International Legal Affairs: V9N1
Export Regulation Recap: 2016 Changes and Amendments
Export Control Reform
Avid readers of this column will recall that export control reform has been underway since 2009, at the request of President Obama. Undertaken with the goal of strengthening national security and increasing the competitiveness of U.S. manufacturing, the reform effort has focused on current threats while adapting to changing economic and technological landscape. The reform effort has taken two noteworthy avenues: ITAR category revisions and EAR/ITAR definition harmonization.
ITAR Category Revisions
In terms of ITAR category revisions, categories IV through XXI have been reviewed and updated. The last three categories governing firearms (Category I), artillery (Category II) and ammunition (Category III) have yet to be reviewed and amended. No update or timeline has been provided regarding the review and amendment of these three categories.
ITAR category XII governing Fire Control, Range Finder, Optical, and Guidance Equipment has been amended in an attempt to more precisely describe articles warranting control on the USML and to establish a “bright line” between the USML and the CCL regarding control of these items.
The revisions introduce a concept that has not been used in other revisions to the USML: identifying certain items as defense articles if they were “specially designed for a military end user.” The final rule removes some fire control, laser, imaging, guidance equipment, and related software and technology from the USML and moves jurisdiction to CCL ECCN 7A611 and newly created ECCNs 7B611, 7D611 and 7E611.
ITAR and EAR Definition Harmonization
On June 3, 2016, BIS and DDTC issued a final rule for the purpose of harmonizing the definitions of many of the terms found in the ITAR and EAR. The purpose of the rules is to increase clarity and consistency between key terms used in the regulations. Some of the terms that were revised or introduced in these rules include “export,” “re-export,” “release” and “re-transfer.”
Important conceptual changes include the ITAR formally adopting the “deemed export” concept previously only found in the EAR regulations. In practice the ITAR had long regulated technology transfers to foreign nationals; however, for purposes of deemed exports under the ITAR, DDTC will continue to review all citizenships of foreign employees, whereas BIS will only look at the last country of residence or citizenship.
For in-country transfers that occur outside of the United States, both the EAR and the ITAR have been modified to clarify that an in-country transfer may require additional authorization if there is a change in end user or end-use in the same foreign country.
In the context of cloud computing, the BIS rule provides a carve-out from the “export” definition for certain unclassified technology or software that is secured using end-to-end encryption. In order for the carve-out to apply, the encrypted technology cannot be intentionally stored in a country subject to a U.S. Arms Embargo or the Russian Federation. The DDTC rule contains no such exemption for encrypted data.
Both sets of regulations have clarified exemptions related to when foreign employees of U.S. companies or U.S. persons are permitted to receive technical data without a license when travelling abroad on a temporary assignment. To achieve this, BIS revised License Exception TMP, and DDTC revised its technical data exemption.
Both BIS and DDTC published final rules that harmonized the Destination Control Statement (“DCS”) required by each agency. Inclusion of a DCS in shipping documentation is required when exporting ITAR and EAR regulated items, resulting in multiple destination control statements being included within the bill of lading and commercial invoice. The new rules, which became effective November 15, 2016, address this problem by creating a single DCS with common language that can be used whether shipping items controlled by the ITAR or the EAR.
Exporters are only required to include the DCS on the commercial invoice. With respect to the shipment of EAR-controlled items, the ECCNs of 9×515 or “600 series” items must be included on the commercial invoice; a DCS is not required for EAR99 items.
For shipments of ITAR-controlled items, exporters must include the end-user, country of destination and license or other approval number or exemption citation on the commercial invoice.
When shipping both EAR and ITAR-controlled items in the same shipment, the State Department rule clarified that items subject to the EAR are not defense articles, even when exported under a license from DDTC. In order to differentiate the items being exported, the exporter must include the appropriate export classification (ECCN or USML Category) for each item on the commercial invoice.
Looking forward to 2017 and beyond, the harmonization effort removing some items from the USML (and ITAR jurisdiction) to the CCL (and BIS jurisdiction) will come as a potential blessing to exporters. The re-classification of some items may cause a temporary burden to small businesses as they seek commodity jurisdictions to see where they fall within the regulations, but the long term result should be beneficial in terms of relaxed export compliance. True export reform will not occur for most readers until USML Categories I, II and III are completed; however, at this juncture it seems unlikely that massive changes will be made to these categories.