New DDTC Requirements for DSP-5s Related to Agreements

On March 11, 2005, in the Niagara Falls courtroom of Judge Robert M. Restaino, a cell phone began to ring. This annoyed Restaino, as is would most of us. However, unlike most of us, he was empowered by the State of New York to punish the offending party. Just one problem - no one stepped forward when the judge asked whose phone had rung. A less courageous bench might have let it go at that, but not the bold Restaino. His solution? Send a total of 46 people to the city jail for the crime of being unfortunate enough to be standing in Restaino’s courtroom that day.

DDTC’s Office of Defense Trade Controls Licensing does not operate its own jail (perish the thought), but it does operate with a great deal of discretion to complicate the international business of exporters. Exhibit A is an obscure-sounding announcement to the DDTC website around the beginning of the year. Despite its title, “Replacement of Section 9.4 of the Guidelines for Preparing Agreements“, this recent missive from Foggy Bottom actually has limited impact on agreement preparation. Its real affect is to complicate the process for applications to export hardware in furtherance of an agreement.

Effective February 1, exporters of hardware in furtherance of an agreement must comply with a number of new procedures (these bullets are directly quoted from the announcement - the use capitalization and boldface are in the original):

• The agreement/amendment authorizing the subject hardware MUST be approved PRIOR to submission of the hardware license request. License requests prematurely submitted are subject to Return Without Action.
• The license request MUST be submitted by the agreement holder or another U.S. signatory of the identified agreement.
• The end-user identified on the license request MUST be a foreign licensee (signatory) or end-user on the subject agreement.
• The first foreign consignee (not including foreign intermediate consignees) to receive the subject hardware MUST be a foreign licensee (signatory) or end-user on the subject agreement.
• The purpose block of the license request MUST include the words “In Furtherance of TA/MA/DA/AG XXXX-XX” on the very first line.
• The license request must be submitted with following support documentation:
  • Purchase Order, Letter of Intent, Contract, or Request for Goods from the foreign party to the applicant. This documentation MUST identify the relevant agreement. The dollar value of defense articles does not need to be provided.
  • DSP-83 for significant military equipment (SME). If original was provided with the agreement, applicant must upload a copy with the license request.
  • Letter of Explanation from the Holder of the Agreement, signed by an empowered official, using the format provided in the attached example. The information in this letter is requested pursuant to 22 CFR 122.5.

The last bullet is a real kicker - a complex and often lengthy letter of explanation which must now accompany each and every license application for the export of hardware in furtherance of an agreement. Bad news folks - the time it takes you to prepare a typical DSP-5 in this scenario just doubled or tripled.

Like the proverbial man who shouts “Help! Help!” while beating you senseless, DTCL has some chutzpah to tell us that its seat-of-the-pants rulemaking “does not represent new data gathering requirements; instead it is a request for data review under the record keeping requirements of 22 CFR §122.5.” Not coincidentally, the Paperwork Reduction Act requires that federal agencies get permission from the Office of Management and Budget before imposing new data gathering requirements. The approach here seems to be that if they don’t call it a data gathering requirement, it is not one. (Insert your own Orwell reference here, dear reader.)

Some of these requirements flow from a reasonable effort on the part of DTCL to keep tabs on agreement values approaching the threshold for congressional notification, which our regulator friends have a genuine obligation to do. But couldn’t this apparent problem be solved by making life difficult just for those exporters who inappropriately submit licenses related to agreements which are still pending or exceed the authorized hardware values of their agreements? If the plan is really to integrate these auditing functions into D-Trade, can we expect the letter of explanation requirement to go away once the audit enhancements go online (whenever that might be)?

At this point you may be wondering what happened to Judge Restaino of Niagara Falls. He never did find the phone. But the New York State Commission on Judicial Conduct had not trouble locating him and removing him from the bench. Can’t DTCL heed the lesson of this wayward jurist and not collectively punish all defense exporters for the misdeeds of a few?