Consultants Corner

Following the 50% Rule .. BIS Adds 29 Entries to the Entity List

On October 9, 2025 via 90 Fed. Reg. 48193 (“FRN”), the Department of Commerce Bureau of Industry Security (“BIS”) added 29 entries (26 entities and 3 addresses) located in China, Hong Kong, Turkey, and the U.A.E. to the Entity List . These entities were involved  in diverting U.S. origin commodities to Iran for use in Unmanned Aircraft Systems (UAS)/ Unmanned Aircraft Systems (UAVs) or aircraft in violation of the U.S. Export Administration Regulations (EAR).

 

Why This Matters

  • First Update to the Entity List since Implementation of the BIS Affiliate Rule (AKA 50% Beneficial Ownership Rule)

Under the new Affiliate Rule, implemented on September 29, 2025, companies are prohibited from engaging in a transaction without prior USG authorization with an unlisted entity that is 50% or more owned, in the aggregate, by an entity or entities identified on the BIS Entity List (EL) and the Military End User (MEU) list and the Dept. of Treasury’s Office of Foreign Asset Controls (OFAC) Specially Designated National List (SDN) List.

Companies must obtain the parent companies and owners of an entity up through to the ultimate beneficial owner and screen the entities against the EL, the MEU, and SDN for potential matches and ownership that is greater than then 50% threshold.

The requirement to screen for 50% ownership is not a new requirement – it is a requirement under the OFAC sanction programs – however under the BIS Affiliate Rule companies must review the licensing requirements or prohibitions for each owner identified on SDN, the EL, and MEU and apply the most restrictive requirement to the transaction.

 

  • Companies Must Adopt New Strategies and Tools to Comply with the Expanded Use of the 50% Beneficial Ownership Rule and Frequent Updates to the Lists

Performing 50% Beneficial Ownership screening and managing the rescreening of parties to a transaction (e.g. purchase, end user, freight forwarder, supplier, etc.) due to frequent updates to the lists will be challenging for companies with limited resources. Since September 29 when the Affiliate Rule was implemented, OFAC and BIS collectively added more than 150 entities over five different updates to the SDN and Entity list.

 

To manage these compliance requirements more efficiently, companies should use third-party sanctioned/restricted party ownership research services that dive deep into the Beneficial Ownership structure to augment existing sanctioned/restricted party screening tools. These tools should include persistent screening of the parties to the transaction against changes to the sanctioned/restricted party lists or a mechanism to regularly upload a list of parties for screening. Companies not using such services should supplement standard third-party services with internal sanction ownership research by utilizing publicly available information (e.g. investor reports, business documents filed with government, information from media outlets etc.) to fill potential gaps that exist between when an entity is added to a list to when the third-party service completes their research and updates their lists.

 

Lastly, company personnel conducting the screenings must be trained not only to use the screening tools but also to conduct sanctioned/restricted ownership research, identify and mitigate compliance risk or escalate to senior management when the risk cannot be mitigated.

 

On Our Radar

  • U.S . Origin Components Were Recovered from the UAS/UAV wreckage

The US Government stated in the FRN that it has identified the entities who diverted U.S. origin commodities to Iran from information found on the U.S. origin commodities recovered in the UAS/UAV  wreckage, presumably manufacturer’s name or logo, part number serial number, etc.

 

The FRN does not mention the manufacturer's role in the investigation, nonetheless, this underscores the importance of screening the parties to the transaction and particularly the end use/end user of the exported commodities. Moreover, companies should keep records of their due diligence efforts, such as end use statements or other documents,  if their products are later found in an unauthorized country or application, to assist the government in their investigation.

  • The Additions Included the China and Hong Kong Subsidiaries of Arrow Electronics, a U.S. Electronics  Distributor

BIS added the China and Hong Kong subsidiaries of Arrow Electronic to the BIS EL for facilitating the purchase of U.S. origin electronics  found in the wreckage of UAS operated by Iranian proxies. Arrow Electronics stated they are in discussions with BIS to resolve this issue. It will be interesting to see if the compliance actions taken by BIS are contained to the China and Hong Kong subsidiaries or if at a later date it spills over to the parent company.

Regardless of outcome, this action highlights the importance of ensuring that your foreign subsidiaries and affiliates compliance with U.S. export regulations are imperative and validating end use/end user and screening the parties to the transaction are mandatory not optional.

 

What’s Next?

  • Education - business functions, e.g. business development, purchasing, order entry/contract etc., that engage in transactions with foreign parties on the new requirements. Include foreign subsidiaries and affiliates in this process.
  • Discuss strategies for collecting and screening ultimate beneficial ownership information to ensure compliance.
  • Explore third-party screening solutions to augment and streamline your existing screening processes.

Following the 50% Rule .. BIS Adds 29 Entries to the Entity List Read More »

Out With The New, Back To The Old Ways BIS Rescinds Biden Era Firearms Restrictions On Exports

By John Herzo, J.D.

Senior Compliance Associate

On September 29, 2025 via 90 Fed. Reg. 47170, the Department of Commerce’s Bureau of Industry and Security (“BIS”) rescinded in part Interim Final Rule, 89 Fed. Reg. 34680 (“Firearms IFR”), that imposed additional export requirements on the export of EAR regulated firearms, related ammunition and components thereof.

The Firearms IFR imposed a range of additional requirements, including:

  • A “presumption of denial” for exports to non-governmental user (civilian and commercial entities) to the following 36 “high-risk” countries: Bahamas, Bangladesh, Belize, Bolivia, Burkina Faso, Burundi, Chad, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Indonesia, Jamaica, Kazakhstan, Kyrgyzstan, Laos, Malaysia, Mali, Mozambique, Nepal, Niger, Nigeria, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Suriname, Tajikistan, Trinidad and Tobago, Uganda, Vietnam, and Yemen;
  • Export license requirements on sporting shotguns and optics to U.S. allies;
  • Limited the use of EAR License Exceptions BAG 15 CFR § 740.14 and LVS § 740.3;
  • Additional documentation requirements for license applications:

o  Purchase Order for all license applications for EAR regulated firearms, related ammunition and components;

o  Import Certificate or Equivalent Document for all license applications for EAR regulated firearms, related ammunition and components; and

o  Passport or National ID Card for all license applications for exports of EAR regulated firearms, related ammunition and components to individuals (Natural Persons);

  • Shorter validity period, one (1) Year as opposed to four (4) Years for other BIS 748P licenses for all BIS 748P licenses for the permanent export of EAR regulated firearms, related ammunition and components.

The current rule, 90 Fed. Reg. 47170, revokes a majority of the changes made to the EAR by the Firearms IFR, 89 Fed. Reg. 34680, and restores a majority of the export rules for EAR regulated firearms, related ammunition and components that previously existed. However, the current rule retains the four new ECCNs (0A506, 0A507, 0A508, and 0A509) implemented by Firearms IFR, 89 Fed. Reg. 34680, and does not remove the requirements to obtain BIS 748P licenses for most exports of EAR regulated firearms, related ammunition and components.

The current rule, 90 Fed. Reg. 47170, revokes the purchase order requirements for BIS 748P license applications for EAR regulated firearms, ammunition and components and the requirement for an Import Certificate or Equivalent Document. However, an Import Certificate or Equivalent Document is still a requirement for BIS 748P license applications for exports to countries that require these documents for entry of firearms, ammunition and components into their country. It should be noted that the Import Certificate or Equivalent Document in these instances was a requirement of the EAR prior to implementation of Firearms IFR, 89 Fed. Reg. 34680.

The current rule, 90 Fed. Reg. 47170, also revokes the requirement for a Passport or National ID Card to support a BIS 748P license application for export to individuals (Natural Persons).

Lastly, the current rule, 90 Fed. Reg. 47170, reinstates the four (4) year validity period for BIS 748P licenses for firearms, ammunition and components.

What does the current rule, 90 Fed. Reg. 47170, mean for U.S. exports of EAR regulated firearms, ammunition and components:

  • There is a wider range of countries to which EAR regulated firearms, ammunition and components can be exported to without the BIS 748P license application being reviewed with a presumption of denial;
  • There are less supporting documentation requirements to obtain a BIS 748P license EAR regulated firearms, ammunition and components;
  • EAR License Exceptions BAG § 740.14 and LVS § 740.3 may be available for the export of EAR regulated firearms, ammunition and components;
  • BIS 748P licenses for the export of EAR regulated firearms, ammunition and components will now be valid for four (4) Years.

What is not clear in the current rule, 90 Fed. Reg. 47170, is whether any BIS 748P licenses that were either revoked or modified by the Firearms IFR, 89 Fed. Reg. 34680, will be reinstated or reinstated without their modifications.

FD Associates suggests that any exporter that had their BIS 748P license revoked or modified contact Benjamin Barron, Supervisory Export Policy Analyst, Bureau of Industry and Security, Department of Commerce, Phone: 202-482-4252, or Ronald Rolfe, Supervisory Export Policy Analyst, Bureau of Industry and Security, Department of Commerce, Phone: 202-482-4563 or by Firearms@bis.doc.gov to determine if their revoked or modified license(s) will be reinstated.

Out With The New, Back To The Old Ways BIS Rescinds Biden Era Firearms Restrictions On Exports Read More »

BIS50% Rule – BIS/EAR New Ownership Test

By George Canovas, Vice President, Compliance; Creighton Chin, Senior Compliance Associate

Edited by Jenny Hahn, President, FD Associates

I. Introduction

On June 19, 2025, I wrote an article “Understanding the 50% Rule: How BIS Is Rewriting Export Control Boundaries.” I ended this article with “No drama, no panic. Just preparation. Because when this rule lands, and it will, you’ll want to be ready, not surprised.” Well, it landed on September 29, 2025 and the question of “who really owns the company you are dealing with” is now a reality. That question has now become central to compliance. On September 29, 2025, the Bureau of Industry and Security (BIS) amended 15 C.F.R. §744.11 and its Supplements 4 and 7, extending restrictions to any entity that is fifty percent or more owned, directly or indirectly, by a party on the Entity List or the Military End User (MEU) List.

The Affiliates Rule goes further than the Entity List and MEU List. BIS extended the 50 percent ownership test to affiliates of parties designated under certain OFAC Specially Designated National (SDN) programs identified in 15 C.F.R. §744.8(a). It also extends the Foreign Direct Product (FDP) rules under §734.9(e), including the Russia/Belarus MEU FDP rule, so that foreign-produced items meeting FDP criteria through the involvement of a covered affiliate are now subject to EAR license requirements.

To be clear, these companies are now automatically subject to the same restrictions as their listed entities. This significant policy shift is not an isolated change but rather the culmination of a long regulatory evolution that began with the International Traffic in Arms Regulations’ (ITAR) foreign ownership rules, matured with the Office of Foreign Assets Control’s (OFAC) 2014 50% guidance, and has now fully integrated into the Export Administration Regulations (EAR) framework, making ownership a cornerstone of export compliance that demands a thorough understanding of its history and implications to prepare for what lies ahead.

II. Executive Takeaways

  • Effective immediately. The BIS Affiliates Rule took effect September 29, 2025.
  • Short window of relief. A Temporary General License (TGL) applies only through November 28, with strict limits.
  • Covers Entity List, MEU List, and SDN programs. Ownership links to these parties now trigger license requirements.
  • Foreign Direct Product rules included. Affiliates bring foreign-produced items under EAR controls if FDP criteria are met.
  • Ownership is cumulative. Direct and indirect stakes are aggregated at each tier of the chain.
  • Cascade effect. Subsidiaries of subsidiaries are restricted once the 50% threshold is crossed.
  • Most restrictive rule applies. If multiple restricted owners exist, the toughest license policy governs.
  • Branches and divisions are covered. Even non-legally distinct operations fall under the Affiliates Rule.
  • EAR99 is no safe harbor. Simple, uncontrolled items still require a license when affiliates are involved.
  • Red Flag 29 adds a duty. Exporters must resolve ownership uncertainties or stop the transaction.
  • CSL is no longer sufficient. Screening lists won’t catch all covered affiliates; ownership due diligence is mandatory.
  • Petition process available. Non-listed affiliates can request BIS modification to exclude them if risk is low.
  • Savings clause. Shipments already en route on Sept. 29 can be completed by Oct. 29 without a license.
  • Universities and research institutions affected. Especially those with foreign partnerships or end-users tied to listed entities.
  • Small and mid-sized defense firms at risk. Limited compliance resources make ownership checks harder to scale.
  • Tech startups vulnerable. Venture funding and opaque ownership create exposure under the rule.
  • Multinationals with JVs hit hard. Especially in aerospace, energy, and high-tech with ties to China, Russia, or sanctioned hubs.
  • Financial institutions implicated. Banks, PE, and law firms must incorporate ownership into diligence and financing reviews.
  • Global supply chains disrupted. Transactions through Europe, the Middle East, or Asia may suddenly become restricted.
  • Immediate compliance upgrades needed. Companies must expand screening, enhance KYC, escalate reviews, and train staff.
  • FD Associates is ready. We assist with risk assessment, red flag resolution, and tailored compliance strategies to keep exporters ahead of enforcements.

III. FOCI and ITAR - The First Ownership Gatekeeper

The path to this moment is not new. The ITAR Regulations tied ownership to compliance decades ago. Under 22 C.F.R. §120.16, the definition of a “foreign person” includes entities under foreign ownership or control. For cleared contractors, the National Industrial Security Program Operating Manual (NISPOM) at 32 C.F.R. Part 117 requires mitigation of Foreign Ownership, Control, or Influence, usually through proxy boards, voting trusts, or technology control plans.

Crucially, the ITAR does not leave “ownership” and “control” undefined. 22 C.F.R. §120.65 expressly sets out what counts as ownership and control in this context, clarifying that both direct and indirect power to direct the policies of management of a company triggers ITAR coverage. Crossing the fifty percent ownership threshold has never automatically barred participation in defense contracting, but it has always presumed foreign influence and triggered mitigation. The message from ITAR was clear: ownership and control cannot be separated from compliance.

IV. OFAC and the Birth of the 50% Rule (2014)

The sharper turn came from sanctions. In August 2014, the Office of Foreign Assets Control (OFAC) issued its Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property Are Blocked. This guidance, grounded in 31 C.F.R. §500.310 and elaborated in OFAC’s published FAQs (398 and 401 through 403), confirmed that any entity fifty percent or more owned by one or more blocked persons is itself treated as blocked. The rule aggregates ownership stakes, so two sanctioned parties holding twenty-five percent each are treated the same as one holding fifty percent. Indirect ownership through shell companies also counts. Once blocked under the fifty percent rule, an entity remains blocked absent specific OFAC authorization. That guidance forced a shift across industry: list screening alone was no longer sufficient, because without knowing who owned a counterparty, one could not know whether the transaction was legal.

V. EAR and BIS Expansion (2014–2020)

BIS absorbed the same logic over time. Under 15 C.F.R. §744.11, the agency has long designated parties on the Entity List when their activities are deemed contrary to U.S. security. In 2020, BIS added 15 C.F.R. §744.21, creating a framework for “military end use” and “military end users” in China, Russia, and Venezuela. The Military End User List, set out in Supplement No. 7 to Part 744, formalized this approach. These rules did not yet impose a bright-line ownership test, but they tied export controls to affiliations and relationships that often turned on state ownership. The system was moving toward a recognition that control through ownership was itself an end-use risk.

VI. The September 29, 2025 BIS Rule

On September 29, 2025, BIS announced an interim final rule that decisively aligns its regulations with OFAC’s 2014 guidance by declaring that any subsidiary or affiliate owned 50 percent or more by an Entity List or MEU List party is automatically treated as if it were listed, eliminating loopholes that allowed clean subsidiaries to act as export fronts for listed parents, accounting for indirect ownership through layered structures and offshore holding companies, flagging significant minority ownership as a red flag requiring enhanced due diligence, and providing companies with a short transition period to unwind deals, re-screen counterparties, and update contracts before enforcement begins. This rule represents a full alignment of BIS’s approach with OFAC’s sanctions framework and ITAR’s FOCI principles, closing a critical gap in export control enforcement and reshaping compliance obligations across industries.

It is important to note where ownership is shared among multiple restricted parties, for example, one on the Entity List and another on the MEU List, BIS requires that the most restrictive licensing requirements apply, even if one owner’s stake is small. This “most restrictive” standard means exporters must trace and aggregate ownership across all restricted categories to evaluate license eligibility.

The September 29, 2025 BIS Rule

VI. The September 29, 2025 BIS Rule

The reach of the rule is not theoretical. BIS illustrated in its Federal Register notice that if Company A is on the Entity List and owns 50 percent of Company B, which is not listed, then Company B is automatically subject to the Entity List restrictions. If Company B in turn owns 50 percent of Company C, then Company C is also restricted. The chain continues, even if the later-tier affiliates never appear on a BIS list. (See above)

VII. Country Risk Under the BIS 50% Rule

The September 29, 2025 BIS “50% Rule” expansion has different practical consequences depending on the country where your business or partners operate. Certain jurisdictions are far more likely to host Entity List or Military End User (MEU) parties, or to conceal beneficial ownership through state-owned enterprises (SOEs) and opaque holding structures.

High Risk (Directly Implicated)

  • China, Hong Kong, Macau – Largest concentration of Entity List and MEU List parties. State-owned enterprises hold controlling stakes in aerospace, AI, quantum, and semiconductor firms. Even civilian-facing firms may be majority-owned by listed parents.
  • Russia – Extensive Entity List coverage, particularly in aerospace, energy, and defense-industrial sectors. Sanctioned oligarch ownership structures are common.
  • Iran – Wide-ranging restrictions, with nearly all major industrial entities majority-owned or controlled by sanctioned parties.
  • Belarus – High overlap with Russian military-industrial base and sanctions.

Moderate Risk (Targeted Sectors, Regional SOEs)

  • Venezuela – State-owned energy, mining, and defense companies frequently appear on BIS/OFAC lists.
  • North Korea – Already nearly comprehensive embargo, but risk lies in indirect dealings via third countries.
  • United Arab Emirates (select free zones/partners) – While not sanctioned, the UAE hosts intermediaries and holding structures that can obscure Chinese, Russian, or Iranian ownership. Enhanced diligence required.
  • Turkey – Growing scrutiny for dual-use exports and middleman roles in Russia-related transactions.
  • Cyprus – Also known as a transshipment point where companies are setup to facilitate transactions with China and Russia.

Lower but Not Zero Risk

  • India, Malaysia, Singapore – Generally lower baseline risk, but technology hubs can attract Chinese/Russian capital or host opaque investment vehicles.
  • Latin America (Brazil, Mexico, Argentina) – Lower Entity List presence, but risk arises when firms are partly owned by Chinese SOEs or used as transshipment points.

NOTE: This list is not all encompassing.

  • EAR99 Implications are SUBSTANTIAL

 

  1. EAR99/ECCN”99” in General

EAR99/ECCN “99” items are those not specifically listed on the Commerce Control List or are listed with an ECCN number with a 99 in it (i.e. 9A991- the AT controlled ECCNs). They typically don’t require a license for export to most destinations. But, and this is the critical point, they are still subject to end-use and end-user controls under Part 744 of the EAR. That means if your counterparty is restricted, EAR99/ECCN “99” status doesn’t help as it would continue to require export licensing, and because of a presumption of denial, it would likely not be approved.

  1. How the 50% Rule Changes the Landscape

Under the new rule (amended 15 C.F.R. §744.11 and its supplements), any entity that is 50% owned by an Entity List or MEU Listed party is treated as if it were itself listed.

That means:

  • Even EAR99 or AT controlled items (previously no license required) require a license if they are destined to such an entity.
  • The presumption of denial that applies to listed entity and MEU parties applies equally to their majority-owned subsidiaries, no matter the classification of the item.
  • A shipment of innocuous EAR99 or AT controlled spares, software, or support materials can now be just as prohibited as a controlled ECCN 9A610 or 3B001 item if the recipient falls under the new ownership test.
  1. Examples

Imagine a U.S. company shipping common replacement fasteners classified EAR99 to a European distributor. On the surface, the distributor looks clear, it is not a named on the Entity List. But under the new rule, because it is 55 percent owned by a Chinese aerospace conglomerate already on the Entity List, that distributor is treated as listed. Suddenly, the EAR99 fasteners require a license from BIS, and that license will likely be denied.

Or consider a university sending EAR99 lab consumables to an overseas research partner. If the partner university is majority-owned by a foreign state entity that appears on the MEU List, the transaction is restricted even though the items are not controlled.

  1. The EAR Takeaway

The September 29, 2025 rule makes it clear that classification alone does not insulate you from ownership risk. EAR99 or AT controlled (previously no license required commodities) no longer represents a “safe harbor” when the recipient is owned by a listed entity. Screening for ownership is now as important as screening for the entity name itself. For exporters and compliance teams, the message is blunt: if you don’t know who owns your counterparty, you don’t know whether you can legally ship, even if all you are sending is EAR99.

IX. Who This Hits Hardest

The new rule falls hardest on companies that lack the resources or visibility to conduct deep ownership checks. Small and medium-sized enterprises are at the front line. Many rely on thin compliance budgets and basic screening tools, which makes them especially vulnerable when their distributors, resellers, or investors are majority-owned by listed parties. A Virginia-based commercial drone quadcopter company, for example, might sell through a European distributor that appears clean in standard screening, only to discover it is 60 percent owned by a Chinese aerospace conglomerate on the Entity List. In that situation, every shipment becomes un-licensable, enforcement risk escalates, and prime contractors disengage.

Tech startups in dual-use fields face a different but equally severe challenge. Venture funding that tips foreign ownership past fifty percent can instantly flip their licensing posture from compliant to prohibited. One financing round can jeopardize the ability to ship, partner, or even continue operations in the U.S. market.

Larger multinational firms are also caught when joint ventures with state-owned enterprises shift into restricted territory. Even if the venture itself has never appeared on a list, once majority ownership by a listed entity is established, the restrictions apply. This creates contractual uncertainty, operational disruption, and reputational risk in industries like aerospace, energy, and advanced manufacturing.

Financial institutions and professional services firms also bear new exposure. Banks, private equity funds, and law firms structuring transactions in jurisdictions such as Cyprus, the British Virgin Islands, or Hong Kong may inadvertently become conduits for restricted ownership structures if diligence stops at name screening. These sectors must now implement forensic-level beneficial ownership checks to avoid entanglement with listed parents.

X. Real World Example of Complexity

The Aviation Industry Corporation of China (AVIC) is explicitly listed on the Military End User List (MEU) under BIS’s Supplement No. 7 to Part 744744 and is also listed on the Entity List, Supplement No. 4 to Part 744 of the EAR.  As a Chinese state-owned aerospace and defense conglomerate, AVIC maintains a vast portfolio of subsidiaries and equity stakes, many of which straddle civilian and military sectors.

Because AVIC is an MEU, under the September 29, 2025 “50 % Rule,” any entity that is 50 percent or more owned (directly or indirectly) by AVIC is now treated as though it were similarly restricted—even if that entity has never been named on a BIS list itself.

Several publicly reported U.S. connections illustrate how this might play out in practice:

  • AVIC owns Cirrus Aircraft, which is headquartered in Minnesota, making Cirrus a U.S. subsidiary of a Chinese aerospace conglomerate.
  • Through acquisitions, AVIC has gained control of or influence over U.S. firms in aerospace and component manufacturing, including the U.S.–based steering systems company Nexteer Automotive. In 2010, Nexteer, based in Michigan, was acquired by a subsidiary of AVIC.
  • AVIC has also acquired U.S. component firms and supply chain assets, such as Continental Aerospace Technologies (through which it indirectly controls Thielert, Southern Avionics, and Danbury Aerospace).
  • AVIC also has dozens of subsidiary companies in Europe either from U.S. owned companies or European founded companies.

Think about a U.S. company shipping basic avionics part to a domestic or a foreign subsidiary of a U.S. company in Europe. On paper, everything looks fine, the distributor isn’t on any government list and it passes routine screening. But, if that distributor is a majority owned by a U.S. company and that company is ultimately controlled by AVIC in China, the new BIS rule makes the transaction restricted.

The outcome is simple and costly as a license would be required, and it would almost certainly be denied. That means the exporter risk in losing or delaying contracts, facing compliance penalties and damaging its reputation with prime contractors.

The rule also makes clear that branches and non-legally distinct operations of listed entities are treated as affiliates, closing another common gap. The lesson is clear. It is not enough to know who you are selling to by name. You need to know who owns them.

XI. Steps to Address the New Era

The September 29 rule makes clear that traditional denied party list screening alone is not enough. To address the new ownership-based obligations under 15 C.F.R.§744.11 and it supplements companies and its employees must take the following steps:

  1. Conduct Beneficial Ownership Checks. Move beyond surface screening. For all counterparties determine the direct and indirect owners, including through registries, corporate filings and reliable commercial databases.
  2. Request certified ownership structure. Develop and implement a certification that requires counterparties to certify their structure.
  3. Escalate complex structures. When ownership appears opaque or layered through offshore companies, escalate immediately to the Empowered Official or legal team. Do not proceed with the transaction until you are given the trade compliance all-clear.
  4. Document Ownership Diligence. Documentation is your friend here, having a process can demonstrate and are following for all international transactions is imperative. Maintain records of how the ownership was determined, what sources were used and any escalation decisions. Remember that documentation is critical for demonstrating compliance in an audit.
  5. Train Staff and Suppliers. Provide annual training on the BIS 50% rule on OFAC parallel ownership rule Make clear that EAR99 and AT controlled ECCN’s are not exempt when the counterparty is majority-owned by a listed entity.
  6. Assume Presumption of Denial. For transactions involving majority owned affiliates of listed parties, do not rely on licensing as a fallback. BIS has indicated such licenses will face a presumption of denial.

BIS created two procedural relief mechanisms.

  • First, a savings clause allows shipments that were already en route on September 29 pursuant to actual orders to be completed without a license if they arrive by October 29, 2025.
  • Second, non-listed affiliates captured solely through ownership may petition BIS under §744.16(e) or §744.21(b)(2) to request that their parent’s entry be modified to exclude them if diversion risk is demonstrably low.

NOTE: In addition, BIS created a new Red Flag 29 in Supplement No. 3 to Part 732. If an exporter has reason to know that a counterparty may be majority-owned by a listed party but cannot determine the exact ownership, there is now an affirmative duty to resolve the question. If ownership cannot be confirmed, the transaction must be stopped unless a BIS license is obtained. Simply screening names is no longer enough.

XII. Conclusion

The rule is effective immediately as of September 29, 2025. BIS also issued a Temporary General License (TGL) that remains in effect through November 28, 2025. The TGL is narrow. It allows certain exports, reexports, and transfers involving affiliates captured only by ownership, provided either: (1) the destination is in Country Group A:5 or A:6, or (2) the affiliate is a joint venture with a U.S. or A:5/A:6 partner that is not itself majority-owned by a restricted party. The TGL does not apply if the affiliate is owned in any percentage by a Specially Designated National under a §744.8 program, and it only suspends the new ownership-based license requirement. All other EAR requirements remain in place. This change means that list screening alone is no longer enough. Exporters must be able to identify the beneficial owners of their counterparties, document how that determination was made, and escalate cases where ownership is opaque. Even shipments of EAR99 and AT controlled items will now require a license if the counterparty is majority-owned by a listed entity, and those licenses will almost always be denied.

The takeaway is clear. Ownership checks must become a standard part of every compliance program, alongside classification and licensing. Companies that do not adapt quickly will face blocked transactions, contract losses, and heightened enforcement risk once the 60-day window closes.

At FD Associates we understand that the September 29, 2025 rule doesn’t just raise the compliance bar, it fundamentally changes how business must approach ownership, risk and due diligence. Our team has decades of experience interpreting BIS and OFAC guidance, and designing compliance programs that work in the real world, not just on paper. We can discuss strategies to address these obligations.

Whether you are a startup navigating foreign investment, a smaller or mid-tier defense supplier under pressure from primes, or a multinational with joint ventures abroad, FD Associates can help you map beneficial ownership, evaluate exposure under the 50% rule, and put in place procedures and safeguards regulators expect. The rule may be blunt, but the path forward does not have to be. With the right partner, companies can protect contracts, reduce risk, and stay ahead of enforcement.

FD Associates is that partner. Please reach out to use at +1.703.847.5801 or info@fdassociates.net

BIS50% Rule – BIS/EAR New Ownership Test Read More »

What the Latest ITAR Revisions Mean for Small Businesses – September 2025

George (Jorge) Cánovas Vice President – Compliance FD Associates, Inc.

By George (Jorge) Cánovas

Vice President – Compliance

FD Associates, Inc.

When most people hear the phrase International Traffic in Arms Regulations or ITAR, they imagine crates of missiles, stealth fighters, or nuclear warheads. They do not picture an underwater robot used by a marine survey company, a high-performance antenna that can be fitted on a commercial airframe, or a piece of body armor sold through a subcontractor. Yet those are precisely the kinds of items the law can capture. Many of you are specifically aware of this and how nuances can matter to include end users and forward manufacturing.

For readers who have never worked with these rules, or work tangentially with the ITAR in a business development or management position, the ITAR is the regulatory framework administered by the U.S. Department of State (DoS) that controls exports of defense articles, services, and related technical data. The backbone of the system is the U.S. Munitions List, a dense catalog of categories ranging from firearms to avionics to chemical precursors. If your work or your businesses work appears on that list, you cannot transfer it abroad or share it with foreign persons inside the United States without approval. And “export” does not just mean shipping. Letting a foreign engineer review controlled design drawings in your office can be treated exactly the same way as sending a crate of parts across a border.

This is not an academic concern. A small business that never thought of itself as part of the defense sector can suddenly find that its products, software, or even research activities fall under ITAR, which can occur when the DoS’s Directorate of Defense Trade Controls (DDTC) modifies the rules. When that happens, the company must apply for licenses through the DDTC, keep meticulous records, and adapt to a new world of restrictions and oversight. Licenses can take weeks or months and may come with conditions that change how and when you deliver to customers. Penalties for violations are severe, running from multimillion-dollar fines to loss of export privileges. It can also go the other way, and relive companies if the items they produce, sell, etc., have been removed.

A Final Rule with Far-Reaching Impact

On August 27, 2025, the State Department published a final rule in the Federal Register amending key sections of ITAR. This rule revises the U.S. Munitions List, updates definitions, and creates a new license exemption. It builds on an interim rule issued in January 2025 and is explicitly framed as part of a broader strategy to streamline defense trade and deepen cooperation with U.S. allies and partners[1]. The timing was no accident. A few months earlier, President Biden signed Executive Order 14268, Reforming Foreign Defense Sales to Improve Speed and Accountability, which directed the Departments of State and Defense to review the U.S. Munitions List to ensure it focuses on the most sensitive technologies while clearing away unnecessary restrictions.

The rule removes several items that the government no longer believes provide a critical military advantage. Certain GNSS anti-spoofing and anti-jam systems, some controlled reception pattern antennas, airborne collision avoidance system antennas, and tungsten- or steel-based lead-free birdshot are all being shifted off the USML. Once removed, they fall under Department of Commerce jurisdiction and the Export Administration Regulations (EAR), meaning they remain regulated for export but in a less restrictive framework.

At the same time, the final rule strengthens control. It makes permanent temporary controls on items “specially designed” for the F-47 Next Generation Air Dominance Platform[2]. It clarifies definitions around advanced military aircraft. It also responds to public comments that highlighted the civil use of large autonomous underwater vehicles. Recognizing the importance of these systems to sectors like energy, telecommunications, and marine research, the rule creates a new license exemption that allows U.S. companies to participate in operations involving certain Underwater Unmanned Vehicles performing functions such as inspecting offshore pipelines, repairing telecom cables, or conducting search and rescue missions, without the full weight of ITAR licensing. This is a striking acknowledgment of the dual-use reality of twenty-first century technology.

DDTC also emphasized that these revisions are not final. The agency continues to welcome input from the public, inviting companies and researchers to identify items they believe should be revised, removed, or added in future updates. This willingness to consult is unusual in the world of arms control and underscores a trend toward more transparent, iterative management of the U.S. Munitions List.

If your company works in aerospace, maritime technology, advanced electronics, protective equipment, chemicals or any sector that develops products with potential dual-use application, we strongly suggest the you read the attached Federal Register Notice . The revision may address technology that your company handles, makes or develops. The revision reshapes what falls under the ITAR and what shifts to Commerce, falling into the EAR. These changes carry real consequences for how you classify your products, pursue contracts, and handle foreign partnerships. Even if you have never considered yourself part of the defense supply chain, these changes could quietly alter your obligations.

Overview of the Changes In-Process

Items removed from the U.S. Munitions List (now under EAR) under the new revisions[3]:

  • Certain Global Navigation Satellite System (GNSS) anti-spoofing systems
  • Certain GNSS anti-jam systems
  • Controlled Reception Pattern Antennas (CRPAs) for Position, Navigation, and Timing (PNT)
  • Airborne Collision Avoidance System (ACAS) antennas
  • Tungsten- and steel-based lead-free birdshot projectiles

Items added or clarified under ITAR control[4]:

  • Items “specially designed” for the F-47 Next Generation Air Dominance Platform (now permanently controlled) USML Category VIII(a)(7) – permanently controls items specially designed for advanced military aircraft, including the F-47.
  • Foreign advanced military aircraft, explicitly defined to include those with AESA (Active Electronically Scanned Array) fire-control radars, integrated electronic warfare and signature management systems, and beyond-visual-range targeting capability USML Category XI(b) – electronic systems, equipment, or software specially designed for military electronic warfare, countermeasure, and surveillance functions.
  • Body armor and protective equipment, revised to reflect the current National Institute of Justice performance standards (USML X)
  • Energetic materials and chemical precursors, including poly-NIMMO and CL-20-related compounds (USML V)
  • Revised definitions for certain electronic warfare equipment, excluding some civil navigation gear but tightening controls on military countermeasure, see USML Category XI(b)

New ITAR Exemption:

  • ITAR License Exemption ITAR §123.16(b)(15) (newly created exemption in the Final Rule) is added for Unmanned Underwater Vehicles (UUVs) under 8,000 pounds may be exported temporarily without an ITAR license when used for civil purposes such as scientific research, natural resource exploration, infrastructure inspection or repair (including oil and gas pipelines and telecom cables), and search and rescue operations.

What It Means for Small Businesses

For a small company, the consequences are immediate and tangible. A firm producing antennas or sensors may suddenly find that while many models are now subject to the EAR, certain advanced or military-configured versions remain ITAR-controlled. That reclassification affects the markets the firm can serve, the partnerships it can form with larger primes, and the way investors assess its risk profile.

Consider also the opportunities. A marine robotics startup might benefit from the new UUV exemption. Instead of months of waiting on a license, it could send a vehicle overseas for a civil infrastructure project with far fewer delays provided the company is registered with DDTC. That advantage is real, but only if the company can prove it qualifies, document the mission, and keep meticulous control of the platform.

A chemical supplier may need to revisit formulations now listed by name in the U.S. Munitions List or a software developer whose algorithms strengthen satellite navigation against spoofing may find itself removed from the ITAR and now under the EAR  jurisdiction, which is less restrictive for some destinations but carries its own set of risks.

The common thread is that export classification is critical to all exporters. ITAR is not just associated with missiles, tanks and stealthy aircraft, it touches electronics, materials science, robotics, and software.

For small businesses, the difference between opportunity and liability often lies in whether leadership is paying attention to how their company products, software, technology and services are controlled and the reason that executives must clearly understand the liabilities, as well as business strategic opportunities. If your business can navigate these opportunities correctly and with foresight, you will be the company with the competitive edge, which equates to profits.

Foreign Businesses Should Take Notice

These ITAR US Munitions List revisions should also matter deeply for foreign companies. ITAR follows the item, not just the U.S. manufacturer. A distributor in Europe handling American-made products cannot re-export them freely without reexport authorization. A shipyard in Asia servicing vessels with U.S. navigation equipment must comply with U.S. licensing rules. Even a foreign research consortium that touches U.S. technical data can be pulled into the ITAR regime. Foreign companies need to be knowledgeable on specific changes to the ITAR and the EAR if they do business in the defense sector.

What may not be obvious is that compliance can be a competitive advantage. Executive Order 14268 is explicit about its intent: to streamline defense trade, facilitate cooperation with allies, and reduce unnecessary burdens. For a foreign company seeking to enter the U.S. defense supply chain, demonstrating a mature understanding of ITAR and the EAR is not a box-checking exercise it is a selling point. American primes and government customers increasingly want foreign partners who can handle controlled technology without fear of violations. Firms that invest in compliance now are better placed to win contracts, attract U.S. partners, and be viewed as credible contributors to joint defense projects.

The executive order behind this rule makes the logic plain, that is; by focusing the U.S. Munitions List on the most sensitive technologies and easing controls elsewhere, the U.S. government is trying to speed up defense trade with trusted allies. Foreign businesses that align early, adopt compliance systems, and train their staff are positioning themselves not only to stay safe but also to grow faster in a global marketplace that prizes reliability and accountability.

A Note on Research Institutions

Although this article focuses on businesses, academic research institutions are not immune to the ITAR and the evolution of changes in the regulations. University labs often work with technologies that straddle the civil–military divide. An engineering department experimenting with advanced antennas, a marine science institute operating an underwater vehicle, or a chemistry lab developing new energetic materials can all find themselves pulled into ITAR. The presence of foreign students adds further complexity, since allowing access to controlled data counts as an export under the law. U.S. institutions operating off U.S. soil can find themselves in even a more complex situation. What is clear is that institutions that fail to update their technology control plans, and their internal compliance programs risk both regulatory exposure, reputational harm and the loss of valuable grant opportunities.

Final Thoughts

The September 2025 rule is not simply a regulatory housekeeping exercise. It is part of a deliberate strategy to make the U.S. export control system more precise, more responsive, and more supportive of international cooperation. For small businesses, it is a reminder that compliance is inseparable from competitiveness. For foreign firms, it is a signal that mastering ITAR and the EAR is a way to distinguish themselves as reliable partners in the U.S. defense market. And for research institutions, it is another push to integrate export awareness into daily life.

In the end, these revisions tell a story of adaptation, as it is clear that the U.S. government wants to protect the warfighter’s edge without smothering innovation. Businesses that fully embrace and comply, whether in Virginia or Paris, will not only stay on the right side of the law but will also gain an advantage in a world where compliance is itself a mark of credibility.

Please contact FD Associates if you have any questions or our team of experts can help to position your enterprise to have a clear competitive edge and ensure profits, not liabilities end up on your P&L statement.

© FD Associates, Inc., 703-847-5801 – 1945 Old Gallows RD, Suite #530, Vienna, VA 22182

What the Latest ITAR Revisions Mean for Small Businesses – September 2025 Read More »

Advanced Computing IC Controls – Impacts On Company Compliance Programs

Creighton Chin – Senior Associate – Compliance

FD Associates

 

On May 13, 2025, the U.S. Department of Commerce, Bureau of Industry & Security (“BIS”) published a policy statement, accompanied by two guidance documents, that introduced new license requirements under the Export Administration Regulations (“EAR”) for the exports, reexports, and transfers of Advanced Computing Integrated Circuits (IC), and other commodities for use with Artificial Intelligence (AI) models that support Weapons of Mass Destruction (WMD) and military-intelligence in certain countries.

 

The key points of these documents are summarized below.

 

  • The BIS policy statement, Controls that May Apply to Advanced Computing Integrated Circuits (IC) and Other Commodities Used to Train AI Models, (herein after referred to May 13 AI Policy Statement) requires exporters and re-exporters to obtain a BIS license to export, reexport, or transfer a commodity classified under Export Control Classification Numbers (ECCN) 3A090.a, 4A090.a  and .z items in Categories 3, 4, and 5, e.g. 5A992.z, when there is “knowledge[1]” that the commodity will be used in an AI model that will further the use of WMDs or military intelligence activities in a D:5 country, or for or on behalf of an entity headquartered in a D:5 country.This license requirement applies to U.S. persons that provide any support or performs any contract, service, or employment, when there is “knowledge” that the activities and services will be used for or may assist the training of AI models for or on behalf of parties headquartered in D:5 countries (including China) or Macau.Exporters and re-exporters should presume a policy of denial consistent with policies stated in Part 744.6 – Restriction on Specific Activities of “U.S. Persons”; Part 744.22 - Restrictions on Export, Reexports, and Transfers to certain Military-Intelligence End Users; and Part 744.23, “Supercomputer,” “Advanced - Node Integrated Circuits,” and Semiconductor Manufacturing Equipment End Use Controls, of the Export Administration Regulations (EAR) for any D:5 country.
  • In its guidance document, Industry Guidance to Prevent Diversion of Advanced Computing Integrated Circuits, BIS provided to exporters and reexporters AI-oriented behavioral and transactional red flags that will trigger a license under the May 13 AI Policy Statement when not mitigated. These red flags add to the “Know Your Customer” Guidance and Red Flags published in Supplement No. 3 to Part 732 of the EAR.

Included with this guidance are due diligence actions required for vetting companies involved in the use or export of AI ICs to destinations outside country Group A:1.

 

This latest knowledge-based end user and end use control and the related due diligence actions, such as evaluating a customer’s ownership structure, adds to the list of other knowledge-based end user and end use restrictions in Part 744 that companies must address when doing business internationally.

 

These requirements and those under consideration by BIS, such as implementing a 50% ownership similar to one imposed by the Office of  Foreign Asset Controls (OFAC) and proposed rules that will expand the scope of intelligence gathering restrictions, require a company to continuously evaluate its compliance program to ensure that it evolves with regulatory changes, as well as those within the company, to prevent violations under the EAR.

 

We recommend that companies - even those that are not affected by this new requirement - review their compliance programs to ensure it includes a robust end user and end use screening process that reviews transactions against the denied and restricted party lists and the Parts 744 and 746 controls. The process should include methodologies for collecting end user and end use information, as well as for red flag identification with increasing levels of due diligence and risk mitigation that matches the identified risk level.  BIS has stated recently that it expects companies to be derisking high risk transactions as described in the various guidance documents and in the EAR and will penalize companies that ignore red flags.

 

Companies should assess whether their screening tools used for denied and restricted party screening screens the parties to the transaction against relevant lists. The relevant list extends beyond the lists specified under the EAR and include, as stated in the guidance, the Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals (SDN) List, or the U.S. Department of State’s Statutorily Debarred Parties List. In practice, the screening lists should include all the lists administered by OFAC and the DoS.  As part of assessment, companies should ensure their screening tools and processes rescreens entities against updates to the lists and flags to responsible employees any open transactions involving a potential match.

 

With the increasing likelihood that BIS will implement a 50% ownership rule, companies must now consider enhancing their screening process to include an evaluation of an entity’s ownership structure and relevant close affiliations. This is necessary to determine whether the entity is 50% or more owned by a party on the Entity List or other restricted party lists that could prohibit the transaction or trigger a license requirement under the EAR.

 

Evaluating a company’s ownership structure and potential connections to restricted or sanctioned parties may be supported through ownership research services provided by Kharon, Dow Jones, and Dun & Bradstreet. Additional sources include investor reports, open-sourced platforms (e.g. OpenSanctions.org, and China Defence University Tracker), and general internet searches.  Each has its strengths and limitations and should be used to augment traditional screening tools.

 

Finally, the review should evaluate whether the compliance program provides ongoing training to the employees responsible for screening transactions. Training should include update on regulatory changes, effective use of the screening tools and techniques for researching an entity’s ownership, and changes in the company’s activities (e.g. introduction of new productions or markets) that could subject the activity under existing proposed rules.

 

As export control regulations continue to evolve and government regulators place greater emphasis on companies to know their customers and to mitigate risk of diversion, companies that fail to regularly review and update their compliance program expose themselves to significant penalties.

 

A robust end user and end use screening process is one element of a compliance program.

 

The article Does Your Export Compliance Program Pass Muster? highlights essential elements of an effective compliance program and challenges that companies may face when implementing a program.  FD Associates has the expertise and experience to navigate these challenges and can support your company with targeted solutions, such as enhancing your end user and end use screening processes or developing a compliance program tailored to your company.

[1] Knowledge. Knowledge of a circumstance (the term may be a variant, such as "know," "reason to know," or "reason to believe") includes not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts.

Advanced Computing IC Controls – Impacts On Company Compliance Programs Read More »

Department of State Agreement Notifications – Inking the Deal

By Kenneth E. Schmidt, J.D. – Senior Associate

After fording the river and finally getting your Technical Assistance Agreement (“TAA”) or Manufacturing License Agreement (“MLA”) approved by Directorate for Defense Trade Controls (“DDTC”), it can be tempting to start firing off information to and performing defense services for authorized parties.  Like cowboys and cowgirls of the past, however, we need to keep firmly in the saddle and not let the cart drift ahead of our horse.

While approval of a TAA/MLA is a good first step on the journey to share export-controlled information and begin defense services, we need to be careful to disarm those thorny administrative tasks, such as inking the TAA/MLA and providing a copy of the fully executed agreement to DDTC within 30 days of the last signature.  The International Traffic in Arms Regulations (“ITAR”) Part 124.4 states:

(a) The United States party to a manufacturing license or a technical assistance agreement must file one copy of the concluded agreement with the Directorate of Defense Trade Controls not later than 30 days after it enters into force. If the agreement is not concluded within one year of the date of approval, the Directorate of Defense Trade Controls must be notified in writing and be kept informed of the status of the agreement until the requirements of this paragraph or the requirements of § 124.5 are satisfied.

Yes, DDTC wants to see dried ink on that TAA/MLA as a condition precedent to utilizing TAA/MLA authorization.  And while it may seem outdated, digital signatures are still not permitted.

Now the second obligation often overlooked in the excitement and flurry of the next great adventure, is the need to let the sheriff (a/k/a DDTC) know before you set out to export technical data or perform defense services.  This initial notification requirement is set forth in ITAR Part 123.22(b)(3)(ii), which states:

(ii) Manufacturing license and technical assistance agreements. Prior to the initial export of any technical data and defense services authorized in an agreement the U.S. agreement holder must electronically inform DDTC that exports have begun. In accordance with this subchapter, all subsequent exports of technical data and services are not required to be filed electronically with DDTC except when the export is done using a U.S. Port. Records of all subsequent exports of technical data shall be maintained by the exporter in accordance with this subchapter and shall be made immediately available to DDTC upon request. Exports of technical data in furtherance of an agreement using a U.S. Port shall be made in accordance with § 125.4 of this subchapter and made in accordance with the procedures in paragraph (b)(3)(iii) of this section.

Did you catch that “[p]rior to?”  Yep, prior to setting out on the trail with your TAA/MLA, your TAA/MLA must be signed (fully executed), a copy of which provided to DDTC within 30 days after entering into force, and DDTC must be notified prior to the initial export of technical data and/or providing of defense services under the TAA/MLA.

So, if you need help navigating the wild west of TAA/MLA implementation or would like to know what to do if your cart got ahead of the horse, give us a call at 703-847-5801.

Department of State Agreement Notifications – Inking the Deal Read More »

The Department of State Published a Proposed Rule to Create an Exemption for Certain Exports, Reexports, Retransfers, Or Temporary Imports Of Defense Articles Or Defense Services, Or Certain Brokering Activities Between or Among Authorized Users Within Australia, The United Kingdom, And The United States (AUKUS)

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

89 Fed. Reg. 35028

On April 19, 2024, FD Associates, Inc., advised its followers of the U.S. Department of Commerce, Bureau of Industry and Security’s (“BIS”) amendment to the Export Administration Regulations (“EAR”) to remove license requirements, expand the availability of license exceptions, and reduce the scope of end-use and end-user-based license requirements for exports, reexports, and transfers (in-country) to or within Australia and the United Kingdom (“UK”) to enhance technological innovation among the three countries and support the goals of the Governments of Australia, United Kingdom, United States (“AUKUS”).

The Department of State’s (“the Department”) proposed rule for exports by and between AUKUS member nations has been published. On May 1, 2024, the Department of State published a proposed rule in the Federal Register (89 Fed. Reg. 35028) that, if finalized, would create an exemption for certain exports, reexports, retransfers, or temporary imports of defense articles or defense services, or certain brokering activities between or among authorized users within Australia, the United Kingdom, and the United States. The exemption would be available for all defense articles or defense services, except for those contained within a limited excluded list. The proposed rule would also introduce a provision to allow for certain transfers of classified defense articles to certain dual nationals and would codify an expedited license review process for Australia, the United Kingdom, and Canada. Industry may submit comments regarding the proposed rule to the Department by May 31, 2024.

The Department has proposed to amend the International Traffic in Arms Regulations (ITAR) to support the goals of the AUKUS partnership, the enhanced trilateral security partnership among Australia, the United Kingdom, and the United States. This exemption is designed to foster defense trade and cooperation between and among the United States and two of its closest allies. It is reflective of the nations’ collective commitment to implement shared security standards on protecting defense technology and sensitive military know-how.

The proposed new exemption, designed to implement the provisions of new section 38(l) of the Armes Export Control Act (AECA), would be located in ITAR § 126.7 and would provide that no license or other approval is required for the export, reexport, retransfer, or temporary import of defense articles; the performance of defense services; or engagement in brokering activities between or among designated authorized users within Australia, the United Kingdom, and the United States provided certain requirements and limitations are met. These include a list of excluded defense articles and defense services not eligible for the exemption, which can be found in a proposed Supplement No. 2 to Part 126. The scope of excluded defense articles and defense services remain subject to revision and the Department welcomes comment on proposed Supplement No. 2 to Part 126.

 

A summary of the key details regarding the requirements and limitations of the proposed exemption are as follows:

  • In § 126.7(b)(1), the exemption may only be used for transfers to or within the physical territory of Australia, the United Kingdom, or the United States;
  • In § 126.7(b)(2), the pool of eligible members, known as authorized users, is created to facilitate secure defense trade and cooperation. Australia and the United Kingdom’s members will undergo an authorized user enrollment process, in coordination with DDTC, and those members will be listed through the DDTC website. Members located in the United States must be registered with DDTC and not debarred under ITAR § 127.7.
  • In § 126.7(b)(3), the defense articles and defense services listed in Supplement No. 2 to Part 126 are not eligible for this proposed exemption. These items are excluded from eligibility under the proposed exemption because (1) they are exempted from eligibility by statute, including AECA section 38(j)(1)(C)(ii), or (2) are specifically exempted by either the UK, Australia, or the United States, per AECA section 38(l)(4)(A). These items are, however, subject to the expedited licensing procedures listed in § 126.15 and may be reviewed and revised during the lifetime of the exemption.
  • In § 126.7(b)(4), transferors that use this proposed exemption must abide by this requirement for recordkeeping purposes, and such records must be made available to DDTC upon request.
  • In § 126.7(b)(5), the limitations provided exclude exemption use for transfers that would require certification to Congress pursuant to sections 36(c) and 36(d) of the AECA.
  • In § 126.7(b)(6) and (7), the Department is reiterating other ITAR provisions to underscore that the proposed exemption is subject to other requirements within the subchapter, and the named sections are not an exhaustive list.
  • In § 126.7(b)(8), the Department is establishing that classified defense articles and defense services are eligible for transfer under this exemption provided the authorized users in the United States, Australia, and the United Kingdom meet their respective industrial security requirements. For authorized users in the United States, this is the National Industrial Security Program Operating Manual (NISPOM) (32 CFR part 117) and, for Restricted Data, the Atomic Energy Act of 1954, as amended. For Australian authorized users, this is the Defence Security Principles Framework (DSPF) Principle 16 and Control 16.1, Defence Industry Security Program, and for United Kingdom authorized users this is the Government Functional Standards (GovS) 007: Security.
  • The Department is also proposing to add a provision to the exemption in ITAR § 126.18 to allow certain dual nationals of Australia and the United Kingdom to receive classified defense articles without a separate license from DDTC. These persons must be authorized users of the exemption in § 126.7 or regular employees of such authorized users in § 126.7, hold a security clearance approved by Australia, the United Kingdom, or the United States that is equivalent to the classification level of SECRET or above in the United States, and be located within the physical territory of Australia, the United Kingdom, or the United States or be a member of the armed forces of Australia, the United Kingdom, or the United States acting in their official capacity.
  • Lastly, the Department is proposing to revise § 126.15 per the provisions of section 1344 of the NDAA for Fiscal Year 2024. This revised text would note the review of license applications for exports of certain commercial, advanced-technology defense articles and defense services to or between the physical territories of Australia, the United Kingdom, or Canada, and are with government or corporate entities from such countries, shall be processed within certain timeframes. The subject export must not be eligible for transfer under an ITAR exemption. License requests related to a government-to-government agreement between Australia, the United Kingdom, or Canada and the United States must be approved, returned, or denied within 30 days of submission. For all other license applications subject to this section, any review shall be completed no later than 45 calendar days after the date of the application.

Please contact your FD Associates consultant for guidance on transactions with Australia and the UK.

The Department of State Published a Proposed Rule to Create an Exemption for Certain Exports, Reexports, Retransfers, Or Temporary Imports Of Defense Articles Or Defense Services, Or Certain Brokering Activities Between or Among Authorized Users Within Australia, The United Kingdom, And The United States (AUKUS) Read More »

The Fifteen Year Freeze in DDTC Registration Fees Sees a Big Thaw

By Kenneth Schmidt – Senior Associate

After a fifteen-year pause in price increases, impressive by any measure, the Directorate of Defense Trade Controls (DDTC) proposes to recalibrate its registration fee structure for exporters, importers, brokers, and manufacturers to fund ongoing operations, technology modernization, registrant support, monitoring and enforcement, and general public outreach operations.  The change will mostly impact the approximately 14,500 current DDTC registrants.  The rationale, inflation increases over the 15-year period when the rates were last established is a staggering 40%.  Given the irregularity of the fee increases, some of the proposed fees are below the 40% inflation while other rates represent an increase that accounts for inflation but adjusts for the future.

DDTC Registration Tiers

DDTC uses a three-tiered structure for registrations.  Tier 2 and Tier 3 will see the biggest adjustments, both in terms of price and tier scope.

The tiers are proposed to be defined as follows:

Tier 1

Registrants are persons in the business of manufacturing who (i) do not export, (ii) utilize ITAR exemptions for export, or (iii) have yet to receive a favorable determination from DDTC (i.e. approval, approval with provisos, or written authorization from DDTC to conduct ITAR-regulated activities. Tier one will also include persons engaged in the business of brokering activities (whether you license or not).

Tier 2

Registrants are moderate users of DDTC services and comprise those who received five or less favorable determinations on license applications or requests for authorization for the twelve months preceding ninety days prior to the expiration of current registrant’s expiration.

Tier 3

Registrants comprise those receiving more than five favorable determinations in the twelve months preceding ninety days prior to the expiration of current registrant’s expiration.  Additionally, Tier 3 registrants pay an additional $1,100.00 for each favorable determination over five.

DDTC’s current registration discount for exporters and temporary importers of low-value items who fall under Tier 3 will remain unchanged.  This low-value discount formula is currently available on the DDTC website.

Finally, Tier 2 and Tier 3 non-profit organizations (26 U.S.C. 501(c)(3)) may also be eligible for a discount to Tier 1 treatment.

DDTC Registration Fees

Now for the sticker shock:

  • Tier 1 registrations will now be a flat fee of $3,000.00 (33% increase)
  • Tier 2 registrations will now be a flat fee of $4,000.00 (45% increase) and permit five or less favorable determinations within the lookback period.
  • Tier 3 registrations will now be a flat fee of $4,000.00 (45% increase) and $1,100.00 (~440% increase) for each determination beyond the gratis five determinations within the lookback period.
  • Exceptions: Existing discounts apply to exporters with low value exports and temporary import license filers
  • Tier 2 and Tier 3 non-profits may qualify for Tier 1 rate

Comments on the proposed rule are requested by June 10, 2024.

The Fifteen Year Freeze in DDTC Registration Fees Sees a Big Thaw Read More »

BIS Amends the EAR Removing Most Licensing Requirements to Australia and The United Kingdom to Support the Australia, United Kingdom, United States (AUKUS) Enhanced Trilateral Security Partnership

By John Herzo, Senior Compliance Associate, FD Associates, Inc.
Odyssey Gray III, Senior Associate, FD Associates, Inc.
April 19, 2024
89 Fed. Reg. 28594

Effective April 19, 2024, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) amended the Export Administration Regulations (“EAR”) to remove license requirements, expand the availability of license exceptions, and reduce the scope of end-use and end-user-based license requirements for exports, reexports, and transfers (in-country) to or within Australia and the United Kingdom (“UK”) to enhance technological innovation among the three countries and support the goals of the Australia, United Kingdom, United States (“AUKUS”) Trilateral Security Partnership. The full Federal Register Notice may be found at the following link:

https://www.federalregister.gov/documents/2024/04/19/2024-08446/export-control-revisions-for-australia-united-kingdom-united-states-aukus-enhanced-trilateral

On December 22, 2023, President Biden signed the National Defense Authorization Act (NDAA) for Fiscal Year 2024, Public Law 118-31, which enacted provisions related to streamlining defense trade between and among the United States, UK, and Australia, provided certain conditions are met. To support the United States' broader defense trade and technology cooperation with the AUKUS partners, BIS issued this change to remove certain license requirements for exports to Australia and the UK under the EAR.

On September 15, 2021, the leaders of Australia, the UK, and the United States announced their “resolve to deepen diplomatic, security, and defense cooperation in the Indo-Pacific region, including by working with partners, to meet the challenges of the twenty-first century” by creating AUKUS, an enhanced trilateral security partnership. Through AUKUS, partner governments strengthen each other's ability to support their collective security and defense interests, building on longstanding and ongoing bilateral ties. AUKUS consists of two main pillars. Pillar I focuses on trilateral submarine cooperation. Pillar II focuses initial partner collaboration efforts on advanced capabilities in the following areas: (1) advanced cyber, artificial intelligence (AI), and autonomy; (2) quantum technologies; (3) hypersonic and counter-hypersonic capabilities; (4) electronic warfare; (5) innovation; (6) information sharing; and (7) additional undersea capabilities.

The UK and Australia are two of the United States' closest allies, with longstanding collective defense arrangements. They are also members of all four multilateral export control regimes (i.e., the Wassenaar Arrangement on Export Controls for Conventional Arms and Related Dual-Use Goods and Technologies, Australia Group, Nuclear Suppliers Group, and Missile Technology Control Regime (MTCR)). They are also members of the Global Export Controls Coalition (GECC) of governments that have substantially aligned on export control measures in response to Russia's illegal war against Ukraine. The UK and Australia have robust export control systems and have taken additional measures in recent months to enhance technology protection and promote secure trade. Specifically, in December 2023, the United Kingdom's National Security Act 2023 came into force, providing for inter alia enhanced protections against the unauthorized disclosure of certain defense-related information. In March 2024, the Australian Parliament passed the Defence Trade Controls Amendment Act 2024 and the Safeguarding Australia's Military Secrets Act 2024, providing for inter alia controls on the reexport of items originally exported from Australia and disclosures of controlled technology to certain foreign persons within Australia, as well as controls on the provision of defense services. Following their passage in their respective parliaments, the UK and Australian actions received royal assent. These actions highlight the UK's and Australia's commitment to implementing robust export controls and technology protection measures.

 

Summary Of Changes To The EAR

With this rule, Australia and the UK will have nearly the same licensing treatment under the EAR as Canada. The liberal licensing treatment of items destined for Canada was made possible in part because Canada is included in the National Technology and Industrial Base (NTIB) (as defined in 10 U.S.C. 4801(1)). In 2017, this definition was broadened to include the UK and Australia. Accordingly, the regulatory changes in this rule not only advance the goals of the AUKUS Enhanced Trilateral Security Partnership but also further align the treatment of the UK and Australia under the EAR with fellow NTIB member Canada.

The biggest changes to the EAR pursuant to this rule are the removal of list-based license requirements for exports, reexports, and transfers (in-country) to Australia and the UK, including the removal of license requirements for national security column 1 (NS1), regional stability column 1 (RS1), and missile technology column 1 (MT1) reasons for control for the destinations of Australia and the UK. This is an important change as it removes licensing requirements for exports of ALL 600 Series ECCN items to Australia and the UK and many 9x515 satellite-related license requirements to Australia and the UK.

Other minor changes to the EAR pursuant to this rule include the applicability of License Exceptions under §§ 740.15, 740.16, and 740.17 (License Exceptions Aircraft, Vessels and Spacecraft (AVS), Additional Permissive Reexports (APR), and Encryption Commodities, Software, and Technology (ENC), respectively), for use to Australia, Canada, and the UK.

BIS also exempted Australia, the UK, and Canada from unilateral reporting requirements for thermal imaging camera transactions.

Consistent with recent changes to the EAR concerning thermal imaging cameras, the interim final rule removes military end-use and end-user-based license requirements for exports, reexports, and transfers (in-country) of certain cameras, systems, or related components detailed under § 744.9(a)(1)(i) and (a)(1)(iii) of the EAR which previously only applied to Canada.  The exception now applies to Australia, Canada, and the UK.

BIS requires certain transactions involving Canada to be reported in Electronic Export Information (EEI) filings, and these paragraphs now include Australia and the UK for clarity without changing existing EEI filing requirements. There is no change to the requirement to file EEI for shipments to Australia and the UK. For instances involving the use of a license exception or license, the usual EEI license codes apply. If exporting as No License Required, the license code is C33 in EEI.

There are two sections under the EAR where Canada is still treated differently than Australia and the UK. Pursuant to § 742.7(a)(4), Canada remains exempted from certain crime control-related license requirements for non-firearms items. The text in this section has been edited to read “Canada only,” as these items still require a license to Australia and the UK. Firearms-related items and other CC-controlled items in ECCNs 0A501 (except 0A501.y), 0A502, 0A503, 0A504, 0A505. a, .b, and .x, 0A981, 0A982, 0A983, 0D501, 0D505, 0E501, 0E502, 0E504, 0E505, and 0E982 will continue to require a license when destined to and among the UK and Australia.

In addition, existing license requirements for the following items will remain in place:

  • Certain satellites and related items;
  • Certain items controlled pursuant to the Chemical Weapons Convention, and items controlled for short supply reasons (e.g., certain petroleum products and Western red cedar); and
  • Certain law enforcement restraints and riot control equipment, implements of torture or execution, and horses exported by sea.

 

Detailed Description Of The Specific Changes To The EAR

BIS made the following six major export control policy changes to further align the treatment of Australia, Canada, and the UK under the EAR:

  1. The first three changes involve the removal of list-based license requirements for exports, reexports, and transfers (in-country) to Australia and the UK. Specifically, BIS is removing license requirements for national security column 1 (NS1), regional stability column 1 (RS1), and missile technology column 1 (MT1) reasons for control for the destinations of Australia and the UK. As Australia and the UK are not currently subject to NS2 or RS2 controls, with this rule all Commerce Country Chart-based NS and RS controls are removed for these countries.
    • To facilitate this change, the Xs are removed from the Country Chart (supplement no. 1 to part 738) for NS1, RS1, and MT1 for Australia and the UK.
    • Corresponding to the Commerce Country Chart, provisions in part 742 of the EAR that specify the license requirements for NS, MT, and RS reasons (§§ 742.4(a), .5(a), and .6(a), respectively) are revised in order to fully remove the license for Australia and the UK.
  2. Based on the change above, “600 series” items, which are generally items on the Wassenaar Arrangement Munitions List, no longer require a license to Australia or the UK. In addition, items controlled under the EAR for missile technology reasons consistent with the MTCR Annex no longer require a license to Australia or the UK.
  3. Except for those items requiring a license to all destinations worldwide pursuant to § 742.6(a)(9), many 9x515 satellite-related items no longer require a license to Australia or the UK.
  4. The fourth policy change is consistent with the general RS1 removal. BIS maintains a special RS Column 1 license requirement in § 742.6(a)(3) applicable to military commodities described under ECCN 0A919. Specifically, the special RS1 control required a license for reexports to all destinations except Canada for items classified under ECCN 0A919 except when such items are being reexported as part of a military deployment by a unit of the government of a country in Country Group A:1 (see supplement no. 1 to part 740 of the EAR) or the United States. This final rule removes license requirements for 0A919 items to Australia and the UK.
  5. BIS removed military end-use and end-user-based license requirements for exports, reexports, and transfers (in-country) of certain cameras, systems, or related components detailed under § 744.9(a)(1)(i) and (a)(1)(iii) of the EAR. Prior to this rule, the only exception to the requirements under these paragraphs was for Canada. With the publication of this rule, the exception now applies to Australia, Canada, and the UK.
  6. BIS revised its treatment of significant items (SI) ( e., hot section technology for the development, production or overhaul of commercial aircraft engines, components, and systems) controlled under ECCN 9E003.a.1 through a.6, a.8, .h, .i, and .l, and related controls to allow these items to be exported, reexported, or transferred (in-country) to or within Australia and the UK without a license, consistent with the current exception for Canada. This provision is in § 742.14(a).

BIS also made the following minor changes to the EAR to further align the treatment of Australia, Canada, and the UK under the EAR pursuant to this rule:

  1. Under § 734.17(c)(1), precautions for internet transfers of products eligible for export under § 740.17(b)(2) shall include such measures as an access control system that, either through automated means or human intervention, checks the address of every system outside of the U.S. or Canada to check against transfers to foreign government end users, was edited to include Australia and the UK within the list of countries exempted from the required measures.
  2. Under §§ 740.15, 740.16, and 740.17 (License Exceptions Aircraft, Vessels and Spacecraft (AVS), Additional Permissive Reexports (APR), and Encryption Commodities, Software, and Technology (ENC), respectively), BIS expanded the explicit applicability of these License Exceptions for use to Australia, Canada, and the UK.
  3. Under § 742.2(a)(1), a license was required to all destinations, including Canada, for CB Column 1 items; with the publication of this rule the countries exempt from the license requirement is expanded to include Australia and the UK in the list for clarity, although the revision does not change existing license requirements.
  4. Under § 742.7(a)(4), Canada remains exempted from certain crime control-related license requirements for non-firearms items, but the text has been edited to read “Canada only” as these items are not available without a license in Australia and the UK.
  5. Under § 742.13(a)(1), Canada is mentioned as requiring a license for certain communications intercepting devices; with the publication of this rule, this phrase now includes Australia and the UK for clarity, although the revision does not change existing license requirements.
  6. Under § 742.18(a)(1), Canada is mentioned as requiring a license under the Chemical Weapons Convention; with the publication of this rule, this phrase now includes Australia and the UK for clarity, although the revision does not change existing license requirements.
  7. Under § 743.3(b), BIS exempted Australia, the UK, and Canada from unilateral reporting requirements for thermal imaging camera transactions.
  8. Under §§ 754.3(a), .4(a), and .5(a), a license is required for short supply reasons for control for certain items, including to Canada; these phrases now include Australia and the UK for clarity without changing existing license requirements.
  9. Under § 758.1(b)(3), (6), and (9), BIS requires certain transactions involving Canada to be reported in Electronic Export Information (EEI) filings, and these paragraphs now include Australia and the UK for clarity without changing existing EEI filing requirements.
  10. Under § 758.11(a), which covers the scope of export clearance requirements for firearms and related items, BIS now includes Australia and the UK alongside Canada for clarity as destinations to which certain clearance requirements continue to pertain.

Among other things, license exception Aircraft, Vessels, and Spacecraft (AVS) treats exports to Canadian airlines in most destinations as an export to Canada. Since MT1 items do not require a license for export to Canada, the primary impact of this AVS eligibility is that Canadian airlines in most destinations may receive MT1 items as spare parts. Consistent with the removal in this rule of MT1 license requirements for the UK and Australia, and as discussed above, BIS added AVS eligibility for Australian and United Kingdom airlines to receive such items in most destinations. As a conforming change, BIS created two new definitions for what constitutes an “Australian airline” and “United Kingdom (or UK) airline.” These two definitions are added to § 772.1 and mirror the definition of “Canadian airline.”

Lastly, the following requirements will remain unchanged as a result of this rule. Under the EAR, firearms-related items and other CC-controlled items in ECCNs 0A501 (except 0A501.y), 0A502, 0A503, 0A504, 0A505. a, .b, and .x, 0A981, 0A982, 0A983, 0D501, 0D505, 0E501, 0E502, 0E504, 0E505, and 0E982 will continue to require a license when destined to and among the UK and Australia. This license requirement mirrors the license requirement for firearms-related items in ECCNs 0A501 (except 0A501.y), 0A502, 0A504 (except 0A504.f), and 0A505 (except 0A505.d) destined to Canada. Prior to this IFR, license requirements for these items to the UK and Australia were implemented through NS1/RS1 reasons for control. Since these license requirements are removed for the UK and Australia in this rule, BIS added a footnote to the Commerce Country Chart for the UK and Australia, which indicates that a license is still required for these 0x5zz firearms-related items in those two countries. This does not change the scope of the license requirements for these items to the UK and Australia that applied prior to the effective date of this rule.

Please contact your FD Associates consultant for guidance on transactions with Australia and the UK.

BIS Amends the EAR Removing Most Licensing Requirements to Australia and The United Kingdom to Support the Australia, United Kingdom, United States (AUKUS) Enhanced Trilateral Security Partnership Read More »

ITAR Brokering – The Good, The Bad and the Ugly

John Hezro, Senior Associate of ITAR for FD Associates

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

Edited by Jenny Hahn, President, FD Associates, Inc.

September 20, 2023

Did you know that the International Traffic in Arms Regulations (“ITAR”) has an entire chapter devoted to non export activities?? ITAR Part §129 relates to brokering activities performed by U.S. Persons (individuals and companies), foreign companies owned by U.S. persons and foreign persons conducting brokering activities in the U.S. The ITAR’s brokering requirements are some of the most challenging aspects of the ITAR to understand and comply with. This article will provide you with a quick guide to the brokering requirements.

Before we step into this discussion, we explore a recent Department of State consent agreement levied on a U.S. company who did not appreciate the complexities of the ITAR’s brokering requirements.  On August 25, 2023, Island Pyrochemical Industries Corp (“IPI”) entered into a 3 year consent agreement with the Department of State (“DOS”) regarding certain violations of the ITAR, including brokering violations. They received a civil penalty and have committed to a monitored compliance program for 3 years. The Charging Letter, Consent Agreement and Order (Link here) are for public display on the Department of State website.

IPI is a small, privately held corporation with less than 100 employees and a manufacturer and supplier of specialty chemicals and related materials with a variety of applications in both the commercial and military sectors, including rocket propellants and precursor chemicals used in explosive ordnance. IPI has affiliates in Brazil and the People’s Republic of China (“PRC”). IPI engages in both domestic and foreign sales.

After registering as a broker in March, 2015, on or around April 2015, IPI contacted three companies to discuss the procurement of ammonium perchlorate (“APC”).  APC is listed on the US Munitions List and is considered a defense article. IPI, including IPI’s President and Chief Executive Officer (“CEO”), met with representatives from Avibras Industria Aeroespacial SA (“Avibras”), a Brazilian company, to discuss a transaction to procure APC for Avibras’ use in manufacturing certain rockets for its client, the Kingdom of Saudi Arabia.

At the same time, IPI contacted Dalian Gaojia Chemical Co., Ltd (“Dalian”), a PRC manufacturer of APC, and an export company, Aerospace Long-March International Co., Ltd. (“ALIT”), a subsidiary of China Aerospace Science and Technology Corporation, about the supply of APC to Brazil from China.

By undertaking these activities, IPI, engaged in brokering activities, as described in ITAR Part §129.2)\, by facilitating communications and engagement between Avibras. Brazil and ALIT, China[1]. On May 27, 2015, IPI entered into an agreement with Avibras for the procurement of APC from ALIT. The underlying communications validated that IPI was taking an action on behalf of another, coordinating the sale and delivery of the APC from ALIT, China to Avibras, Brazil.

In addition to this activity, IPI also engaged in multiple brokering activities in this transaction involving the solicitation, promotion, negotiating, contracting for, arranging, and otherwise assisting in the purchase of APC from China. All of this was done without obtaining a broker authorization from the Department of State, after having attempted to secure an export license for the transaction.

IPI’s brokering activities included:

(1) Recommending courses of action to Avibras on obtaining the APC from the PRC and assisting in arranging meetings with suppliers during a planned trip to the PRC, thereby negotiating for, arranging for, and otherwise assisting in and facilitating the purchase of APC by Avibras and the transfer of the APC from the PRC to Brazil;

(2) IPI finalizing an arrangement to supply Avibras with APC manufactured in the PRC thereby facilitating the manufacture and intended export of a foreign defense article from the PRC to Brazil on behalf of Avibras;

(3) IPI arranging for shipment of APC from the PRC to Brazil on behalf of Avibras;

(4) IPI issuing Dalian the final specifications for the APC thereby facilitating, on behalf of Avibras, the manufacture of the APC;

(5) IPI providing a down payment to Dalian to enable Dalian to begin manufacturing the APC thereby facilitating on behalf of Avibras Dalian’s manufacture of APC; and

(6) IPI arranging for Avibras to send a purchase order to ALIT with pricing specified by IPI for shipment of APC from the PRC to Avibras in Brazil demonstrating that IPI assisted in the export and transfer of APC from the PRC to Brazil on behalf of Avibras.

As stated earlier, IPI registered with the DOS as a broker in March, 2015. Such registration implies that IPI understood the requirements of the ITAR, particularly related to brokering. IPI  then applied for a DSP5 permanent export license for unclassified materials and technical data in July, 2015 in connection with the sale of the APC material to Avibras, listing itself as the manufacturer and ALIT, China as an intermediary party. Apply for a DSP-5 license implied that the APC was being exported from the United States to Brazil, not the transfer from China to Brazil of APC. The DOS rejected the DSP-5 application seeking an explanation on the roles of the parties. In a resubmission of the DSP-5 license, in August, 2015, ALIT was no longer listed, but IPI was still listed as the manufacturer. The application was DENIED because it was not consistent with U.S. national security and foreign policy objectives. This was because China is an ITAR 126.1 sanctioned country. The facts described herein were described in a Directed Disclosure response by IPI to DOS.  (meaning that IPI did not voluntarily report these actions to the DOS).

IPI was charged with 3 violations of the ITAR, count one – unauthorized brokering without a license, counts 2 and 3, misrepresentation or omission of facts in an export control document.

DOS determined that IPI’s unauthorized brokering activities demonstrated a disregard for its export compliance responsibilities.

IPI was fined $850,000 by the Department of State, required to appoint a Special Compliance Officer, complete a Classification Review, obtain an Audit by an outside auditor, allow onsite reviews by the Department of State and obtain export compliance training, among other remedial measures. The fine and remedial measures are significant for a small company with less than 100 employees.

Provided below is guidance to assist your company’s compliance with the ITAR’s brokering requirements found at § 129 of the ITAR.

Broker Registration

The first step is registration with the Department of State specifically as a broker. It is a precondition for applying for broker prior approval licenses (when needed). Registration is required for only one brokering activity. Registration as a broker is separate from registration as a manufacturer or export.

Pursuant to §129.3, the following persons must register as a broker:

  • U.S. and foreign persons meeting the definition of a broker must register with the Department of State as a broker per the ITAR at §129.3(a); and
  • Broker registrations are submitted via the Department of State’s DECCS electronic licensing system using form DS2032 and checking the box for broker.

The ITAR at §129.3(b) includes the following exemptions from the broker registration requirements:

  • Foreign governments or international organizations, including their employees, acting in an official capacity; and
  • Persons exclusively in the business of financing, insuring, transporting, customs brokering, or freight forwarding, whose activities do not extend beyond financing, insuring, transporting, customs brokering, or freight forwarding. Examples include air carriers or freight forwarders that merely transport or arrange transportation for licensed defense articles, and banks or credit companies who merely provide commercially available lines or letters of credit to persons registered or required to register in accordance with §122 or 129.

Who Is A Broker

Before you register as a broker, you need to know who the ITAR defines as a broker and how it defines brokering activities. The ITAR at §129.2(a) defines who a broker is as follows:

  • Broker means any person who engages in the business of brokering activities:
    • Any U.S. Person wherever located;
    • Any foreign person located in the United States; or
    • Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. Person.

The key point to remember regarding the ITAR’s definition of a broker is that it only captures foreign persons when they are located in the U.S. or foreign person located outside the United States where the foreign person is owned or controlled by a U.S. Person. Therefore, most foreign persons are NOT subject to the ITAR’s brokering regulations and do NOT need to register as a broker.

What Is Considered ITAR Brokering

The next step is to define what constitutes what the ITAR considers is brokering as it may differ from the traditional brokering activities. The ITAR at §129.2(a) defines brokering activity as follows:

  • Any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin;
  • Such action includes, but is not limited to: financing, insuring, transporting, or freight forwarding defense articles and defense services; or
  • Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.

As you can see, a company can perform a brokering activity that does not involve the export from the United States of ITAR controlled technical data, hardware or defense services. In IPI’s case it was the transfer of material described in the ITAR’s U.S. Munitions List from China to Brazil at the heart of the broker violation.

“Any action on behalf of another” is broad and applicable to any actions that facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service. The phrase “any action” has been interpreted to mean several different things, for instance:

  • Exactly what it says, any action. This could be as simple as providing an email address or phone number of prospective foreign buyer of a U.S. or foreign defense article to the seller of the defense article;
  • Letting a purchase order for the drop shipment of a foreign defense article from one foreign country to another foreign country;
  • Initiating the manufacturing activity, caused when the purchase order is let, which starts the manufacturing process for a defense article that will be shipped from one foreign country to another foreign country; or
  • Initiating or supporting the shipping arrangements to have the material finalized for the drop shipment from one foreign country to another foreign country.

To determine if the activities your company engages in are brokering activities pursuant to the ITAR, first ask yourself, is your company assisting in the transaction in the following types of administrative activities as referenced in §129.2(b)(2):

  • Providing or arranging office space and equipment;
  • Providing hospitality;
  • Providing advertising;
  • Providing clerical assistance;
  • Providing assistance with obtaining visas;
  • Providing translation services;
  • Collecting product and pricing information to prepare a request to proposal;
  • Promoting company goodwill at trade shows; or
  • Providing legal advice to clients.

If your company is performing any of the administrative activities referenced above, it is not performing a brokering activity.

The following are also not brokering activities per §129.2(b)(2):

  • Activities performed by an affiliate on behalf of another affiliate; and
  • Activities by persons, including their regular employees, that do not extend beyond acting as an end-user of a defense article or defense service exported pursuant to a license or other approval under §123, §124, or §125, or subsequently acting as a reexporter or retransferor of such article or service under such license or other approval, or under an approval pursuant to §123.9.

If the activities your company engages in aren’t listed above, ask yourself is this transaction related to the prospective sale and/or export or import (as applicable) of U.S. or foreign origin ITAR regulated (or enumerated) hardware, technical data or services, and are on behalf of another party, U.S. or foreign? If your answer is yes, ask yourself, is my company taking any of the following actions:

  • Soliciting the sale of the ITAR regulated[2] (or enumerated[3]) hardware?
  • Promoting the sale of the ITAR regulated (or enumerated) hardware?
  • Negotiating the sale of the ITAR regulated (or enumerated) hardware?
  • Contracting for the sale of the ITAR regulated (or enumerated) hardware?
  • Arranging for the sale and/or export or import of the ITAR regulated (or enumerated) hardware?
  • Arranging the transfer of foreign defense articles from the foreign supplier to a foreign purchaser or foreign end user?
  • Obtaining a DSP-5 license for the export of the ITAR regulated hardware (or enumerated) or a DSP-61 for the temporary import of ITAR regulated hardware on behalf of another?
  • Obtaining an ATF Form 6 Permanent Import Permit for the permanent import of ITAR regulated (or enumerated) hardware that is listed on the ATF’s United States Munitions Import List (“USMIL”), on behalf of another?
  • Buying foreign origin ITAR enumerated hardware listed on the ITAR’s United States Munitions List (“USML”) or equipment listed on the USMIL from a foreign manufacturer or foreign owner for delivery to the U.S. for sale to another U.S. party?

If you answer yes to any of the above, brokering is occurring and a broker license will be required from the Department of State prior to ANY brokering activity taking place, for the articles listed below pursuant to §129.4(a)(2), if listed on the USML or the USMIL and for any foreign origin defense articles listed on the USML or listed on the USMIL, unless a license exemption is available:

  • Firearms and other weapons described by USML and USMIL Category I(a) through (d), USML and USMIL Category II(a) and (d), and full up rounds of Ammunition described in USML and USMIL Category III(a);
  • Rockets, bombs, and grenades as well as launchers for such defense articles described by USML Category IV(a), and launch vehicles and missile and anti-missile systems described by USML Category IV(b) (including man-portable air-defense systems);
  • Vessels of war described by USML Category VI;
  • Tanks and military vehicles described by USML Category VII;
  • Aircraft and unmanned aerial vehicles described by USML Category VIII;
  • Night vision-related defense articles and inertial platform, sensor, and guidance-related systems described by USML Categories XII(c) and (d);
  • Chemical agents and precursors described by USML Categories XIV(a), (d), and (e), biological agents and biologically derived substances described by USML Category XIV(b), and equipment described by USML Category XIV(f) for dissemination of the chemical agents and biological agents described by USML Categories XIV(a), (b), and (e);
  • Submersible vessels described by USML Category XX; and
  • Miscellaneous articles described by USML and USMIL Category XXI.

Broker License Exemptions

If you determine that your company is brokering and requires prior approval brokering authorization, the next step of the process is to determine if any of the ITAR’s brokering license exemptions apply to your transaction. The ITAR’s brokering license exemptions are found at §129.5(a) and §129.5(b).

Pursuant to §129.5(a), brokering activities undertaken for an agency of the U.S. government pursuant to a contract between the broker and that agency are exempt from the requirement for approval provided that:

  • The brokering activities concern defense articles or defense services solely for the use of the agency; or
  • The brokering activities are undertaken for carrying out a foreign assistance or sales program authorized by law and subject to control by the president by other means, as demonstrated by one of the following conditions being met:
    • The U.S. Government agency contract with the broker contains an explicit provision stating the contract supports a foreign assistance or sales program authorized by law and the contracting agency has established control of the activity covered by the contract by other means equivalent to that established under this subchapter; or
    • The Directorate of Defense Trade Controls provides written concurrence in advance that the condition is met.

Pursuant to §129.5(b), brokering activities regarding a foreign defense article or defense service are exempt from the requirement for approval when arranged wholly within and destined exclusively for the North Atlantic Treaty Organization, any member country of that organization, Australia, Israel, Japan, New Zealand, or the Republic of Korea, except in the case of the defense articles or defense services specified in § 129.4(a)(2) (see above), for which a broker license is required.

In order to use the broker license exemptions at §§ 129.5(a) and 129.5(b), pursuant to §129.5(c), brokers engaging in brokering activities described in §§129.5(a) or (b) are not exempt from obtaining a broker license from the Department of State if:

  • The broker is not registered as required by §129.3; or
  • The broker or any person who has a direct or indirect interest in or may benefit from the brokering activities, including any related defense article or defense service transaction, is ineligible as defined in §120.1(c)(2); or
  • A country or person referred to in §126.1 of this subchapter is involved in the brokering activities or such activities are otherwise subject to §129.7.

Broker Licensing

If your company is performing brokering activities and does not meet the requirements of the broker license exemptions referenced above, your company will need to submit a broker license (DS4294) to the Department of State, after it has secured a Broker registration code and before it undertakes any brokering activity. Below are the steps to file a broker license request:

  • The broker license request must be filed via the DS4294 form utilizing the Department of State’s DECCS electronic licensing system detailing the known specifics of the transaction, refer to §129.6(b);
  • Must identify the applicant’s name, address and PM/DDTC broker registration code;
  • Identify the specific brokering activity to be approved;
  • Identify the name, nationality, address, and place of business of all persons who may participate in the brokering activities;
  • Requires the ITAR 126.13 certification;
  • Must identify the specific defense article(s) or defense services involved as follows:
    • The USML/USMIL category;
    • The name or military nomenclature of each defense article;
    • Whether the defense article is Significant Military Equipment;
    • Estimated quantity of each defense article;
    • Estimated U.S. Dollar value of defense articles and defense services;
    • Security classification;
    • End-user and end-use; and
  • Identify whether the brokering activities are related to a sale through Direct Commercial Sale or under the U.S. Foreign Military Sales program or other activity in support of the U.S. Government.

Brokering Items On The USML Not  Listed In ITAR §129.4?

 

Provided the defense articles, technical data or defense services are U.S. origin, and not described in ITAR §129.4, no prior brokering approval is required, unless a sanctioned country or party is involved. If no prior brokering approval is required, the broker is required to report the brokering activity specifics with each annual broker registration renewal.

 

Summary

As you will now conclude, the ITAR brokering regulations are complex and compliance is critical to avoid fines and compliance remedial measures as described for IPI. Some key points to remember are:

  • Anyone who engages in a brokering activity, even a single brokering activity, must register with the Department of State as a broker before undertaking the brokering activity;
  • Foreign persons must register as brokers if they are to conduct a brokering activity when they are located in the U.S. or when they are owned or controlled by a U.S. Person;
  • The brokering of ANY foreign defense article requires prior brokering authorization approval, unless an ITAR broker exemption applies;
  • Even though most small arms and full up ammunition has moved to the export jurisdiction of the Export Administration Regulations (“EAR”), the brokering of U.S. or foreign origin small arms or full up ammunition enumerated on the ATF’s USMIL require prior ITAR brokering authorization approval;
  • Your company can perform a brokering activity without making an export of ITAR controlled technical data, hardware or defense services;
  • If your company is brokering any U.S. defense articles enumerated in 129.4(a)(2) your company will require a prior approval broker license or the utilization of a broker license exemption;
  • If your company is brokering any foreign defense article enumerated on the USML or the USMIL, your company will require a prior approval broker license or the utilization of a broker license exemption.
  • If your company is brokering a foreign defense articles enumerated in 129.4(a)(2) your company can utilize the NATO, Australia, Israel, Japan, New Zealand, or the Republic of Korea broker license exemption at §129.5(b) if the transaction is wholly within these countries including the country of manufacture; and
  • Annually all brokering activities, licensed or unlicensed, must be reported to DOS with the annual registration renewal.

Need help?? Contact our expert export consultants and attorneys for assistance at 703-847-5801 or by email at info@fdassociates.net.

[1] China is an ITAR 126.1 arms sanctioned country

[2] ITAR Regulated = Controlled by the ITAR.

[3] ITAR Enumerated = Foreign origin equipment, no U.S. content, included in the ITAR’s United States Munitions List (USML) or the ATF’s United States Munitions Import List (USMIL).

ITAR Brokering – The Good, The Bad and the Ugly Read More »