Consultants Corner

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  And while it may seem outdated, digital signatures are still not permitted.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

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.

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.

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 9×515 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 9×515 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.

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).

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

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.