears that companies will be expected to provide specifics on who within the company were involved with pertinent violations of regulatory requirements.

While the DOJ memorandum expressly applies to the investigation of criminal and civil violations by the DOJ community, it is not clear that the investigators at the Departments of State and Commerce, U.S. Customs and Border Protection, or the U.S. Census Bureau are mandated to follow the dictates of the DOJ memorandum. Nevertheless, for any violation of applicable export laws where DOJ becomes involved with an investigation, it is clear that DOJ will be pursuing investigations of key persons within companies who were responsible for the violations of applicable export rules.

As such, we recommend that companies involved with investigations of export violations fully disclose the names of individuals involved with purported violations of export rules, as well as the applicable managers and senior level executives overseeing compliance, to the government agencies involved with enforcing the violations. Only by doing so will corporations be able to limit or lessen their criminal liability for misconduct.

[1] Deputy Attorney General Sally Quillian Yates Delivers Remarks at New York University School of Law Announcing New Policy on Individual Liability in Matters of Corporate Wrongdoing

[2] See text of speech given by Principal Deputy Assistant Attorney General for the Criminal Division Marshall L. Miller on September 17, 2014: http://www.justice.gov/opa/speech/remarks-principal-deputyassistant-attorney-general-criminal-division-marshall-l-miller.

DOJ Issues Guidance On Pursuing Individual Accountability For Corporate Wrongdoing Read More »

Client Notice: DDTC Waives Requirement For Exporters To Lodge DSP-5 Permanent Export Licenses With CBP, Effective Immediately

DDTC announced on 12/21/2015 that it has waived the requirement for the industry to lodge DSP-5 permanent export licenses for hardware with CPB. This decision was made in anticipation of the implementation of the U.S. Customs and Border Patrol (CBP) Automated Commercial Environment (ACE) and because DDTC has been electronically sending CBP registration and licensing data on a daily basis. Since CBP port officials will have access to the DDTC registration and licensing data through ACE, DDTC has determined that is no longer necessary for exporters to lodge DSP-5 permanent export licenses with CBP.

The ITAR will be updated accordingly. The notice is found on the DDTC home page.

If you have any questions, please contact us at 703-847-5801.

Client Notice: DDTC Waives Requirement For Exporters To Lodge DSP-5 Permanent Export Licenses With CBP, Effective Immediately Read More »

Time To Update Your Records – Customs And Census Update HTS And Schedule B Codes For 2016

By Keil J. Ritterpusch, Esq., Senior Associate

With the ringing in of 2016, it’s time to update your Harmonized Tariff System (“HTS”) and Schedule B codes for your export and import shipments. While we were busy ushering in the New Year, U.S. Customs and Border Protection (“CBP”) and the U.S. Census Bureau (“Census”) were busy making changes to the HTS and Schedule B codes. Every year, these two agencies discontinue certain codes and establish new codes.

Many changes that are applied to HTS codes do not translate to Schedule B codes (and vice versa), so it is imperative that you check each schedule to verify any changes and ensure compliance before importin g or exporting. Luckily for importers and exporters, there is a thirty (30) day grace period in which the Automated Export System (“AES”) will still accept the old 2015 codes. This grace period ends 30 days after December 31, 2015 (or on January 30, 2016). After that date, using expired HTS or Schedule B codes will result in a fatal error in AES.

AESDirect (http://aesdirect.census.gov) will still accept 2015 HTS and Schedule B codes. However, the system has been updated to reflect the 2016 changes so exporters can begin using the updated codes now. AESPcLinkusers will need to update their AESDirect code table before the grace period expires. AESDirect websiteusers will have the table automatically updated; so, no action is required.

Here are some important links concerning the updates:

CBP updated the list of valid HTS codes for importing. Meanwhile, Census updated the list of valid Schedule B codes for exporting.

Both the 2016 Schedule B and HTS tables are available for downloading at:
http://www.census.gov/foreign-trade/aes/documentlibrary/#concordance

The current list of HTS codes that are not valid for AES are available at:
http://www.census.gov/foreign-trade/aes/documentlibrary/concordance/hts-not-for-aes.html

Please contact FD Associates if you have questions or need assistance in applying these changes across your organization. We’re ready to help you with any of your export compliance requirements.

Time To Update Your Records – Customs And Census Update HTS And Schedule B Codes For 2016 Read More »

AES Transition To ACE

By John Herzo, Senior Associate

On February 19, 2014, President Obama mandated a single system for reporting export and import information. The system used to collect this information is the International Trade Data System’s (“ITDS”) Automated Commercial Environment (“ACE”).

By December 31, 2016, U.S. Government agencies are required to utilize the ITDS ACE system to receive data related to the release of imports and clearance of exports.

The U.S. Census Bureau (“Census”) currently collects export data from U.S. exporters via its Automated Export System (“AES”). Census will transition the collection of data via AES to the collection of such data through the ACE system. Census will also transfer data previously collected via the AES into the ACE system. The look and function of the portion of ACE designated for the collection of export information will be similar to the AES.

On November, 30, 2015, U.S. Customs & Border Protection (“CBP”) announced that all export filers that have obtained an ACE account may utilize ACE to file export data with Census. Note: if your company has an AESDirect account, your company will not automatically be given an ACE account. Your company will need to obtain a separate ACE account. To establish an ACE account, register at: www.cbp.gov/ACE

Both AES and ACE will be available to filers for use during a transition period that is estimated to be several months after November 30, 2015. We will update you once the a specific date has been set for the end of the transition period.

The added advantages of ACE over AES are as follows:

The ACE filer can instantly view, free of charge, all export information submitted via ACE under its EIN number for the past five years plus the current year. Export information filed over the past five years via AES will be migrated from AES into ACE when your ACE account is set up. Filers still using AES can request one year’s worth of export information from Census for free and will be charged $125 per each additional month of requested data, up to a total of five years’ worth of data;
ACE offers an auto-save feature;
ACE allows filers to save partial shipment information;
Filers can save complete shipment information for use with a later submission in ACE;
ACE allows the filer to view the ACE interface in Spanish;
ACE allows the filer to create user administration roles and profiles; and
ACE allows the filer to create and save templates for future use.

AES Transition To ACE Read More »

Key Aspects Of Successful Voluntary Disclosures

By John Herzo, Senior Associate

The goal of any Voluntary Disclosure (“VD”) submitted to the Department of State (“DOS”) or Voluntary Self-Disclosure (“VSD”) submitted to the Department of Commerce (“DOC”) (collectively referred to as, “disclosure”) is to report and assure the DOS or DOC that the violations will not occur again. You also want DOS or DOC to close the disclosure without taking any civil or criminal action against your company or otherwise levying a fine based on the facts addressed in the disclosure. Key elements of the voluntary disclosure process are described below.

Investigation: Management Support For The Disclosure And The Investigation Process

Management support signals the importance of the matter for company employees and will allow for all aspects of the potential non-compliance to be fully investigated. Management support of the process should give authority to the investigation team to fully investigate all aspects of the transaction in question and related matters deemed appropriate by the investigation team and to convey to the persons involved that the goal of the investigation is to determine what went wrong, why it went wrong and how to assure it won’t happen again. It is not intended to place blame for the violation. Management support should provide the persons involved in the transaction with the encouragement to fully cooperate with the investigation and not sweep important facts under the rug.

Thorough Interview Of Each Person Involved In The Transaction In Question (And Related Matters)

Each person involved in the transaction, including employees of other entities involved, if applicable, should be interviewed. The lead personnel in each department involved in the potential matter of non-compliance should also be interviewed including personnel in business development, shipping/receiving, engineering and IT. Questions regarding the specific facts of the matter should be asked. To determine if the matter is part of a systemic issue or if there are related issues, questions regarding similar types of transactions should be asked.

Thorough Audit Of The Documentation Related To The Transaction In Question

Although the interview process is a key aspect of the investigation, people’s memories and interpretation of the events may be incorrect and will be subjective. However the documentation associated with the event will be objective. The document review portion of the audit should focus on documentation related to the transaction in question such as: license/agreement approvals; shipping documents/records; technical data such as: technical proposals; drawings; schematics; operation and maintenance manuals; internal and external emails; faxes; phone logs; visitor forms; travel forms; classification information; citizenship documentation. To determine if the transaction is part of a systemic issue or if there are related issues, documentation related to similar types of transactions should be reviewed.

It should be noted that when documentation is not clear regarding what happened or why in a given transaction, the documentation review will need to be augmented with interviews of more personnel to attempt to corroborate or contradict information learned from those who were responsible.

Goal Of The Investigation

The goal of the investigation is to gather information necessary to determine if a matter of non-compliance has occurred. This information will be used to draft a complete disclosure for submission to the DOS or DOC, if the facts indicate a disclosable violation occurred.

The results of the investigation should be reviewed with your company’s Empowered Official, internal legal staff, and outside consultants or counsel to determine if a violation has occurred. The Empowered Official should discuss the result of the investigation with senior management and a decision following company policy should be made regarding the filing of a disclosure.

Disclosure:

The key aspects of a successful disclosure are:

Identification Of The Matter(s) Of Non-Compliance

The disclosure will identify the matter(s) of non-compliance. In addition to laying out the facts in the disclosure letter, we recommend the utilization of matrices to convey the key aspects of the matter(s) of non-compliance to the U.S. Government reviewers. For disclosures related to the export/import of hardware the matrix should identify the following: date of export/import; description of the hardware; quantity; U.S. $ value; intermediate consignee; consignee; end user; end use; country of ultimate destination; license/agreement # or exemption/exception citation; AWB or BOL #. For disclosures related to the export of technical data/technology and/or defense services the matrix should identify the following: date of export; description of non-compliance; list of technical data/technology provided; description of defense service provided; list all foreign parties by name, address and role; and country of ultimate destination.

Identification Of How And Why The Matter(s) Of Non-Compliance Occurred

After you have identified the matter(s) of non-compliance, the disclosure will need to identify how and why the matters of non-compliance occurred. This information will come from the interviews and audit of the documentation related to the transaction in question. This section should be tailored to transition smoothly to the following section, where “mitigating factors” are explained.

Mitigating Factors

Mitigating factors are arguably the most important part of any disclosure. The ITAR and EAR both address the manner how mitigating circumstances factor into avoiding civil and criminal action and to reduce potential fines. Key mitigating factors include: no willful intent to violate the regulations; no harm to U.S. national security and/or U.S. foreign policy objectives; export was made to a U.S. ally; belief, based on prior approvals, that had your company requested authorization for the export in question such authorization would have been granted; foreign availability of similar products. To be included in the disclosure, mitigating factors must be specific to the subject matter(s) of non-compliance.

Corrective Actions

When there are insufficient mitigating factors involved, the corrective action section of a disclosure becomes the most important section of the disclosure. By explaining the corrective actions taken or being taken, the company is letting the government know what actions your company has and/or will take to help ensure that the disclosed matter(s) of non-compliance will not occur again. The corrective actions included in your disclosure should be specific to the subject matter(s) of non-compliance. Key corrective actions include: taking immediate steps to stop actions so that the matter(s) of non-compliance do not continue (e.g., holding a shipment until the correct license is obtained or removing a foreign person employee from a program until the correct license is obtained), providing training to strengthen and establish a cross-check on export transactions (hardware and technical data) to ensure review of transactions against requirements of licenses and regulations. The U.S. government reviewers will want to know that your company has a documented export compliance program and assigned trained individuals within your company responsible for export compliance. Therefore, the disclosure should address any changes your company has or will make to its export compliance manual and internal processes or procedures to ensure similar matter(s) of non-compliance will not occur and what training personnel involved in the matter of non-compliance or trade compliance has or will receive.

All corrective actions should be specifically focused on the matter of non-compliance that your company is able to undertake within the time frame stated in the disclosure. For instance, if a corrective action is to update your company’s export compliance manual within 30 days of the submission of the disclosure, that should be an achievable action.

An essential aspect of any successful disclosure is one’s compliance with all stated corrective actions. Failure to comply with stated corrective actions will be a severe issue if the same type(s) of matter(s) of non-compliance occur again. As a result, many enforcement actions by DOS and DOC in recent years have been brought because company’s fail to follow through on promised corrective actions. Follow-on auditing is recommended to verify implementation of corrective actions.

Supporting Documentation

Copies of relevant documentation reviewed during the document review portion of the investigation should be included with the disclosure submission such as: license/agreement approvals; shipping documents/records; technical data such as: technical proposals; drawings; schematics; operation and maintenance manuals; emails; faxes; phone logs; visitor forms; travel forms; classification information; citizenship documentation.

Any documentation related to a stated corrective action should also be included. For instance if a stated corrective action is that your company updated its export compliance manual specific to the violation, a copy of the updated export compliance manual should be submitted with the disclosure. If a stated corrective action is that the persons involved in the subject matter(s) of non-compliance received refresher export compliance training, copies of the refresher export compliance training slides with sign-in sheet should also be included.

*******

Call FD Associates at 703-847-5801 or email info@fdassociates.net if you need support with compliance investigations, the preparation of disclosures or the overall enhancement of your export compliance program.

[1] It should be noted that the investigation of potential matters of non-compliance should involve all three of the major regulations that pertain to exporting hardware and/or technical information from the United States: (1) the International Traffic in Arms Regulations (“ITAR”); (2) the Export Administration Regulations (“EAR”); and (3) the Federal Trade Regulations (“FTR”). While this article concentrates on the requirements for disclosures submitted to DOS and DOC for prospective non-compliance with the ITAR and the EAR respectively, it should be noted that exporters need to also assess whether export shipments described in VDs or VSDs need to be addressed in disclosures to the U.S. Census Bureau, who administers the FTR.`

Key Aspects Of Successful Voluntary Disclosures Read More »

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?

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.
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).
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.
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.
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?

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