EAR

Warning: hopelessly infected with editorial and opinion comments

– And Now We Get to Pay for Great Service: The Directorate of Defense Trade Controls (DDTC) plans on charging exporters for license applications and other submissions. The proposal is for DDTC to charge registrants $250 per application, to include license and agreement applications and amendments. The fees would be charged as part of the registration fees, and DDTC would look to the past two years of licensing activity as a basis for the charge. So if your company submitted 100 applications and amendments over the past two years, you registration fee would go up from $1,750 to $27,500 ($2,500 new higher registration fee + $250×100). The good news is that most exporters will probably wind up passing these costs back to the US Government in the form of higher charges for defense articles, so we’ll wind up with a massive money shell game scheme that will make everyone feel good. In DDTC’s defense, DDTC personnel indicated that the latest Presidential Directive stated that a substantial portion of DDTC’s budget had to be “self-financing” so they have not choice but to institute user fees of some sort. But can’t they just hold on for another eight months for another President? For more information click here: http://www.pmddtc.state.gov/docs/dtag/Federal_Register_Proposed_Rule.doc

– A Cold Bureaucratic Drizzle on the UK Treaty: DDTC is working hard on pushing out a new UK exemption ITAR amendment. It’s actually not really an exemption, but some other form of ITAR mish-mash approval. We have not fully digested the unpublished rule: http://www.pmddtc.state.gov/docs/dtag/Draft_UK_Treaty_Exemption_FRN_11_Jun_1930.doc; it’s one of those that makes you go cross-eyed as soon as you start reading it. But here’s a prediction not found in the press releases: The exemption will probably not be all that helpful to the bulk of exporters and you will still need to obtain approvals for many programs involving the UK. In order to keep things inconsistent, the UK exemption takes a whole different approach from the Canadian exemption. For example the UK exemption uses a positive list of USML categories which are eligible for the exemption, whereas the Canadian exemption uses a negative list of USML categories which can’t be utilized for that exemption. You may only use the UK exemption for an end use in the US or the UK. We’ll write more about it when we start understanding it.

– Regulation on Aircraft Parts Jurisdiction Nearing Release: DDTC is poised to release the new regulation on ITAR aircraft parts jurisdiction, which basically states that low level components that are used in both defense and civil aircraft are subject to the EAR. Thanks. Even the new rule does not totally explain how to treat a low level dual use part that was initially designed for a defense application but is later used in a civil application. But what’s left unclear becomes open to interpretation, so here goes another round of aircraft parts jurisdiction debate. The regulation draft can be found here: http://www.pmddtc.state.gov/docs/dtag/17_(c)_DTAG_version_6-12-08.doc

– Agreement Guidelines Rewrite: DDTC has embarked on a comprehensive rewrite of the Agreements Guidelines (”AG” - see http://pmddtc.state.gov/docs/agbook.pdf), which are increasingly taking on the role as a kind of ITAR supplement of ever shifting and half-baked policy and regulatory pronouncements. The current version is admittedly out of date, with various supplements on the website which negate whole sections in the core document which can make for a confusing read. But exporters have come to fear any AG change for what it might add. For example, the latest AG 9.4 rewrite shifted the burden of Agreements tracking from DDTC to the exporter, creating major new headaches for license application drafters. The new 9.4 also created a whole new class of red tape requirements that are making shipments through trading companies to major Japanese and European allies unbelievably complicated. So brace yourself with the new AG rewrite as it is likely create all kinds of unpleasant or unintended consequences. Prediction: The new Agreements Guidelines will be twice as long and twice as convoluted as the current draft. Brace yourself.

– Brokering still Broken For Now: The effort to rewrite and reissue the ITAR Part 129 brokering requirements have stalled and moved to the back burner. The last update we had was that the new revised clarifying rule would be out at the “end of 2007.” Now it seems other priorities have taken hold at DDTC and the new rules seem to be in indefinite limbo, which may not be such a horrible thing as the clarifying rules are unlikely to make things much clearer or easier for exporters.

The Bureau of Industry and Security has proposed to amend the Export Administration Regulations by making changes to ensure consistency within the language and terminology of Part 744. Because this is only a proposed rule, none of the changes are in force at this time.

Part 744 of the EAR deals with the end-user and end- use based control policy. Sections 744.3 (missile catch-all control), 744.4 (chemical/biological weapons catch-all control), and 744.6 (US persons involvement in weapons of mass destruction proliferation activities) all prohibit exports, reexports and transfers (in-country) of items subject to the EAR. 744.2 (nuclear catch-all control) presently only states it prohibits exports and reexports of items subject to the EAR. The proposed amendment would change the nuclear catch-all control language to prohibit export, reexport, and transfers (in-country) to conform to the other sections.

The rule also proposes to amend the “is informed” paragraph (B) of the sections of part 744 to ensure that the same terminology is used throughout all sections. Read More

On April 11, 2008 the Department of State, Directorate of Defense Trade Controls (DDTC) published a proposed change to the International Traffic in Arms Regulations (ITAR). The notice of proposed rulemaking would add language intended to clarify the application of Section 17(c) of the Export Administration Act of 1979 (EAA) to the implementation of the ITAR and the Department of State’s obligations under the Arms Export Control Act (AECA). The proposed change would affirm that jurisdiction over exports of certain civil aircraft parts and components lies with the Department of Commerce under the Export Administration Regulations (EAR), and not with the Department of State under the ITAR. Comments on the proposed amendment will be accepted by the Department of State through May 12, 2008. Read More

So, you got some commercial hardware controlled by the Export Administration Regulations, and then you load some military software on to it. What do you have? You have an item that is now controlled by the International Traffic in Arms Regulations.

And even if the Commerce Department gives you many licenses for many exports of those things, you still have ITAR violations.

That seems to be what happened in this case in which Northrop Grumman Corp. reached a settlement agreement related to exports that Northrop Grumman discovered after it acquired Litton Industries in 2001. The violations Northrop discovered occurred from 1994-2001. According to documents provided to the State Department from Northrop the company had committed over 110 violations involving sales of 73 aircraft navigation systems. Northrop Grumman discovered the violations as it was working to install its compliance procedures in its new acquisition.

Read More

OK, so you violate the Export Administration Regulations, you might get a fine between $50,000 and $500,000 in most cases. And in the small percentage of ITAR violations in which there is a monetary penalty, you normally are looking at a fine between $1 million to $20 million. But, ladies and gentleman, if you over charge the US Government for shipping costs, you might end up with a big fat $28 million fine.

National Air Cargo (NAC), a US military contractor, has paid $28 million to settle both criminal and civil allegations. NAC is said to have defrauded the Department of Defense, and the Justice Department by submitting fraudulent claims for payments for the shipment of freight. The company pleaded guilty to one count of knowingly making a material misstatement to the US.

From 1999 to 2005 NAC transported freight wholly by surface transportation rather than by air as required by the Department of Defense regulations. The company would then bill the DOD for freight charges and pocket the difference between air and land delivery. The company falsified documents to represent actual delivery dates.

The lawsuit was actually brought on by Mark Oehm, a former NAC employee, the “whistleblower” brought on the lawsuit under the False Claims Act, which permits private citizens to bring lawsuits on behalf of the US and receive a portion of the proceeds of any settlement or judgment. Oehm will be receiving $3.3 million as his share, he may not have his job anymore, but I am sure his share of the settlement will help him cope.

More information:

• DOJ News Release

Secretary Mancuso delivered the keynote address on March 17, 2008 at the Export Control Forum in Newport Beach California. Mancuso emphasized the need to strengthen the US dual-use export control enforcement architecture and pushed for Congress to pass “a reauthorized Export Administration Act as quickly as possible.”

He also restated that his three highest policy priorities are still:

• Refining BIS’s enforcement efforts; focusing on terrorists, proliferators, and nations with transshipment concern;
• Reforming and updating dual-use export controls to enhance US national security and competitiveness;
• Accelerating and elevating international engagement with the most dynamic high technology markets in the world.

More information:

• BIS News Release

The Bureau of Industry and Security has issued an order suspending all export privileges for 180 days for several businesses associated with Balli Holdings of the UK. The companies commencing in the UK, Armenia and Iran all knowingly violated the Export Administration Regulations.

The companies are charged with:

• re-exporting three US origin aircraft to Iran and had prepared to send an additional three before being caught;
• making false statements to the BIS in an attempt to conceal the end-user of the aircrafts;
• failing to comply with a BIS order to return the three additional aircraft

More information:

• US Sanctions British, Armenian firms for Iran exports (Iran Focus News)

Parthasarathy Sudarshan, president of Cirrus Electronics pleaded guilty to felony charges of conspiracy to violate the International Emergency Economic Powers Act and the Export Administration Regulations, and to violate the Arms Export Control Act and the International Traffic in Arms Regulations. Sudarshan faces up to five years in prison, a $250,000 fine and a maximum of three years supervised release.

Cirrus Electronics, an international electronics firm holds office in the United States, Singapore, and India. Sudarshan held himself as the company’s CEO and used the company to illegally export controlled microprocessors and electronic components to Indian state entities involved in developing ballistic missiles, space launch vehicles, and fighter jets. In particular the company sent US technology to Vikram Sarabhai Space Centre (VSSC) and Bharat Dynamics, Ltd. (BDL), both companies are on the Department of Commerce’s Entity List and any exports to these entities are restricted. Cirrus Electronics provided their US vendors with fraudulent certificates that claimed that the end users of these electrical components were non-restricted entities in India, when in fact they were not. Sudarshan also made sure to route the products through its Singapore office and then send the packages on to India to further conceal any misconduct from the US government.

Sudarshan is scheduled to be sentenced on June 16, 2008.

More information:

• DOJ News Release (PDF)

Parker Hannifin Corporation, Aerospace Group

Contract Senior Contracts Administrator

Parker Electronics Systems, an industry leader in the design and mfr of fuel mgmt systems and controls, seeks individual to administer contracts for complex programs and ensure fulfillment of contractual, fiscal & performance obligations. The successful candidate will demonstrate their ability to perform the essential functions of proposal preparation, contract review and negotiation of price, terms and other performance requirement in accordance with FAR/DFAR. Candidate shall also possess a strong working knowledge of ITAR, EAR administration (i.e. TAA’s, MLA’s DSP-5’s). Requires a Bachelors degree in Bus Admin or related field and 6+ years of related experience, preferably in the military aerospace Industry.

We offer competitive salaries & benefits. To be considered, please email: hresd [at] parker.com, fax 631.273.2817, or send your resume to: HT Dept-CC, Parker Hannifin Corp., Electronics Systems, 300 Marcus Blvd, PO Box 9400, Smithtown, NY 11787.
EOE

www.parker.com

On February 28, 2008 the Department of the Commerce, Bureau of Industry and Security issued a final rule amending the Export Administration Regulations. The rule will expand authorization for temporary exports and reexports to Sudan under EAR License Exception TMP (”Temporary Imports, Exports, and Reexports”), 15 C.F.R. Part 740.9.

The revision will now allow for an expanded list of “tools or trade” usually characterized by “usual and reasonable kinds of quantities of commodities, software, and technology for lawful use”. Software must be solely used for servicing or in-king replacement of software legally exported, which must remain loaded on exempted equipment while in Sudan. Before the final rule, all software was required to be loaded on to the hardware prior to sending the hardware to Sudan.

The new regulation will now permit reexports, they must however, be shipped to Sudan to and by eligible users for eligible uses. A permissible “eligible” user includes any non-governmental organizations or an individual staff member, employee, or contractor of such an organization.

All revisions are said to be effective immediately, but many are cautioned that there are still several restrictions involving TMP. For a complete list of restrictions and newly authorized component please see the final rule.

More information:

• Federal Registers
• BIS - Sudan Web Guidance (PDF)

On March 11, 2008, BIS’ Acting Assistant Secretary of Export Administration, Matthew Borman addressed the Regulations and Procedures Technical Advisory Committee (RAPTAC) and described a number of Bureau of Industry and Security (BIS) regulatory initiatives of interest to exporters and reexporters.  This was welcome news after what seems like years of BIS preoccupation with China Military Catch All and Verified End User issues.  Some highlights include: 

New License Exception ICT - BIS is working on a rule to create a new license exception ITC or Inter-Company Transfers.  The new license exception would allow US companies to export (and deemed export) normally license required hardware, software and technology within their companies and overseas affiliates that they control.  It’s not clear yet if the new ICT will see the light of day, but a draft rule is currently circulating.  The new license exception could potentially make life a lot easier for US companies, especially on the deemed export front.  But the bad news is that the company must apply with BIS to use the license exception.  It’s not clear what BIS might expect to grant a company ITC status, but at a minimum you would probably have to demonstrate you have a strong compliance program, if not a host of other obligations. 

Encryption Rules Rewrite - Addressing one of the most convoluted sections of the EAR, Mr. Borman advised that BIS is working on rewriting the crypto rules.  Whenever anybody in Government talks about encryption they are more secretive than Client 9 arranging for a “date,” but Mr. Borman did offer up a few insights.  First, the rewrite would clear Key Management Infrastructure (KMI) references and other encryption related deadwood that no one ever uses anymore.  Second, he stated that the revisions would attempt to make the crypto rules more akin to other EAR controls to make it more understandable to regular EAR practitioners and less of a stand-alone specialty as it is now. 

De Minimis Reform is Still Alive - Before BIS got sidetracked with the whole China thing, BIS was discussing revising the long neglected de minimis rules. Mr. Borman indicated that BIS had not forgotten about de minimis, or in his words “It’s clear we needed to update de minimis requirements.”  When this reform proposal was discussed in the past, BIS indicated that the updated rules would allow a combined hardware and software de minimis calculation.  Currently, reexporters must calculate hardware and software separately, and if either is over the de minimis thresholds the item becomes subject to EAR jurisdiction.  The reality is that many products have hardware and software together, like a laptop.  To do separate calculations for laptop hardware and laptop software often resulted in US jurisdiction even when the total combined US hardware and software content on the laptop was well under US de minimis thresholds. 

Deemed Export Country of Affiliation Revisions - Mr. Borman indicated that BIS will be soliciting comments about changing the EAR’s deemed export focus to a “country of affiliation” test.  I must admit, I did not understand where BIS was trying to go with this, so this is a pretty worthless news report.  Mr. Borman used the example of a Canadian who recently worked for a company on the Entities List, stating that fact would be relevant for determining deemed export license requirements.  The implication would be that you could not use the standard Canada-No License Required (NLR) eligibility for deemed exports of technology to this type of person.  But in the example given, the current Red Flag rules would probably already suffice in potentially restricting technology deemed exports.  Hopefully the fog will lift on what BIS is really trying to do here in the coming months.

Beginning on April 28, 2008, AES reporting requirements for export license exceptions will change. It will be mandatory to report the Export Control Classifications Number (ECCN) on the AES record when using license exceptions TSR, RPL, GOV, GFT, TSU, BAG, AVS, APR, KMI, TAPS, ENC to export goods, technology, or software from the United States.

The ECCN will be required for the following exception codes:

1. C35-LVS
2. C36-GBS
3. C37-CIV
4. C38-TSR
5. C40-TMPC
6. C41-RPL
7. C42-GOV
8. C43-GFT
9. C44-TSU
10. C45-BAG
11. C46-AVS
12. C47-APR
13. C48-KMI
14. C49-TAPS
15. C50-ENCC51-AGR
16. C53-APP

While some have argued that this new requirement should not pose any problems for exporters, those arguments usually come from people who are not responsible for doing AES submissions and coordinating export paperwork and documentation.

More information:

www.access.gpo.gov/bis/ear/ear_data.html

It used to be that the International Traffic in Arms Regulations allowed a US citizen employee of a US exporter to carry export-license-required-technical data (technology) out of the country on his/her laptop while the EAR did not allow the same thing to happened. That has now changed.In the December 12, 2007 Federal Register, the Bureau of Industry and Security, Commerce has revised the Export Administration Regulations (EAR) to expand the export license exceptions Temporary Imports, Exports, and Reexports (TMP) and Baggage (BAG) to allow for certain exports and reexports of technology between two U.S. persons or their employees traveling or those that are temporarily assigned abroad.

The rule expands the availability of License Exceptions TMP and BAG but does not authorize any new release of technology. Any technology exported under the new rule may only be released to persons who may receive that same technology pursuant to other provisions of the EAR which means it will still be subject to restrictions applicable to technology exports and reexports. Read More

Mine Safety Appliances Company in Pittsburgh, PA has been charged with violating the Export Administration Regulations and forced to pay a fine of $470,000. The company is charged with committing 107 violations beginning as early as May of 2001.

During 71 separate occasions Mine Safety Appliance Company reexported various safety equipment items that were subject to the Regulations, from the United Arab Emirates to Iran without the required U.S. government authorizations. Then on 31 other occasions the company reexported controlled items to the same location without the required licenses from the BIS.

Mine Safety Appliance Company also reexported safety equipment items subject to the regulations from the United Arab Emirates to Syria without the required Department of Commerce licenses on 5 separate instances.

The Pittsburgh Company will not be debarred as long as their fine is paid as agreed.

More information:

BIS Order (e2025.pdf) (PDF)

Effective November 7, 2007, the Department of Commerce will control the licensing of the QRS11-00100-100/101 and the QRS11-00050-443/569 Micromachined Angular Rate Sensors. The Department of State previously held the licensing jurisdiction for the sensor, as it was found on the United States Munitions list. Many industry inquiries about incorporating the part into civil automatic flight control systems and standby systems led to its removal from the Munitions List causing the part to no longer be under the jurisdiction of the state. The instrument systems, automatic flight control systems and the aircraft which would house the sensor will remain subject to the EAR.

More information:

Federal Register Notice