Export Control News & Alerts

Aerospace Export Control Newsletter
May 2003

Contents

1 RECENT DEVELOPMENTS AND COMPLIANCE TIPS

1.1 What's up with Iraq? The New US Trade Controls

1.2 Serbia and Montenegro No Longer ITAR-Proscribed

1.3 OFAC Update

1.4 AES Update

2 CHANGES TO US GOVERNMENT LAWS, REGULATIONS AND POLICIES

2.1 Prohibited Parties List Changes

1.1 What's Up With Iraq?

By Maarten Sengers

Do your sales reps keep bugging you with Iraq opportunities? Are you confused by the multiple Iraq Federal Register Notices in May talking about this General License or that? Well, so are many, including those answering the Q&A phone bank at the Office of Foreign Assets Control (OFAC). Here's the current deal on Iraq: the embargo has been lifted. Items classified as EAR99, as well as those classified in most AT controlled Export Control Classification Numbers (ECCNs) no longer require export or reexport licenses to Iraq.

How did this happen? When the Iraq war began to wind down, the administration began feverishly trying to undo the embargo. But years of layered laws and rules are difficult to unravel, and so the process is occurring in steps. The UN also had to lift their sanctions. For the past few months, OFAC and the Bureau of Industry and Security (BIS) have attempted to untangle the mess through a series of website announcements and regulations changes. The most important step thus far was the General License issued by OFAC on May 23 that effectively lifted the embargo.

The General License in 31 CFR 575.533 now authorizes most Iraq transactions previously prohibited elsewhere in the rules, with only a few restrictions. It basically states that if the Export Administration Regulations (EAR) authorize the export or reexport, the FAC rules authorize the export or reexport, and all financial and other transactions incident to that export or reexport. The EAR Part 746.3 in turn outlines what is, and what is not, controlled to Iraq under the EAR.

746.3 states that EAR99 and items controlled for AT reasons only, like aerospace parts in 9A991, telecommunications equipment in 5A991 or 5A992, or computers in 4A994, do not require export licenses to Iraq. All these items can now be exported or reexported to Iraq without a license under NLR. A few AT controlled items still require a license. These include those listed in ECCNs: 1C980, 1C981, 1C982, 1C983, 5A980, 0A980, 0A982, 0A983, 0A985, and 0E982. Proliferation and other EAR catch-all controls will still apply.

Under the current state of the regulations, if the EAR requires a license, the OFAC General License authorization does not apply. So if you wanted to export an inertial navigation unit under ECCN: 7A003 the EAR would tell you needed an export license and you would go to OFAC to get it. Currently, the licensing policy is favorable, so you may actually get one in a year or less.

Note that the FAC rules retain some residual controls. Transactions with those on the Department of Defense deck of cards watch lists are prohibited. So add those to you prohibited parties database. Trade in cultural antiquities is also prohibited.

Finally, assets frozen during the time of the embargo remain frozen.

We expect additional regulations to be forthcoming which will officially transfer nearly all jurisdiction over new transactions with Iraq transactions to the Export Administration Regulations. BIS officials indicate that the Iraq regulatory landscape will eventually be similar to other countries in the region, like the United Arab Emirates or Saudi Arabia.

1.2 Serbia and Montenegro No Longer ITAR-Proscribed

In a Notice Dated May 14, 2003, the White House issued a Presidential Determination stating, "furnishing of defense articles and services to Serbia and Montenegro will strengthen the security of the United States and promote world peace." Crack export compliance consultants have determined this to mean that Serbia and Montenegro are no longer 126.1 ITAR proscribed countries. That means that licenses have a chance of approval and that you can use whatever scarce exemptions may be available.

1.3 OFAC Update

By Maarten Sengers

Aside from the Iraq activity, OFAC has been particularly busy publishing a multitude of interpretations and enforcement settlements on their website.

The enforcement settlements page can be particularly interesting for the bored export administrator. We only make note of companies that caught our eye, who didn't appear to be in the Aerospace Export Control Update subscriber database. That should be an incentive to subscribe!

Who knows how Wal-Mart ran afoul of the Cuba embargo, but in April, they paid a $50,000 fine for Cuba violations. Also in April, the New York Yankees settled charges that they violated the Cuba embargo with a $75,000 fine. Cuba, the New York Yankees and baseball going hand in hand, the love fest broken only by the folks at OFAC. Speaking of love fest, Playboy Enterprises also ran afoul with the Cuba embargo, and paid a $27,500 fine. The website provides no details, or pictures, related to that one.

On a more aerospace front, OFAC posted a letter on its website clarifying the provisions in the Iran Transactions Regulations part 560.528, which states that licenses may be issued on a case by case basis for the export of aircraft parts and technology to ensure the safety of civil aviation and safe operation of US-origin commercial passenger aircraft. A license applicant had asked for approval to reexport ECCN: 7A994 aircraft navigation equipment. OFAC denied the license, stating that the equipment was not directly to or exclusive for the operation of US origin commercial passenger aircraft.

Moreover, OFAC noted that items controlled for Anti Terrorism (AT) reasons, like 7A994 and other aircraft parts in 9A991. OFAC may not authorize the direct or indirect exportation from the United States of these items in the absence of a waiver of the [Arms Non-Proliferation Act of 1992.]" Waiver of this act is extremely difficult to obtain. The OFAC letter basically reminded aerospace exporters that, in spite of all the references in the Iran regulations, getting a license for aircraft parts to Iran is virtually impossible.

1.4 AES Update

By Maarten Sengers

We have been talking about the new Census rules that will require mandatory filing of SED's through AES for years now. So it should sound repetitive (but, by now, perhaps not surprising that we are still waiting. But the Census folks now seem pretty confident that the rule will actually out soon, as in a matter of days or weeks rather than months. Once this rule is published, it will go into effect 30 days after publication, followed by a 90 day transition period where either a paper filing or an AES filing will still be accepted. After that, all filing will need to be electronic.

The first go around will require a mandatory AES SED entry for everything on the United States Munitions List (USML) and anything that is in an Export Control Classification Number (ECCN) other than EAR99. A later regulation, which according to Census officials will be released in "2004," which probably really means 2010, will require a filing for all EAR99 items as well.

Hopefully in tandem with the Census rule, the Directorate of Defense Trade Controls (DDTC) will issue an ITAR change to reflect all the new added ITAR requirements. Note that a series of new SED data elements will be added for ITAR shipments. These data elements include: 1) DDTC registration number, 2) an SME indicator, 3) "eligible party" indicator, 4) USML Category, 5) DDTC quantity and 6) Exemption/License#. The ITAR changes will likely impose a pre-shipment AES filing requirement: 8 hours for aircraft or vessel shipments and 24 hours for vessel shipments. There is talk of allowing exporters a limited number of emergency shipments where the prior filing notice can be waived.

We hope that the ITAR will be amended to remove the requirement of mailing SEDs to State for hardware under an exemption (see 22 CFR 123.22), as that requirement seems especially pointless if the whole system is becoming electronic. We further recommend that DDTC conduct a word search on "SED" in the ITAR, as they will pull up a number of arcane requirements that should be dumped in the electronic age and they might even find some inconsistencies in the SED requirements.

Speaking of electronic age, Customs and DDTC are going in kicking and screaming. It is likely that for a while at least, Customs may require both a paper SED and an electronic AES entry for exports of USML items while they figure things out.

The new bad news is that Census is now talking about further SED related initiatives. Census is now considering that anyone filing an AES entry should be licensed, like Customs brokers. The proposed Census filing license would likely require you to be a US citizen or permanent resident, pass a test, pass a background check and pay a fee of at least $125. Under this proposal, all companies who file through AES, as will become mandatory, would have to get their company AES filers licensed.

2.1 Prohibited Parties Lists Changes

2.1.1 Office of Foreign Assets Control Lists, Department of Treasury

In the May 19, 2003 Federal Register the Office of Foreign Assets Control (OFAC) made changes to its list of Specially Designated Nationals o Sudan.

First, OFAC added these entities to its Sudan list:

1) National Cigarettes Co. LTD., PO Box 2083, Khartoum, Sudan, and all other branches in Sudan.

2) National Electricity Corporation, PO Box 1380, Khartoum, Sudan.

3) Posts and Telegraphs Public Corporation, Khartoum, Sudan. Sudan National Broadcasting Corporation (a.k.a. Sudan Radio & TV Corp.; a.k.a. Sudan T.V. Corporation), PO Box 1094, Omdurman, Sudan.

4) Sudan Tea Company, Ltd., PO Box 1219, Khartoum, Sudan.

5) Sudanese Free Zones and Markets Company (a.k.a. SFZ), PO Box 1789, Khartoum, Sudan; Chad; Saudi Arabia; Turkey; UAE.

6) Sudanese Petroleum Corporation, 7th Floor, Al Kuwaitiah Building, El Nile Street, Khartoum, Sudan.

OFAC also updated its information on these two entities already on its Sudan list:

--Kordofan Automobile Company, PO Box 97, Khartoum, Sudan-to-Kordofan Automobile Company (a.k.a. Coptrade Eng and Automobile Services CO LTD.), PO Box 97, Khartoum, Sudan.

--Sugar and Distilling Corporation, New Mustafa el Amin Building, Barlaman Avenue, PO Box 511, Khartoum, Sudan-to-Sugar and Distilling Corporation (a.k.a. Sugar and Distilling Industry Corporation), New Mustafa el Amin Building, Barlaman Avenue, PO Box 511, Khartoum, Sudan.

2.1.2 Bureau of Non Proliferation, Department of State: Proliferation Sanctions List

The US Government has imposed sanctions on the following entities because it has determined that they have engaged in proliferation of nuclear, chemical/biological weapons or missiles. Generally speaking, the sanctions:

 --Ban US Government contracts with and assistance to the parties,

 --Suspend any outstanding muntions licenses or authorizations for the parties

 --Prohibit imports into the United States from the parties

 --Deny license applications for the parties

The sanctions technically do not prohibit the use of NLR or license exceptions for commercial and dual-use items subject to the Export Administration Regulations (EAR). As a practical matter, exporters and reexporters should treat these parties as if they are ineligible to receive EAR items under NLR or license exceptions. (The reason for this advice is that the EAR prohibits transfers with if you know or suspect the items will be used in prohibited proliferation activities and the State Department Federal Notices for these parties put you in a position where you now know these entities are engaged in prohibited proliferation activities.)

The parties recently added are:

1) Khan Research Laboratories (Pakistan)

2) Changgwang Sinyong Corporation (North Korea) and its sub-units and successors.

3) Shahid Hemmat Industrial Group (SHIG) (Iran)

4) Mikhail Pavlovich Vladov (Moldovan person).

5) Cuanta S.A. (Moldova) and its sub-units and successors.

6) Computer & Communicatii SRL (Moldova) and its sub-units and successors.

7) North China Industries Corporation (NORINCO)

2.1.3 Bureau of Industry and Security, Department of Commerce: Unverified List

In the May 16, 2003 Federal Register the Bureau of Industry and Security (BIS) announced that it added the following entities to its Unverified Parties List:

1) Lucktrade International PTE Ltd., 35 Tannery Road 01-07 Tannery Block, Ruby Industrial Complex, Singapore 347740.

2) Peluag Teguh, 203 Henderson Road 09-05H, Henderson Industrial Park, Singapore.

3) Lucktrade International, P.O. Box 91150, Tsim Sha Tsui, Hong Kong.

BIS issued licenses for transactions involving the above entities but after the issuance of the license it was unable to conduct a Post Shipment Verification (PSV) on the above entities to ensure the items involved in the transactions are being used as authorized by the license.

The practical impact of this action is that if you deal with a party on this list, you must assume there is a "red flag" indicating a high risk of illegal diversion for your transaction. This means you have an affirmative duty to thoroughly investigate the transaction to make sure your items will not be used or transferred in a way that violates the EAR.

Alternatively, some companies will take a more cautious route and merely refuse to participate in any transaction involving the listed entities. That's what we recommend.

 

John Black, Maarten Sengers, and Chuck Hough

 

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