Skip navigation and go to main content

< All Newsletters

The Export Control Update Newsletter
October 2008

CONTENTS

  1. New BIS Encryption Regulation Contains Good and Bad News for US Exporters
  2. DDTC Posts Checklists to Help You with Your Applications
  3. Grand Jury Indicts 8 in Mayrow Case
  4. Senate Postpones Consideration of Relaxed ITAR Treatment for UK and Australia
  5. Exports of Kits Containing TEA Net $115,000 Fine
  6. DDTC Clears Non-ITAR Status of Anti-tumor Drugs
  7. BIS: Intra-Company Transfers Won't Require a License if You Implement Thorough Compliance Procedures
  8. DDTC: "Our 'Company Visits' Are Not Audits"
  9. More EEI and AES Clarification for Shipments to Puerto Rico
  10. BIS to Offer Option of Publishing Product Classifications
  11. Rwanda Removed from ITAR 126.1 Prohibited Country List
  12. Physicist Accused of Transferring Space Technology to China
  13. Expensive Internet Cigars: OFAC Fine Adds over $6,000 to Price
  14. State Implements Huge Increases in Registration Fees for ITAR Exporters and Manufacturers
  15. DDTC Issues Waiver for Eagle Global Logistics Name Change
  16. BIS Revises De Minimis Rule
  17. Antiboycott Fines for Syrian Transactions
  18. BIS Revises Various Export Controls in Various ECCNs
  19. Older stories are in the Export Control Update newsletter archive

1. New BIS Encryption Regulation Contains Good and Bad News for US Exporters

In response to industry pressure and a Presidential Directive issued earlier this year, the Bureau of Industry and Security (BIS) published an interim final rule on October 3, 2008 modifying the Export Administration Regulations (EAR) governing the export of hardware, software and technical data using encryption technology. The rule makes some marginal changes to the regulations but falls short of any significant restructuring of the regulatory regime which as been in place for almost a decade. Despite the limited nature of the changes, many U.S. companies will need to tweak their compliance practices immediately in order to comply with the new rules — there is no “grace period” for implementation.

The new rule, ironically entitled “Encryption Simplification” takes up eighteen pages in the Federal Register. BIS plans on developing additional guidance to be posted on its website as questions will inevitably be raised regarding the correct interpretation of certain provisions contained in the final rule.

Good News for Some

Companies in the business of making products for the consumer market will benefit from the regulatory changes. For example, companies that make mass-market products using weak cryptography (now defined as using key lengths not exceeding 80 bits; for asymmetric algorithms with key lengths not exceeding 1024 bits; and for elliptic curve algorithms with key lengths not exceeding 160 bits) no longer have to submit a notification of self-classification prior to export. These products can be classified as 5X992 and exported under “NLR”.

The new regulation introduces a category of products performing “ancillary cryptography” and exempts them from review and reporting requirements. Examples provided by BIS in its definition of ancillary cryptography in section 772.1 of the EAR include “business process modeling and automation (e.g., supply chain management, inventory, scheduling and delivery); industrial, manufacturing or mechanical systems (including robotics, other factory or heavy equipment, facilities systems controllers including fire alarms and HVAC); automotive, aviation and other transportation systems. Relief from the review and reporting requirements is also given to companies making products using short-range wireless technology.
BIS has also raised the thresholds that allow some network infrastructure equipment to be exported under the unrestricted provisions of ENC. As a consequence, low-end virtual private network (VPN) hardware and other wide area networking products can now potentially qualify for license-free shipment to both commercial government end-users worldwide.

All exporters will benefit by the inclusion of Bulgaria, Canada, Iceland, Romania and Turkey to the “License Free Zone” (also known as the “Supplement 3 countries”). Both government and commercial entities in these countries may receive product under ENC once a review request is submitted.

Bad News for Others

BIS has made a change affecting the classification of mass-market products that could present a compliance challenge for companies who may conduct a limited international release of product coincident with the submission of a technical review. Companies had previously been allowed to self-classify mass-market products as 5x992 and export under NLR (no license required) pending a 30 day BIS review. The new rules require that future products be temporarily classified as 5x002 pending a final BIS determination and export be made according to the provisions of ENC. This change is viewed as a roll-back of an existing liberalization and will undoubtedly be cited in comment letters to BIS. Companies will likely claim that expensive system change requirements in their order processing, export documentation and ERP systems will be required to comply with the new rule.

BIS is actively working on a long range plan to further modify the encryption regulations. However, given the fact that this is an election year and that fundamental changes to U.S. encryption export rules will require Wassenaar Arrangement approval there will likely be no further changes for at least a year to eighteen months.

— Felice Laird, Export Strategies LLC

2. DDTC Posts Checklists to Help You with Your Applications

DDTC posted checklists to aid exporters in the application process, on its website. The website provides checklists for DSP-5, DSP-73, and DSP-61. Examples of supporting documentation that must be submitted with the applications are also provided.

Links to the checklists:

— Danielle McClellan

3. Grand Jury Indicts 8 in Mayrow Case

A grand jury has returned a superseding indictment charging eight individuals and eight corporations in connection with their relationship to the Mayrow General Trading Company network. The network sought to acquire US-origin dual-use and military components for the Iranian Government, which are used in the manufacture of IEDs that are deployed against US troops in Iraq.

The charges include conspiracy, violations of IEEPA, the US Iran Embargo, and making false statements to federal agencies. The defendants purchased thousands of US dual-use goods and exported them to ultimate buyers in Iran via the UAE, Malaysia, England, Germany, and Singapore. The indictment alleges the following exports:

  • 120 field-programmable gate arrays
  • More than 5,000 integrated circuits
  • 345 GPS
  • 12,000 Microchip brand micro-controllers
  • Field Communicator

None of the defendants are located in the US which may cause problems when the US begins extradition. Britain, Germany, Iran and Malaysia will have the option to deny the extradition, especially in cases where the only contacts that the defendants had with the US were the purchases of the US-origin goods, and if the exports to Iran did not break the laws of their countries of residence the extradition could likely be denied. The only way the defendants could be prosecuted is if they decided to visit the US or a country that will allow rendition or extradition.

If the individuals and corporations are extradited and found guilty of the charges they will each face a maximum sentence of 5 years for the conspiracy charges, a max of 20 years for breaking IEEPA and the Iran Embargo, 5 years for false statements and a fine of up to $1 million.

In addition to the indictment, the Commerce Department released that 75 companies and individuals have been added to the Entity List in connection with the Mayrow network exports.

More information:

— Danielle McClellan

4. Senate Postpones Consideration of Relaxed ITAR Treatment for UK and Australia

United Kingdom and Australia will be deferred until next year. The delay is prompted by the Senate’s concern that the State Department needs to amend the ITAR in order for the treaties to be enforceable. The FRC became frustrated after waiting for such amendments to be drawn up, and after receiving another excuse from the State Department for the lag they decided to simply deem both treaties incomplete and view them once again in 2009.

The delay has caused aggravation with UK officials who explain that, “All the UK government wants is clarity of message from the US government on what’s happened and whether or not they are motivated to get this ratified as soon as their processes are complete, Right now, we’re getting all sorts of messages from each of the three strands of government.”

No word on the frustrations of the Australians.

More information:

— Danielle McClellan

5. Exports of Kits Containing TEA Net $115,000 Fine

Nalco Company of Illinois has been charged with 13 violations of the Regulations. The company exported hardness kits containing Triethanolamine (“TEA”) and replacement solutions containing TEA to the Bahamas, Dominican Republic and Angola. Because the items contained TEA they are subject to the EAR.

On 13 separate occasions beginning in April 2003 through September 2006 Nalco exported the TEA goods without obtaining a license from the Department of Commerce. The company has been fined $115,000; they will not be debarred or suspended from export transactions as long as they pay their penalty.

More information:

— Danielle McClellan

6. DDTC Clears Non-ITAR Status of Anti-tumor Drugs

DDTC has amended the ITAR to clarify that certain anti-tumor drugs are not within the definition of “chemical agents.” Effective on September 19, 2008 the following changes will be made to Part 121.1, paragraph (c) Category XIV. Note 5 will now follow *(c):

Note 5: Pharmacological formulations containing nitrogen mustards and certain reference standards for these drugs are not considered to be chemical agents and are licensed by the Department of Commerce when:

  1. The drug is in the form of a final medical product; or
  2. The reference standard contains salts HN2 [bis(2-chloroethyl) methylamine], the quantity to be shipped is 150 milligrams or less, and individual shipments do not exceed twelve per calendar year per end user.

Technical data for the production of HN1 [bis(2-chloroethyl) ethylamine]; HN2 [bis(2-chloroethyl) methylamine], HN3 [tris(2-chloroethyl) amine hydrochloride, remains controlled under this Category.

Although DDTC has made explained that certain anti-tumor drugs are not considered defense articles under this subchapter, the know-how for production of nitrogen mustards or their salts is specifically retained on the US Munitions List.

More information:

— Danielle McClellan

7. BIS: Intra-Company Transfers Won't Require a License if You Implement Thorough Compliance Procedures

US to export, reexport, or transfer (in-country) dual-use goods to their sister companies without a license. Items on the CCL could be exported among the companies for internal company use without the burden of obtaining a license.

The exemption however will come with several criteria that must be met; first and foremost the US government must ensure that the companies (both parent and wholly-owned or controlled in fact entities companies) have “effective regime in place to comply with export controls.” The grant of ICT would also be restricted to those approved companies and certain ECCN’s that are authorized by BIS. The plan is that BIS will authorize the exception for companies that demonstrate “effective internal control plans, submit annual reports on their use of ICT, and agree to audits by BIS officials as requested.

Companies will be required to submit the following documentation:

  • Records of screening, training, and self-evaluation elements of the company’s control plan
  • List of the wholly-owned entities and controlled in fact entities that the applicant parent company intends to be eligible users
  • List of individuals or groups that have at least 10% ownership interest
  • List of ECCN’s of items planned to be exported, reexported or transferred (in country)
  • Narrative describing the purpose for which the requested ECCN’s will be used and the anticipated resulting commodities
  • Disclosure of relationship with each entity that is intended to be an eligible user and/or eligible recipient
  • Signed statement by a company officer of the eligible applicant parent company stating that each entity will allow BIS to conduct audits on the use of the ICT exception

Many are skeptical and believe that the standard for receiving the exemption will not be lenient enough to make the license exemption any easier to use than an ordinary export license. Others fear that when it comes to relaxing export controls on intra-company transfers, the cure is worse than the disease.

More information:

— Danielle McClellan

8. DDTC: "Our 'Company Visits' Are Not Audits"

DDTC has posted FAQ’s regarding the “Company Visit Program” (CVP) on its website. CVP involves DDTC officials visiting US companies registered with DDTC as manufacturers, exporters, or brokers. The visit is not intended to be an audit but DDTC will be, “exercising its responsibility under record keeping requirements detailed in Section 122.5(b) of the ITAR.”

The visit is supposed to be a learning tool to provide information on how companies comply with the laws and regulations and how DDTC can better do its job as regulator thereof. The four main purposes of the CVP are as follows:

  1. Learn how companies have established defense trade control programs
  2. Understand how those programs are implemented and comply with the AECA and ITAR
  3. Gather information for DDTC to determine whether or not they are exercising regulatory responsibility in licensing and compliance
  4. Use the information gathered from visits to adjust or revise the regulations and practices accordingly

Companies will be selected based on their volume of licensed activity, nature of business, type of technology, geographic location, follow-up to a disclosure of an ITAR violation or monitoring of a consent agreement. Overall, in the past 3 years only 60 companies have been visited with the majority being disclosures of violations.

More information:

— Danielle McClellan

9. More EEI and AES Clarification for Shipments to Puerto Rico

Last month we reported that the Census Bureau announced that Puerto Rico is within the US Customs territory and shipments between Puerto Rico and the US are exempt from the new advance filing deadlines set forth in the new Foreign Trade Regulations (FTR). Beginning September 30, 2008 it will be mandatory that Electronic Export Information (EEI) be filed through AES in advance, 24 hours before shipment via vessel or 2 hours via air.

The Census Bureau has now released a clarification to the exemption, when shipping any items between the US and Puerto Rico proof of the EEI filing citation, post departure filing citation or exemption must be presented to the carrier prior to the departure of goods. The filing does not have to be in advance, but it must be filed.

Remember however, most carriers want this information earlier than the time frames that have been set. Most carriers have a “no docs, no load” policy, meaning they must have the ITN number or an exemption listed on the transport document or your shipment will not be loaded. All ITN formats and exemption formats must meet the new criteria set forth in the Jun 9, 2008 Federal Register.

More information:

— Danielle McClellan

10. BIS to Offer Option of Publishing Product Classifications

BIS is going to allow companies to have the opportunity to have their Commodity Classification information made accessible via the BIS website. “This information will improve procedural transparency in the licensing process help exporters comply with export compliance,” BIS explains.

Anyone who has or plans to have Commodity Classification information or an export control point of contact available on your company’s website and would like this information to be accessible via the BIS website please contact CommodityClassification [at] bis.doc.gov with the following information:

  • Company name
  • General description of the products/services
  • Commodity classification information website address
  • Export control point of contact

More information:

— Danielle McClellan

11. Rwanda Removed from ITAR 126.1 Prohibited Country List

On July 10, 2008 the United Nations Security Council issued Resolution 1823 terminating the remaining prohibitions on defense exports to non-governmental entities and persons in Rwanda and persons in states neighboring Rwanda. Now that the remaining sanctions have been removed, the Department of State has issued a final rule amending the ITAR.

Part 126.1 of the ITAR is amended as follows:

  • paragraph (c) (8) will be removed and paragraphs (c) (9), (c) (10), and (c) (11) will be redesignated because of the removal.
  • Paragraph (h) will be removed and reserved

The changes are effective September 25, 2008.

More information:

— Danielle McClellan

12. Physicist Accused of Transferring Space Technology to China

Virginia physicist and president of AMAC International faces up to 25 years of jail time if convicted of violating the Arms Export Control Act and the FCPA. Shu Quan-Sheng, a 68 year old native of China, naturalized US citizen is charged with:

  • Unlawfully exporting a defense service to foreign persons without prior approval
  • Unlawfully exporting a defense article
  • Bribing, offering a bribe, and attempting to bribe a foreign government official.

Shu provided technical assistance and foreign technology acquisition information to several PRC government entities involved in the design, development, engineering and manufacture of a space launch facility in Hainan, China. Information included technology in the fields of cryogenic pumps, valves, transfer lines and refrigeration equipment. Shu is also accused of offering payments to PRC officials in order to be awarded a contract worth $4 million for the development of a hydrogen liquefier.

Since 2003 Shu has been involved in China’s efforts to upgrade their space exploration and satellite technology capabilities, the expertise and data he offered required licenses from the State Department. Documents provide that Shu never obtained any licenses, or written approvals with respect to brokering, export of defense articles, or proposals to provide defense services to the PRC.

Shu’s arrest and the publicity of this case has severely undercut the Chinese governments message that the country had come into its own as a mature, space-faring nation, and that it needs no outside assistance to achieve its goals.

More information:

— Danielle McClellan

13. Expensive Internet Cigars: OFAC Fine Adds over $6,000 to Price

OFAC has posted on their website the latest civil penalties imposed on entities and individuals.

The following is a summary of some of the penalties imposed:

  • Agoda Company, Pte Ltd. has remitted a payment of $6,750 to settle allegations that the company provided travel-related services in which Cuba or Cuban nationals had an interest. The company arranged hotel reservations in Cuba without an OFAC license, Agoda voluntarily disclosed the violation.
  • Tabletops Unlimited, Inc. has agreed to pay $1,000 for attempting to send a funds transfer to the Bank Melli account of a company located in Tehran, Iran for the purchase and import of Iranian-origin goods into the US without a license.
  • Two individuals were fined a total of $6,556.50 for purchasing Cuban-origin cigars offered on the internet; neither voluntarily disclosed the violation.

More information:

— Danielle McClellan

14. State Implements Huge Increases in Registration Fees for ITAR Exporters and Manufacturers

Effective September 25, 2008 exporters of defense articles or services who are required to register with DDTC will face the new higher annual registration fees. State has issued the final rule and amendments to the ITAR to adopt the three tier fee schedule. It is noted that the fees are based on the number of license applications that DDTC has reviewed, adjudicated or issued a response to, only these licenses will count toward the registrants licensing activity. Applications RWA or denied by DDTC will not count as a licensing activity; therefore will not be charged against the registrant.
The price structure is as follows:

  • Tier 1: Registrants, with whom DDTC has not reviewed, adjudicated or issued a response to any license applications during the 12-month period or simply those registering for the first time will pay $2,250.
  • Tier 2: DDTC has reviewed, adjudicated or issued a response for between 1 and 10 license applications during the 12-month period; registration fee will be $2,750
  • Tier 3: If DDTC has reviewed, adjudicated or issued a response for more than 10 applications a registration fee of 2,750 plus an additional fee of $250 for every license after 10 will be imposed.
    * the registration fee will be capped at either 3% of the total value of the license applications that have been reviewed during the 12-month period or $2,750 which ever is greater.
  • Universities and other tax exempt registrants may reduce their fee to $2,250 with provided proof of their tax exempt status with their registration package.

Parts 122.3 and 129.4 of the ITAR will be amended to coincide with the final rule.

More information:

— Danielle McClellan

15. DDTC Issues Waiver for Eagle Global Logistics Name Change

DDTC has issued a waiver regarding the name change of Eagle Global Logistics to CEVA Freight LLC. All currently approved and pending authorizations identifying Eagle Global Logistics will not be required to submit an amendment to reflect the name change. A copy of the DDTC notice must be attached to the currently approved license by the license holder.

New license applications received after October 20, 2008 must identify Eagle Global Logistics as CEVA Freight LLC or the license will be RWA for correction of the new name.

A copy of the website notice must be maintained by the license holder and presented with the relevant license to customs at time of shipment.

More information:

— Danielle McClellan

16. BIS Revises De Minimis Rule

BIS has revised provisions to the EAR pertaining to “de minimis” rules, the calculation for the rules will be amended for foreign produced hardware that is bundled with US origin software. The ruling also clarifies the term “incorporated” and adds language to make clear the de minimis rules.

Foreign produced products are subject to export and reexport controls under the EAR if they contain more than a certain percentage ($ value) of US origin controlled content. Previously US origin software and technology had to be compared against foreign origin software content in the foreign produced item. So, if the US software content was more than 25 percent of the total software in the foreign made item, the item was subject to US jurisdiction, even if the total value of the software as compared to the entire machine in which it is incorporated is less than 25 percent. The new rule is slowly moving away from this “apples-to-apples” comparison requirement by amending Section 734.4 to exclude, in some cases, foreign made commodities “bundled” with de minimis amounts of US origin software from the jurisdiction of the EAR. The “bundling” concept relates to “software that is configured for a specific commodity, but not necessarily physically integrated into the commodity” (i.e. printer software that is not loaded into the printer itself but is shipped on a CD along with the printer).

Exclusions to the bundling rule are:

  • US origin software exported or reexported separately from the foreign commodity are still subject to EAR
  • Exports or reexports of software for additional users and upgrades are considered separate transactions for export control purposes and are subject to EAR
  • The bundling rule applies EXCLUSIVLY to software controlled for Anti Terrorism (“AT”) reasons. Software controlled for any other reasons (i.e. 5D002 encryption software) will not be considered bundled with foreign-produced items and will remain subject to the EAR.

Part 734.4 has been amended to clarify the new rule on “controlled” content, noting that US origin content need only by included in the de minimis calculation if it is controlled for reexport to the end destination, and that part 744 controls should not be considered in making this judgment. The definition of “Incorporated” is clarified (for de minimis purposes) to make clear that content is considered “incorporated” if:

  1. essential to the functioning of the foreign equipment;
  2. customarily included in sales of the foreign equipment;
    reexported with the foreign produced item.

BIS has removed “rack mounted” and “cable connected” concepts previously used to determine the extent of the US origin content incorporated into the foreign produced item, the theory was found to be imprecise. It is also clarified that costs should be determined by the local market cost in the country of export and cost depreciation for components is not permitted. Part 734.4(b) regarding specials rules on encryption has not been changed. Finally 734.4(g) is changed to make clear that records must be retained in accordance with other provisions of the EAR concerning the method by which the percentage of de minimis US content is calculated.

BIS has amended part 736 to make clear that the de minimis rule applies to reexports of technology and software, as well as reexports of commodities by adding language to the former section.

Supplement No. 3 to Part 744 is amended to establish the same definition of “incorporate” for purposes of the required Wassenaar Arrangement statement on medical equipment.

BIS has not offered any clear guidance concerning how to perform the de minimis calculation under the bundling rules. The new definition of the term incorporated suggests that generic US origin components typically sold and shipped with a foreign origin product could qualify for de minimis treatment, the admendment does not appear to require the US commodity component to be specially designed or configured for the foreign end product, as long as it is “essential to the functioning ”of the end product. With no further guidance from BIS exporters and reexporters should proceed cautiously with how they apply the definition to their items and document all calculations.

All amendments are effective immediately.

More information:

— Danielle McClellan

17. Antiboycott Fines for Syrian Transactions

Rhode & Liesenfeld, Inc. of Texas has been fined $108,000 for thirty-six violations of the Regulations. Between 2002 and 2003 the company engaged in transactions involving the sale and/or transfer of goods and services from the US to Syria. Rhode furnished information concerning business relationships with the boycotted country, an activity prohibited by Section 760.2(d) of the Regulations.

The charging letter does not describe in any detail the information that was disclosed. As long as the company pays the first $30,000 by October 29, 2008, they will not lose their export privileges.

More information:

— Danielle McClellan

18. BIS Revises Various Export Controls in Various ECCNs

BIS has issued a final rule in the October 14, 2008 Federal Register. The lengthy public rule revises the EAR to implement changes made to the Wassenaar Agreement’s List of Dual Use Goods and Technologies.

The following revisions are effective immediately:

  • The following ECCN’s controlled for national security reasons are amended:
    1A004, 1E001, 1E201, 2B001, 2B002, 2B006, 2B007, 2B008, 3A001, 3A002, 3A229, 3B001, 3C002, 3C005, 3D001, 3E001, 5A001, 5A002, 6A001, 6A005, 6A995, 7A002, 7A003, 7A008, 9A012, and 9E003
  • The following new ECCN’s will be added to the CCL: 1A006, 1A007, and 3C006
  • Definitions will be added to section 772.1 of the EAR

The rule also adds and expands unilateral US export controls and national security export controls on certain items to make them consistent with the amendments made to implement the Wassenaar Arrangement’s decisions.

Although the rule is effective immediately the rule does contain a “saving clause” which will all pending shipments pursuant to actual orders for export or reexport to a foreign destination to proceed under the previous license exception eligibility or without license so long as the shipments are exported from the US or reexported before December 15, 2008.

More information:

— Danielle McClellan

See more newsletters

 

News & Alerts by Email

Stay informed with our free monthly newsletter.




Sample newsletters/archive


Upcoming Seminars

Get practical advice on complying with US export regulations.

San Diego
January 26-29

Singapore
March 2-4

Austin
March 23-26

Munich
May 4-6

Montréal
May 20-22

More information and complete schedule


About the links inside our news stories

Our stories have links to pages and documents on other Web sites. We’ve been publishing export control updates for a very long time (since 1999). Web sites change all the time; sometimes they remove files from their sites. We apologize if you encounter links in our news stories that do not work anymore.