By: Scott Gearity
— originally published in the World ECR…the journal of export controls and sanctions
This article is the first in a series of articles that will look at how US controls apply outside the US and how export control reform impacts non-US firms.
In my experience helping those tasked with keeping non-US firms compliant with the US regulations as an instructor with the Export Compliance Training Institute, I have found it helpful to break down this challenging subject matter into bite size pieces. Consider this an introduction to analysis under the Export Administration Regulations outlining the steps a reexporter should work through to reach US reexport decisions.
Step 1: Who are you?
In this step, as well as the two to follow, it quickly becomes clear that complying with US export controls outside the US is not merely equally as challenging as it is within the US, but it is actually even more perplexing. There are several issues US firms never have to consider which are crucially important to a non-US company.
The first question to face when considering US controls on activities outside the US centers on understanding what additional restrictions, if any, may apply to a firm based on who or what it is and how it is organized. While most US reexport controls apply similarly to both US and non-US persons, another layer of regulation may apply to US persons and, somewhat less frequently, foreign subsidiaries of US companies.
Anyone who reexports a US-origin item is, from the perspective of the US Government, subject to the jurisdiction of the Export Administration Regulations or other applicable US rules. As will be explored further, a non-US-origin item with certain amounts of types of US-origin content may also be subject to US jurisdiction. In any case, if the item is subject to US regulations, the regulations may require a license for reexport. All of this applies more or less equally to both US and non-US entities.
On top of these baseline controls, the EAR proscribes US persons from participating in certain proliferation-related activities. Office of Foreign Assets Control sanctions regulations prohibit transactions with embargoed countries, specially designated nationals and others. Subsidiaries of US companies may not generally trade with Cuba or Iran. These are just a few examples to illustrate how understanding an organization’s ownership and control structure is important. Inside the US, these issues are of little relevance since any entity operating in the US is subject to the full breadth of US law.
Step 2: Sensitive US Content
If the commodity, software or technology to be reexported is of US-origin, and it will be reexported on its own, skip to Step 4. Otherwise, continue with Step 2.
Under the EAR, some US-origin content is considered so sensitive that incorporating it into a non-US-origin item always subjects the non-US item to US jurisdiction (i.e. it is not eligible for de minimis – a concept to be reviewed in Step 3). Fortunately, only a handful of items are deemed “sensitive.” These include specific aircraft commercial standby instrument systems, particular semiconductors and interconnect devices and certain types of encryption, among others. So, a non-US-made assembly incorporating a “sensitive” item automatically becomes subject to the EAR, even if that is the only US-origin part. Of course, as will be explored in the subsequent steps, being subject to the EAR does not necessarily mean that a reexport license is required.
Of particular note to buyers of US-origin military equipment, ECR introduced a new category of “sensitive” content – 600 series items. 600 series items are those controlled in XX6XX Export Control Classification Numbers (e.g. ECCN 9A610) and which were, for the most part, previously controlled on the US Munitions List. Non-US items that incorporate 600 series US-origin content are always subject to the EAR, but only when destined for a destination in Country Group D:5. Among the countries in this group are China, Venezuela and Zimbabwe. Importantly, when such non-US items are destined for a country not in Country Group D:5, the 600 series content is not considered “sensitive.”
If the non-US-made item to be reexported incorporates “sensitive” US-origin content, skip to Step 4. If not, continue with Step 3.
Step 3: US Content De Minimis
Most non-US products will not contain any “sensitive” US content, but there is still a way in which a product nonetheless may be subject to the EAR. If a non-US item contains US content, and that content is not “sensitive,” then the reexporter should determine if the US content is “de minimis.” If the US content is de minimis, the non-US-made item is not subject to EAR reexport controls. If the content is not de minimis, the non-US-made item is subject to the EAR.
And yes, your sneaking suspicions are correct. The upshot of de minimis is that the US claims authority over all sorts of things and know-how made or developed outside the US, based solely on the fact that they contain US parts, software code or technology. Of course, the US Government might put it differently: “look at all these things with US components which we reasonably and generously do not claim jurisdiction over!”
What are the details? For a non-US-origin product to be subject to the EAR when reexported to any destination, the value of its incorporated US content must be greater than 25 percent. If the value of the incorporated US content is greater than 10 percent, but no more than 25 percent, the non-US product is only subject to the EAR when reexported to destinations in Country Group E:1 (presently Cuba, Iran, North Korea, Sudan and Syria).
Only controlled US content must be considered when calculating de minimis. Put somewhat differently, it is only necessary to include the US content in the calculation if the reexport of that US item to the country of destination is ineligible for No License Required and License Exception GBS. So, many types of US hardware and software controlled at a low level will have no effect on de minimis calculations for most countries.
In all of these cases, a fair market value standard is applied. This will often be the sale or purchase price, particularly in an arm’s length transaction. Making de minimis decisions requires the reexporter to obtain accurate valuations and classification details from its suppliers. It is up to the reexporter to make its own de minimis determination (with the exception of technology, which requires a report to the Bureau of Industry and Security, followed by a thirty day waiting period before relying upon the calculation).
If the non-US made item has de minimis US-origin content, stop here. The reexport is not subject to the EAR. If the non-US-origin product has greater than the de minimis level of US content, proceed to the next step.
Step 4: Export Classification
In reaching Step 4, it has been established that an item is subject to the EAR for one of these three reasons:
- The item is of US-origin.
- The item is of non-US-origin and incorporates “sensitive” US-origin content.
- The item is of non-US-origin and incorporates greater than the de minimis level of US-origin content.
Once it is clear that the reexport transaction falls under the EAR, the next task at hand is to classify the item being reexported. The EAR control list, formally known as the Commerce Control List, consists of hundreds of Export Control Classification Numbers (ECCNs). Although there is a great deal of overlap between the CCL and multilateral control lists (e.g. Wassenaar Arrangement, Missile Technology Control Regime, etc.), the CCL describes many items not on the multilateral lists. Should the reexporter be unable to find an item on the CCL, that item is likely classified EAR99. EAR99 can be viewed as a basket category which captures anything subject to the EAR, but not elsewhere listed on the CCL – a unique feature of the US export control system.
While reexporters are generally not required to document classification and license exception determinations, or to place classification information on shipping documents, documenting reexport decisions will help mitigate fines and penalties should an inadvertent licensing error occur. Always require US suppliers to provide classification information in writing. While a reexporter may still be held liable for unauthorized reexports based on faulty US supplier ECCNs, this is potentially a significant mitigating factor if the reexporter can demonstrate the due diligence they undertook to get the decision right.
Part of export control reform is the creation of new ECCNs, known as the 600 series, to control items formerly subject to the ITAR. For example, ECCN 9A619.a controls certain military gas turbine engines “specially designed” for a military use, but which are not controlled by the ITAR in USML Category XIX. A thorough understanding of this new, defined term “specially designed” is essential to accurate classification decisions.
Solid classification is a critical step. An erroneous ECCN determination can quickly escalate into a violation, because it easily leads to incorrect licensing decisions.
Step 5: Is this item eligible for No License Required?
Another unusual aspect of the US system is that reexports of many of the commodities, software and technologies on the control list do not trigger a license requirement. Just because something is described by the CCL, it does not mean that a license or even a license exception (the US equivalent of the general or open licenses seen in other jurisdictions) is necessary. This is why the next step is to ask if the item being shipped is eligible for reexport No License Required.
To determine if an item is eligible for reexport NLR, it is necessary to know two things – the country of destination and the classification of the item. Then look to the reasons for control, which are found in the header to each ECCN. The reason for control should indicate a two letter symbol, such as “CB”, “AT” or “NS.” The reason for control will also specify a column number next to this symbol, such as CB Column 1 or NS Column 2. Next cross reference these reasons for control against the Commerce Country Chart found in Supplement No. 1 to Part 738 of the EAR. Find the intended reexport destination on the chart and match it to the specific columns which indicate the reason(s) for control related to the particular ECCN. If there is no “X” in any of these columns for the country in question, that item is eligible for reexport to that country NLR, as long as a catch all control does not apply (reference Step 7 below). If there is one or more “X” in any applicable reason for control column associated with the country of destination, NLR is not available.
Items classified EAR99, which have no applicable reasons for control, may typically be reexported NLR except to Cuba, North Korea and Syria. Some EAR99 reexports to Iran and Sudan are also NLR-eligible.
If the reexport is eligible for NLR, skip to Step 7. If not, proceed with Step 6.
Step 6: Is there a license exception?
It might be logical to assume that if NLR does not authorize a reexport, a license would be required. But that is not what the EAR says. Before applying for a license, consider if a license exception may be available. A license exception is a built-in regulatory authorization which permits certain exports, reexports or transfers without need to obtain advance approval from BIS. The appeal is obvious – no need to wait and no uncertainty for the reexporter. Just tick the boxes and make the shipment.
Unfortunately, it is not quite that simple. Some things are flat out ineligible for any exceptions (for example, most items controlled for missile technology reasons). And each exception comes with its own set of limitations and conditions. In some cases, these are minimal constraints, but in others, they are quite onerous.
To take an example of one of the simpler authorizations, License Exception GBS permits reexports Country Group B, as long as the ECCN for the item states “GBS: Yes.” This can be quite useful, as Country Group B includes about 80 percent of the world’s countries. Qualification for License Exception GBS and some others are driven primarily by the ECCN – i.e. the ECCN states if it is possible to use the exception. Others, such as those intended for replacements (License Exception RPL) or temporary shipments (License Exception TMP) are more driven by the particulars of the situation than by ECCN (though classification may still be relevant).
Step 7: Is there a catch-all control?
Just when you thought you might be able to reexport NLR or under an exception, there is one final gauntlet – catch-all controls. These are limitations which impose a license requirement where one would not necessarily exist otherwise.
If a catch all control applies, you may not proceed with any transaction involving any item subject to the EAR. For example, US origin items may not be reexported to a prohibited party, certain embargoed destinations, for proliferation-related end users and uses or to parties who may divert the products contrary to the EAR. You may not use NLR or a license exception if any catch all control applies.