International Legal Affairs: Volume 4, Number 1
With every passing year, technology and innovation make the world smaller, allowing for international business to move ever quicker. In the arms trade, offsets and foreign manufacturing are nothing new. Nevertheless, as new technology proliferates worldwide and as international barriers to trade fall, it is becoming more common to involve foreign nationals and third party nationals in the small arms manufacturing process. In a response to changing demands upon the arms industry, the U.S. State Department, Department of Defense Trade Controls (DDTC) recently amended its regulations governing the transfer of technical data from the United States to non U.S. citizens.
On July 28, 2011, DDTC posted guidance on its website regarding the interpretation and implementation of the new exemption under 22 CFR §126.18 of the International Traffic in Arms Regulations (ITAR). The new rule became effective on August 15, 2011. The new rule allows for the transfer of unclassified ITAR controlled defense articles, including technical data, to dual nationals or third-country nationals (DN/TCNs) who are “bona fide, regular employees, directly employed by” a “foreign business entity, foreign governmental entity, or international organization.” The exemption (like many ITAR exemptions) may only be utilized if several hurdles may be overcome.
Traditionally, the transfer of defense articles and technical data has been restricted, with an examination of the DN/TCN’s country of origin. If the DN/TCN’s country of origin was a proscribed country described in 22 CFR 126.1, (i.e., China, Syria, Iran, etc.) the transfer would typically be denied. This posed a multitude of problems for legitimate DN/TCNs that did not owe any allegiance to their country of origin. A case in point – if an individual was born in Iran, (a 22 CFR 126.1 proscribed country) but immigrated to the United States as a toddler, presumably, there would be no allegiance to Iran. Nevertheless, using the traditional DDTC guidance, transfers of defense articles and technical data to the Iranian born individual would likely be prohibited.
Before continuing, a few definitions are in order. DDTC currently considers a “dual national” to be “an individual who holds nationality from the country of their employer, and also holds nationality from one or more additional countries.” A “third country national” is “an individual who holds nationality from a country other than the country of their employer.”
As this article describes the transfer of defense articles and technical data, it is presumed that the employer is licensed (or sublicensed) pursuant to applicable DDTC export licensing requirements. In the case of defense articles and/or technical data, appropriate DDTC export licensing would be a DSP-5 export license, a Manufacturing Licensing Agreement, a Technical Assistance Agreement, or a Warehousing Distribution Agreement. Within this article, the term “agreement” will be used to describe all four types of DDTC export licensing transactions.
Finally, in order to be covered by the new exemption, transfers of defense articles and technical data must be made to “bona fide, regular employees,” and must either occur within the physical territory where the end-user is located, where the governmental entity or international organization conducts official business, or where the consignee operates. The transfer must be within the scope of the approved agreement of applicable to the authorized entity.
While these requirements would appear to be easily met, the regulatory requirements are less than clear. If a company meets the above exemption conditions, the company must also (1) maintain a security clearance approved by the host nation government, or (2) screened the receiving employee for “substantive contacts” with countries subject to an arms embargo under 22 CFR 126.1(a) prior to allowing any transfer of defense articles or technical data. According to DDTC’s guidance, any level of security clearance issued and approved by the host government is acceptable to meet the requirements of §22 CFR 126.18(c)(1). In other words, it appears that a foreign equivalent of a “confidential” clearance would be sufficient.
Practical issues may arise in trying to get a security clearance for the employee. Host government security clearances are typically only granted when an employee has a need to access classified information, whether foreign or domestic. Due to the difficulty in acquiring (and maintaining) a security clearance, it may be required to use the “substantive contacts” test in order to use the exemption.
Under §126.18, “substantive contacts” may include (but are not limited to) the following:
- Regular travel to a foreign location;
- Recent or continuing contact with agents, brokers, and foreign nationals;
- Continued demonstrated allegiance to a foreign country;
- Maintenance of business relationships with persons within a foreign country;
- Maintenance of a residence within a foreign country;
- Receiving salary or other continuing monetary compensation within a foreign country; or
- Actions otherwise indicating a risk of diversion.
DDTC’s guidance does not prioritize each of its examples or provide additional guidance on each of the examples. For example, a DN/TCN may have regular contacts with family members that still reside within a foreign country. A DN/TCN may travel to a foreign country frequently to visit family members. While these acts may constitute “substantive contacts,” the contact may not be significant enough to disqualify use of the exemption. There currently is no guidance on when contacts with foreign interest rise to the level of being significant.
DDTC provides additional guidance (appropriately titled “Implementation Considerations”) that should be assessed with particular care by a company seeking to use the exemption:
- Contacts by the FN/TCN with government or military officials, agents, or proxies;
- Business contacts (focusing on the nature of the business and its legitimacy);
- Family contacts with individuals who pose a risk of diversion;
- Non-family contacts with individuals who acquire and sell defense articles for profit or monetary gain, who work for or with front companies, or who work for criminal/terrorist organizations;
- The totality of continuing connections to a third country, including carrying a passport of that country, casting ballots for elections in that country, currently or previously holding an official position within that country, and prior employment with the government of that country;
- Frequent international travel; and
- Maintaining a residence in a foreign country.
The depth of a screening procedure that includes countries other than those listed in 22 CFR 126.1 could pose significant challenges for those seeking to comply with the exemption. It may be difficult (or impossible) to determine which countries, other than those listed in §126.1, have demonstrated a pattern of diversion. Also of note, inquiring about some of the “substantive contact” elements may trigger privacy, employment law, and/or legal issues that exist in many foreign jurisdictions. It may be illegal in some jurisdictions (whether foreign or domestic) to inquire about the FN/TCN’s travel and/or contact with foreigners.
Companies seeking to use this exemption should be aware that it is DDTC’s current policy to disqualify an employee from access to ITAR-controlled defense articles and technical data if the employee has any contractual relationship or employment with an ITAR §126.1(a) (proscribed) country. It is unclear what (if any) types of contractual relationship or employment would be exempted from the policy. For example, if the current DN/TCN employee’s sole contact with the ITAR §126.1(a) country was as a conscript fulfilling a mandatory military service requirement, and has had no further contact with the ITAR §126.1(a) country following military service, one would presume that the DN/TCN would be prohibited under current DDTC policy, despite there being a low risk of potential diversion.
A sample questionnaire provided by DDTC in the Implementation Considerations suggests one possible way for authorized entities to comply with the screening requirements in §126.18. The sample questionnaire contains 17 questions relating to an employee’s contacts with a third country. The Implementation Considerations do not suggest how frequently the questionnaire responses would need to be updated, which would affect the amount of time and resources that a company would need to devote to the screening process. A copy of the Implementation Considerations and the sample questionnaire can be found online at: www.pmddtc.state.gov/licensing/documents/D-TCN_Policy_ImplementationFinal.pdf.
Similarly, answers to frequently asked questions (FAQ) regarding the new 126.18 exemption may be found online at: www.pmddtc.state.gov/faqs/documents/D-TCN-FAQFinal.pdf.
Recall that the 126.18 exemption need not be utilized. It is acceptable to license the transfer of defense articles and technical data to FN/TCNs with an approved license from DDTC. Prior to release of the exemption, the DDTC review and approval method was the only method in which the lawful transfer of defense articles or technical data could be transferred to an FN/TCN. Given the uncertainty and ambiguity in implementing the exemption, companies may wish to have their employees obtain security clearances, rather than forego screening for substantial contacts. In the event that a security clearance cannot be obtained, it may be a wise choice to continue seeking DDTC review and approval, rather than attempt to utilize the 22 CFR 126.18 exemption.
Jason Wong is a Washington licensed attorney. He regularly provides legal counsel to manufacturers, importers, and exporters in the firearms and defense industries via his law firm, The Firearms Law Group. He may be contacted by emailing jmwong@FirearmsLawGroup.com.
The guidance provided within this article was correct and current at the time it was written. Policies and regulations change frequently. The preceding article is not intended as legal advice, and should not be taken as legal advice. If the reader has specific legal questions, seek competent legal counsel.