Minute by Minute Report from Commerce Update Conference 2006
October 2006
Editor’s Note:
If you didn’t make it to Update 2006, it turns out that the only thing you missed was the posh reception including sushi, crab cakes, and free drinks. You get all of the substance of the presentations here because Scott Gearity wrote a live report from the Commerce Department’s annual Update conference on October 16-17, 2006. Note the time stamp at the beginning of each point below.
–John Black
I have selected the key points (in my opinion) from Scott’s blog. (If you want to read the whole thing, go to his website, www.exportcontrolblog.com.)
| 8:38 | Acting Under Secretary for Industry and Security Mark Foulon fast facts — he’s a Rhodes scholar and previously worked for a Democratic senator. |
| 8:46 | Last year: 34 criminal convictions and over $3 million in criminal fines; 104 administrative cases and $13+ million in penalties. |
| 9:55 | 119 people arrested last year for Arms Export Control Act violations. |
| 9:58 | GS says DDTC’s backlog is 10,000 cases! Somewhat more staff, including military officers, increasingly mandatory D-Trade are helping. |
Update Day 1: ENCRYPTION
| 10:37 | ITCD completed 2301 reviews and classifications last year, 18% mass market encryption, 69% License Exception ENC, the balance a grabbag. Also, 837 licenses, the vast majority crypto IVLs. |
| 10:45 | On to encryption… don’t forget about Category 5, Part II’s see-through rule, which captures items with cryptographic capabilities regardless of whether or not data confidentiality is their main function. |
| 10:56 | A few important issues in encryption reviews:
|
Update Day 1: CHINA CONTROLS
| 1:32 | $2.4 billion of the $38.9 billion in exports to China last year were shipped under BIS license. There were about $12.5 million in denials. |
| 1:42 | The new proposed China rule clarifies that the policy is to deny the export of National Security controlled items to Chinese military end-use. Also creates new authorization Validated End User (VEU) — a whitelist of sorts for vetted Chinese entities. You could think of this as an “open” Special Comprehensive License (SCL).. Open in the sense that it’s use wouldn’t be restricted to a single applicant like a SCL. |
| 2:15 | Q: How will the rule affect the Chinese ARJ program? A: If OEMs are commercial entities, we’ll consider them, but if they have a military pedigree not so much. |
| 2:16 | Q: Will the rule impact civil aircraft flying Chinese leaders? A: Tough one, we’ve received a number of comments about this. |
| 2:18 | Q: The definition of military end-use sounds a lot like the ITAR. Is this rule redundant? A: We are only looking at end-use, not end-user. |
| 2:19 | Q: What’s the status of Hong Kong? A: Status quo — one country, two systems. That goes for the EAR, too. HK maintains a “first rate and very responsive” export control system. |
Update Day 1: STATE DEPARTMENT EXPORT CONTROLS
Courtesy Doug Jacobson of International Trade Law News, here’s his summary of this morning’s deemed export breakout session:
Department of State Export Controls and Licensing, Ann Ganzer, Director of Office of Defense Trade Controls Policy
—Provided an overview of DDTC. The ITAR is an illustration of what is controlled. “We believe that we control things that have not been invented yet.”
—Licenses — Going electronic. Had a wake for Ellie Net on Friday. D-Trade licenses get processed first. First, look at applicant first. Exporting is a privilege not a right. Look at end-user and end-use. Look at foreign policy. What impact on country seeking equipment, etc. Look at human rights impact on other countries.
—DOD reviews 1/3 of applications. Staffed to other agencies, such as NASA. But DDTC makes final decision.
—Congressional notifications. When required, DDTC does not notify Congress when it is not in session. This impacts the licensing timetable.
—Deemed exports under State… DDTC looks at all citizenships held.
—DDTC Venezuela sanctions not in accordance with BIS. Working on revising ITAR, but should assume in section 126.1. [Editor’s Note: Hmmm, compliance by assumption. Assume the ITAR means things it doesn’t say. I guess this is nothing new. —JB]
—DDTC processed 70K applications in FY 2006. Greg Suchan noted 10,000 case backlog will it ever get fixed? “always hopeful”. Like filling a bathtub with drain open. Have a few new people, but are new. Take time to train. Times are decreasing.
—Punted brokering questions.
—Aircraft Parts — Does ITAR part ever lose its ITAR identity? Section 38(f) requires congressional notification to remove from USML. If aircraft part, needs to be removed from USML before migrating to commercial. Easier to use commercial components on military aircraft, rather than the reverse.
—Item on USML does not lose its character. Used QRS-11 as example. Three CJs held that QRS-11 was on USML. “Bomb in a suitcase is still a bomb, not a suitcase.” QRS-11 carve-out for stand-by instruments. Carve out for FPAs in night vision. Carve out for personal protection gear.
—Providing USML item to foreign person in US would require a license. Transfer of title can be an export. [Editor’s Note: The ITAR says transfer of tech data and aircraft, vessel or satellite to foreign person in the US is an export, but it does not say the transfer of other defense articles to foreign persons in the US is an export. —JB]
—Best not to contact licensing officers, contact Response Team. [Editor’s Note: But make sure you don’t get a wrong interpretation of the ITAR from the RT. —JB]
—Due diligence on buying and selling ITAR within US. Depends on case. Confirming registration is good. Depends on who you are selling to though.
—Voluntary disclosures — Concerned about companies that do not submit VSDs.
—Freight forwarders and export licenses — if FF can fulfill requirements of exporter under ITAR, they can apply for and obtain a license. However, if a FF can’t open the package then they can’t apply for a license.
—Whether to release licenses to a customer is the exporter’s decision.
—Example of an item that is first used for military, but not subject to ITAR. For example, an aircraft part that was first used by military while waiting for FAA certification.
—DDTC considers all citizenships when reviewing licenses. Thus, if person holds Chinese citizenship, prohibits exports of USML items to China and Chinese nationals.
—DDTC wants to get the word out. Has long-relationship with SIA, but interested in working with other organizations.
—10% increase in CJs in 2006. Total of 364. Expect companies to do their own CJs, but consult with DDTC in gray areas or where you can’t figure it out. Working with groups to develop best practices in CJs.
—DDTC has been successful on keeping aircraft parts from Iran’s military.
—President Bush has only waived sanctions on China three time. Very rare. Examples included bomb disposal equipment and chemical weapons destructions equipment.
Update Day 2: ENFORCEMENT PLENARY
| 3:01 | Deputy Assistant Secretary for Export Enforcement Wendy Wysong offers FY2006’s enforcement statistics: 34 criminal convictions w/$3 million in criminal fines, 104 administrative cases w/$13.1 million in administrative penalties and 180 warning letters. That includes both export and antiboycott cases. [See the BIS FOIA site for full details of many of these.] |
| 3:13 | Antiboycott slice of the pie included 9 administrative settlements totaling $80,000 plus 3 warning letters, which is more than last year (but still seems quite limited). |
| 3:18 | Prohibited boycott requests from Kuwait, Yemen, and Iraq increased from 2005. Most requests originating in Iraq are from the Iraqi Government. |
| 3:25 | BIS completed 242 pre-license checks (23 unfavorable) and 700 post-shipment verifications (145 unfavorable) in FY2006. Based in part on these checks, BIS will soon be publishing additional names to the Unverified List. |
| 3:26 | Wysong makes the case for voluntary self-disclosure: it’s a mitigating factor of great weight, BIS gives at least a 50% discount off the maximum fine as credit and acknowledges the exporter’s cooperation. There are signs that her pitch may be working. The number of VSDs has increased from 78 in FY04 to 148 the following year and 157 in FY05. Only 7 of the resolved cases from the past three years have resulted in fines of any size. |
Update Day 2: INTERNATIONAL PERSPECTIVES ON EXPORT CONTROLS
| 1:13 | Berge says Sweden didn’t have an export control law until 1986 (which was coincidentally the last act signed by the prime minister of the day before he was assassinated) |
| 1:27 | As is the situation in most countries other than the US, the Canadian EICB controls both dual-use and military goods. A one-stop shop. However, Canada’s export control regulators do not have their own enforcement branch. |
| 1:29 | That’s interesting — licensing officers in Canada are organized by company rather than commodity, so they get to know exporters a bit better. |
| 1:33 | Canada maintains an Area Control List (ACL), a sort of sanctions list, which for now has a membership of one — Myanmar — but is about to add another — Belarus. |
| 1:37 | The Canadian official is heavily stressing all the similarities between the US and Canadian export control systems, perhaps not a bad strategy when attempting to stave off implementing of the Commerce’s 2005 proposal to limit the export of items subject to MT controls to Canada. |
| 1:39 | In certain cases, the Canadians require their exporters to demonstrate US reexport authorization in order to obtain export approval from the EICB. |
| 1:50 | Q: How does Canada treat Cuba and Iran? A: We mention the US controls in our guide and administer some of our own based on the control lists, but there’s no embargo. |
| 1:51 | Q: What are the most significant differences between US and Canadian export control systems? A: Reexports and deemed exports are not restricted by Canada. |
| 1:54 | Q: Do Canadian companies require licenses to reexport US origin items back to the US? A: Few exports from Canada to the US need a license. |
| 1:56 | Q: How does Canada feel about potentially losing the MT piece of the Canadian exemption? A: We want to keep it and hope US industry advocates for that position. |
Update Day 2: A SYSTEMATIC APPROACH TO CLASSIFICATION
| 10:18 | Gene Christiansen, the longtime and more than a little grandfatherly BIS engineer may well be the only guy who can tell a joke with the punchline “EAR99″ and actually get a laugh. |
| 10:22 | The first of what I expect will be for than a few helpful tips from Christiansen — classification isn’t just about finding a spot for your product on the Commerce Control List. Don’t exclude the other possibilities — specifically, that the item is publicly available or that it is not subject to BIS jurisdiction (i.e. it’s on the US Munitions List rather than the CCL). |
| 10:29 | If you take a published textbook, extract from it and modify it in some way, the resulting text is not necessarily publicly available. According to Christiansen, even just highlighting the pertinent piece could be construed as a modification which removes something from public availability. |
| 10:37 | Denzil Tice of DDTC: Commodity jurisdiction determination is the first step in trade compliance. It’s also an ongoing effort, since the ITAR captures not just items designed for a military use, but items modified or adapted for one. |
| 10:43 | Only about 300 CJs issued by State each year. |
| 10:54 | CJ Tips: Remember that you’re writing for two audiences. First, the non-technical reviewers and second the technical people. Be up front and limit the background and flag-waiving. Do your research. Don’t assume State understands the item up for CJ. Fully explain any government funding, including what type. MilSpec/MilStd does not necessarily mean subject to the ITAR, but you should explain fully. If your marketing materials or website indicate a predominantly military application, explain why that differs from your CJ request. |
| 11:24 | Q: Can you elaborate on MilStd? If an item is designed to a military standard, but for a commercial application, is it still under the EAR? A: Yes. There are military specifications for chocolate chips and dog cookies. That doesn’t mean they’re subject to the ITAR. |
| 11:30 | Q: How long does it take to process a CJ? A: About 160 days right now. Items are getting more complex even though we’re not seeing a huge increase in numbers of requests. |
Update Day 2: FOREIGN POLICY CONTROLS AND SANCTIONS
| 8:53 | BIS plans a policy of denial for Cuba for medical equipment intended for medical tourism there or in support of Cuban-Venezuelan medical care for petroleum exchanges. |
| 8:56 | Cuba licensing stats — 303 applications, 175 of which were approved, 8 were denied and 119 returned without action. Also, 166 AGR notices, 163 of which were approved and 3 were incomplete. Average processing time 30 days. |
| 8:58 | Iraq licensing stats — 112 applications, 76 approved, 36 RWA’d, 0 denied. Average processing time 29 days. Armored passenger vehicles, personal protective equipment and crime control item are the main exports, mostly to US forces and Iraqi Government. |
| 9:06 | Libya stats — 303 applications, 259 approved, 1 denied, 43 RWA’d. Avg processing time 35 days. |
| 9:09 | North Korea stats — 9 applications, 1, approved, 1 denied, 7 RWA’d (all of the RWA’s were related). 14 day average processing time. |
| 9:13 | Syria — 249 applications, 169 of which were approved (no denial/RWA breakdown provided). Computer hardware, software, electronic equipment are among the items frequently denied. Average processing time 28 days. |
| 9:19 | Sudan — both OFAC and BIS have jurisdiction, submit applications to both simultaneously. Stats — approved 17 licenses, avg. processing time 22 days (no application figure provided). Telecom, computers and software among the items authorized. |
Update Day 1: DEEMED EXPORT
Once again courtesy Doug Jacobson of International Trade Law News, here is a write-up of today’s deemed export breakout:
—Congress authorized an increased budget for deemed export compliance activities, which resulted in an increase in BIS deemed export staff from three to six.
—BIS received 840 deemed export applications in FY 2006. BIS approved most applications received and less than 1% were denied. Almost 60% of the deemed export licenses received were for PRC foreign nationals, followed by India (13%), Iran (7%), Russia and Germany (2% each) and UK (1%).
—While some applications languish, most deemed export licenses are processed in 40 days (down from 70+ days a few years ago)).
—Technology that is publicly available is classified as EAR99 and is not subject to licensing requirement in most cases (exceptions are Cuban-born nationals or prohibited uses). Take a look at the Q&As on BIS website regarding “use” technology issues. [Editor’s Note: Publicly available technology is not really classified as EAR99 and it is exportable to Cuba and Cuban nationals without a license. –JB]
—In the May 31, 2006 FR notice, BIS reaffirmed existing policy with respect to third-country nationals. The existing policy is based on most recent established citizens or permanent residence. U.S. citizens, green card holders, are not subject to deemed export licensing requirements.
—Scope of “fundamental research” also remains unchanged. Fundamental research exclusion based on technology that is ordinarily shared with scientific community. May be instances where preexisting controlled technology may be used and therefore deemed export requirements may come into play. Certain controlled fundamental research that is protected (placing a box around the research or technology), may be subject to the EAR. See the BIS advisory opinion on patents on research.
—Deemed Export Advisory Committee (DEAC). Purpose of the DEAC is to base policy on collaboration with affected communities. DEAC met for first time last Thursday. Program is only chartered for one year and is expected to make its recommendation by next Fall. Will meet several times over the next few months to get various perspectives and comments. Meeting will be published in FR in advance.
Update Day 1: CENSUS FOREIGN TRADE STATISTICS REGULATIONS
| 3:53 | FTD ombudsman Jerome Greenwell takes over. |
| 4:01 | there were 1.1 million shipments in AES in July alone, representing 97% of the total |
| 4:04 | Census beginning an audit project starting January. They will concentrate on companies which are non-compliant Option 4 filers, those reporting late, and those with numerous unresolved fatal errors. |
| 4:09 | Census will give USPPIs one year of past AES data upon request for free (older than that there’s a fee), which could be a useful audit tool. (Of course, you should be keeping copies of everything you submit to Census in the first place.) |
| 4:14 | ES Fatal Error = No ITN = No Export, capish? |
| 4:17 | Don’t forget AES proof of filing citation. See FTSR Letter 168 for more. |
| 4:29 | Census benchmark for AES compliance is 95 percent. Be below that for 3 consecutive months and you should expect to get a phone call (or worse). |
| 4:38 | Q: Can something be done about the slow ITN response on Fridays? A: Yes, try another day. |
| 4:41 | Q: What’s are the proportions of filings by USPPI or agent? A: 60-65% by agent, the balance by USPPI. |
| 4:42 | Q: Who gets fatal error reports? A: Always goes to filer, not necessarily USPPI. |
| 4:51 | Q: What happens after your third voluntary disclosure within a year? A: You get penalized |
| 4:52 | Q: Will post-departure filing go away? A: Don’t know |
| 4:55 | Q: How do I confirm that no forwarders are using my EIN without authorization? A: Request records from Census. Hope to automate this. |
| 5:03 | Q: Will AES be ready for HTS revision in 2007? A: Yes. |
| 5:05 | Q: Our Miami-based forwarders won’t provide bills of lading or airway bills? A: Tell us who they are, we’ll give them a call. |
Update Day 2: OFAC
Doug Jacobson of International Trade Law News reports from today’s OFAC breakout session:
Dennis Wood, OFAC’s Assistant Director for Compliance, Outreach and Implementation, opened the program by providing some interesting quotes
from the bible, the U.K. Government and others on compliance-related issues.
—He also noted that OFAC has authority to “visit” companies and that such outreach activities will continue.
—Dennis mentioned the ABN AMRO enforcement case which led to the imposition of an $80 million penalty on the bank. In that case OFAC partnered with a number of other regulatory agencies to impose a multitude of penalties. He predicts that future fines will be increased as a result of inter-agency efforts to address compliance failures.
—After donning an OFAC jacket, Dennis turned the podium over to Hans Huber, a member of OFAC’s compliance and outreach division.
—OFAC jurisdiction is broad and applies to U.S. citizens and permanent resident aliens located anywhere in the world or any individual physically located in the U.S., such as a Chinese national located in the U.S. With respect to companies, the issue of foreign subsidiaries is often the most problematic. Such decisions are made on a case-by-case basis, but OFAC could always take action against the U.S. parent if the subsidiary is beyond the reach of U.S. jurisdiction.
—Next, Hans discussed the comprehensive sanctions on Cuba, Iran and Sudan. Hans noted that his PowerPoint slide discussing comprehensive sanctions sent someone to jail as a result of an indirect export to Iran. When OFAC conducted a search of the target company, they found a copy of Hans’ presentation which noted that Iran was a prohibited destination.
—Next, Susan Hutner of OFAC’s licensing division was introduced. She started by talking about Sudan, which changed dramatically on Friday. The Darfur Peace and Accountability Act restricts the President from lifting current sanctions and restricts OFAC from implementing certain sanctions on Southern Sudan. The new executive order issued by President Bush reimposed sanctions on the Government of Sudan. It also prohibits all transactions by U.S. persons relating to Sudan’s petroleum or petrochemical industries, including, but not limited to, oilfield services and oil or gas pipelines. The problematic issue is that transshipments through Northern Sudan are still restricted, which further complicates transactions. Continue to watch OFAC’s website for more information.
—Regarding the Palestinian Authority (PA), there are a number of general licenses that authorize certain transaction with the PA. Sanctions are not territorial, but apply to transactions with the PA (the government of West Bank and Gaza).
— Allison Cooper, Chief of OFAC’s investigation unit, discussed some compliance-related horror stories that led to enforcement actions. The common theme in each of theme will be a systemic breakdown in compliance. She also discussed some red flags, such as making sure that Iranian flag vessels are not involved in the shipment. She noted that most of the issues arose as a result of the payment for goods. Many of the enforcement actions also relate to subsidiaries of U.S companies.
—Regarding penalties and consequences, Hans noted that the proposed penalty is going to be the statutory maximum or the value of the goods. OFAC will take into account aggravating and mitigating factors.
—Regarding effective compliance strategies, the foundation to compliance is to screen the parties to the transaction. If you have a screening hit, the exporter has to do the necessary due diligence to determine if the hit is the intended target or not. For example, Hans noted that Cuba City, Wisconsin is not a prohibited destination.
— Scott Gearity, www.exportcontrolblog.com
