New Defense Trade Treaties Will Streamline ITAR Licensing

Special Guest Article from Pillsbury Winthrop Shaw Pittman LLP

The U.S. Government recently completed the negotiation of two defense trade cooperation treaties, one with the United Kingdom and the other with Australia. These treaties establish a bilateral framework with each country to enhance defense cooperation and reduce barriers to the exchange of defense goods, services and information. If ratified, the treaties will allow the U.S. to streamline licensing for items subject to the International Traffic in Arms Regulations (ITAR) when exported to members of an “Approved Community” in each country for specified programs.

U.S. - UK Treaty

On September 20, 2007, the President transmitted to the Senate for advice and consent to ratification the Treaty Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland Concerning Defense Trade Cooperation, which was signed in London on June 21, 2007 and in Washington on June 26, 2007.

Focus on Defense Cooperation Between Governments

The report issued by the State Department and included with the President’s transmittal letter to the Senate identifies the purpose of the treaty, which is “to improve the interoperability” of the armed forces of the U.S. and UK “by facilitating the movement of Defense Articles in support of certain mutually agreed activities, while maintaining and ensuring proper safeguards against unauthorized release of the defense technology involved.” The treaty applies to defense articles required for combined military or counter-terrorism operations; cooperative security and defense research, development, production and support programs; specific security and defense projects where the UK Government is the end-user; and U.S. Government end-use.

No Licenses Required

The treaty establishes a framework for exports of defense articles and defense services without a license or other authorization from the U.S. State Department’s Directorate of Defense Trade Controls (DDTC) to entities within an “Approved Community.” Transfers outside the Approved Community would remain subject to DDTC licensing and unauthorized transfers would constitute violations of the Arms Export Control Act.

The treaty defines “Defense Articles” as “articles, services and related technical data, including software, in tangible or intangible form, listed on the United States Munitions List of the International Traffic in Arms Regulations, as modified or amended.” This definition applies to both U.S.- and UK-origin items, thus obliging the UK to observe the U.S. Munitions List as DDTC may interpret and apply it.

The “Approved Community” of entities eligible for license-free exports will consist primarily of agencies or facilities of the two governments. Identified nongovernmental UK entities (i.e., companies) may be eligible if they meet agreed eligibility requirements, are accredited by the UK Government according to treaty implementation arrangements, and the parties mutually agree to include them on an approved list. UK Government employees and employees of eligible UK entities may have access to defense articles (which would include, for example, exports or deemed exports of controlled technical data) if they meet certain criteria including UK security accreditation and need-to-know.

The U.S. Community includes companies that are eligible to export under U.S. laws and regulations, including registration with DDTC. The UK Government will not require licenses to export defense articles to members of the U.S. Community, and may permit such exports under blanket or open authorizations.

Retransfers and Reexports Still Require Authorization

Under the treaty, U.S. Government authorization would not be required for “transfers” that take place within the U.S. or UK Approved Communities. However, “retransfers” to an entity in the UK that is outside the UK Approved Community or “reexports” to a location outside the UK will require UK Government authorization. Before approving such a retransfer or reexport, the exporter will be required to provide the UK Government with supporting documentation including U.S. Government approval of the retransfer or reexport. Exports from the U.S. to an entity or facility outside the UK Approved Community would continue to require licenses as before. Unauthorized retransfers and reexports from the UK Approved Community could violate both U.S. and UK law.

Implementation of the Treaty

Although the treaty is self-executing upon ratification, it will be necessary for DDTC to adopt implementing regulations to identify which defense articles are eligible. Potential exporters will also need to know whether the proposed recipient is eligible and the proposed project is within the scope of the treaty. Exporters who ship under the treaty will be required to maintain records, and each government may establish procedures for notification to legislative bodies, including advance notification of certain exports. Each government will maintain enforcement authority for exports, transfers, retransfers or reexports outside the scope of the treaty.

Implementation of the treaty in the UK will likely be swifter than in the U.S. The treaty has been presented to the Parliament, which will have 21 sitting days to approve or deny the treaty. The U.S. Administration has requested the Senate to ratify the treaty promptly with the aim of finalizing implementation arrangements by the end of 2007. The Senate, however, has not yet scheduled legislative action.

U.S. - Australia Treaty

On September 5, 2007, President Bush and Australian Prime Minister John Howard signed the U.S.-Australia Treaty on Defense Trade Cooperation. The text of the treaty has not been published, but documents released by Howard’s office describe the treaty in terms that are similar (if not identical) in concept and content to the U.S.-UK Treaty. The U.S.-Australia Treaty is intended to provide a “comprehensive framework for two way trade between Australia and the United States in defense articles, including equipment, spare parts, services and related technical data, within an ‘approved community’ of government facilities and private companies in the United States and Australia without the need for licenses.”

Like the UK treaty, the Australia treaty will apply to articles, services and related technical data required for combined U.S. and Australian military or counter-terrorism operations and cooperative security and defense research. The approved community will include the U.S. and Australian governments and companies in both countries that have been qualified to receive license-free exports under the treaty. Implementing arrangements will specify what articles will be covered and details including qualification criteria.

Neither the U.S. nor the Australian government has provided a time line for implementation of the treaty, other than a statement of general intent to present it to their respective legislatures and to develop implementing arrangements promptly thereafter.

Potential Benefits to Industry

The documents released by Prime Minister Howard’s office highlight the benefits of the treaty to Australian industry by opening new avenues for industrial cooperation and allowing for effective partnering and technology sharing. For example, although the treaty will not address procedures for exports under the Foreign Military Sales (FMS) program, it will permit the transfer of equipment to members of the approved community facilitating the involvement of Australian companies in support work. A particular benefit will be timely access to U.S. technology and the ability to share technical data without the need for an export license, which will reduce lead times in discussing potential business opportunities and improve the prospects for Australian companies seeking to participate in U.S. defense programs.

Prospects for Implementation and Ratification

Although the text of the UK treaty focuses on defense cooperation between the two governments, the UK treaty will facilitate broader cooperation between the U.S. and UK defense industries, just as the explanatory materials from Prime Minister Howard’s office emphasize the benefits to Australian industry. For defense manufacturers in both the UK and Australia, bypassing cumbersome ITAR licensing requirements will offer significant benefits. The extent of these benefits will depend on how the treaties are implemented. Access to technical data by third-country nationals or dual nationals, even if eligible under UK or Australian security requirements, will need to be clarified. Narrow lists of defense articles or specifically identified programs or restrictions on companies in the UK and Australian Approved Communities will limit the utility of the treaties and turn them into elaborate variations on previous unsuccessful efforts to facilitate defense trade through the little-used bulk licensing arrangements for major projects, major programs or global authorizations in ITAR § 126.14. If implemented broadly, however, the treaties could establish a model, offering the prospect of a license-free zone for countries whose security policies are fully aligned with those of the United States.

Senate ratification of the treaties is not a certainty and the Administration may not have sufficient political capital to overcome objections at this late stage in its second term. The Administration’s failed effort in 2004 to amend the Arms Export Control Act to exempt exports to the UK and Australia from ITAR license requirements does not give cause for hope. UK and Australian companies with a stake in the ratification of these treaties should engage resources quickly to press for early Senate action.

— by Christopher R. Wall, Thomas M. deButts, and Ada L. Loo, Pillsbury Winthrop Shaw Pittman LLP

To contact the authors, visit pillsburylaw.com