Deemed Export

TFC Manufacturing Inc., a California-based aerospace fabrication facility has been charged with violating the “deemed export” rule. The Commerce Department’s Bureau of Industry and Security has required the company pay a $31,500 penalty.

From March to April 2006, TFC Manufacturing Inc. released unlicensed US technology for the production of aircraft parts classified under ECCN 9E991. The company gave the information to an employee who was a national of Iran, under the Export Administration Regulations; this release of technology to a national of Iran is deemed to be an export and is prohibited without a license.

More information:

• BIS Imposes $31,500 Penalty on California Company For Violating Deemed Export Rule (International Trade Law News)

The issue of “deemed exports” in the fundamental research arena at US universities is back front and center thanks to a new GAO report. The report, issued in early December, 2006, used unusually critical language in questioning whether the DDTC and BIS were doing an adequate job of educating universities about compliance with US export regulations as they relate to research programs. The GAO’s major concern was that sensitive information could be accessed by foreign students.

Universities contacted by the GAO complained that any guidance from State and Commerce was focused too much on corporations and didn’t address the specific issues of universities.

In response to the report, the DDTC issued a statement saying, in essence, that they recognize that a risk exists but do not know if they have the resources to do anything about it at this point. Both agencies (DDTC and BIS) also candidly stated that their top priorities were processing license applications, not outreach and education.

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

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In the March edition of Aerospace Export Control Update we brought you our analysis of the plans afoot at BIS to tighten up on deemed exports.  Last month we reminded you to get your comments in before the May 27 deadline.  Well, if this impacts you there’s really no excuse anymore for not commenting since BIS has smartly recognized that the concern over their proposal in academia, industry and government research bodies and therefore extended the comment period to June 27.

Even alternative weekly newspapers, usually better known for their reviews of obscure Canadian bands and advertisements for massage services, are picking up on the deemed export issue.  For an example see “Student of Concern” by Christi Hegranes in the May 18 issue of the Bay Area’s SF Weekly.  A few details are off (anybody paid a $1 license application fee to Commerce lately?), but I haven’t read anything else that does as good of a job putting the issues into context for a broad audience.

Bill Reinsch gave a very interesting speech to the ACI’s National Forum on Export Controls touching on many of the today’s major export control issues - deemed export, “higher fences, fewer items,” the post-9/11 effect, terrorism, China - and, more importantly, putting them in their proper historical and political context.  The National Foreign Trade Council is kindly hosting the full text.  Read the whole thing.  And while you’re at it, be sure to read the comments of Reinsch’s successor Peter Lichtenbaum at the same conference as well.

Time is running out to weigh in on Commerce’s sweeping ideas for expanding the deemed export rule.  The American Physical Society felt strongly enough about the proposals to contact the chairs of physics departments at universities across the country and urge them to send in their feedback.  The deadline is May 27 and comments can be submitted via http://www.regulations.gov, email to scook [ a t ] bis.doc.gov (with RIN 0694-AD29” in the subject line), or fax to (202) 482-3355.

It has been a year since Commerce Department Inspector General Johnnie E. Frazier issued a critical report (pdf) on deemed export controls administered by BIS.  The title sums up the IG’s perspective nicely - “Deemed Export Controls May Not Stop the Transfer of Sensitive Technology to Foreign Nationals in the US”.  On March 28 BIS took the next step in responding to the IG report by notifying the exporting community that they intend to propose new regulations in an effort to implement most of the IG’s recommendations.

The overall impact of adopting the IG’s recommendations, assuming they are all implemented, would be to tighten up the regulations in a few important respects:

• A proposal to look at a foreign national’s country of birth, rather than their country of most recent citizenship/permanent residency in determining if a technology transfer to that individual requires a license.  For example, under the current regulations the transfer of technology within the US to an Iranian-born engineer with Canadian citizenship would be evaluated like an export of that technology to Canada.  Frazier wants BIS to treat it like an export to the foreign national’s country of birth, Iran in this example, apparently regardless of how long the foreign national has lived in his adopted country.
• A modification of the definition of use in the context of technology transfers to foreign nationals which has the effect of expanding the definition.
• Clarifications to two parts of the Q&A in the regulations both of which have the effect of making the guidance more restrictive.

BIS is accepting comments on these proposals through May 27, after which they will publish a final rule.

If deemed export is a significant issue for your company, it would be particularly wise for you to read the entire IG report and strongly consider commenting on the proposed rule either directly or through a trade association in which your company participates.  Take an especially close look at the BIS response to each IG recommendation (beginning on page 51 of the report) for insight into what other measures the agency will be taking outside the regulatory changes discussed in the published notice.

U.S. companies have a long history of struggling with regulations governing how they manage the flow of technology between domestic and foreign installations. Since the Export Administration Regulations (EAR) define shipments of goods and technology to foreign subsidiaries just like transfers to arms-length customers, managing such transfers has always required the active involvement of corporate export control officials.

To be sure, restrictions on intra-company transfers have eased in recent years. The most helpful decontrol came just over a year ago, when the Clinton administration lifted licensing requirements for most exports of encryption products, which are crucial to corporate operations. An additional decontrol last October further eased paperwork requirements for companies that ship encryption to foreign subsidiaries.

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The Bush administration has yet to lift the Jan. 20 regulatory moratorium imposed by White House Chief of Staff Andrew Card - a mandate that prevents approval of any regulatory change without the signature of a Bush political appointee. Administration officials have not declared when the moratorium will be lifted, and prospects for a clearing-out of regulations in the Bureau of Export Administration (BXA) appear slim. Although the administration has declared its intent to place Washington attorney Kenneth Juster in BXA’s under secretary slot, Juster isn’t expected to be confirmed by the Senate until April, at the earliest.As a result, all BXA regulations must receive the personal attention of Commerce Secretary Donald Evans, a man whose routine schedule leaves little time for scrubbing provisions of the latest license exception.

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