Consultants Corner Archives - Page 6 of 7

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

By Keil J. Ritterpusch, Esq., Senior Associate

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

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

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

Here are some important links concerning the updates:

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

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

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

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

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

AES Transition To ACE

By John Herzo, Senior Associate

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

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

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

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

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

The added advantages of ACE over AES are as follows:

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

AES Transition To ACE Read More »

Key Aspects Of Successful Voluntary Disclosures

By John Herzo, Senior Associate

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

Investigation: Management Support For The Disclosure And The Investigation Process

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

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

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

Thorough Audit Of The Documentation Related To The Transaction In Question

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

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

Goal Of The Investigation

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

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

Disclosure:

The key aspects of a successful disclosure are:

Identification Of The Matter(s) Of Non-Compliance

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

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

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

Mitigating Factors

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

Corrective Actions

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

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

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

Supporting Documentation

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

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

*******

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

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

Key Aspects Of Successful Voluntary Disclosures Read More »

Export Control Reform – A 60 Day Snapshot

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

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

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

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

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

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

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

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

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

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

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

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

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

Export Control Reform – A 60 Day Snapshot Read More »

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

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

THE DEVIL’S IN THE DETAILS

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

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

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

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

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

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

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

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

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

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

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

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

On October 15, 2013, the initial wave of ECR commenced with ECCN 9A610 and related ECCNs established for certain military aerospace platforms, systems, subsystems, parts, components, production, test and inspection equipment, software and technology, and ECCN 9A619 and related ECCNs established for certain military gas turbine engines, parts and components, production, test and inspection equipment, software and technology transferred off the ITAR’s US Munitions List to the Commerce Control List under the EAR. As part of the ECR Initiative, exporters were able to take advantage of a “license free zone” to 36 of the 44 countries provided by License Exception STA in Part 740.20.c.¹

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

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

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

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

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

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

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

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

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

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

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

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

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

Use Of EAR License Exception STA – Are You Ready?? Read More »

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

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

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

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

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

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

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

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

New US Drone Export Policy Strengthens Control On Military Drones

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

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

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

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

Department of State UAS Policy

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

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

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

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

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

Department of Commerce UAS Regulatory Changes

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

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

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

Implications for the Future of UAS Exports

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

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

New US Drone Export Policy Strengthens Control On Military Drones Read More »

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

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

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

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

What does this mean for foreign licensees?

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

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

What does screening look like?

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

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

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

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

Export Control Reform

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

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

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

Questions? Contact your FD Associates consultant for assistance.

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

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

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

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

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

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

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

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

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

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

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

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

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

Obama Administration Recommends Removal Of Cuba As A State Sponsor Of Terrorism Read More »