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Consultants Corner

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”) of 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  And while it may seem outdated, digital signatures are still not permitted.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 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.

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 »

The Second Step in ITAR Registration

GraceBIO

ABC Company is registered with the Department of State as a manufacturer of defense articles. During the company annual registration renewal process, the ABC Company office administrator assigned to prepare the registration renewal for signature by the senior corporate officer identified that ABC Company had in the preceding 12 months since the last registration renewal moved and changed their name due to a corporate rebranding effort.

 

In the DECCS DS-2032 registration form, as ABC Company attempts to prepare the renewal, they find that they cannot make these changes because the name and address are greyed out on the application.

 

What are they doing wrong?

 

Is it administrative? Or is there a regulatory compliance matter that they have failed to comply with?

 

ABC Company is experiencing both an administrative issue and a compliance issue.

 

There is an administrative issue because the name and address blocks on the renewal form are greyed out; the DECCS system will not allow for these changes to be made on the renewal form. A registration amendment must be filed to change these details on the DS-2032.

 

There is a compliance issue because a change in company name and address requires ABC Company to notify DDTC of the changes under 22 C.F.R. § 122.4. By failing to notify DDTC, ABC Company has found themselves to be in non-compliance with the ITAR.

 

22 C.F.R. § 122.4 states that within 5 days of the event, or 60 days in advance, written notification must be made to DDTC by the senior officer of the registrant of that change.

 

What counts as a change in company information?

  • Any change to the eligibility and/or conviction status of those listed on the registration statement. This includes indictment or otherwise charged (i.e. by criminal information in lieu of indictment) for or conviction of violating any of the U.S. criminal statutes listed in ITAR 120.6 or foreign criminal law on exportation of defense articles where conviction of such law carries a minimum term of imprisonment greater than 1 year; or becomes ineligible to contract with, or to receive a license or other approval from any agency of the U.S.G;
  • Any change to your company name or address.
  • Any change to your company organizational structure.
  • Any change in the ownership or control status of the company (DDTC requires all persons directly or indirectly with 5% or more ownership to be listed)
  • Any change in your senior officials, owners, and board members:
    • Resignations/Retirements
    • New appointments
    • Ownership percentage changes
  • Any acquisition, divestment, or establishment of a new subsidiary engaged in ITAR related activities.
  • Any change to parent/subsidiary or affiliate companies’ information.

 

As exports consultants, we routinely discover that our ITAR registered clients have failed to properly notify the Department of State, Directorate of Defense Trade Controls and Compliance (“DDTC”) of material changes to their company information. We learn of this when asking our clients to verify the accuracy of the information contained in the current DS2032 filing made 1 year earlier. Name changes, address changes, owners/officer and ownership changes are significant material changes that should be managed within your company with an eye towards making all notifications within the 5-day post event notice timeline. Failure to notify the Department of State signals that your company doesn’t have a pulse on this administrative obligation. If your company is not managing its registration within the Department of State ITAR requirements and compliance guidelines[1], what else is your company not compliant with?

 

All companies and organizations involved in ITAR-regulated manufacturing and exporting must have a valid registration with DDTC. Filing a registration with DDTC annually and receiving approval is the first step in ensuring your company avoids any ITAR related compliance violations.

 

Maintaining a valid registration is the second step. Maintenance of your registration is more involved than submitting a renewal application each year and submitting the DDTC renewal fee payment (see below for a recent update on fees). All DDTC registered companies are required to submit notification to the Department of State of certain changes to the company information listed on your registration statement. This requirement is stipulated in 22 C.F.R. § 122.4(a)[2].

 

22 C.F.R. § 122.4(a) requires notification to DDTC within 5 days of the event of any change to the eligibility and/or conviction status of those individuals or entities listed on the registration statement. This includes indictment or otherwise charged (i.e. by criminal information in lieu of indictment) for or conviction of violating any of the U.S. criminal statutes listed in ITAR 120.6 or foreign criminal law on exportation of defense articles where conviction of such law carries a minimum term of imprisonment greater than 1 year; or becomes ineligible to contract with, or to receive a license or other approval from any agency of the U.S.G.

 

22 C.F.R. § 122.4(a) also requires 5-day notification to DDTC if there is a change in the registrant’s name or address, organizational structure, ownership of control of the company, establishment, acquisition, or divestment of a subsidiary company, or any change to the board of directors, senior officers, partners, or owners.

 

22 C.F.R. § 122.4(b)[3] requires notification to DDTC 60 days prior to an intended sale or transfer of ownership or control of the registered company to a foreign person or entity. The 60-day notification does not relieve the requirement to notify the DDTC of the sale or transfer (5-day notice) after the Committee on Foreign Investment in the United States (CFIUS) review is complete, or to secure export licenses for any possible export of technical information during the due diligence process.

 

22 C.F.R. § 122.4(c)[4] requires notification to DDTC within 5 days of the event to any merger, acquisition, or divestiture of a registrant. The details of the transaction should be provided in the notification along with all licenses and agreements that will be affected by the change. Following notification to DDTC, the registrant must subsequently receive approval of the transaction.

 

 

Recent update from DDTC on registration fees:

 

On June 26, 2023, The Department of State’s IT Modernization Team deployed the new “Renewal Fee Details” functionality to the DECCS Registration application. This feature will only be visible to Registration application users and affect small companies who fall into the Tier 3 (submitters of more than 10 export license applications) with a reduced registration fee.

 

Registration tiers are based on the number of license applications submitted by the registrant. Tier 1 registrants are those submitting an initial registration application, registrants who have not submitted any license applications during the preceding 12 months, and non-profit registrants. The set fee for Tier 1 registrants is $2,250. Tier 2 registrants are those renewing their registration who have submitted 1-10 license applications during the preceding 12 months. The set fee for Tier 2 registrants is $2,750. Tier 3 registrants are those renewing their registration who have submitted more than 10 license applications during the preceding 12 months. The fee for Tier 3 registrations is based at $2,750 and increases $250 for every license application after the 10th application.

 

The process:

  • 90 days or fewer remaining prior to the Registration expiration date;
  • The organization is subject to a Tier 2 or Tier 3 registration renewal fee[5]; and
  • Organizations having a minimum of 1 or more licenses “Approved” or “Approved with Provisos” in the twelve-month window ending 90 days before Registration expiration.

 

Provided the above criteria are met, users will see a new “Renewal Fee Details” button in their Registration dashboard in DECCS when there are 90 days or less before the expiration date. Selecting this button will display a pop-up window featuring additional details and information on how the renewal fee was calculated. Users will now be able to see the following information consolidated into the new Renewal Fee Details window:

 

  • Registration expiration date;
  • License Period “Start” and “End” dates;
    • Any licenses which were either “Approved” or “Approved with Provisos” within this date range were incorporated in the calculation of renewal fees;
  • Number of Licenses;
    • Any licenses which were “Returned Without Action” (RWA) will not be included in the calculation of renewal fees;
    • DS-4294 & DS-6004 licenses are not included in the calculation of renewal fees;
  • Total License Value;
  • 3% of Total License Value Reduced Fee (Tier 3 Renewals Only);
    • The 3% of Total License Value Reduced Fee field is provided only for calculation purposes and will not be applicable to all organizations. Please see the “Payment of Registration” website page to determine your organization’s renewal fee tier and discount fee eligibility; and
  • Renewal Fee Charged By DDTC.

 

Within this pop-up window, users will be presented with a “Download Licenses” button which generates a .csv file of all licenses considered when calculating the renewal fee charged by DDTC. This .csv file will include the case number, license type, approval date, and license value of all licenses “Approved” or “Approved with Provisos” within the license period date range that were used in the calculation of the renewal fee.

 

ITAR registered companies must remain vigilant in maintaining the accuracy of their registrations with The Department of State. Do not skip the second step of your ITAR registration.

 

 

 

[1]https://www.pmddtc.state.gov/ddtc_public/ddtc_public?id=ddtc_kb_article_page&sys_id=4f06583fdb78d300d0a370131f961913

[2] § 122.4 Notification of changes in information furnished by registrants. (a) A registrant must, within five days of the event, provide to the Directorate of Defense Trade Controls a written notification, signed by a senior officer (e.g., chief executive officer, president, secretary, partner, member, treasurer, general counsel), if:  (1) Any of the persons referred to in § 122.2(b) is indicted or otherwise charged (e.g., by criminal information in lieu of indictment) for or convicted of violating any of the U.S. criminal statutes enumerated in § 120.6 of this subchapter or violating a foreign criminal law on exportation of defense articles where conviction of such law carries a minimum term of imprisonment of greater than 1 year, or becomes ineligible to contract with, or to receive a license or other approval to export or temporarily import defense articles or defense services from any agency of the U.S. Government; or (2) There is a change in the following information contained in the Statement of Registration: (i) Registrant's name; (ii) Registrant's address; (iii) Registrant's legal organization structure; (iv) Ownership or control; (v) The establishment, acquisition, or divestment of a U.S. or foreign subsidiary or other affiliate who is engaged in manufacturing defense articles, exporting defense articles or defense services; or (vi) Board of directors, senior officers, partners, or owners.

[3] (b) A registrant must notify the Directorate of Defense Trade Controls by registered mail at least 60 days in advance of any intended sale or transfer to a foreign person of ownership or control of the registrant or any entity thereof. Such notice does not relieve the registrant from obtaining the approval required under this subchapter for the export of defense articles or defense services to a foreign person, including the approval required prior to disclosing technical data. Such notice provides the Directorate of Defense Trade Controls with the information necessary to determine whether the authority of § 38(g)(6) of the Arms Export Control Act regarding licenses or other approvals for certain sales or transfers of defense articles or data on the U.S. Munitions List should be invoked (see § 126.1(e) of this subchapter).

 

[4] (c) The new entity formed when a registrant merges with another company or acquires, or is acquired by, another company or a subsidiary or division of another company shall advise the Directorate of Defense Trade Controls of the following: (1) The new firm name and all previous firm names being disclosed; (2) The registration number that will survive and those that are to be discontinued (if any); (3) The license numbers of all approvals on which unshipped balances will be shipped under the surviving registration number, since any license not the subject of notification will be considered invalid; and (4) Amendments to agreements approved by the Directorate of Defense Trade Controls to change the name of a party to those agreements. The registrant must provide to the Directorate of Defense Trade Controls a signed copy of such an amendment to each agreement signed by the new U.S. entity, the former U.S. licensor and the foreign licensee, within 60 days of this notification, unless an extension of time is approved by the Directorate of Defense Trade Controls. Any agreement not so amended may be considered invalid.

 

The Second Step in ITAR Registration Read More »

BIS Issues Largest Civil Penalty In History for Export from Abroad of Foreign Manufactured EAR99 Hard Disk Drives to Huawei in China

By:      Keil Ritterpusch – Vice President – Compliance – FD Associates, Inc.

 

On April 19, 2023, the U.S. Department of Commerce Bureau of Industry & Security (“BIS”) issued a $300 million civil penalty to Seagate Technology LLC of Fremont, California (“Seagate US”) and Seagate US’s Singaporean affiliate, Seagate Singapore International Headquarters Pte. Ltd. (“Seagate Singapore”) for the export from abroad to Huawei Technologies Co. Ltd. (“Huawei”) of approximately 7,420,496 foreign manufactured Hard Disk Drives (“HDDs”) for a total sales price of $1,104,732,205.

BIS determined, through an extended investigation into sales by Seagate US and Seagate Singapore to Huawei and through the review of technologies and equipment used by Seagate affiliated companies manufacturing HDDs, that all HDDs manufactured by Seagate in China, Northern Ireland, Malaysia, Singapore, and Thailand were “subject to the EAR” when sold to Huawei (directly or by downstream parties where Seagate had knowledge).  BIS reached this conclusion by applying the Export Administration Regulations’ (“EAR’s”) Foreign Direct Product Rule (“FDPR”) specific to transactions involving Huawei entities, EAR § 734.9(e)(1), to the sale of foreign manufactured HDDs by Seagate US foreign affiliates.[1]

Specifically, BIS found that Seagate HDDs manufactured outside the United States were manufactured using technology originating in the United States that was controlled for export by Export Control Classification Number (“ECCN”) 3E991, among other ECCNs, and that Seagate plants manufacturing HDDs abroad used ECCN 3B992 inspection equipment for detecting defects on HDD substrates and media.  From information on Seagate US’s website, all Seagate HDDs are listed as EAR99 items.  The use of this technology and equipment alone made all of their products, when sold to Huawei, “subject to the EAR”.

In reviewing information on the civil penalty imposed by BIS in BIS’s public announcement of the penalty, the BIS Order, the Settlement Agreement, and the Proposed Charging Letter (“PCL”) for the civil penalty, it is clear that two major aggravating factors were at play in this case. The first was that all of Seagate’s competitors publicly stated after August 2020 that they would not sell HDDs to Huawei.  The second aggravating factor was that Seagate not only continued to sell to Huawei, but substantially increased its sales and entered into long-term supply agreements with Huawei.

 

(https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3264-2023-04-19-bis-press-release-seagate-settlement/file)

Nothing in the published documents references any defenses claimed by Seagate for the sale of its foreign manufactured HDDs to Huawei.  However, we can deduce that Seagate determined – albeit informally — that its foreign manufactured HDDs were “not subject to the EAR”.  What the Seagate civil penalty case says for any worldwide party who sells products to Huawei or any of the 48 other Entity List entities with special FDPR Rules in EAR § 734.9(e)(2) is that the bar for determining whether your foreign manufactured products are “subject to the EAR” is very low.  BIS declared emphatically in the press release for the Seagate civil penalty that companies:

“need to evaluate [their] entire manufacturing process to determine if specified U.S. technologies, [equipment] or software [are] used in building the essential tools used in production” and if specific U.S. technologies, equipment, or software are used directly in the manufacture of products outside of the United States.

Given that Huawei was added to the Entity List with a special FDPR in August 2020 and more than 45 entities were added to the Entity List with similar (if not more expansive) FDPR requirements in October 2022, this major compliance action by BIS should be a warning.  BIS’s Director of Export Enforcement John Sonderman stated this expressly in the public release for the Seagate civil penalty:

“Those who would violate our FDP rule restrictions are now on notice that these cases will be investigated and charged, as appropriate”

[1] The “Huawei FDPR” was moved from Footnote 1 to Supplement No. 4 to Part 744 of the EAR to EAR § 734.9(e)(1) on February 3, 2022 (87 FR 6033), with a further revision to the “Huawei FDPR” by BIS on October 13, 2022 (87 FR 62186).

BIS Issues Largest Civil Penalty In History for Export from Abroad of Foreign Manufactured EAR99 Hard Disk Drives to Huawei in China Read More »

3D Systems Corporation’s Trifecta Of Violations Of U.S. Export Control Laws

By John Herzo, Senior Associate, FD Associates, Inc.
And Jenny Hahn, President, FD Associates, Inc.
April 11, 2023

Background:

On February 27, 2023, 3D Systems Corporation (“3D Systems”) entered into a settlement agreement with the Department of Commerce, Bureau of Industry and Security (“BIS”) for violations of the Export Administration Regulations (“EAR”) resulting in a fine up to $2,777,570; a three (3) year consent agreement with the Department of State for violations of the International Traffic in Arms Regulations (“ITAR”) with a fine of up to $20,000,000; and a settlement with the Department of Justice for violations of the False Claims Act with a fine of up to $4,540,000. In addition to the fines related to the EAR violations, 3D Systems must conduct two (2) audits of its export controls compliance program and is subject to a three-year denial of its export privileges under the EAR. Based on the ITAR violations, 3D Systems will engage an external Special Compliance officer for at least the first year of its 3 year Consent Agreement with the Department of State and will conduct two external audits of its ITAR compliance program and implement additional compliance measures.

3D Systems’ violations, included those of its subsidiary Quickparts.com, Inc., (“Quickparts”). Quickparts provided prototypes and low-volume production parts using traditional computer numerical control machining, cast urethane modeling, and injection molding services. Quickparts regularly exported customer data primarily to third-party suppliers abroad, including China, for quotation and potential production.

3D Systems’ violations, including those of operating divisions, subsidiaries (in particular Quickparts), and business units, of the EAR, ITAR and False Claims Act included:
• Exports to China without a license;
• Acting with knowledge a violation would occur by exporting EAR-controlled technology to China without the required license; exports, reexports and transfers of technology/technical data to Germany without a license;
• Exports, reexports and transfers to Taiwan without an ITAR license;
• Exports, reexports and transfers to China without an ITAR license;
• Exports of technical data to foreign person employees (FPEs) from India and the United Kingdom;
• A failure to maintain records; and
• Violations of the False Claims Act by improperly transmitting export-controlled technical data to China in violation of the export control laws of the United States in connection with certain NASA and DOD contracts.

Having an effective compliance program including training that educates all employees on all aspects of export is a foundational element of a trade compliance program. The facts of this case presented several lessons that industry should take note of when making exports and vetting suppliers. These actions resulted in the noted enforcement actions:

• Heed the warning. The enforcement actions taken against 3D Systems, including those of operating divisions, subsidiaries (in particular Quickparts), and business units by the Department of Commerce, Department of State and the Department of Justice began when a customer of Quickparts notified Quickparts in 2015 of potential violations of the EAR in connection with the export of technology subject to the EAR to China. The customer also informed Quickparts that it had submitted a voluntary disclosure to the United States Government regarding such potential violations. 3D Systems and Quickparts did not act on this information by filing their own self-disclosure and they continued to make exports to China without export licenses. It was not until two years later, after a visit by the BIS’ Office of Export Enforcement in April 2017 and in response to BIS’s October 2017 administrative subpoenas, that 3D Systems/Quickparts subsequently filed self-disclosures; and

• The agencies talk! An interagency referral from BIS/OEE to the Department of Justice led to the civil settlement between the Department of Justice and 3D Systems to resolve allegations that 3D Systems violated the False Claims Act by improperly transmitting export-controlled technical data to China in violation of the export control laws of the United States in connection with certain NASA and DOD contracts; and

• You are responsible for the acts of your subsidiaries, even when sold. Most of the ITAR, EAR and False Claims Act violations by Quickparts occurred when Quickparts was a subsidiary of 3D Systems. 3D Systems sold Quickparts in June of 2021, to Trilantic North America, a middle-market private equity firm, prior to the enforcement actions taken against 3D Systems. By charging 3D Systems after the sale of its subsidiary, BIS, the Department of State and the Department of Justice broke prior precedent of applying successor liability to the new owner. To date, BIS, the Department of State and the Department of Justice have not taken any known enforcement action against Quickparts’ new owner, Trilantic North America; and

• Export Jurisdiction and Classification analysis: A foundational element of all trade compliance programs is knowing the export jurisdiction (ITAR or EAR) of incoming technical information. Before exporting technical data received from customers, the exporter must establish the export jurisdiction (ITAR or EAR) and the export classification within the U.S. Munitions List (USML) for ITAR or Commerce Control List (CCL) for EAR. These determinations drive the export licensing requirements. Not knowing or understanding the export markings on technical data identifying the export jurisdiction or classification led to the export violations of the nature described herein; and

• Know where your technical data is stored on your network. The violations regarding exports to Germany occurred because 3D Systems arranged for the backup of the U.S. email systems for Quickparts’ and other subsidiaries to a server in Germany creating an immediate export scenario. Employee emails containing design documents such as blueprints, drawings, plans, diagrams, engineering designs and specifications, computer-aided design files were included in these email files. It is imperative that company IT personnel and management understand the risks with backup of emails and other programs that will contain export controlled information to servers outside the U.S. and being able to identify where in your network your technical data or your customers technical data is critical to a successful export compliance program. Not only is the unencrypted backup of technical data a contravention of U.S. export rules, any government contractor may cause violations of the NIST 800-171 and DFARS Cybersecurity rules by doing so; and

• Fox in the hen house. Hiring foreign persons creates an immediate export scenario. Placing these persons in positions of direct responsibility for ITAR and EAR controlled programs obligates the company to first secure the access to export controlled technical data until they have secured the appropriate ITAR and EAR Foreign Person Employee Licenses from the appropriate government agencies. 3D Systems or its subsidiaries failed to lock down the network and failed to obtain the required Foreign Person Employee Licenses; and

• Restricting network access: Implementing network access requirements to the level of “need to know” and coordination with IT to block folders with export controlled content regulated by the ITAR or EAR is the first step to ensuring export compliance until the foreign person employees or foreign subsidiaries have been granted ITAR and EAR authorizations to such export controlled data for specific programs; and

• Understanding restricted countries: An essential element of any trade compliance program is training personnel on the export status of individual countries under sanction. The ITAR, EAR and OFAC all have different levels of restrictions on countries, in addition to that placed on individuals and entities. China has been an armed embargoed nation under the ITAR since 1989; and

• Maintenance of Records: It is an ITAR and EAR requirement to maintain records for a minimum period of five years from the date of export. It is expected that the company export compliance program will have specific policies and procedures including the retention of employee emails for the required period. This includes all related records including those created by former employees. The enforcement actions against 3D Systems, its operating divisions, subsidiaries and business units included failures to maintain records pursuant to the EAR and the ITAR. Email accounts were deleted when employees left the company; and

• Don’t be snarky with the government: Statements made in voluntary disclosure filings should genuinely reflect the serious nature of violation(s) being disclosed and express respect to the government process. Discounting the importance of conducting a full review and investigation into possible violations because the company deems it burdensome will result in only one outcome. A financial penalty.

This article explores the details of these violations below.

EAR:

3D Systems entered into a settlement agreement with BIS regarding nineteen (19) violations of the EAR.

On November 30, 2015, a Quickparts customer notified Quickparts of potential violations of the EAR in connection with the export of technology subject to the EAR to China. The customer also informed Quickparts that it had submitted a disclosure to the United States Government regarding such potential violations. On April 19, 2017, in connection with the disclosure, a BIS Special Agent conducted an outreach with 3D Systems’ then Director of Operations and Special Projects. On April 20, 2017, BIS issued a Warning Letter to 3D Systems regarding the conduct described in the disclosure. 3D Systems and Quickparts therefore knew or had reason to know that certain technology it handled regularly as part of its On Demand Manufacturing (“ODM”) business unit that was subject to the EAR and likely required BIS licenses prior to its release to most countries, including China. However, despite the outreach and explanation by a BIS Special Agent of the Company’s export control compliance obligations under the EAR, neither 3D Systems nor Quickparts sought to or obtained a license for such technology before exporting it. Thus, by forwarding technology subject to the EAR to China without the required BIS license it was with knowledge that a violation of the EAR had occurred. Refer to 15 C.F.R. § 772.1, which provides that “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.”

The first two charges related to the export of controlled technology to China without a license. On two occasions from October 2, 2015 through October 3, 2015, 3D Systems’ subsidiary Quickparts exported technology subject to the EAR to China without the required license from the Department of Commerce. Specifically, Quickparts exported design documents such as blueprints, drawings, plans, diagrams, engineering designs and specifications, computer-aided design files, via e-mail to its then-subsidiary’s office located in China. These design documents were technology required for the development, production, operation, installation, repair, overhaul, or refurbishing of spacecraft and related commodities, classified under Export Control Classification Number (“ECCN”) 9E515. The 9E515 technology at issue is controlled for national security and regional stability related reasons, and, pursuant to Sections 742.4 and 742.6 of the EAR, a BIS license was required to export such items to China (and per the EAR a policy of denial exists for such license applications).

The next four charges relate to 3D Systems and Quickparts acting with knowledge of a violation by exporting EAR-controlled technology to China without the required license. On four occasions from June 14, 2016, through February 7, 2018, Quickparts exported technology subject to the EAR to China with knowledge that a violation of the EAR had occurred, was occurring, or was about to occur in connection with the export. Specifically, Quickparts released design documents such as blueprints, drawings, plans, diagrams, engineering designs and specifications, computer-aided design files, via e-mail to its Chinese subsidiary. The design documents were technology required for military electronics, classified under ECCN 3E611 and technology required for the development, production, operation, installation, repair, overhaul, or refurbishing of spacecraft and related commodities, classified under ECCN 9E515. Both 3E611 and 9E515 technology are controlled for national security and regional stability related reasons. A BIS license was required to export such items to China.

Four charges related to 3D Systems, via Quickparts, engaging in prohibited conduct by exporting EAR-controlled technology to Germany without the required license. On four occasions between January 21, 2015 and June 14, 2016, Quickparts exported technology subject to the EAR to Germany without the required license from the Department of Commerce. Specifically, Quickparts’ employee emails containing design documents such as blueprints, drawings, plans, diagrams, engineering designs and specifications, computer-aided design files, were stored on a server located in Germany. These design documents were classified under ECCN 3E611, technology required for military electronics, and ECCN 9E515, technology required for the development, production, operation, installation, repair, overhaul, or refurbishing of spacecraft and related commodities. Both the 3E611 and 9E515 technology at issue was controlled for national security and regional stability related reasons, and pursuant to Sections 742.4 and 742.6 of the EAR, a BIS license was required to export such items to Germany. All Quickparts employee emails and attachments were stored on a server located in Germany, which “mirrored” the email server in the United States. When the mirrored server was activated in December 2014, any emails in an employee’s inbox as of that date, and those that the employees sent or received after that date, were transferred to the German server. 3D Systems ceased the practice for its subsidiary’s in December 2017 and fully decommissioned the German server in October 2018, since which time all 3D Systems employee email, including those of its operating divisions, subsidiaries and business units are hosted exclusively in the United States.

Lastly, 3D Systems failed to comply with the EAR’s recordkeeping requirements. Between January 21, 2015 and February 7, 2018, in connection with the transactions described in the charges referenced above, 3D Systems failed to comply with the recordkeeping requirements set forth in Section 762.2 of the EAR. 3D Systems failed to retain documents required to be retained under Section 762.2, including contracts relating to these exports.

Based on the violations described above, 3D Systems was assessed a civil penalty in the amount of $2,777,570, that was required to be paid to the U.S. Department of Commerce within 30 days of the date of the Order. 3D Systems shall complete two (2) audits of its export controls compliance program. 3D Systems Corporation is subject to a three-year denial of its export privileges under the EAR. Such denial shall be suspended for a probationary period of three years, and shall thereafter be waived, provided that 3D Systems has made full and timely payment as set forth above, has completed the audits and submitted the audit results as set forth above, and has not committed another violation of EAR or any order, license, or authorization issued under the EAR.

ITAR:

As noted, in October 2017, the Bureau of Industry and Security served a subpoena on 3D Systems seeking information related to potential export violations under the EAR. Following the receipt of the subpoena, 3D Systems expanded the scope of its internal investigation of Quickparts’ handling of export control data, which resulted in the discovery of ITAR violations that 3D Systems disclosed to the Department of State in three disclosures. The violations involved unauthorized exports, reexports, and retransfers of technical data to Germany, Taiwan, and China; unauthorized exports of technical data to foreign person employees (FPEs) from India and the United Kingdom; and a failure to maintain records related to foreign person employees’ and exports of technical data to Germany and China.

3D Systems agreed to pay a civil penalty of $20,000,000 pursuant to the 3 year Consent Agreement with the Department of State. Half of the civil penalty, $10,000,000, will be suspended if 3D Systems uses $10,000,000 for Department of State approved remedial compliance measures to strengthen 3D Systems’ compliance program. 3D Systems will also engage an external Special Compliance officer for at least the first year of the Consent Agreement and will conduct two external audits of its ITAR compliance program and implement additional compliance measures.

From December 2014 to October 2018, 3D Systems stored all employee emails, including Quickparts employee’s email that contained technical data and attachments, on an unencrypted email server located in Germany, which “mirrored” the email exchange server in the United States to provide a back-up system and improve service for users outside of the United States. Through this mirroring process, all email 3D Systems employees sent or received appeared simultaneously on 3D Systems’ U.S. and German email servers. 3D Systems reported that emails on its U.S. and German servers contained technical data controlled under multiple USML Categories, including IV(i), VII(h), VIII(i), XII(f), and XIII(l), for the purpose of providing quotation and manufacturing services for third-party customers and troubleshooting technical issues. As a result of the implementation of this mirroring process, 3D Systems exported without authorization ITAR-controlled technical data to Germany many times when its employees’ emails containing technical data appeared on its German servers.

3D Systems ceased mirroring to the German server of Quickparts’ employee emails in December 2017. However, in addition to Quickparts employees’ emails, emails from employees in other 3D Systems business units were also mirrored to the unencrypted email server in Germany. At the time, Advanced Manufacturing Group (“AMG”) was a business unit within 3D Systems. AMG created benchmarking parts for potential 3D Systems customers in connection with the sale of its 3D printers. As part of the benchmarking process, 3D Systems customers provided AMG with technical data to print test parts so that the customers could evaluate the capabilities of 3D Systems’ printers. Customers occasionally provided ITAR-controlled technical data to AMG as part of their benchmarking requests, including via email. The mirroring continued until October 2018, when 3D Systems fully decommissioned the German server. Thus, until October 1, 2018, 3D Systems automatically backed-up ITAR-controlled technical data included in emails to the unencrypted email server located in Germany, resulting in unauthorized exports. Through the use of this process, 3D Systems, its operating divisions, subsidiaries, and business units, without authorization exported technical data to Germany on multiple additional occasions.

Quickparts’ office in China, assisted Quickparts employees in the United States with obtaining quotations from third-party suppliers in China and managing projects that proceeded from quotation to production. As part of the quotation process, Quickparts employees in the United States provided requests for quotation (RFQs), which included associated technical data received from Quickparts customers in the United States, to Quickparts employees in China without authorization. The Quickparts employees in China retransferred the technical data to third-party suppliers in China for quotations. Also, Quickparts employees in the United States sent RFQs and associated technical data directly to third-party suppliers in China. In some instances, the third-party suppliers in China used the technical data to manufacture ITAR-controlled defense articles. Quickparts exported without authorization technical data controlled under USML Categories IV(i), XII(f), and XIII(l) 36 times and Quickparts China retransferred without authorization technical data 28 times from December 2015 to December 2017.

Quickparts’ offices in China sometimes used overseas third-party suppliers located in countries other than China as part of the quotation process. For example, between June 2017 and April 2018, Quickparts’ offices in China reexported without authorization ITAR-controlled technical data from China to Taiwan. On three such occasions, Quickparts’ offices in China emailed technical data to Idea Development Company in Taiwan.

3D Systems identified two foreign person employees (FPEs) (one each from India and the United Kingdom, respectively) whose job functions required export controlled information which meant 3D Systems/Quickparts had without authorization repeatedly exported ITAR-controlled technical data to the FPEs. The two FPEs were a Sales Manager and a Manufacturing Manager who reviewed ITAR-controlled documents to provide customers and Quickparts personnel with advice regarding the manufacturing options. These two individuals had substantive interactions with ITAR-controlled technical data whenever a customer’s question or production issue was brought to their attention. These activities likely resulted in unauthorized exports of technical data to other foreign persons/entities listed under several USML Categories referenced.

3D Systems failed to produce copies of multiple records related to its ITAR controlled activities that the Department of State requested, which limited the scope of the Department’s investigation. The full scope of 3D System’s, including those of its operating divisions, subsidiaries and business units, unauthorized exports to China and Germany, retransfers within the China, and exports to FPEs is unknown because 3D Systems disclosed that it did not maintain complete records for:
• Unauthorized exports of technical data via email;
• The members of the Quickparts China email distribution list, and thus the number of unauthorized exports and retransfers;
• The nationality of employees who received technical data from customers; and
• The individual use of technical data on company servers because IT systems did not record this information.

As a consequence of not having a central system to transfer RFQs and associated ITAR-controlled technical data within 3D Systems, 3D Systems only has records of the exports of ITAR-controlled technical data in employee emails. Historically, 3D Systems had not implemented a document retention policy with respect to employee emails. In some instances, 3D Systems deleted former employee emails upon their departure or sometime thereafter. 3D Systems identified 30 former employees, approximately 16 percent of the total employees potentially involved in exporting technical data, for whom emails were no longer available for review. The failure to retain these employees’ emails meant 3D Systems did not maintain complete records of all exports to Germany and China these employees made, even though, based on their job duties, they exported technical data to Germany and China.

In addition to the failure to maintain employee emails, any 3D Systems employee with IT credentials had the ability to locate folders containing ITAR technical data, and all users’ credentials permitted them to open and view documents within those folders. 3D Systems identified 65 FPEs who worked for 3D Systems since January l, 2012, and who could have accessed ITAR-controlled technical data due to their IT systems access credentials. 3D Systems’ IT system was not designed to track individual access to technical data. As a result, 3D Systems could not provide records of exports of ITAR-controlled technical data to these FPEs even if, based on their job duties, some exports likely did occur. 3D Systems identified additional business units other than Quickparts and AMG that may have received ITAR-controlled technical data from customers. Specifically, 3D Systems reported that the plastics printer sales team (Plastic Printer Sales) and the software services and technical support teams (Services & Support) on occasion received ITAR-controlled data from potential plastic printer customers and from customers experiencing technical issues with software purchased from 3D Systems. However, while 3D Systems acknowledged that it is likely that the employees of the Plastic Printer Sales and the Services & Support business units had their email mirrored to the German server until October 2018, 3D Systems did not conduct a review for potential ITAR violations because they believed “the risk of controlled data existing in these employees’ email was low, conducting a review of this email was unlikely to uncover potential ITAR violations and therefore did not justify such a burdensome review.”

Department of Justice:

3D Systems agreed to pay the United States up to $4.54 million to resolve allegations that it violated the False Claims Act by improperly transmitting export-controlled technical data to China in violation of the export control laws of the United States in connection with certain NASA and DOD contracts.

Per the terms of a civil settlement executed with the Department of Justice on February 27, 2023, 3D Systems Corporation agreed to pay $2.27 million in restitution to the federal government within 30 days. The company may be required to pay an additional $2.27 million in penalties under the Justice Department settlement agreement, for a total of up to $4.54 million, if it fails to pay at least that amount in civil penalties to the Department of State and the Department of Commerce in connection with the parallel administrative settlements referenced above.

According to the Justice Department Settlement Agreement, 3D Systems, through its Quickparts subsidiary completed on-demand manufacturing projects both directly and indirectly on contracts issued by DOD and NASA, including for projects involving technical or other data potentially classified under and controlled by the International Emergency Economic Powers Act, the Arms Export Control Act, the Export Administration Regulations, and/or the International Traffic in Arms Regulations.

The referenced Export Control Laws prohibit certain controlled items and/or intellectual property from being exported to certain foreign countries, including China, without a license or authorization from the appropriate federal agencies. In the Justice Department settlement agreement, the United States alleged that between January 1, 2012 and December 31, 2017 3D Systems exported certain items and/or intellectual property to China without the appropriate license or authorization in violation of the Export Control Laws in connection with certain contracts issued by DOD and NASA in violation of the False Claims Act. The claims resolved by the settlement are allegations only. There has been no determination of liability.

https://www.pmddtc.state.gov/ddtc_public?id=ddtc_kb_article_page&sys_id=384b968adb3cd30044f9ff621f961941 and https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3233-2023-02-27-3d-press-release/file and https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2023/1468-e2807/file and https://www.justice.gov/usao-ndtx/pr/3d-printing-company-pay-454-million-settle-false-claims-act-allegations-export and https://www.3dsystems.com/press-releases/3d-systems-announces-sale-demand-manufacturing-business

3D Systems Corporation’s Trifecta Of Violations Of U.S. Export Control Laws Read More »

DDTC Announced Today A Temporary Suspension of the ITAR “See-Through Rule” For Certain High Energy Storage Capacitors Described on the USML

ITAR 120.11 (c)[1] pertains to the Order of Review and the Integration of controlled items described on the USML and states:

 

Defense articles described on the USML are controlled and remain subject to the ITAR following incorporation or integration into any item not described on the USML, unless specifically provided otherwise in this subchapter.

 

DDTC published the following announcement on their website as a notification to the Industry of temporary suspension of ITAR § 120.11(c) with respect to certain high energy storage capacitors

 

On November 21, 2022, the Deputy Assistant Secretary of State for Defense Trade Controls temporarily suspended for a period of six (6) months the applicability of § 120.11(c) of the International Traffic in Arms Regulations (ITAR) for certain capacitors described in U.S. Munitions List (USML) Category XI(c)(5).

 

USML XI(c) (5) controls the following types of capacitors.

(5) High-energy storage capacitors with a repetition rate of 6 discharges or more per minute and full energy life greater than or equal to 10,000 discharges, at greater than 0.2 Amps per Joule peak current, that have any of the following:

(i) Volumetric energy density greater than or equal to 1.5 J/cc; or

(ii) Mass energy density greater than or equal to 1.3 kJ/kg;

 

 

The Department assessed that it is in the security and foreign policy interests of the United States to facilitate commercial uses of certain capacitors when integrated into any item not described on the USML (for example, certain items used in energy exploration and commercial aviation).

 

Accordingly, pursuant to ITAR § 126.2, and the Department’s administration of the Arms Export Control Act (AECA), the Deputy Assistant Secretary of State for Defense Trade Controls ordered the temporary suspension of ITAR § 120.11(c) with respect to capacitors described in USML Category XI(c)(5) that have a voltage rating of one hundred twenty-five volts (125 V) or less and have been integrated into, and included as an integral part of, any item not described on the USML. Such articles are licensed by the Department of Commerce when integrated into and included as an integral part of items subject to the EAR.

 

This temporary suspension is valid for a period of six months, from November 21, 2022, to May 21, 2023, or when terminated by notice, whichever occurs first.

Capacitors described in USML Category XI(c)(5) remain subject to the controls of the ITAR in all other circumstances, including as stand-alone articles. The export, reexport, retransfer, or temporary import of technical data and defense services directly related to all defense articles described in USML Category XI(c)(5) remain subject to the ITAR.

 

Any violation of the ITAR, including any violation of the terms and conditions of any export license issued by the Department of State prior to the temporary suspension announced herein, remains a violation of the AECA. The Department of State strongly encourages the industry to disclose unauthorized exports, reexports, retransfers, or temporary imports of defense articles, including the subject capacitors, that occurred prior to this temporary suspension.

 

Editors comments:

Industry has seen the ITAR See Through rule overcome before. It's important to follow DOS issuance of CJs and Consent Agreements to get insight into the regulators thinking on export controls of certain items.

 

Both Boeing and Goodrich incorporated the QRS-11 chip into commercial items, the 777 aircraft, and a flight standby instrument. DDTC awarded them both hefty civil penalties for this action, thus validating the ITAR See-Through Rule's existence before it was formally adopted into the ITAR in 2022. In the QRS-11 case, after the fines were assessed to Boeing and Goodrich, the regulators incorporated specific exceptions into the ITAR and EAR pertinent to when the QRS-11 chip is installed/integrated into a civil item.

 

One has to wonder the cause of this suspension and opine there may be a Commodity Jurisdiction Request in process or a compliance case that is causing the regulators to rethink controls for certain high-energy storage capacitors meeting the technical levels noted. Stay tuned for further updates...

 

This notice also serves as a reminder of the criticality of reviewing your Bill of Materials when manufacturing commercial items to ensure that you don't trip over the ITAR See-Through Rule.

 

DDTC Announced Today A Temporary Suspension of the ITAR “See-Through Rule” For Certain High Energy Storage Capacitors Described on the USML Read More »

The U.S. Department Of State, Office Of Defense Trade Controls Issues Two Temporary Open General Licenses That Will Assist Foreign Parties With Retransfers of U.S. Origin ITAR Defense Articles

In an extraordinary announcement announced on July 19, 2022, the U.S. Department of State, Office of Defense Trade Controls Licensing (“ODTCL”) has taken a proactive step in assisting foreign companies in the United Kingdom, Australia, and Canada by issuing two Temporary Open General Licenses (“OGEL”) pursuant to the International Traffic in Arms Regulations (“ITAR”) and ITAR § 126.9(b) authority to authorize the retransfer and reexport of previously authorized and exported defense articles and technical data to and within Australia, Canada, and the UK.

These Temporary OGELs go into effect on August 1, 2022, and expire one year later on July 31, 2023. ODTCL is issuing these OGELs as part of a pilot program to assess the viability and appropriateness of the open general license concept.

OGEL 1 and OGEL 2 only relate to ITAR-controlled defense articles and technical data that were previously authorized for export from the U.S. pursuant to a valid license, agreement, or other authorization and cannot be used as authorization for any exports from the U.S.

 

 

OGEL 1 authorizes the retransfer[1] (as defined in § 120.51) of unclassified defense articles to:

  • The Government of Australia, the Government of Canada, or the Government of the United Kingdom;
  • Members of the Australian Community as defined in § 126.16(d)[2], at all locations in Australia;
  • Members of the United Kingdom Community as defined in § 126.l7(d)[3], at all locations in the United Kingdom; or
  • Canadian-registered persons as defined in § 126.5(b). [4]

 

OGEL 2 authorizes the reexport[5] (as defined in § 120.19) of unclassified defense articles and technical data between or among:

 

  • The Government of Australia, the Government of Canada, or the Government of the United Kingdom;
  • Members of the Australian Community as defined in § 126.16(d), at all locations in Australia;
  • Members of the United Kingdom Community as defined in § 126.l 7(d), at all locations in the United Kingdom; or
  • Canadian-registered persons as defined in § 126.5(b).

 

The retransfer pursuant to OGEL 1 and the reexport pursuant to OGEL 2 of any unclassified defense articles and technical data to any of the parties listed above for OGEL 1 and OGEL 2, is subject to all the following requirements, limitations, and provisos:

 

Requirements: The transferor shall:

  • Comply with the requirements of § 123.9(b)[6];
  • Maintain the following records for each retransfer/reexport: a description of the defense article, including technical data; the name and address of the recipient and the end-user, and other available contact information (e.g., telephone number and electronic mail address); the name of the natural person responsible for the transaction; the stated end use of the defense article; the date of the transaction; and the method of transfer;
  • Ensure that such records are available to ODTCL upon request; and
  • Utilize Open General License No. 1 or Open General License No. 2 as the license or other approval number or exemption citation on all records pertaining to transfer

 

Limitations and Provisos:

  • The defense articles and technical data to be retransferred/reexported were originally exported pursuant to a license or other approval issued by ODTCL pursuant to section 38 of the Arms Export Control Act (AECA), the Defense Trade Cooperation Treaty between the United States and Australia (§ 126.16), or the Defense Trade Cooperation Treaty between the United States and the United Kingdom, (§ 126.17);
  • A defense article or technical data originally exported pursuant to the ITAR’s Foreign Military Sales (“FMS”) exemption at § 126.6(c) may not be retransferred/reexported under OGEL 1 or OGEL 2;
  • Defense articles and technical data described in § 126.16(a)(5) or § 126. l 7(a)(5) may not be retransferred/reexported under OGEL 1 or OGEL 2;
  • Defense articles may not be retransferred under OGEL 1 or OGEL 2 if they are listed on the Missile Technology Control Regime (MTCR) Annex or identified as Missile Technology (MT) on the United States Munitions List (USML) in § 121;
  • Defense articles may not be retransferred/reexported under OGEL 1 or OGEL 2 if they will be used to support the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, or processing of a missile, UAV, space-launch vehicle, item listed on the MTCR Annex, or item listed as MT on the USML in § 121;
  • Technical data may only be retransferred/reexported under OGEL 1 or OGEL 2 for the purpose of organizational-level, intermediate-level, or depot-level maintenance, repair, or storage of a defense article;
  • Any major defense equipment (as defined in § 120.8)[7] valued (in terms of its original acquisition cost) at $25,000,000 or more and any defense article or related training or other defense service valued (in terms of its original acquisition cost) at $100,000,000 or more, may only be retransferred/reexported under OGEL 1 or OGEL 2 for the purpose of: maintenance, repair, or overhaul defense services, including the repair of defense articles used in furnishing such services, if the retransfer/reexport will not result in any increase in the military capability of the defense articles and services to be maintained, repaired, or overhauled; or a temporary retransfer/reexport of defense articles for the sole purpose of receiving maintenance, repair, or overhaul;
  • The retransfer/reexport must take place wholly within the physical territory of Australia, Canada, or the United Kingdom;
  • Any retransfer/reexport of a defense article other than technical data is for end use by, or operation on behalf of, the Government of Australia, the Government of Canada, or the Government of the United Kingdom; and
  • OGEL 1 or OGEL 2 may not be utilized by persons to whom a presumption of denial is applied by ODTCL pursuant to §§ 120.l(c) or 127.l l(a), including, among other reasons, for past convictions of certain U.S. criminal statutes or because they are otherwise ineligible to contract with or receive an export or import license from an agency of the U.S. Government.

 

Information regarding OGEL 1 and OGEL 2 can be found on the Department of State’s website at:

 

https://www.pmddtc.state.gov/ddtc_public?id=ddtc_public_portal_news_and_events

[1] (a) Retransfer, except as set forth in § 120.54, § 126.16 or § 126.17, means:

(1) A change in end use or end user, or a temporary transfer to a third party, of a defense article within the same foreign country; or

(2) A release of technical data to a foreign person who is a citizen or permanent resident of the country where the release or transfer takes place.

 

[2] (d) Australian Community.  For purposes of the exemption provided by this section, the Australian Community consists of:

(1) Government of Australia authorities with entities identified as members of the Approved Community through the DDTC Web site at the time of a transaction under this section; and

(2) The non-governmental Australian entities and facilities identified as members of the Approved Community through the DDTC Web site at the time of a transaction under this section; non-governmental Australian entities and facilities that become ineligible for such membership will be removed from the Australian Community.

 

[3] (d)[3] United Kingdom Community.  For purposes of the exemption provided by this section, the United Kingdom Community consists of:

(1) Her Majesty's Government entities and facilities identified as members of the Approved Community through the DDTC Web site at the time of a transaction under this section; and

(2) The non-governmental United Kingdom entities and facilities identified as members of the Approved Community through the DDTC Web site (www.pmddtc.state.gov) at the time of a transaction under this section; non-governmental United Kingdom entities and facilities that become ineligible for such membership will be removed from the United Kingdom Community.

 

[4] For purposes of this section, “Canadian-registered person” is any Canadian national (including Canadian business entities organized under the laws of Canada), a dual citizen of Canada and a third country other than a country listed in § 126.1 of this subchapter, and permanent resident registered in Canada in accordance with the Canadian Defense Production Act, and such other Canadian Crown Corporations identified by the Department of State in a list of such persons publicly available through the Internet website[4] of the Directorate of Defense Trade Controls and by other means.

 

[5] (a) Reexport, except as set forth in § 120.54, § 126.16, or § 126.17, means:

(1) An actual shipment or transmission of a defense article from one foreign country to another foreign country, including the sending or taking of a defense article to or from such countries in any manner;

(2) Releasing or otherwise transferring technical data to a foreign person who is a citizen or permanent resident of a country other than the foreign country where the release or transfer takes place (a “deemed reexport”); or

(3) Transferring registration, control, or ownership of any aircraft, vessel, or satellite subject to the ITAR between foreign persons.

(b)  Any release outside the United States of technical data to a foreign person is deemed to be a reexport to all countries in which the foreign person has held or holds citizenship or holds permanent residency.

 

[6] (b) The exporter, U.S. or foreign, must inform the end-user and all consignees that the defense articles being exported are subject to U.S. export laws and regulations as follows:

(1) The exporter must incorporate the following information as an integral part of the commercial invoice, whenever defense articles are to be shipped (exported in tangible form), retransferred (in tangible form), or reexported (in tangible form) pursuant to a license or other approval under this subchapter:

(i) The country of ultimate destination;

(ii) The end-user;

(iii) The license or other approval number or exemption citation; and

(iv) The following statement: “These items are controlled by the U.S. government and authorized for export only to the country of ultimate destination for use by the ultimate consignee or end-user(s) herein identified. They may not be resold, transferred, or otherwise disposed of, to any other country or to any person other than the authorized ultimate consignee or end-user(s), either in their original form or after being incorporated into other items, without first obtaining approval from the U.S. government or as otherwise authorized by U.S. law and regulations.”

 

[7] Pursuant to section 47(6) of the Arms Export Control Act (22 U.S.C. 2794(6)), major defense equipment means any item of significant military equipment (as defined in § 120.7) on the U.S. Munitions List having a nonrecurring research and development cost of more than $50,000,000 or a total production cost of more than $200,000,000.

 

The U.S. Department Of State, Office Of Defense Trade Controls Issues Two Temporary Open General Licenses That Will Assist Foreign Parties With Retransfers of U.S. Origin ITAR Defense Articles Read More »