Commerce Department's Proposed Changes to AD/CVD Policy and Procedures Likely to be Criticized by U.S. Trading Partners

The U.S. Department of Commerce announced today a number of proposed changes to U.S. antidumping (AD) and countervailing duty (CVD) policy and procedures intended to "strengthen trade enforcement and help keep U.S companies competitive." These measures, which are certain to be controversial and provoke criticism from China and other U.S. trading partners, will be reviewed by the Commerce Department during the next few months through a "transparent review" that will include an opportunity for public comments.

Most of the proposed changes are targeted at countries designated as non-market economies, which currently include China and Vietnam.

U.S. importers of products subject to AD/CVD investigations are likely to oppose the proposed change that would require importers to post cash deposits rather than bonds to secure entry of their products into the U.S. once a preliminary affirmative determination is made in an AD/CVD case.

A number of the proposed changes to current AD/CVD law and practice are also likely to generate a strong reaction by attorneys that handle AD and CVD cases on a regular basis. There will also be questions as to whether these changes are in compliance with the WTO Anti-dumping Agreement and the WTO Agreement on Subsidies and Countervailing Measures.

Another controversial aspect of this proposal is that the press release announcing these proposed changes claimed that these changes were being made in support of the President's National Export Initiative, which aims to double U.S. exports during the next five years. If implemented, these measures are likely to increase the AD and CVD duties paid by importers and the cost of certain imported products subject to such duties. However, it is unlikely that these measures will have any positive impact on the ability of the U.S. manufacturing sector to export their products.

If the Commerce Department chooses to go forward with these changes, revisions to the AD/CVD regulations (19 CFR Part 351) will be required in most cases.

The following is a summary of the 14 proposed changes:

1. Expanded use of random sampling to select companies as individual respondents in AD investigations and reviews rather than choosing the largest exporters;
2. Strengthening Commerce’s current practice regarding the issuance of company-specific AD rates in NME cases;
3. Clarification of Commerce’s current NME practice that when the Department uses import prices for valuing a production factor, such prices should include all applicable freight and handling costs;
4. Clarification of Commerce’s current NME practice to require companies to report production inputs for all products produced at each of their facilities – not just those facilities that produced merchandise destined for the United States – for use in the Department’s NME dumping calculations;
5. Clarification of Commerce’s current CVD practice to reiterate that Commerce considers state-owned enterprises (SOEs) as constituting a “specific” group when they are alleged to be receiving countervailable subsidies from the government;
6. Reconsidering the treatment of export taxes and value-added taxes (VAT) in Commerce’s NME AD methodology; and
7. Strengthening the treatment of resellers and other non-reviewed parties in NME cases to ensure that such parties pay the full amount of AD duties.
8. Adoption of a new methodology for valuing wage (labor) rates in NME cases by using surrogate wage rates that fully capture all labor costs (including benefits and taxes paid to workers by their employers) in the NME country;
9. Eliminating the practice of allowing individual companies to seek removal from an antidumping (AD) or countervailing duty (CVD) order based on their ability to show zero dumping margins or subsidy rates for three (AD) or five (CVD) consecutive years;
10. Tightening the rules in non-market economy (NME) cases for determining when the price of production inputs purchased from market economy countries will be substituted for the Department’s standard valuation for such inputs;
11. Considering whether importers will be required to post cash deposits rather than bonds for imports that fall within the scope of an AD/CVD investigation starting with the issuance of Commerce’s preliminary determination (rather than following the imposition of an AD/CVD order);
12. Strengthening the certification process for the submission of factual information to the Department;
13. Strengthening the accountability of attorneys and non-attorneys practicing before Commerce; and
14. Tightening the deadlines for submitting new factual information in AD/CVD cases.

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U.S. Representatives Send Letter Asking President to Enforce Iran Sanctions Act

Citing news reports outlining apparent violations of the recently enacted Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), U.S. Reps. Mark Kirk (R-Ill.) and Ron Klein (D-Fla.) recently sent a letter to President Obama asking the Administration to immediately enforce the law.

The letter noted that "Although we are encouraged by recent reports of international companies voluntarily exiting the Iranian energy market, it appears that a number of firms -- such as Russia's LUKOIL -- continue to supply Tehran with refined petroleum products." The letter indicates that LUKOIL has a significant business presence in the U.S. and concludes by stating that no "company should be allowed to skirt the Iran Sanctions Act. Therefore, we ask you to enforce the law and hold companies like LUKOIL accountable without delay."

A copy of the Kirk/Klein letter to President Obama can be found here.

Representative Kirk is the Republican nominee for President Obama's former Senate seat in Illinois.

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Date of First Meeting and Structure of President's Export Council Announced

President's Export Council Chairman Jim McNerney and Vice Chairman Ursula Burns have announced that they plan to structure the group into the following five subcommittees:

1. Small and Medium Sized Business Engagement
2. Export Promotion and Advocacy
3. Global Competitiveness
4. Manufacturing, Services and Agriculture
5. Workforce Readiness

The first meeting of the President's Export Council is scheduled for September 16th.

The President's Export Council is the principal national advisory committee on international trade. The council advises the president of government policies and programs that affect U.S. trade performance; promotes export expansion; and provides a forum for discussing and resolving trade-related problems among the business, industrial, agricultural, labor, and government sectors.

The President's Export Council is comprised of 20 private-sector members; five U.S. senators; five U.S. representatives; the Secretaries of Commerce, Agriculture, Energy, Homeland Security, Labor, State, and Treasury; the Chairman of the Export-Import Bank of the United States; the U.S. Trade Representative; and the Administrator of the Small Business Administration.

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State Department Imposes $42 Million in Civil Penalties on Xe Services for Numerous ITAR Violations

The U.S. Department of State announced today that on August 18, 2010, Xe Services LLC (formerly Blackwater Worldwide) entered into a civil penalty agreement with the State Department's Directorate of Defense Trade Controls (DDTC) to settle numerous alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).
The 41 page Proposed Charging Letter issued by DDTC indicates that Xe allegedly committed 288 violations of the ITAR involving the unauthorized export of defense articles and provision of defense services to foreign end-users in multiple countries between 2003 and 2009.

While the charging letter noted that Xe had taken efforts to implement compliance measures and to cooperate with DDTC during the "latter part of the investigation", the Proposed Charging Letter stated:

At the same time, the Department considered aggravating factors in determining what charges to pursue, including that Respondent's historic inability to comply with ITAR controls were system failings; the frequency and nature of Respondent's violations; that Respondent did not fully cooperate with the Department during the initial 18 months of this multi-year investigation; Respondent failed to comply with record-keeping requirements, further impeding the investigation; many of the violations by Respondent were disclosed only after the Department issued a directed disclosure; several of the Respondent's statements were false and some disclosures contained misrepresentations or omissions of material fact that had to be revised as prior reports were determined to be inaccurate or incomplete; and implications for national security.

The State Department noted that many of the alleged ITAR violations occurred while Xe was providing services in support of U.S. Government programs and military operations abroad between 2003 and 2009 and they did not involve sensitive technologies or cause a known harm to national security.
Under the four-year term Consent Agreement, Xe will pay in fines and in remedial compliance measures an aggregate civil penalty of $42 million to complete settlement of civil violations. $12 million of this amount will be suspended for pre-and post-Consent Agreement remedial compliance measures.

In announcing the settlement agreement, the State Department stated that it will not impose an administrative debarment of Xe in this case. The State Department is also rescinding the general policy of denial on export license applications with respect to Xe because the Department is satisfied that the company has taken the necessary steps to address the causes of its ITAR violations, identify compliance problems, and resolve these violations.

The remedial measures included:

• Replacement of senior management; 
• Established an independent Export Compliance Committee to oversee its remedial compliance efforts;
• Improved ITAR compliance procedures; 
• Conducted various ITAR training; and 
• Conducted a targeted ITAR audit to confirm the effectiveness of its compliance measures. 

DDTC stated that:

. . . had the Department not taken into consideration Respondent's Voluntary Disclosures, remedial compliance measures, cooperation in the latter part of the investigation, change in management, support of U.S. Government programs, and the absence of disclosure of sensitive technologies or actual harm to national security as significant mitigating factors, the proposed charges against and penalties imposed upon Respondent would likely have been more significant. 

The Consent Agreement also provides that Xe will take a number of additional compliance steps, including external compliance oversight and to continue and improve compliance measures.

The Proposed Charging Letter, Consent Agreement and Order can be found here.

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September NCITD Meeting to Focus on Export Controls and Sanctions Enforcement

The next meeting of the National Council on International Trade Development (NCITD) will take place on September 8, 2010 in Washington, DC. The program will focus on export controls and sanctions enforcement and will feature the following speakers:

• John Sonderman, Acting Director, Office of Export Enforcement, Bureau of Industry and Security, U.S. Department of Commerce

• Michael Geffroy, Assistant Director for Enforcement, Office of Foreign Assets Control, U.S. Department of the Treasury

• Lisa Studtmann, Director, Office of Defense Trade Controls Compliance, U.S. Department of State

For information on how to join NCITD and attend the meeting, see www.ncitd.org or contact the NCITD Secretariat at 202-872-9280.

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Trade Compliance Certificates vs. Certification: Buyer Beware!

Trade compliance professionals need to understand the difference between a certificate program and a certification program before paying for import and export compliance education, training and testing courses according to an article in the August 2010 edition of The Export Practitioner.

Written by trade compliance educator/consultant John Priecko and certification consultant Betty Fishman, the article discusses the recent proliferation of providers claiming to offer certifications for trade compliance professionals.

In addition to discussing the key differences between certificate and certifications, the article provides some "red flags" to look for in claimed certification programs.

The article concludes by advocating an independent standards organization to oversee trade-related education/training and states that such an organization can serve as a clearing house for trade compliance best practices benchmarking.

Access to The Export Practitioner's website requires a subscription. However, readers can obtain a one-day free pass by clicking the "One Day Pass" tab at the top left hand page of the website. You can also receive a free copy and trial subscription to the print edition at no cost or obligation by contacting the Export Practitioner at 202-463-1250, Extension 193.

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Census Bureau Reports That AESDirect Export Filing System Back On-line

As previously advised, the AESDirect http://www.aesdirect.gov/ electronic export information filing system was down yesterday due to a power outage resulting from severe weather conditions in the DC area. AESDirect service was restored last night.

The Census Bureau's advisory issued this morning is reprinted below. As indicated in the advisory further information on the AES Downtime policy can be found on the blog of the Census Bureau's Foreign Trade Division Census.  

AES Broadcast 08/13/2010 Broadcast # 2010043

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AESDirect Program Back On-line

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This message is intended for AESDirect program users only.

The power has been restored to the primary datacenter for the AESDirect program and AESDirect is back on-line.

All AESDirect program transactions for shipments that moved under the AES Downtime Policy must now be filed along with any new AES transactions.

For further information or questions, contact the U.S. Census Bureau's AES Branch.

Telephone: (800) 549-0595, select option 1 for AES Email: askaes@census.gov
Online: www.census.gov/trade.
Blog: blogs.census.gov/globalreach/2010/07/a-look-into-the-aes-downtime-policy.html

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OFAC Issues Guidance on Implementation of Restrictions on Iranian Origin Food and Carpets

U.S. persons and companies that currently import food and carpets from Iran should be aware of the guidance reprinted below that was issued today by the Office of Foreign Assets Control (OFAC) concerning a change in U.S. law made by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA").

OFAC's Iranian Transactions Regulations currently contain a general license authorizing the importation into the U.S. of foodstuffs from Iran that are classified under chapters 2-23 of the Harmonized Tariff Schedule of the United States (HTS) (such as pistachios and non-beluga caviar (which is prohibited by other aspects of law). In addition, the importation of carpets and other textile floor coverings of Iranian origin that are classified under chapter 57 or heading 9706.00.0060 of the HTS are also authorized.

However, due to the additional Iran sanctions recently passed by Congress, OFAC will soon issued a regulation amending the Iranian Transaction Regulations to eliminate the general license and such imports will be no longer permitted starting on September 29, 2010. OFAC has also indicated that any authorized Iranian products must be imported by September 28, 2010 and it will not issue any specific licenses authorizing any imports after that date. As a result, importers must move quickly to ensure that any pending orders are entered for consumption by their customs brokers by September 28, 2010.

Attempts to import Iranian origin foodstuffs and carpets after September 28th can lead to significant civil and criminal penalties. For example, civil penalties of up to $250,000 or twice the amount of the transaction that is the basis of the violation can be imposed administratively. Criminal penalties of up to $1,000,000 in fines and imprisonment for up to 20 years can be imposed for willful violations of the Iranian Transaction Regulations.

Guidance Regarding Import Prohibitions Imposed by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010

On July 1, 2010, the President signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (the “Act”), which, among other things, prohibits the importation of Iranian-origin goods and services into the United States, effective 90 days after the Act’s date of enactment. No exception to this prohibition may be made for the commercial importation of Iranian-origin goods described in section 560.534(a) of the Iranian Transactions Regulations (31 C.F.R. Part 560). The Office of Foreign Assets Control cannot authorize by general or specific license the commercial importation of such Iranian-origin goods (which include certain foodstuffs and carpets) on or after September 29, 2010. Consequently, the general license in section 560.534 of the ITR will be eliminated by September 29, 2010, and any such goods for commercial importation into the United States must be entered for consumption before that date.

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State Department's Proposed Policy Change on Foreign National Employees May Not Resolve All Concerns

The State Department's Directorate of Defense Trade Controls (DDTC) published a proposed rule in the August 11, 2010 Federal Register that would amend the International Traffic in Arms Regulations (ITAR) to modify U.S. policy regarding end-user employment of dual national and third country nationals. This policy change, which is billed as part of the President's export control efforts, if implemented would eliminate the need for end-users of defense article or controlled technical data located outside of the U.S. to obtain an export license (DSP-5) from DDTC prior to the transfer of defense articles within a foreign business entity or organization or providing access to that information to company employees with the approved destination country.

However, this license free treatment comes with several additional requirements, including employee screening for "substantive contacts" with restricted or prohibited countries listed in section 126.1 of the ITAR (such as China, Venezuela and other countries subject to U.S. sanctions), non-disclosure agreements and technology security/clearance plans.

While this policy change is intended to minimize the human rights concerns that have arisen in several countries, this proposed policy change may not be enough to overcome all of these concerns. Of particular concern will be how to screen employees "for substantive contacts with restricted or prohibited countries" without violating local law.

A summary of these issues from the Canadian perspective is provided below. This article was written by Toronto-based attorney John Boscarial, who serves as the head of McCarthy Tétrault's International Trade and Investment Law Group, and is reprinted by permission.

Proposed US Defence Control Changes Aim to Resolve Conflicts with Canadian Human Rights Law

          By John Boscariol, McCarthy Tétrault

Canadian companies dealing in aerospace and military goods and technology have long struggled with requirements under the US International Traffic in Arms Regulations (ITARs) that prohibit employees of certain nationalities or born in certain proscribed countries from accessing US-controlled defence services and technology in Canada. In order to comply with these restrictions, Canadian companies have had to risk violating provincial and federal anti-discrimination laws, as well as exposure to human rights complaints, when denying employees access to projects involving US-controlled defence items because of their nationality or country of birth.

There may now be some light at the end of the tunnel for companies subject to these conflicts between Canadian and US law. Today, the US State Department released its proposal to amend the ITARs to address the conflicts with human rights policies in Canada and other countries and the administrative burden associated with compliance with these restrictions — see Amendment to the International Traffic in Arms Regulations: Dual Nationals and Third-Country Nationals Employed by End-Users. Comments on the proposed amendments may be submitted until September 10, 2010.

The proposal provides that no approval from the US State Department Directorate of Defense Trade Controls (DDTC) will be required for the transfer of defence articles within a foreign business entity that is an approved end-user or consignee for those items, “including the transfer to dual nationals or third-country nationals who are bona fide, regular employees, directly employed by the foreign business entity.” Further, the transfer must take place completely within the territories where the end-user is located or where the consignee operates, and must be within the scope of an approved export licence, other export authorization, or licence exemption.

There are significant conditions, however, that Canadian companies will have to satisfy in order to take advantage of this exemption. They include:

1. obtaining security clearances for their employees from the Canadian government or having a process in place to screen employees and execute Non-Disclosure Agreements ensuring that the employee will not transfer any information to unauthorized parties; and
2. screening employees for substantive contacts with the prohibited or restricted countries, and establishing and maintaining a technology security/clearance plan for such screening and related record-keeping (such plan to be available to the DDTC upon request).

The proposed amendments set out those considered to be “substantive contacts” with the restricted countries, and include recent or regular travel, recent or regular contact with agents or nationals of such countries, continued allegiance to such countries, or acts otherwise indicating a risk of diversion. An employee with substantive contacts with persons from restricted countries “shall be presumed to raise a risk of diversion, unless DDTC determines otherwise.”

Canadian companies dealing with aerospace and defence products, technology or services should review these proposals carefully to assess their potential impact on current and future operations. In particular, the amendments appear to impose on Canadian companies a significant due diligence burden with regard to the gathering of information on employee activities outside of the workplace.

Even if these amendments are finalized, Canadian aerospace and defence companies will continue to face challenges in ensuring they are compliant with a patchwork of applicable US and Canadian law in this area, including the ITARs, Canadian privacy and human rights law, as well as Canadian defence controls under Canada's Defence Production Act and Export and Import Permits Act.

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AESDirect Outage Notice and AES Downtime Policy

Exporters and Freight Forwarders Using AESDirect to file Electronic Export Information in connection with exports from the U.S. should see the following notice issued by Census. Note the reference to ITAR-controlled shipments.


AES Broadcast 08/12/2010 Broadcast # 2010042

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AESDirect Program Outage

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This message is intended for AESDirect program users only. Due to
severe weather conditions, the power at the AESDirect program site is
down. If you are not an AESDirect program filer, you will not be
affected by this outage.

During this outage all AESDirect program filers may submit shipments
under the AES Downtime Policy. State Department licensable shipments
cannot be exported under the AES Downtime Policy and must be held
until the connection is restored and an Internal Transaction Number (ITN)
is received. Once the connection is restored, all AESDirect program
transactions for shipments that were exported under the AES Downtime
Policy must be filed along with any new AES transactions.

AES PcLink users are encouraged to continue creating and storing
shipments in a queue on their local computer for transmission when
AESDirect is brought back on-line.

If you utilize the AES Downtime Policy for export, please contact the
port where you will export from. In lieu of the AES Proof of Filing
citation, please use the AES Downtime citation which consists of the
phrase AESDOWN, your individual company's Filer ID, followed by the
date.

For example: AESDOWN 123456789 05/10/2010

Please see the U.S. Customs and Border Protection web site
for further information on the AES Downtime Policy:

http://cbp.gov/xp/cgov/trade/automated/aes/tech_docs/aestir/june04_intro/

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Overview and Summary of DDTC Consent Agreement with AAR International Involving Presidential Airways

By John Priecko*

Below is a detailed summary of the the State Department's Directorate of Defense Trade Controls (DDTC) July 2010 Consent Agreement with AAR International, Inc (AAR).  This is a unique successor liability case in several respects. Unlike some previous cases involving alleged violations of the Arms Export Control Act and the International Traffic in Arms Regulations (ITAR) DDTC did not impose any monetary penalty on AAR, the successor in interest to Presidential Airways.

In addition, DDTC did not mention in the Proposed Charging Letter, Consent Agreement or Order that AAR acquired Presidential from Xe Services LLC (formerly Blackwater Worldwide). That omission raises a number of interesting questions and expectations regarding a related settlement involving Xe Services and/or Blackwater for these alleged violations.

Thoroughly reading settlements and monitoring various U.S. Government enforcement and compliance resources on an ongoing basis should be a integral part of any trade compliance professional’s reading and an essential element in any comprehensive Trade Compliance Program. One-page summaries like these will help get the word out and more quickly and allow readers to digest and compare individual cases.

*Mr. Priecko is the President of Trade Compliance Solutions, a network of experienced compliance-related professionals. He is a trade compliance veteran with more than 15 years of experience. He can be reached at 703-895-1110 or jpriecko@comcast.net.

AAR 071510 Settlement Summary 081210

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House Members Form Bipartisan Working Group on Iran Sanction Implementation

Congressman Howard L. Berman (D-CA), Chairman of the House Foreign Affairs Committee, and Congresswoman Ileana Ros-Lehtinen (R-FL), the Ranking Republican Member of the Committee, today announced that they have initiated a bipartisan Working Group on Iran Sanction Implementation.

The purpose of the working group is to help ensure that U.S. and international sanctions on Iran are fully implemented, effectively enforced and, ultimately, have the intended effect of bringing about Iran’s termination of all activities contributing to its pursuit of a nuclear weapons capability.

The bipartisan Working Group on Iran Sanctions Implementation will meet on a regular basis with Obama Administration officials, foreign ambassadors and outside experts to oversee and verify enforcement of Iran sanctions implementation.

The House Foreign Affairs Committee will hold a hearing this fall on Iran sanctions implementation. Last Thursday, July 29, 2010, the House Committee on Oversight and Government Reform held a similar hearing entitled, "Implementation of Iran Sanctions" The hearing examined the implementation of Iran sanctions, including efforts to discourage companies from doing business with Iran as long as Iran continues to work on developing nuclear weapons and supports terrorism.
 

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DDTC Publishes Final Rule Requiring CJs to be Submitted Electronically Using DS-4076 Form

The State Department's Directorate of Defense Trade Controls (DDTC) published a final rule in today's Federal Register amending the International Traffic in Arms Regulation (ITAR) that will require commodity jurisdiction (CJ) determinations to be submitted electronically using the DS-4076 CJ Determination Request Form that was introduced by DDTC last year.

The regulation specifies that paper CJs may be submitted for 29 days after the effective date, which means that  September 2, 2010 will be the last day to submit CJs the old fashioned way. Starting on September 3, however, CJs will have to be submitted electronically via DTrade2, DDTC's defense export electronic licensing system.

DDTC has yet to make any changes to the DS-4076 CJ form to incorporate the suggestions submitted by industry during the public comment period.

Determining the proper government agency that has jurisdiction over products, technology or software to be exported is an important first step in the U.S. export controls system.

The purpose of submitting a CJ to DDTC is to obtain a determination whether a product, technical data or service is covered by the U.S. Munitions List (USML) and is subject to the ITAR's export licensing requirements or not.
 A commodity classification (commonly known as a CCATS) can be obtained from the Commerce Department's Bureau of Industry and Security (BIS) to determine the proper Export Control Classification Number (ECCN) if the CJ determination states that the article is subject to the Commerce Department's jurisdiction. 

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Treasury Identifies and Designates 21 Entities Determined to be Owned or Controlled by the Government of Iran

The U.S. Department of the Treasury today added 21 entities to the Specially Designated Nationals List that were determined by the U.S. to be owned or controlled by the Government of Iran.

These 21 entities, which included including banks, insurance firms, mining concerns, investment firms and technology companies, are located in Japan, Germany, Italy, Belarus, Luxembourg and Iran.

According to the Treasury Department, "today's identifications will mitigate the risk that such entities pose to legitimate transactions." This is because OFAC's Iranian Transactions Regulations (31 CFR Part 560) prohibit transactions between U.S. persons and the Government of Iran.

The complete list of entities identified today as owned or controlled by the Government of Iran can be found here.

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Today's News and Notes

The Government of Japan today enacted new sanctions on Iran. A summary of the new sanctions can be found here. 

Registration is now open for SIA's Fall ITAR Conference to be held in Washington, DC on November 15 and 16, 2010.

Danish and Japanese companies deny violating U.S. sanctions on Iran.

Reuters: Iran feels sanctions heat at UAE ports.

Texas resident arrested for attempting to export night vision sights to Russia. Further details on this unusual case can be found here and here.

Educational Testing Service (ETS) announced last week that resumed registrations in Iran for its TOEFL® and GRE® tests. The brief suspension was the indirect result of tighter U.N. Security Council restrictions on financial transactions involving Iran, which resulted in ETS's banking arrangements being discontinued. Students wishing to take the tests may register through Iran's National Organization of Educational Testing, or with credit/debit cards issued by banks that are not prohibited under U.N. or U.S. sanctions. ETS has permission from the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury to conduct its testing business in Iran.

Bangkok Post: Thailand is in the process of implementing a dual-use export control regime. 

FCPA Professor: The FCPA's Long Tentacles (discusses impact of FCPA investigations on mergers and acquisitions).

The U,K.'s Financial Services Authority today fined members of the Royal Bank of Scotland Group £5.6m for failing to have adequate systems and controls in place to prevent breaches of UK financial sanctions.

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Interim Final Rule Intended to Clarify Purpose of BIS Commodity Classifications and Advisory Opinions Has Been Misinterpreted

The Bureau of Industry and Security published an interim final rule in today's Federal Register intended to clarify the purpose of the commodity classifications (commonly known as CCATS) and advisory opinions that it issues. Unfortunately, the purpose of this interim rule, which was to help educate exporters with export compliance, has been widely misinterpreted.

The interim final rule amends sections 734.3 and  748.3 of the Export Administration Regulations (EAR) by adding language noting that: 

• Commodity classifications and advisory opinions may not be relied upon as determinations that the items in question are "subject to the EAR" as described in section 748.3 of the EAR.
• Those who request commodity classifications and advisory opinions should have determined that the items at issue are not subject to the exclusive export control jurisdiction of one of the other U.S. Government export control agencies, such as the Directorate of Defense Trade Controls, OFAC, and Nuclear Regulatory Commission.
• Advisory opinions are limited to BIS's interpretation of EAR provisions and may not be relied upon or cited as evidence that the items in question are not subject to the to the export control jurisdiction of another U.S. Government agency.

The interim final rule also indicates that BIS will begin inserting the following reminder language on all future commodity classifications (CCATS):

This commodity classification sets forth the classification of the above-listed items if they are subject to the EAR. This commodity classification is not a determination by BIS as to whether the above-listed items are ‘‘subject to the EAR.’’ As defined and  described in sections 734.2 through 734.4 of the EAR, the term ‘‘subject to the EAR’’ means, among other things, that the item(s) are not exclusively controlled for export or reexport by another agency of the U.S.
Government. See 15 CFR 734.3(b)(1). Thus, this document is not, and may not be relied upon as, a U.S. Government determination that the above-listed items are not, for example, subject to the export control jurisdiction of the International Traffic in Arms Regulations (ITAR) (22 CFR Parts 120– 130), which are administered by the U.S. Department of State.

BIS's interim final rule was intended to remind exporters that the purpose of a commodity classifications, which is to provide the Export Control Classification Number (ECCN) of products, technology or software as described on the Commerce Control List (CCL), is only one part of the export analysis. Prior to seeking a commodity classification from BIS, an exporter should first determine the proper government agency that has jurisdiction over their item, technology or software. For example, products that are included on the U.S. Munitions List or are considered to be "defense articles" under the International Traffic in Arms Regulations (ITAR) are subject to the export licensing jurisdiction of the State Department's Directorate of Defense Trade Controls (DDTC).

Under the current U.S. export control regime, DDTC is the only agency that can issue commodity jurisdictions, commonly known as CJs, to advise an exporter whether an item or service is subject to the ITAR or not. Because of the intended purpose of CJs and commodity classifications, the information submitted to BIS to obtain a commodity classification (product specifications, etc.) is very different than the information submitted to DDTC to obtain a CJ (design intent, application, military versus commercial sales, etc.).

The modifications made to the EAR, as well as the new language included on commodity classifications, is also intended to eliminate, to the extent possible, those cases where a person or company exporting a defense article can avoid criminal prosecution under the Arms Export Control Act by claiming that they had obtained a CCATS from BIS for an item when the item was actually subject to the jurisdiction of the ITAR.

The interim final rule also sought to educate those in law enforcement who prosecute export control violations by helping to distinguish commodity classifications from commodity jurisdictions.

Despite the clear purpose of this rule, there have been headlines in various publications indicating that this interim final rule is confusing as it seems to indicate that BIS will not accept responsibility for its decisions, that such classification are not dependable or that exporters can not rely on commodity classifications or advisory opinions issued by BIS.

These interpretations are incorrect. BIS classifications and advisory opinions can certainly be relied upon for issues relating to the EAR. However, under the current export control regime, which provides that different agencies have jurisdiction over dual-use and defense articles, exporters must be certain that their item is "subject to the EAR" before relying on a commodity classification or advisory opinion issued by BIS. While this confusion may be eventually eliminated by the creation of a single export control list and single licensing agency, the clarification in this interim final rule is useful and is long overdue.

October 1, 2010 is the deadline for submission of public comments to BIS on the interim final rule.

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