Export Controls: An Introduction
Jun 01, 2011 QuickCounsel Download PDF
By Leigh T. Hansson, Esq., Michael J. Lowell, Esq., and Michael A. Grant, Esq., Reed Smith LLP
This QuickCounsel provides an introduction to U.S. export controls. Export controls are laws and regulations that govern the sale, transfer, shipment, or release of goods, services, and information to foreign persons or to foreign countries. In the U.S., export controls are administered by a variety of executive agencies and exist to promote a variety of U.S. interests. However, this QuickCounsel focuses on the broadest export controls: the International Traffic in Arms Regulations, 22 CFR Parts 120-130 ("ITAR"), the Export Administration Regulations, 15 CFR Parts 730-774 ("EAR"), and the embargoes and sanctions administered by the Department of the Treasury, Office of Foreign Assets Control ("OFAC").
International Traffic in Arms Regulations
The ITAR regulates the export and import of "defense articles" and "defense services" pursuant to Section 38 of the Arms Export Control Act, 22 USC § 2778. The ITAR is administered by the Directorate of Defense Trade Controls ("DDTC"), an office within the U.S. Department of State's Bureau of Political-Military Affairs. The ITAR establishes a framework for defense trade that includes prior review and licensing of exports and temporary imports, registration, and a variety of reporting, record-keeping, and administrative requirements. Non-compliance with the ITAR can result in significant criminal and civil penalties.
Scope of the ITAR
All exports or temporary imports of "defense services" or "defense articles," including related "technical data," require prior approval from DDTC unless the export or import qualifies for an exemption. The ITAR's licensing requirements apply extraterritorially also. After export from the U.S., prior authorization is required before a defense article or defense service can be transferred to an end-use, end-user, or destination not previously authorized – a so-called "reexport or retransfer." In short, all transfers of defense articles or defense services are subject to ITAR licensing requirements, from the initial export from the U.S. to subsequent transfers among foreign countries or persons.
The ITAR requires manufacturers, exporters, and brokers of defense articles or defense services to register with DDTC. Registration entails completion of a form identifying your company's owners, management, related companies, and product and service offerings. Registrants pay an annual fee that varies depending on the number of licenses obtained and have a few affirmative obligations, such as notifications to DDTC of material changes in the company. DDTC publishes guidance on the contents of a registration application.
Export Authorizations (Licensing)
There are four (4) basic types of authorizations that can be used to export defense articles, defense services, and/or technical data:
There are four (4) types of ITAR licenses:
The ITAR contains a limited number of exemptions which authorize the export or temporary import of defense articles, technical data, or defense services without a license. Exemptions are largely set out in ITAR §§ 123.4, 123.16, 124.2, 125.4, 125.5, 126.4, and 126.5. Commonly-used exemptions include low-value spare parts, defense articles for trade shows, repairs and returns, and exemptions for exports by or for the U.S. Government's end use. The Canadian exemption in ITAR 126.5 is the only country-specific exemption, although exemptions may exist in the future to implement treaties with the United Kingdom and Australia. Exemptions must be declared prior to or at the time of export and specific recordkeeping and reporting requirements may apply depending on the particular exemption used. In some cases, an exemption must be formally declared to U.S. Customs at the time of export and there may be requirements for the documentation that accompanies the export.
Exports of defense services are authorized pursuant to a DDTC-approved agreements. The possible ITAR agreements are generally characterized as one of the following: Technical Assistance Agreement ("TAA"), Manufacturing License Agreement ("MLA"), Warehousing and Distribution Agreement ("WDA"), or off-shore procurement agreement. TAAs, MLAs, and WDAs are written agreements between the U.S. person(s) and the foreign person(s) approved in writing by DDTC. The ITAR require very specific information about the proposed agreement prior to authorization and there are a number of clauses that must be included in the agreements. There are also a number of requirements following approval of an agreement and continuing obligations on the parties to the agreement. The agreements and limitations on their use are described in ITAR Part 124. In addition, DDTC has published extensive guidance on the use and administration of these agreements.
A General Correspondence ("GC") is a flexible licensing tool in the form of a letter used to request authorization or guidance from DDTC for a matter for which there is no formal application. As a licensing application, a GC is commonly used by foreign persons to request authorization for a retransfer or reexport to a new end-use, end-user, or destination. GCs are also often used for advisory opinions, exceptions from the ITAR pursuant to ITAR § 126.3, and to fulfill a variety or registration requirements pursuant to DDTC guidance.
Compliance & Enforcement
The penalties for violations of the ITAR include fines, imprisonment, and debarment. DDTC has compliance officers who investigate potential ITAR violations, often with the assistance of Customs and the Federal Bureau of Investigation ("FBI"). The ITAR provides a voluntary disclosure process in ITAR § 127.12 that provides for significant mitigation of penalties when a company self-reports its violations. Many ITAR violations are voluntarily disclosed and typically do not result in imposition of a financial penalty. In many cases, DDTC will close out voluntary disclosures with a warning only provided that the person self-reports the violation and takes appropriate steps to correct the circumstances that allowed the violation to occur (e.g., adoption of policies and procedures, training, and licensing). However, in some cases, DDTC has imposed multi-million dollar penalties and placed restrictions on the approval of licenses or the use of exemptions for companies found to have violated the ITAR. DDTC has also debarred an number of individuals and entities and others have been subject to criminal prosecution.
Export Administration Regulations
The U.S. Department of Commerce, Bureau of Industry and Security ("BIS") administers the Export Administration Regulations, 15 C.F.R. Parts 730-774 ("EAR"). The EAR are promulgated under the authority of the Export Administration Act of 1979, as amended, 50 U.S.C. app. 2401-2420, as continued under the President's authority pursuant to the International Emergency Economic Powers Act, 50 U.S.C. 1701, et seq. The EAR provides a framework for exporting, reexporting, and retransferring commercial and "dual use" items, technology, and software. "Dual use" items are items that have both commercial and military or proliferation applications. EAR § 772.1. The EAR also requires certain recordkeeping (EAR § 762), reporting (EAR § 743), and administrative requirements (EAR § 758).
Export Authorizations (Licensing)
Unlike the ITAR, which requires an export license or exemption for all exports, many exports of EAR items do not require prior approval from the U.S. Government. These exports are identified as "NLR" (no license required). Exports of EAR items that cannot be exported as NLR, are often authorized under one of a number of license exceptions that exist in the EAR. EAR§ 740.17. Exports that do not fit within a license exception and which cannot be exported as NLR, must be authorized under an export license issued by BIS. Export licenses are obtained through BIS' Simplified Network Application Process Redesign ("SNAP-R") system.
Determining Whether an Export Requires a License or License Exception
Items that are classified as EAR99 may be exported with no license or license exception unless General Prohibitions 4 through 10 apply. EAR § 736.2(b)(4-10). Items on the CCL also require a review against General Prohibitions 4 through 10, but that is just the first step in the analysis. If one of the General Prohibitions applies, a license is required. If none of the General Prohibitions 4 through 10 applies, then you must review the Commerce Country Chart (Supplement No. 1 to EAR Part 738) and the ECCN entry on the CCL for the item. Using the reasons for control from the ECCN entry and the intended destination country for the export, you then check the Country Chart. If there is no "X" in the box for the country under the applicable reason for control then the export does not require a license or license exception. If there is an "X" in the box, then your export requires a license or license exception. Possible license exceptions can be evaluated by reviewing the license exceptions identified in the ECCN and the license exceptions contained in EAR § 740.17. If a license exception applies, then no license is required.
Compliance & Enforcement
The penalties for violations of the EAR include fines, imprisonment, and debarment. BIS has an active enforcement and investigations capability and is capable of investigating violations independently. However, BIS often works with Customs and the FBI to investigate violations. Like the ITAR, the EAR has a voluntary disclosure process where persons can self-report violations of the EAR. EAR Part 764. BIS has the discretion to seek penalties against violators or to issue warnings only and request implementation of corrective actions. BIS has assessed fines against a number of individuals and companies that have been found to violate the EAR. (http://efoia.bis.doc.gov/exportcontrolviolations/tocexportviolations.htm). Although the penalties in the average case tend to be smaller than those imposed by DDTC for violations of the ITAR, BIS imposes fines much more often than DDTC. Persons found to have violated the EAR have also been subject to criminal prosecution by the U.S. Department of Justice.
Embargoes and Sanctions
The U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC") administers a variety of embargoes and sanctions issued by the President under the authority of the Trading with the Enemy Act, 50 U.S.C. app. § 1, et seq., and the International Emergency Economic Powers Act, 50 U.S.C. 1701, et seq. OFAC also investigates violations of various money laundering and terrorist-financing statutes. Many of the OFAC regulations and embargoes are contained in 31 C.F.R. §§ 500-599.
The ambiguous nature of many of the export control provisions gives rise to a number of challenging and complex compliance issues for manufacturers and exporters. This QuickCounsel highlights a few of the frequent issues that companies face:
Both the ITAR and EAR apply to the release or transfer of technical data or technology to foreign persons located in the U.S. The transfer or release is deemed to be an export to the home country or countries (for dual nationals) of the foreign person. Deemed exports must be considered and analyzed at the time of the visa application for the foreign person.
Restricted Party Screening
In order to ensure compliance with export controls and sanctions, exporters should screen the parties to their proposed export against various lists of designated parties maintained by the U.S. Government.
"See Through" Rule
Under the ITAR, a defense article incorporated into a commercial end item does not bring the article outside the jurisdiction of the ITAR. Instead, the ITAR is applied such that DDTC will "see through" the end item to the controlled defense article incorporated in the commercial end item. The "see through" rule most notably applied in the case of ITAR-controlled sensors that were incorporated into commercial aircraft. Although the sensors accounted for a relatively small percentage of the total value of the aircraft, the aircraft were subject to ITAR controls once the sensors were incorporated.
Export Reform Initiative
In April 2010, the Obama Administration announced a plan to consolidate the current export control system. The proposal is based on four (4) key consolidations: (1) a single control list; (2) a single licensing agency; (3) a single IT system; and (4) a single primary enforcement agency. Certain aspects of the reform have already begun although congressional action will be required to complete the proposed reform. Progress on the reform can be followed on a dedicated Internet site. For more information, see the Top Ten: Export Control Reform Initiative."
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