SED

On October 16, 2007, President Bush signed legislation increasing by a factor of five the civil and criminal penalties under International Emergency Economic Powers Act and penalties for violations of the Export Administration Regulations. Previously, civil penalties had been $50,000 per violation; the amended statute now calls for the greater of $250,000 or twice “the amount of the transaction that is the basis of the violation”. The news is worse than appears because a single export transactions can result in multiple violations, because of this: many times the BIS can double or triple count violations for one shipment. For example, Violation 1) would be the illegal export, Violation 2) would be acting with knowledge of an illegal export, Violation 3) would be making false statements on AES/SED records that no license is required). With this is mind, the practice of multi-counting counting, combined with the new fines could send the monetary amounts of the penalties into the stratosphere if companies are not careful.

The legislation also adds new activities that represent violations; in the past civil violations consisted of violating or attempting to violate the law. Now it is a violation to “conspire” or “cause a violation” of the law. The criminal side merely adds that it is a violations to “willfully conspire to commit” or “aid or abet” a violation.

OK, so you forgot to do your AES filing for that shipment to Aruba, no big deal, right?

According to the Commerce Department, over a period of almost 8 months, Aviacsa Airlines of Houston, Texas exported No License Required aircraft parts without filing the required SEDs/AES on 75 different occasions. The shipments ranged in value from $2550 to approximately $22,000. Consequently, Aviacsa agreed to pay a fine of $450,000—half of the fine is suspended for one year and will be waived if Aviacsa doesn’t get caught with any violations during the one year period.

No doubt, Aviacsa’s lawyers claimed that they got a good deal for their client, who could have faced fines of $875,000, or even more if Commerce had decided to double count violations as it often does.

Bottom Line Compliance Lesson: Failure to file SEDs/AES can lead to problems. I am not saying one mistake will get you in big trouble, but we now know what can happen if you fail to file 75 times. Use this story to scare your company into doing a better job with its SED/AES filing.

In what may truly be the most long-anticipated regulatory change in the export control arena, the Census Bureau is finally nearing its goal of mandating use of the Automated Export System (AES) in place of paper Shipper’s Export Declarations (SEDs) across-the-board. AES is already mandatory (since 2003) for the export of items on the United States Munitions List (USML) and the Commerce Control List (CCL), as well as rough diamonds subject to the Kimberly Process. In a February 17, 2005 notice of proposed rulemaking, Census reiterated its intent to extend the AES requirement to cover all exports from the US which currently require a SED. The threshold triggering the need for a SED under the current Census regulations - a value of more than $2,500 classified under an individual Schedule B or Harmonized Tariff Schedule (HTS) commodity classification code - remains unchanged. (After all these years, an adjustment for inflation would be nice.) Exports valued at less than $2,500, but which require either a license from Commerce or a license or license exemption from State will continue to require AES reporting (data submitted via AES is now called “Electronic Export Information” or EEI).

Census solicited feedback with their February proposed rule, which they received in spades from over forty different exporters, carriers, trade associations, and even other federal government agencies. For those seeking to understand every nuance, impact, and possible criticism of the Census proposal, the comments are an excellent resource. (Although, unfortunately, when Census scanned the comments into Adobe Acrobat files they did not turn on the optical character recognition feature which would have made it possible to easily locate references to particular words or phrases.) I particularly recommend the response offered by the Regulations and Procedures Technical Advisory Committee (pdf, RPTAC), which identifies numerous inconsistencies and ambiguities in the Census proposal, and the comments from US Customs and Border Protection (pdf, CBP) which argues that even the very limited exemptions from filing EEI provide an unacceptable loophole for bad actors to exploit. CBP wants all exemptions eliminated, including the sub-$2,500 exclusion.

Census is expected to issue a final rule as early as this month, which will most likely go into effect sometime around the first day of the new year.

The Census Bureau unofficially announced that it will publish the proposed rule requiring the mandatory use of the Automated Export System (and the elimination of paper Shipper’s Export Declarations) in the Federal Register in June 2004. There will be a 60 day public comment period for the proposed rule. Census hopes to publish the final rule in early Fall 2004, with a January 2005 effective date.

Aren’t you glad you have already started using AES (or PC Link)?

Last month Directorate for Defense Trade Controls (DTC) published a notice on its web site requiring electronic filing of Shipper’s Export Declarations (SEDs) using the electronic AES system for all items controlled by the International Traffic in Arms Regulations (ITAR). On October 27, 2003, DTC amended the ITAR to officially require the same. The new ITAR requires that you electronically report all ITAR exports to the US Government, except for exports of technical data under exemptions (not including the exemption for agreement). Generally speaking, for hardware exports you report electronically using AES and for technical data exports you report directly to DTC.

Note to Companies outside of the United States: If you are transferring items between non-US locations, no AES or ITAR reporting is required but you may want to share the information below with the US-based business who export to you to help them get their exports to you cleared properly.

The primary ITAR revisions come in the new ITAR section 123.22 - Filing, retention, and return of export licenses and filing of export information. ITAR 123.22 requires electronic export reporting for all ITAR exports, either via AES for hardware or via a new system for direct reporting to DTC (the latter system currently is a paper reporting system). These are the new ITAR 123.22 procedures for exports.

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In the October 22, 2003 Federal Register the Census Bureau announced that it will eventually publish a proposed rule that would require AES reporting for all exports from the United States (with certain exemptions). Currently, the AES requirement does not apply to items classified as EAR99 in the Commerce Control List. You currently may use paper Shipper’s Export Declarations to report exports of items classified as EAR99. Census gave no official prediction as to when it might publish the proposed rule. Best guesses are pointing toward late Spring as the likely timing.

In the October 22, 2003 Federal Register the Census Bureau published a notice requiring AES reporting for rough diamonds. The United States is doing this as part of the international effort to combat rough-cut diamonds being used to finance military conflicts in Africa.

Now you must use AES to report your exports of items controlled by the International Traffic in Arms Regulations (ITAR).

DTC recently published guidance on their website on AES shipments. Some key points include:

• As of October 18, all exported items on the Munitions List (hardware and tangible software and tangible tech data) must be declared in AES prior to departure—8 hours for vehicle or air, and 24 hours for vessel or rail.
• In case of an emergency, you may file 1 hour in advance for vehicle or air exports, and 2 hours for vessel or rail. This shorter filing time can be revoked at the discretion of Customs and Border Protection or DTC if they feel it is being abused.
• Until December 18th, a paper SED must also be filed for the same transaction.
• The exporter must complete the new ITAR data fields, as described in last month’s issue.

For more information, see: www.pmddtc.state.gov/aes.htm 

Buried in the DTC web page guidance on AES, DTC published some interesting and painful clarifications on how you should export technical data under a license and report it to DTC, as is required by ITAR Part. Interesting, mostly for a few die-hard ITAR freaks, painful for all exporters of ITAR-controlled tech data.

Many defense exporters have argued, with reason, that the first shipments of technical data under a TAA or MLA does not need to be reported. They argue that the actual ITAR 123.22(d) and 123.24 language only requires reporting of the first shipment under a license, not an agreement because those ITAR paragraphs are in the ITAR Part 123, which has the title “Licenses for the Export of Defense Articles” and agreements are not licenses. Exporters also cite Part 124 “Agreements..” as the ITAR Part to look to for requirements for exporting tech data under agreements.

(John Black here. For the record, I am starting to wonder what relevance logic and using dictionary definitions of words has to understanding the ITAR. For example, since Part 125 is “Licenses for the Export of Technical Data,” that would seem to be the logical place to find the requirements for exports of tech data under licenses. Instead of reading the ITAR you just ought to know what it says. This approach of not basing the meaning of the ITAR on the words of the ITAR and requiring exporters to just know what the ITAR says is irresponsible government. If it is important to the security of our country that we apply the ITAR like the State Department interprets it, the State Department is putting the country at risk by not writing the ITAR to say what the State Department wants it to say because some exporters are not plugged into the State Department and might just read the ITAR.)

Reading the guidance, it’s clear DTC disagrees. “[T]he initial export of technical data and defense services using an agreement will be by letter,” the guidance reads. “For ease in handling these requests, the letter should have an attention line reading “ATTN: Initial Export Notification for Agreement [insert agreement number].”

For shipments of technical data under a license, the guidance states you should notify State of the first shipment of technical data by decrementing the license and returning it to DDTC. If you need to ship technical data thereafter, State says to use an exemption in “124.5.” Presumably they are they are referring to exemption regarding copies of technical data previously authorized exemption in 125.4(b)(4).

(Sorry, John Black here again. Gee whiz, what is going on here? So, I get a DSP-5 for offshore
procurement, export data once, and then use the copy of tech data exemption for the next 50 for the offshore procurement? If what I export is not a copy of what was previously exported, but it falls within the description on my DSP-5, can I use the copy exemption for my non-copy. Interesting use of the English language. In the ITAR the word “copy” includes things that are not copies. I sure wish DTC would revise the ITAR to reflect this. I don’t know about you, but I might forget this sometime over the next couple of years and make the mistake of reading the ITAR and thinking “copy” does not include “non-copies.” Back to you Maarten.)

Finally, State reaffirmed that technical data hand carries under a license still require an SED. You should present a copy of an SED to US Customs “upon request” and one copy should be immediately sent to DTC. The guidance appears to indicate that you don’t have to specifically hunt down a Customs officer to submit an SED, as US Customs would never request an SED for technical data unless the traveler brought it to their attention.

The good news is that all these paper technical data notifications should disappear in January 2004. At that time, State hopes to have in place a system whereby all AES entries for shipments of technical data are automatically routed to State. For more information, see: www.pmddtc.state.gov/aes.htm

(I apologize for interrupting Maarten’s analysis of the new AES requirements with my editorial comments. Sometimes I just can’t keep my mouth shut. –John Black)

Hurray! The final Automated Export System (AES) regulation is finally out. Now it’s time to crack open a cold one and celebrate. Let’s also celebrate, shall we, by drinking down the six-pack of essential bullet point elements of the July 17 Census Federal Register Notice:

• An AES SED filing is required for all ITAR shipments regardless of value, license or exemption, unless specifically exempted by the ITAR. (30 CFR 30.60)
• An AES SED is required for EAR shipments valued at $2,500 or more and classified in an ECCN: other than EAR99. (15 CFR 30.1(b), 30.60)
• Proof of AES filing must be made at the time the cargo is tendered to the exporting carrier. (15 CFR 30.12(d))
• SEDs for EAR99 shipments valued at $2,500 or more may be submitted via AES or in the old paper format. (15 CFR 30.1(b))
• Paper SEDs must be filed at the time the cargo is tendered to the exporting carrier. (15 CFR 30.12)

The rule is effective August 18, 2003, and will be mandatory October 18, 2003.

The rule advises ITAR exporters to look to the ITAR for pre-departure filing requirements. The party has yet to start over at DDTC, as the ITAR, of course, has not been amended yet to describe these or other related AES requirements. So at this time it’s anybody’s guess as to when you should file your AES SED for ITAR shipments. ITAR AES amendments were supposed to be released by August 24, but the latest estimate is now September or October.

(Editor’s Note: What’s the Schedule B Number for that six-pack?)

We have been talking about the new Census rules that will require mandatory filing of SED’s through AES for years now. So it should sound repetitive (but, by now, perhaps not surprising that we are still waiting. But the Census folks now seem pretty confident that the rule will actually out soon, as in a matter of days or weeks rather than months. Once this rule is published, it will go into effect 30 days after publication, followed by a 90 day transition period where either a paper filing or an AES filing will still be accepted. After that, all filing will need to be electronic.

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The latest news on the Automated Export System (AES) front is that the International Traffic in Arms (ITAR) will be amended to establish preshipment filing times for Shipper’s Export Declarations (SED) of all Munitions List items. The new requirement will be that SED’s must be filed 8 hours prior to departure for air shipments, and 24 hours for vessel shipments. Other ITAR changes related to AES are expected, but how soon is anybody’s guess.

A final Census regulation on mandatory SED filing through AES is now expected in the coming month. That regulation will go into effect 90 days after publishing. So by the Spring, we should be filing all our SED’s electronically. Please be ready as the new penalties for failing to file SED’s now look almost as bad any license violation penalty.

The new penalty provisions under the Security Assistance Act of 2000 is an administrative civil penalty of $1,000 per day for up to $10,000 per transaction for delaying filing or failing to file an SED. But the new criminal sanctions for failing to file or filing misleading information is $10,000 per violation or five years imprisonment, or both. An additional embarrassment is admitting to your cellmates that you were locked up for failing to file an SED.

The buzz in Washington is that further AES related changes may be in the offing in 2003. Customs and Census are seriously considering extending preshipment filing requirements to commercial shipments. A natural extension is removing AES Option 4, which allows for post shipment filing of SED information. No definitive decisions have been made on either of these changes.

We have not been pounding the hallways of ODTC lobbying to remove the ITAR requirement for copying ODTC on SED’s for hardware shipments pursuant to an ITAR exemption (22 CFR 123.22(c)). We are in fact in favor of this arcane requirement, as it inevitably leads to many easy audit findings. But some appear to make tired old efficiency arguments that exemption SED’s can more effectively be routed electronically directly to ODTC by Census or Customs under the new mandatory AES.

In the October 9, 2002 Federal Register the Census Bureau published proposed regulations that would require all exporters to use the Automated Export System (AES) for electronic filing of Shipper’s Export Declarations (SEDs). The proposed rules would require mandatory AES filing for all items except those classified as EAR99 under the Export Administration Regulations (EAR).  Importantly, this is only a proposed rule that has not yet entered into force.  The Census Bureau will accept your written comments on the proposal until December 9, 2002. After reviewing the written comments and deciding what, if any, changes to make the proposal, Census will publish a new regulation.  Once the new regulation is published, you will have 90 days before you have to comply with it. It would be reasonable to guess that the actual new regulation will not appear until early 2003, which would mean that compliance won’t be mandatory until the second quarter of 2003.

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Late last summer exporters learned that beginning in March 2002 they would have to file electronically all Shipper’s Export Declarations for all items except those classified as EAR99. Once winter hit, exporters began to panic that the March deadline was fast approaching and details of the new procedure were still not available. Well, once again, no news is good news when it comes to government regulatory changes.

It seems that things have lagged due to difficulties in working out the details on electronic SED filings for items on the US Munitions List. Some government officials have pointed their fingers at the State Department’s Office of Defense Trade Controls as being responsible for delaying things. (We won’t take a cheap shot at State by commenting that apparently their regulatory review process is an even slower track than their license review process.)

Bottom Line: Pull out your calendar for 2003 and mark January as the earliest possible date for mandatory electronic SED filing. While you’re at it, you might want to mark March as a more likely date.

The Census Bureau has announced a series of meetings to brief exporters on the Automated Export System (AES), an upcoming program that will replace paper Shipper’s Export Declarations with electronic SEDs. Last summer, as required by law, Census announced that AES electronic SED filing would be mandatory by March 2002. Census did not implement a mandatory AES filing in March due to the standard, delays in the process for creating and implement, delays apparently not contemplated by Congress when it put an implementation timetable in the law requiring mandatory AES.

There are two AES meetings scheduled for May. The first is May 21, 2002 in Los Angeles, CA and the second is May 23, 2002. Before you schedule these dates I will warn you that the Census web page gives these dates, but also says both meetings will be held May 10, 2002. For further information, go to www.census.gov/foreign-trade/aes/meetings/index.html or contact
aesmeeting [ a t ] census.gov.

Census also announced two upcoming regulations training sessions. The first is May 23, 2002 in Charleston, SC and the second is June 20, 2002 in Detroit, MI. For further information go to www.census.gov/foreign-trade/regulations/seminars.html. The Census web page does not include any details on the Detroit seminar, and the details it includes on the Charleston seminar limited to “Changes have occurred in your Export Industry! Are you ready? Learn from the experts and avoid costly delays and penalties.” I requested additional information
but have not yet received any. I suggest you occasionally check back on the above web page for updates.

Have you ever asked an ODTC official a compliance question? Chances are you’ll get one of three responses:

1. no answer
2. a sarcastic comment about your compliance program or
3. the phrase “read the ITAR.”

Unfortunately, reading the ITAR will only get you so far–the ITAR is fraught with contradictions. One of my favorites is the 124.3(a) Shippers Export Declaration (SED) certification requirement for exports of technical data in furtherance of an agreement.

For such technical data exports, 124.3(a) states that the “US party to the agreement must certify on the Shippers Export Declaration that the export does not exceed the scope of the agreement and any limitation imposed pursuant to this part.” A conscientious ITAR reader would read this clause to mean that an SED is required for exports of technical data pursuant an agreement.

Reading the actual exemption for exporting technical data in furtherance of an agreement would further your belief. That 125.4(b)(2) exemption states you may export such technical data only if you met the requirements, including the SED requirement, of 124.3(a). Okay, so we need an SED — or don’t we?

125.6 to the rescue! 125.6 might as well say “forget what we just told you.” When using any exemption in 125.4, including the 125.4(b)(2) technical data in furtherance of an agreement exemption, “a Shippers Export Declaration is not required for exports of unclassified technical data.” 123.22(d) affirms the negation: “a Shipper’s Export Declaration is not required for exports of unclassified technical data.”

So which set of provisions do we follow? The lazy choice is not to prepare an SED. I’d like to characterize it instead as the democratic choice. The ITAR says in two places that an SED is not required, and in only one place says it is. So that’s two votes against and one for. The nays carry the day.