Wassenaar Arrangement Issues Best Practice Guidelines on Internal Compliance Programs for Dual-Use Goods and Technologies

During the recent Plenary meeting of the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (WA) held in Vienna, Austria, the Participating States of the WA adopted a document encouraging exporters, including companies and academic institutions, located in WA Participating States to develop and implement export-related Internal Compliance Programs (ICPs).

The document, entitled "Best Practices Guidelines on Internal Compliance Programmes for Dual-Use Goods and Technologies" (a copy of which is provided below) states that WA Participating states should consider:

• providing exporters with opportunities to consult on the form and content of their export ICPs;
• encouraging exporters to to submit their draft ICPs for examination and comment;
• implementing measures and stimuli that would encourage exporters to introduce ICPs (e.g., taking the development and implementation of an ICP into account when considering applications for licenses and revoking existing licenses, or making an ICP a condition for the granting of a general license for an exporter.);
• taking steps to assess an exporter’s compliance with domestic export control laws and regulations, as appropriate, which may involve face-to-face consultations and/or inspection visits. 

The document also contains a number of basic and additional elements that may be included in an export ECP, depending on the organizations' structure, size and other circumstances.  The WA's Best Practices Guidelines state that the basic elements of an export internal compliance program for dual-use items include:

1. Commitment to Compliance
2. Structure and Responsibility
3. Export Screening Procedures
4. Shipment Control
5. Performance Review
6. Training
7. Record Keeping
8. Reporting and Corrective Action

Many countries encourage exporters to adopt export-related internal compliance programs. For example, the U.S. Department of Commerce's Bureau of Industry and Security has recommended that U.S. exporters implement an Export Management and Compliance Program and has issued detailed guidelines.  Japan's Ministry of Economy, Trade and Industry (METI) has been encouraging companies to establish export ICPs since 1987 and since 2003 has published on its website the names of companies that have voluntarily established ICPs, conducted self-audits, and registered with METI.

However, the WA's adoption of the Best Practices Guidelines on export internal compliance programs is significant given the number of countries that participate in the WA and the range of countries that are currently seeking membership (e.g., Mexico and India). The issuance of the WA Best Practices Guidelines will likely lead to the increased issuance and use of ICPs by exporters, particularly if governments provide meaningful benefits to exporters that voluntarily adopt and implement such programs.

While the WA's "Elements of Internal Compliance Programmes For Dual-Use Items" is a useful framework for export compliance programs, the elements do not contain a great amount of detail. Exporters should supplement the WA guidelines by reviewing export and other compliance-related materials issued by governments and non-government organizations when creating their ICPs. For example, the Nunn-Wolfowitz's Task Force Report on Export Compliance Programs (pdf), while more than 10 years old, still serves as a useful resource with respect to best practices in export compliance programs. In addition, the detailed export compliance best practices that were recently issued by the Coalition for Excellence in Export Compliance (CEEC) provide specific and practical information with respect to the various elements of export internal compliance programs.

WA 2011- Internal Compliance Programmes

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U.S. Export Control Reform News and Upcoming Deadlines for Public Comments

Resumption of Weekly Wednesday Export Control Reform Update Conference Calls and Addition of Conference Call on Monday, December 19th

BIS Assistant Secretary Kevin Wolf will resume his weekly teleconferences on Wednesdays at 2:00 pm EST to answer questions about the Department of Commerce’s proposed rules regarding the Administration’s Export Control Reform (ECR) Initiative. These calls are intended to foster public understanding of ECR and to assist the public in submitting informed comments to the proposed regulations that are pending (see below). The dial-in number for the conference calls is 1-877-389-6079, Participant Code: 905168. Advance written questions are encouraged and should be sent to oesdseminar@bis.doc.gov with a subject line of “Teleconference questions.”

Because of the overwhelming response to last Wednesday's call, a number of people were not able to join the call. BIS has now added the ability to allow more participants to join the calls.

In addition, an additional call with Assistant Secretary Wolf has been scheduled for Monday, December 19 from 3:30 to 4:30 pm EST (using same number as above).

Deadline for Comments on Moving Aircraft and Related Items from USML Category VIIII to CCL is December 22, 2011

The Directorate of Defense Trade Controls' (DDTC) proposed rule issued on November 7, 2011 would amend the International Traffic in Arms Regulations (ITAR) to revise U.S. Munitions List (USML) Category VIII (aircraft and related parts) to describe more precisely the military aircraft and related defense articles warranting control on the USML and under the ITAR.

The BIS proposed rule also published on November 7, 2011 describes how aircraft and parts determined no longer to be subject to USML Category VIII would be controlled under the Commerce Control List (CCL) in new Export Control Classification Numbers (ECCNs) 9A610, 9B610, 9C610, 9D610, and 9E610. This proposed rule also would control military aircraft and related items now controlled under ECCNs 9A018, 9D018 and 9E018 under new ECCNs 9A610, 9D610 and 9E610. This proposed rule also addresses license exception STA availability for items controlled by the five new ECCNs that would be created.

Comments on these proposed rules are due on December 22, 2011 and should be submitted by email or via www.regulations.gov. See the text of each proposed rule for the applicable reference number (RIN).

Deadline for Comments on Proposed Changes to Export Administration Regulations is February 1, 2012

In addition to considering how to modify the CCL to control items moved from the USML, on August 5, 211, BIS issued a Notice of Inquiry in the Federal Register requesting public comments on how the EAR, Chemical Weapons Convention Regulations, Additional Protocol Regulations, and National Defense Industrial Base Regulations can be clarified or streamlined to be more effective or less burdensome. This is being done as part of President Obama's January 2011 Executive Order directing government agencies to review and improve regulations. BIS regulation review will focus on issues outside the context of Export Control Reform and extends to the entire EAR, including license exceptions and documentation requirements. Any changes from this review that do away with unnecessary complexity will reduce exporters' licensing and compliance burdens and go beyond the significant reductions expected from the Export Control Reform Initiative.

BIS is seeking comments on the following topics:

• Identifying unnecessary compliance burden caused by regulations that are unduly complex, outmoded, inconsistent, or overlapping;
• Specific comments on ways to improve the existing regulations or eliminating outmoded ones;
• Aspects of the regulations the public considers effective or well designed;
• Information on foreign countries’ implementation of export controls.

Comments can submitted until February 1, 2012 to BIS by email or via www.regulations.gov. The regulations.gov ID for this Notice of Inquiry is: BIS–2011–0027.

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Coalition for Excellence in Compliance Releases Restricted Party Screening and Other Export Compliance Best Practices

The Coalition for Excellence in Export Compliance (CEEC) (pronounced “seek”), a voluntary group of experienced export compliance professionals from leading companies, law firms, research organizations and consulting firms, recently released a series of detailed and practical standards containing best practices on a wide range of important topics for export and sanctions compliance programs. 

CEEC's mission is to provide a uniform set of best practices that companies and trade compliance professionals could use to provide clarity over the existing patchwork of official and unofficial guidance regarding export and sanctions compliance requirements and programs. The best practices are not tied to any particular country’s laws or requirements and are intended to be applicable worldwide. 

To date, CEEC has issued best practices covering a wide range of topics, including: screening, training, classification, personnel, management commitment, license determinations and use, and intangible exports. Additional compliance-related best practices topics will be issued by CEEC in the near future.

CEEC’s best practices on Restricted Party Screening (pdf) contains valuable guidance on restricted party screening programs and ways to implement screening programs. For example, CEEC’s restricted party screening best practices provides recommendations on the types of parties to be screened, how and when screening should be conducted, the structure of restricted party screening programs, the lists to check and how matches and potential matches to restricted party lists should be handled.

With respect to the types of parties to be screened, CEEC’s screening best practices note that both domestic and international transactions should be screened, since certain restrictions may apply to domestic transactions, domestic transactions may be part of an international transaction, and reputational concerns may exist. The screening best practices provide a detailed list of the types of parties that should be screened (to the extent applicable), including customers, suppliers, freight forwarders, banks, agents, ship to parties, etc.

CEEC’s screening best practices indicate that a “software tool should be used for screening” and that it should “employ a “fuzzy logic” algorithm to identify close as well as identical matches.” Of course, because restricted party list changes are often effective immediately, the “the automated screening tool must promptly update all applicable watch lists as these lists are changed and updated by issuing authorities.”

As for the structure of a restricted party screening program, CEEC’s screening best practices recommend that the screening process should be documented, and it could be “advantageous to centralize the screening program” in order to “minimize duplicative work and promote uniformity.”

Regarding the lists to check, CEEC advises that a “risk analysis should be done to determine which lists (by country, type, etc.) are needed for the organization to use for screening.” For example, it “may be appropriate to use different lists for different businesses, different categories of transactions, or different geographic locations.”

CEEC’s screening best practices provides specific information and guidance on the frequency of screening and at what point in the screening process screening should be done. For example, the best practices recommend that new business partners should be screened prior to the first transaction or other business dealing and that organizations “should consider implementing procedures to screen at the time the business partner is entered into the organization’s database, when background or credit checks are run, when quotes or proposals are requested, or at some other time, as appropriate.” The best practices indicate that “the intervals in between database screenings should be measured and limited in order to mitigate the risk of doing business with a restricted/prohibited/denied party.”

Finally, with respect to screening matches and potential matches, CEEC’s best practices state that an organizations’ restricted party screening process “must allow for a transaction to be halted unless and until any screening matches are cleared. To minimize business disruption, potential matches should be cleared as promptly as possible and the determination “should be documented.” When an actual match to a restricted party list occurs, the CEEC best practices advise that “depending upon the nature of the list, the legal applicability in the jurisdiction, and an evaluation of reputational concerns, the process must allow for determination by an authorized person whether the transaction may proceed . . . and this decision should be documented.”

CEEC members encourage comments and suggestions for improving the best practices and CEEC’s website contains a contact page for the submission of comments on their efforts to date.

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BIS Adds 15 Parties to Entity List; Justice Department Indicts Five Individuals for Export Control Violations

Today the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) today announced that it will add fifteen parties to the Entity List. The parties, which are located in China, Hong Kong, Iran and Singapore, were added to the Entity List for their alleged roles in a procurement network involving products subject to the jurisdiction of the Export Administration Regulations and International Traffic in Arms Regulations.

The following eight parties will be added to the Entity List since it was determined that they have engaged in actions that could enhance Iran's military capability and because their conduct and deceptive practices pose a risk of ongoing violations of the Export Administration Regulations: 

• Corezing International
• Hia Soo Gan Benson
• Hossein Ahmad Larijani
• Lim Kow Seng
• Lim Yong Nam
• NEL Electronics Pte. Ltd.
• Paya Electronic Complex
• Wong Yuh Lan.

According to BIS these parties participated in a network that engaged in schemes to divert U.S.-origin items to Iran and/or to China by using shifting/circuitous routes and false or omitted information on shipping documentation in an attempt to conceal their activities. These parties are also alleged to have obtained ITAR-controlled antennas designed for use in military radars and aircraft, and exported them to Singapore and Hong Kong. The individuals named above were indicted today by the Justice Department for their alleged roles in conspiring to export U.S.-origin components to Iran that were later found in IEDs in Iraq.

The following seven parties will be added to the Entity List based on evidence that they aided and/or facilitated the activities of the procurement network.

• Action Global, Amaze International and OEM Hub Co., Ltd., all Hong Kong entities, allegedly served as front companies and are otherwise related to the other entities named today.

• Ms. Luo Jie, director of Corezing International, Action Global and Amaze International, is being added on the basis of information indicating that she was involved in the procurement and attempted procurement of U.S. power amplifiers intended for end-users in China, as well as in the diversion of various U.S.-origin goods through Hong Kong to Iran.

• Parto Systems Tehran, an Iranian freight forwarder, is being added based on information indicating that it was involved in the diversion of U.S.-origin items to Iran and is closely associated with Hossein Ahmad Larijani.

• Surftech Electronics, a Singapore corporation established by Hia Soo Gan Benson, is co-located with Corezing International and allegedly sought to purchase certain U.S.-origin items for shipment to Iran.

• Mr. Zhou Zhenyong, director of Corezing International, is being added based on information that he was specifically involved in the procurement and attempted procurement of U.S.-origin items, including U.S.-origin munitions items destined for end-users in China and/or Iran.

While a BIS license is required to export, reexport or transfer any item subject to the EAR to any of the persons listed above, BIS has established a policy of a presumption of denial for all license applications.

The BIS Entity List, found in Supplement Number 4 to Part 744 of the Export Administration Regulations, includes the names of businesses, research institutions, government organizations and individuals that have been identified as being involved in activities that merit additional scrutiny and licensing requirements.

The entries on the Entity List specify the license requirements and license review policy that are applicable to shipments to each listed entity. In some cases, a license will be required to ship items classified as EAR99 to the customer, even when a license would not normally be required. In other cases, all items subject to the Export Administration Regulations will require a license. The export license review policy also varies from entity to entity. In some cases, there is a presumption of approval or denial and, in other cases, the license will be reviewed by BIS on a case-by-case basis. Significant penalties can be imposed against parties that engage in transactions with parties on the Entity List without the appropriate license.

Update: The final rule associated with this announcement was published in the Federal Register on October 31, 2011 and is effective on that date.

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Registration for U.S.-China High Technology Working Group Program on September 26th Ends Tomorrow

Tomorrow is the last day to register for the third annual U.S.-China High Technology Working Group  (HTWG) Public-Private Sector Dialogue that will be held in Washington, DC on Monday, September 26, 2011.

The HTWG was established for the U.S. and China to provide an update on their export control policies and practices, to offer an opportunity for U.S. and Chinese companies to interact directly on these issues, and to learn from individual U.S. and Chinese exporters about the ways in which the two governments can support high technology trade for civilian end-uses.

The program, which is being presented in partnership with the National Association of Manufacturers (NAM), includes an excellent line-up of speakers, including high-level U.S. and Chinese officials from the U.S. Department of Commerce's Bureau of Industry and Security (BIS) and China's Ministry of Commerce (MOFCOM), as well as industry panels addressing the semiconductor industry, aerospace/aviation issues and export compliance practices.

The current agenda and registration information can be found here.

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BIS Publishes New Best Practices for Preventing Unlawful Diversion of Dual-Use Items Subject to the Export Administration Regulations

The U.S. Department of Commerce's Bureau of Industry and Security today published on its website a series of new "Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items Subject to the Export Administration Regulations, Particularly through Transshipment Trade."

These seven new best practices are being issued by BIS following last year's publication in the Federal Register of a notice of inquiry requesting public comments on a draft version of the first update to best practices on transit, transshipment and reexport of dual-use items since 2003.

In response to the notice of inquiry, BIS received written comments from industry and many additional comments through meetings with trade associations, exporters, freight forwarders, carriers, software vendors, advisory committees and other government agencies. As a result of this input, BIS substantially modified several of the proposed best practices in the final version, including combining two of the proposed best practices into one and adding a new best practice (No. 7) regarding the use of information technology.

In publishing these seven industry best practices BIS noted that, while this guidance  practices as it applies to items and transactions that are subject to the EAR, it has broader potential applications. BIS indicated that it envisions this guidance as a step toward a strengthened dialogue with all members of the export logistics supply chain industry, other agencies that administer export controls, and foreign governments in a manner that may make the guidance pertinent beyond its application to the EAR.

Best practice No. 4 is particularly noteworthy, and is likely to generate the most interest among exporters and freight forwarders, since it recommends that companies "avoid routed export transactions when exporting and facilitating the movement of dual-use items unless" there is a "long standing and trustworthy relationship" between the exporter, foreign buyer and the foreign buyer's freight forwarders. A "routed export transaction is defined in Census' Foreign Trade Regulations (15 CFR Part 30) is when a Foreign Principal Party in Interest (e.g., a non-U.S. buyer) authorizes a freight forwarder or other agent in the U.S. to facilitate export of items from the United States on its behalf and prepare and file the Electronic Export Information (EEI). Many exporters of controlled items, whether they are subject to the EAR or ITAR, already prohibit routed export transactions unless they are confident that the buyer of the goods will comply with any restrictions on the diversion or transfer of the exported products. On the other hand, many non-U.S. customers prefer to hire their own freight forwarder in the U.S., particularly when they want to consolidate shipments in the U.S. prior to being exported.

It is important to note that these best practices are recommendations only. While exporters and freight forwarders are recommended to implement these best practices, to the extent possible, there is no legal obligation to comply with these best practices, absent a legal requirement that is set forth elsewhere in the Export Administration Regulations (EAR). In addition, compliance with these best practices creates no defense to liability for the violation of export control laws. However, BIS has indicated that demonstrated compliance with these best practices by a company will be considered an "important mitigating factor in administrative prosecutions arising out of violations of provisions of the EAR that apply to transit, transshipment or reexport transactions."

While these best practices are issued by BIS and are intended for exports of dual-use items subject to the EAR, many of the same principles are applicable to exporters that export defense articles subject to the jurisdiction of the ITAR.

2011 Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items Subject to the Export Administration Regulations, Particularly through Transshipment Trade

The following reflect new best practices that guard against diversion risk, particularly through transshipment trade.

Best Practice No. 1 – Companies should pay heightened attention to the Red Flag Indicators on the BIS Website and communicate any red flags to all divisions, branches, etc., particularly when an exporter denies a buyer’s order or a freight forwarder declines to provide export services for dual-use items.

Best Practice No. 2 - Exporters/Re-exporters should seek to utilize only those Trade Facilitators/Freight Forwarders that administer sound export management and compliance programs which include best practices for transshipment.

Best Practice No. 3 - Companies should “Know” their foreign customers by obtaining detailed information on the bona fides (credentials) of their customer to measure the risk of diversion. Specifically, companies should obtain information about their customers that enables them to protect dual-use items from diversion, especially when the foreign customer is a broker, trading company or distribution center.

Best Practice No. 4 - Companies should avoid routed export transactions when exporting and facilitating the movement of dual-use items unless a long standing and trustworthy relationship has been built among the exporter, the foreign principal party in interest (FPPI), and the FPPI’s U.S. agent.

Best Practice No. 5 - When the Destination Control Statement (DCS) is required, the Exporter should provide the appropriate Export Control Classification Number (ECCN) and the final destination where the item(s) are intended to be used, for each export to the end-user and, where relevant, to the ultimate consignee. For exports that do not require the DCS, other classification information (EAR99) and the final destination should be communicated on bills of lading, air waybills, buyer/seller contracts and other commercial documentation. For re-exports of controlled and uncontrolled items, the same classification and destination specific information should be communicated on export documentation as well.

Best Practice No. 6 - An Exporter/Re-exporter should provide the ECCN or the EAR99 classification to freight forwarders, and should report in AES the ECCN or the EAR99 classifications for all export transactions, including “No License Required” designation certifying that no license is required.

Best Practice No. 7 - Companies should use information technology to the maximum extent feasible to augment "know your customer" and other due-diligence measures in combating the threats of diversion and increase confidence that shipments will reach authorized end-users for authorized end-uses.

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Summary of BIS 2011 Update Conference on Export Controls and Policy (Part 2 of 2)

For those readers that were not able to attend last month's Update 2011 Conference on Export Controls and Policy in Washington, DC, we are presenting a two part summary of the conference prepared by Benjamin Tarr, a law student at the American University's Washington College of Law who is focusing on international law. Below is part two, which covers days two and three of Update 2011. Part one, which covers the first day of Update 2011, can be found here.

Wednesday July 20, 2011

This day began with an Interagency Panel featuring speakers from BIS and the Departments of State and Defense. The first speaker was Ann Ganzer, Acting Assistant Secretary of State for Non-Nuclear and Counter Proliferation. She underscored the need for a multilateral approach to export controls that would curtail and prevent instability. She noted that the State Department is working with the United Nations on arms embargo treaties and is working towards worldwide acceptance of non-proliferation standards in subsequent treaties.

Mr. Anthony Aldwell, Deputy Director of the Defense Technology Security Administration (DTSA) highlighted four factors to be considered for whether to issue export licenses. First, the end state’s policies should be evaluated for friendliness or antagonism towards America’s interests. Second, the end state’s technology level shall be considered. Third, consider the end-user and its history. Fourth, consider the export licenses’ impact on America’s international agreements to ensure compliance with international law. 

He also discussed the key objectives of export control policy, including: protecting assets that give America’s military a critical edge in the fight against terrorism; fostering partnerships among allies; it should enhance enforcement and intelligence agencies.

Wednesday's keynote address was presented by Georg Pietsch, who serves as Director General, Export Controls, of Germany's Federal Office of Economics and Export Controls, which is is commonly known as BAFA.  Mr. Pietsch noted in 2010 approximately 2,700 companies, most of these medium sized companies, submitted over 35,000 formal licence applications to BAFA. In addition, more than 10,000 general inquiries were sent to BAFA’s technical and administrative experts. He noted that number of licence applications has increased by over 50% in six years and the total value of export licence applications received by BAFA in 2010 was approximately 13 billion Euros. He noted that this growth has been very difficult to handle for BAFA and is another reason why BAFA has been following the export control reforms in the U.S. very closely.

Mr. Pietsch addressed how U.S. export controls impact German and other European companies and he noted some legal concerns on the implementation of the State Department's recently published final rule on dual and third country nationals. In addition, he addressed how U.S. export control rules involving classification, exports/reexport and de minimis calculations have a significant impact on German companies.

Mr. Pietsch also addressed BIS's new Strategic Trade Authorization (STA) license exception. On the one hand he noted that "the willingness to enact such liberalizations for long-time partners is without doubt a step in the right direction to get rid of some ineffective, unduly burdensome regulations that restrict German–American economic relations." On the other hand he asked "whether the additional documentation requirements that will come with the STA are really necessary in the case of your closest allies" and that such requirements raise a number of issues for companies located in the European Union. (Editor's note: the full text of Mr. Pietsch's  speech can be found here.)

During the afternoon, there were a number of break out sessions, including one on the new I-129 Form and Deemed Exports. The main theme was the poor communication between compliance officials within the private sector.

The first day concluded with a review of export enforcement issues, including a keynote address by David Mills, Assistant Secretary for Export Enforcement and with an export enforcement panel led by Donald Salo, Jr., Deputy Assistant Secretary for Export Enforcement.

Assistant Secretary Mills noted that he is a strong supporter of outreach and information aimed at small to medium sized businesses since understanding all the elements of export controls remains a challenge and compliance with such laws should not need large staffs.

Striking the right balance between compliance, enforcement and the competitiveness of our exporting community is critical, and as a result, we seek to broaden a two-way dialogue on key control and enforcement issues.

With respect to voluntary self-disclosures, which he called a "pivotal element of compliance", Assistant Secretary Mills said that BIS has implemented a process to centralized the review process of VSDs in Washington, DC, which has resulted in more consistent and speedier resolution. He noted that in fiscal year 2010 226 VSD’s were closed.  Of these, 19% were found not to involve any actual violation, and 67% resulted in warning letters only.  Only 6% of the VSDs resulted in administrative sanctions.  He also said that during the first three quarters of fiscal year 2011, BIS received 193 VSDs, a disclosure rate comparable to previous years.

Mr. Mills also discussed some recent export enforcement cases and BIS's current focus on  seeking penalties against individuals or supervisors who are complicit in deliberate export control violations made by subordinates. (Editor's note: the full text of Mr. Mills' speech can be found here.)

Thursday July 21, 2011

           

In addition to the the popular roundtable discussion sessions with staff from BIS and other agencies, the main program on Thursday was an encryption workshop. In this session, the panel examined the changes made to the encryption provisions of the Export Administration Regulations that were published in the Federal Register on June 25, 2010.

This workshop noted some common encryption mistakes made by applicants. One mistake is that companies use the old Supplement No. Five to Part 742 of the EAR. Another common mistake is that the new Note Four to Category 5, Part 2 of the Commerce Control List, which eliminates encryption controls on many items where encryption is not the primary function, does not require registration and Note Four overrides every other Category Five requirement. 

Editor's note: The presentations from most of the panel presentations can be found here on the BIS website.

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Summary of BIS 2011 Update Conference on Export Controls and Policy (Part 1 of 2)

For those readers that were not able to attend last month's Update 2011 Conference on Export Controls and Policy in Washington, DC, we are presenting a two part summary of the conference prepared by Benjamin Tarr, a law student at the American University's Washington College of Law who is focusing on international law.

Day 1 - Tuesday July 19, 2011

The Update 2011 conference presented by the Commerce Department's Bureau of Industry and Security (BIS) commenced with a short welcome address from Mr. Bernard Kritzer, who serves as the Director of the Office of Exporter Services. He applauded President Obama for his August 2009 pledge to reform the export system to create a classification system which allows government organizations to focus on examining sensitive items for classification while allocating less effort to classifying conventional, non-sensitive items for national security reasons.

After Mr. Kritzer’s speech, Deputy Under Secretary for Industry and Security Daniel O. Hill addressed conference attendees. He announced that President Obama’s export control policies have succeeded, despite widespread skepticism and opposition expressed during Update 2010. Mr. Hill placed special emphasis on the fact that President Obama has led the effort to place the Defense, State and Commerce departments all on the same export control IT system, thus enabling greater efficiency in the export control process. Mr. Hill commended the participants in Update for attending, as the sold-out nature of the conference indicates a surge in interest and attention given to this field.

The morning’s events culminated with a by Eric L. Hirschhorn, Under Secretary for Industry and Security. Under Secretary Hirschhorn opined that the current export control system is based on outdated Cold War technologies and “is not responsive to current threats.” He noted that export control policy and American global competitiveness is directly linked to national security. He applauded the current efforts to implement of a more simplified U.S. Munitions List that created a tiered structural system designed to control sensitive items. This is important, according to Mr. Hirschhorn, because the private sector now manufactures most of the goods used by the military. He believes that the government should focus its resources on the most sensitive items going to countries that pose great risks to U.S. national security. Less important military items should be subject to lesser scrutiny than should items of high sensitivity.

Mr. Hirschhorn elaborated on the Administration's three-tiered control list and mentioned the recent implementation of license exception Strategic Trade Authorization (STA) where exporters can export certain items license-free, absent any specific statutory requirements, to 36 countries including Canada, Australia and countries in the European Union. Specifically, these export reform efforts have focused on eliminating “easy cases” from governmental scrutiny vis-à-vis licensing to enable government resources to focus more of its energy on cases that require further examination as to whether or not to grant licenses. License exception STA will potentially eliminate 3,000 of the 22,000 licenses issued by BIS.

Under Secretary Hirschhorn also mentioned the Administration's role in continuing the sanctions regimes on North Korea, Iran, and Cuba. He also noted BIS's role in efforts to implement UN Security Council Resolution 1540, which directs U.N. members to establish an export control system and to collaborate to advance non-proliferation and counterterrorism goals. Additionally, he noted the Executive Order requiring the BIS, FBI, and military intelligence to share information in counterterrorism efforts.

With respect to enforcement of export control laws and regulations, Mr. Hirschhorn mentioned that BIS will continue to penalize individuals for deliberate violations of BIS regulations with punishment including, but not limited to, fines, imprisonment, and a denial of export privileges. However, the penalties can be mitigated if voluntary self-disclosed. (Editor's note: the full text of Under Secretary Hirschhorn's speech can be found here.)

The next speaker was Assistant Secretary for Export Administration Kevin Wolf who noted that his three goals since joining BIS were: first, to ensure aggressive compliance with the laws and regulations that we have now; second, trying to address the biggest problems that exporters face on a day-to-day basis, such as unnecessary impediments on trade with U.S. allies and dealing with the overlap between the U.S. USML and the CCL. His long-term goal is to address the compliance burden faced by those subject to the U.S. export control system.

Assistant Secretary Wolf then provided detailed information on the recently published proposed rule on how items removed from the USML will be eventually controlled on the CCL. He also mentioned that later this year BIS will be issuing a notice soliciting public comments on efforts that can be taken to streamline and clarify the EAR and are reviewing the public comments received on the notice seeking information on making the CCL a more positive list. He noted that it is BIS's goal by the end of 2012 to have a comprehensive proposal to simplify the EAR and start addressing the regulatory compliance burdens that drain corporate resources. (Editor's note: the full text of Assistant Secretary Wolf's speech can be found here.)

The lunch speaker was William Daley, President Obama’s Chief of Staff and a former Secretary Commerce. He noted that President Obama’s goals will allow the U.S. to double its exports in five years. He also criticized the U.S. control system because it still contains two control lists, each with its own control and IT policies and noted that “One branch doesn’t know what the other is doing.” (Editor's note: The White House's summary of Daley's remarks can be found here).

In one of the afternoon break out sessions, panelists from BIS, OFAC, the State Department and DTSA briefed attendees on sanctions policy issues. Among other things, they noted the recent sanctions imposed on certain companies under the amended Iran Sanctions Act and recently listed Iran Air and Tidewater Mid East Company as supporters of Iran’s WMD program and has imposed sanctions on these two companies. Regarding the situation in Libya, BIS has suspended all licenses to Libya. However, no changes have been implemented vis-à-vis exception eligibility for licenses to Libya.

South Sudanese independence has resulted in challenges to BIS since the U.S. must decide which sanctions, if any, apply to South Sudan. Currently, South Sudan is not subject to anti-terrorism controls that previously applied to all of Sudan. But, sanctions do apply to areas where Sudan and South Sudan cooperate, including much of the oil and gas industry.

Editor's note: The presentations from the Sanctions Panel and other panel presentations can be found here on the BIS website.

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Complimentary Export Controls and Sanctions Programs to be Held in Chicago and Milwaukee on September 7 and 8, 2011

ATTUS Technologies, a leading provider of restricted party screening solutions, will be hosting complimentary breakfast seminars in Chicago, Illinois and Milwaukee, Wisconsin on "Hot Topics in Export Controls and Sanctions Compliance."

The programs, which will be presented by Washington, DC-based export controls and trade attorney Douglas N. Jacobson, will be held in Chicago on September 7, 2011 and in Milwaukee on September 8, 2011. The programs will feature the following topics:

• Update on OFAC sanctions programs on Sudan, Libya, and other countries


• Export Controls and sanctions enforcement update


• Complying with I-129 Export Control Licensing Question and Deemed Export Compliance


• Antiboycott Compliance – What you need to know


• Merger and Acquisition Due Diligence: Importance of Reviewing Compliance With Export Controls and Sanctions Laws


• Plus, the latest news and status on U.S. export control reform efforts, including license exception STA 

Registration for these program is complimentary. For further information and to register see the following links: Chicago and Milwaukee.

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BIS Adds 15 Parties and Makes Other Changes to Entity List

Today the Bureau of Industry and Security (BIS) published a final rule in the Federal Register (pdf) adding 15 parties to the Entity List and making a number of changes to other entries as a result of the agency's annual review of the Entity List.

The Entity List includes the names of businesses, research institutions, government organizations and individuals that have been identified as being involved in activities that merit additional scrutiny and can trigger licensing requirements, even for items that may not otherwise require an export license.

The 15 parties added to the Entity List included a number of individuals, companies and airlines located in Cyprus, Greece, Iran, Syria, Ukraine and the United Kingdom.  These parties were added to the Entity List for violating U.S. restrictions involving exports to Syria and Iran. As a result of being added to the Entity List, a license will be required to export any item subject to the jurisdiction of the U.S. Export Administration Regulations (EAR) to any of the 15 parties and license exceptions are not available for transactions involving these parties. In addition, there will be a presumption of denial of any license application submitted involving any of these parties.

The changes to the Entity List also included modifying a number of current entries involving entities located in Syria and China.

For further information on the importance of checking the Entity List, see our previous post entitled "Failing to Check Entity List can be Costly."

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Failing to Check BIS Entity List Can be Costly (From the ATTUS Technologies Blog)

The following article was recently published on the ATTUS Technologies Blog and is reprinted by permission.

Failing to Check BIS Entity List Can be Costly

By Douglas N. Jacobson*

The recent payment of a $200,000 civil penalty to settle an enforcement action brought by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) serves as an important reminder to parties involved in export transactions of the need to check all restricted party lists maintained by the U.S. Government in connection with export transactions, including the Entity List.

On July 28, 2011, the Deputy Assistant Secretary for Export Enforcement signed an order approving a settlement agreement whereby freight forwarder Toll Global Forwarding (USA) Inc. agreed to pay $200,000 to settle allegations that a company that it had previously acquired, Baltrans Logistics, Inc., had arranged for the export of a number of shipments to organizations in India that were included on BIS’s Entity List.

BIS maintains three restricted party lists: the Denied Persons List, the Entity List and the Unverified List. The Entity List includes the names of businesses, research institutions, government organizations and individuals that have been identified as being involved in activities that merit additional scrutiny and licensing requirements. The entries on the Entity List specify the license requirements and license review policy that are applicable to shipments to each listed entity. In some cases, a license will be required to ship items classified as EAR99 to the customer, even when a license would not normally be required. In other cases, all items subject to the Export Administration Regulations will require a license. The export license review policy also varies from entity to entity. In some cases, there is a presumption of approval or denial and, in other cases, the license will be reviewed by BIS on a case-by-case basis.

In this case, the freight forwarder arranged for the export of electronic components and platinum pellets, both classified as EAR99, from the U.S. to Bharat Dynamics Limited and the Solid State Physics Laboratories in India. While the export of EAR99 items to India would not normally require an export license, Bharat Dynamics Limited and the Solid State Physics Laboratories were included on the Entity List at the time the shipments occurred. The BIS licensing policy for these entities was a “presumption of approval for EAR99 items” and thus an export license may have been issued if a license application would have been submitted.

Because the freight forwarder either did not check to determine whether these two organizations were included on the Entity List prior to the shipment or was not aware of the export license requirements, the freight forwarder was charged by BIS with nine violations of 15 CFR § 764.2(b), causing, aiding and abetting an act prohibited by the Export Administration Regulations (EAR).

In addition to agreeing to settle this case for $200,000, the settlement agreement requires the freight forwarder to undergo an external export compliance audit and submit the results of the audit to BIS next year. The settlement agreement also requires that any potential violations of the EAR must be submitted to BIS for review and that the failure to pay the penalty or submit the audit results as required could lead to a denial of the freight forwarder’s export privileges.

While Bharat Dynamics Limited and the Solid State Physics Laboratories were removed from the Entity List on Jan. 25, 2011, BIS adds new parties to the Entity List and the other lists that it maintains on a regular basis. The charging letter, settlement agreement and other documents related to this case can be found here.

*Douglas N. Jacobson is a Washington, D.C.-based attorney who specializes in export controls, sanctions and other international trade legal issues. He can be reached at (202) 431-2407 or info@djacobsonlaw.com.

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Commerce Department's Press Release on New License Exception STA

Below is the press release issued today by the U.S. Department of Commerce announcing the issuance of the final rule on License Exception Strategic Trade Authorization (STA) that is the subject of the previous post. I will leave it to readers to determine whether License Exception STA is actually a "major" or "significant" step forward in the export control reform process.

Commerce Department Implements New Export Control Rule to Enhance National Security, Facilitate Trade

Major step forward in President's reform initiative to modernize export control system

Washington, DC (MMD Newswire) June 16, 2011 - - U.S. Commerce Secretary Gary Locke today announced the next step in President Obama's export control reform (ECR) initiative aimed at strengthening U.S. national security and ensuring the competitiveness of American companies abroad. The Department will implement today a new license exception, Strategic Trade Authorization (STA), that will facilitate exports between the United States and partner countries while enhancing the competitiveness of key industrial base sectors.

The Export Control Reform Initiative aims to build higher fences around a core set of items whose misuse can pose a national security threat to the United States. By facilitating trade to close partners and allies, the Commerce Department can better focus its resources ensuring the most sensitive items do no end up where they should not.

"This is an important first step towards creating a system that addresses the serious threats we face in today's changing economic and technological landscape. This new license exception will eliminate the need for U.S. exporters to seek licenses in nearly 3,000 types of transactions annually, affecting an estimated $1.4 billion in goods and technology," Commerce Secretary Gary Locke said. "The new license exception will allow us to focus our resources on items that pose a significant national security risk and help facilitate U.S. exports."

"This is a significant step in President Obama's Export Control Reform Initiative which enhances our national security and makes U.S. exporters more competitive by easing their licensing burden for exports to partners and allies," said Under Secretary of Commerce for Industry and Security Eric L. Hirschhorn.

Items such as electronic components for use on the International Space Station, cameras for search and rescue efforts for fire departments, components for civil aviation navigation systems for commercial aircraft, airport scanners, and toxins for vaccine research will be eligible for the new license exception.

At the same time, the license exception establishes new safeguards designed to ensure Department of Commerce approval is obtained before controlled items exported under the exception are re-exported outside of authorized destinations.

To see a copy of the regulation published in the Federal Register Notice, go to http://www.gpo.gov/fdsys/pkg/FR-2011-06-16/pdf/2011-14705.pdf.

Background

The President has directed a broad-based interagency reform of the U.S. export control system with the goal of strengthening national security and the competitiveness of key U.S. manufacturing and technology sectors by focusing on current threats and adapting to the changing economic and technological landscape.

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Bureau of Industry and Security Unveils New License Exception Strategic Trade Authorization (STA)

As part of the ongoing export control reform process, the Bureau of Industry and Security today published in the Federal Register (PDF version of notice) the anticipated new license exception Strategic Trade Authorization (STA).

Under the U.S. Export Administration Regulations, a license exception authorizes the export or reexport of eligible products, software and technology without having to submit a license application and obtain a license from BIS as long as the specific conditions of the license exception are followed.

While License Exception STA will take effect immediately for eligible products, software and technology, as discussed below, it will take some time before the Automated Export System (AES) is modified by the Census Bureau to add the appropriate code in AES.

The scope of the final version of License Exception STA was significantly changed from the version included in the proposed rule published in December 2010. For example, the list of countries eligible to export controlled items that are considered to be less sensitive items was narrowed from 125 countries to eight. Although the final rule does not mention the reason, Ukraine was removed from the list of STA eligible countries.

In addition, based on input received during the public comment period BIS has clearly indicated that License Exception STA can be used for "deemed exports."

According to the final rule, License Exception STA can only be used to export products, software and technology in specific Export Control Classification Numbers (ECCNs) on the Commerce Control List without a license to the following 36 countries (known as 740.20(c)(1) destinations):

Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.

ECCNs eligible to be exported to these 36 countries are indicated by the designation "STA" in the License Exception section of the particular ECCN.

For certain ECCNs involving less sensitive items, software and technology, the following eight additional countries (known as 740.20(c)(2) destinations) are eligible for license exception STA shipments:

Albania, Hong Kong, India, Israel, Malta, Singapore, South Africa, and Taiwan.

However, items controlled for national security reasons are not eligible to be exported under STA to these eight countries and are indicated by "exclusion paragraphs" in the specific ECCN text. 

In addition, items on the Commerce Control List that are subject to control for encryption (EI), short supply (SS), surreptitious listening (SL), missile technology (MT), chemical weapons (CW), and human rights reasons are not eligible for License Exception STA because of various requirements imposed by statutes, treaties or U.S. implementation of international commitments.

The final rule made some favorable changes to the notification requirement contained in the proposed rule. However, the following three conditions will apply to exports, reexports and transfers made under STA:

Condition 1. The consignee must be furnished with the ECCN that applies to each item transferred under License Exception STA. The ECCN notification needs to be made only once for each item to be shipped. As long as the ECCN remains accurate, it does not need to be refurnished for subsequent shipments.

Condition 2. Consignees must provide, prior to the shipment, the following written statement identifying the items to be shipped and restating the ECCN(s) to be shipped.

[CONSIGNEE NAME]:
(i) Is aware that [INSERT DESCRIPTION AND APPLICABLE ECCNS OF ITEMS TO BE SHIPPED] will be shipped pursuant to License Exception Strategic Trade Authorization (STA) in § 740.20 of the United States Export Administration Regulations (15 CFR 740.20); (ii) Has been informed of the ECCNs noted above by [INSERT NAME OF EXPORTER, REEXPORTER OR TRANSFEROR];
(iii) Understands that items shipped pursuant to License Exception STA may not subsequently be reexported pursuant to paragraphs (a) or (b) of License Exception APR (15 CFR 740.16(a) or (b));
(iv) Agrees not to export, reexport or transfer these items to any destination, use or user prohibited by the United States Export Administration Regulations; and
(v) Agrees to provide copies of this document and all other export, reexport or transfer records (i.e., the documents described in 15 CFR part 762) relevant to the items referenced in this statement to the U.S. Government as set forth in 15 CFR 762.7.

The consignee’s written statement must be maintained as well as a log or other written record that identifies each shipment associated with a particular statement.

Condition 3. The consignee must be notified in writing that the shipment is made pursuant to License Exception STA. The notice must either specify which items are subject to License Exception STA or state that the entire shipment is made pursuant to License Exception STA. The notice must clearly identify the shipment to which it refers. The written notice may be conveyed by paper documents or by electronic methods such as facsimile or email.

For "deemed exports," the ECCN notification, consignee statement, and destination control statement requirements are replaced with a requirement that the releaser of the technology or source code notify the recipient in writing of the restrictions on further release and other requirements.

As with all BIS license exceptions, the applicable license exception symbol and code will have to be reported in Electronic Export Information (EEI) filings, regardless of the value of the shipment. The U.S. Census Bureau will soon modify the Automated Export System (AES) by adding a new License Type Code for License Exception STA.

BIS has previously indicated that License Exception STA has the potential to eliminate approximately 3,000 individual licenses that BIS issued last year. Given the narrowed scope of the final version of STA, this number is likely to be reduced. Nevertheless, even if a smaller number of individual licenses do not have to be obtained by U.S. exporters, License Exception STA is a positive development.

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Representative Berman Introduces Bill to Update U.S. Export Control System

Today, Representative Howard Berman (D-CA), the Ranking Member on the House Foreign Affairs Committee introduced what is expected to be the first of several bills to update the U.S. dual-use export control system. Such a bill is needed because the Export Administration Act of 1979 (EAA), the last major export control bill enacted by Congress, lapsed in August 2001 and the Export Administration Regulations have remained in effect as a result of successive presidents invoking the International Emergency Economic Powers Act (IEEPA).

Representative Berman's 68 page bill, entitled the Technology Security and Antiboycott Act (pdf) (no bill number assigned as of this writing), would repeal the EAA and replace the authority in that law with a new statutory scheme that reflects the numerous technological advances and global changes that have occurred since 1979.

The following are some of the key aspects of the Technology Security and Antiboycott Act:

• Provides the President with authority to deploy controls to counteract current and future national security threats, including rogue governments, terrorist organizations, and other non-state actors that seek to attack the U.S. and its allies.

• Modernizes the definition of "national security" to include sustaining U.S. leadership in science, manufacturing and our high-tech workforce, and requires the President to balance traditional security goals with maintaining U.S. academic and manufacturing leadership in applying controls.

• Updates the definition of "dual-use" to include capable of being used in terrorist or cyber attacks. 

•  Establishes a process for regular review of the Commerce Control List to ensure that new items are adequately controlled and that the level of control of items on the lists are adjusted as conditions change.

• Requires control lists to be published in a form that facilitates compliance by small and medium sized businesses and academic institutions.

• Retains IEEPA penalty structure of maximum criminal penalties of $1 million or 20 years in prison and maximum civil penalties of $250,000 or twice the amount that this the basis of the violation.

• Civil penalties for export violations would be based on seriousness of the violation, culpability of the violator and violator's record of cooperation with the government.

• Provides that penalties for export and antiboycott violations would be subject to judicial review.

• Requires the publication of "best practices" guidelines to assist persons in developing and implementing, on a voluntary basis, effective export control programs.

• Provides that implementation of an effective export compliance program should be mitigating factors in civil penalty cases.

• Requires civil aircraft parts certified by the Federal Aviation Administration to be subject to dual-use controls under the Technology Security Act and not the International Traffic in Arms Regulations (ITAR).

• Establishes the Transfer Policy Committee, a high-level interagency management group responsibility for overall administration, rule-making and oversight of export controls. 

• Reenacts provisions authorizing the antiboycott authority and non-proliferation (missile and chemical and biological) functions of the U.S. government.

The Technology Security and Antiboycott Act is expected to be referred to the House Foreign Affairs Committee, where Representative Berman is the senior Democrat. Representative Ileana Ros-Lehtinen (R-FL), the Chairman of the House Foreign Affairs Committee indicated in the May 12, 2011 export control hearing that she plans to introduce a bill to that would authorize a short-term extension of the lapsed Export Administration Act that would also include other provisions to "help enable Congress and the Administration to tackle together the critical changes necessary to strengthen our national security, while advancing commercial interests." The Obama Administration is also working on legislative language to implement those aspects of the export control reform reform process that requires legislation.

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EU Export Controls for North American Trade Compliance Professionals to be Held in DC on July 18, 2011

The Trusted Trade Institute is holding a one-day program on European Union (EU) export controls on July 18, in the Washington, DC area.

The program, entitled "EU Export Controls for North American Trade Compliance Professionals" is being held the Monday before the annual BIS Update Conference on Export Controls, in order to allow those who reside outside of the Washington, DC area to attend both programs in one trip.

This Special Master Class is designed to give participants an overview of the essentials of EU dual-use export controls, with an introduction into the complexity presented by the national administration
of those controls (and their own additional controls) by the individual EU Member States.

Led by a senior official of Germany’s export control agency, this program will outline parallels and contrasts between the EU and US regulatory systems. The program will feature practical presentations and information presented by leading export control attorneys and consultants from the perspective of both
in-house counsel and outside counsel/consultants. The program will also feature keynote remarks by Kevin Wolf, the U.S. Department of Commerce’s Assistant Secretary for Export Administration.

Further information on these programs, including the agenda, speaker bios and registration information, can be found below. The direct registration page can be found here.

EU Export_Controls_2011_Trusted Trade Institute July 18, 2011

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DDTC Publishes Final Rule Adding ITAR Exemption for Certain Transfers to Dual Nationals and Third-Country Nationals Employed by End-Users

Today the State Department's  Directorate of Defense Trade Controls (DDTC) published a final rule in the Federal Register modifying the policy on providing access to ITAR-controlled defense articles and technical data to dual national and third-country nationals that are employed by authorized end-users that are not otherwise eligible to receive controlled items or information under an existing ITAR exemption.

This final rule, which will not take effect until August 15, 2011, culminates a process that began when the proposed rule was published by DDTC on August 11, 2010 (75 Fed. Reg. 48,625) as part of the Obama Administration's export control reform process. Because of the impact of the proposed rule and the interest and sensitivity of this issue outside of the U.S. DDTC received 32 comments, including comments submitted by foreign governments, the American Bar Association, manufacturers and exporters of defense articles, and other interested trade associations. 

While the public comments submitted were unfortunately not been released to the public, DDTC noted that "the overwhelming majority of commenting parties expressed dissatisfaction with the current rule regarding dual and third-country nationals, citing conflicts with foreign human rights laws as well as the burden of compliance, and welcomed the Directorate of Defense Trade Controls' (DDTC) efforts to reform current practice."

It is important to note that this final rule does not completely address President Obama's goal announced in his speech to the Ex-Im Bank on March 10, 2010 where he pledged to harmonize the EAR and ITAR's conflicting standards on dual and third country nationals, to eliminate the double standard between how the United States treats its own dual nationals and what it demands of other countries; and resolve the inherent conflict between U.S. policy and other countries’ privacy, employment discrimination, and human rights laws.

What today's final rule does do is is to amend Parts 120, 124, and 126 of the ITAR to allow dual national and third-country nationals that are employees by approved end-users once specific procedures have been implemented. Specifically, the final rule adds a new exemption in section 126.18 that allows for intra-company, intra-organization, and intra-government transfers of unclassified defense articles and technical data to dual national and third-country nationals who are bona fide regular employees of the foreign consignee or end-user as long as the transferor has "effective procedures" to prevent diversion to destinations, entities, or for unauthorized purposes. With respect to the scope of effective procedures, section 126.18(c) provides that a security clearance approved by the host nation government for its employees or  a Non-Disclosure Agreement will be sufficient. However, the end-user or consignee must also screen its employees for substantive contacts with restricted or prohibited countries listed in Section 126.1 of the ITAR (which includes China, Venezuela, among others). While the "substantive contacts" screening process was widely criticized, DDTC responded by stating that "It is not DDTC's intent to deny access based solely upon relationships or contacts with family members in a context posing no risk of diversion." However, DDTC also stated that "contacts with government officials and agents of governments of Sec. 126.1(a) countries, be they family or not, would require higher scrutiny."

In response to overwhelming criticism, DDTC left in place the "special retransfer authorizations" in section 124.16 of the ITAR when a Technical Assistance Agreement or Manufacturing License Agreement is in place and the foreign nationals are citizens of NATO and certain other countries. However, DDTC amended section 124.16 section to include workers who have long term employment relationships with licensed end-users, in accordance with the new definition of "regular employee'" added in part 120.

To give readers of International Trade Law News an idea of the international reaction to today's final rule, below is an analysis of DDTC's final rule by two experienced export controls practitioners in the Toronto office of McCarthy Tétrault, a leading Canadian law firm.

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Guest Post: Final US ITAR Rule on Dual and Third Country Nationals Raises New Challenges for Canadian Business

Guest Post: Final US ITAR Rule on Dual and Third Country Nationals Raises New Challenges for Canadian Business

by: John W. Boscariol, Brenda C. Swick

Today, the U.S. State Department’s Directorate of Defense Trade Controls (DDTC) published in the Federal Register the final rule containing its long-awaited amendments to the International Traffic in Arms Regulations (ITAR) governing the access of dual and third-country nationals to ITAR-controlled defence articles, including technical data. These, together with ongoing changes to Canada’s Controlled Goods Program (CGP) generally covering similar goods and technology, are anticipated to have a significant effect on Canadian companies in the aerospace, defence and satellite sectors, and in particular on their security, compliance and screening processes.

Up to now, Canadian firms have faced numerous difficulties with ITAR rules that prohibit employees of certain nationalities or born in certain proscribed countries from accessing US-controlled defence goods 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 ITAR-controlled items because of their nationality or country of birth. Companies in affected sectors have had to address, defend and settle costly, and in some cases very public, anti-discrimination claims arising from ITAR compliance.

DDTC officials have stated that the final rule is intended to move away from nationality-based screening and avoid the human rights conflicts that have plagued trade partners in Canada and other countries.

These proposed changes were first released on a preliminary basis for comment by DDTC in August of 2010. Our legal update discussing the preliminary rule can be found here. The final rule retains the essence of what was initially proposed, with some minor changes to the text and some other more significant revisions referred to below.

ITAR Defence Articles May Now be Transferred to 3rd Country or Dual National Employees

Under new ITAR section 126.18, DDTC approval will not be required for the transfer of defence articles, including technical data, to a foreign business entity, foreign government entity, or international organization 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 consignee or end-user." This exemption will apply provided the transfer takes 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.

Key Condition — Effective Procedures to Prevent Diversion

As a condition of transferring to foreign person employees under this provision, the recipient of the defence article is required to have in place "effective procedures to prevent diversion to destinations, entities, or for purposes other than those authorized by the applicable export licence or other authorization in order to comply with the US Arms Export Control Act and the ITAR."

In order to be considered to have such effective procedures, Canadian firms that are consignees or end-users of the defence articles must either (i) require a security clearance approved by the Canadian government for its employees or (ii) implement a screening process for their employees and execute Non-Disclosure Agreements that provide assurances that employees will not transfer any information to persons or entities unless specifically authorized by the employer.

Under the new rule, Canadian firms will be required to screen all employees who are to access controlled items for "substantive contacts" with the 25 restricted or prohibited countries under the ITAR— including China, Vietnam, Haiti, Venezuela and other countries subject to US military sanctions. The final rule has expanded upon what is meant by substantive contacts — these now include:

regular travel to those countries;
recent or continuing contact with agents, brokers and nationals of those countries;
continued demonstrated allegiance to those countries;
maintenance of business relationships with persons from those countries;
maintenance of a residence in those countries;
receiving salary or other continuing monetary compensation from those countries; or
acts otherwise indicating a risk of diversion.

The amendments provide that, although an employee’s nationality is not in and of itself a determinative factor prohibiting access to defence articles, if an employee is determined to have substantive contacts with persons from the ITAR-restricted or prohibited countries, this is presumed to raise a risk of diversion "unless DDTC determines otherwise".

Companies are also required to maintain a technology security/clearance plan that includes procedures for screening employees’ substantive contacts and maintaining records of the same for five years. The technology security/clearance plan and screening records are to be made available to DDTC or its agents for civil or criminal law enforcement upon request.

Other Significant Aspects of the New Rule

The final rule and DDTC’s accompanying commentary address a number of additional significant issues for Canadian companies:

Perhaps most significant from the Canadian perspective is that, despite requests from parties commenting on the proposed changes, DDTC did not agree to an explicit exemption for companies that comply with other countries’ domestic industrial security programs that provide for effective screening and other security measures for the protection of these controlled items. This means that Canadian companies that are registered and comply with Canada’s Controlled Goods Program (which applies to essentially the same items) must still review and revise existing security measures to ensure compliance with this new ITAR rule for all their employees that will access ITAR-controlled goods or technology.
A number of commenting parties had expressed concern that contract employees would not be subject to the new rule. Although DDTC resisted applying the rule to all contract employees, they agreed to narrowly extend it to workers who have a long-term employment relationships with licensed end-users. This is reflected in a new definition of "regular employee". In addition to an individual permanently and directly employed by the company, "regular employee" now also includes "an individual in a long term contractual relationship with the company where the individual works at the company’s facilities, works under the company’s direction and control, works full time and exclusively for the company, and executes nondisclosure certifications for the company, and where the staffing agency that as seconded the individual has no role in the work the individual performs (other than providing that individual for that work) and the staffing agency would not have access to any controlled technology (other than where specifically authorized by a license)".

Many Canadian companies currently benefit from ITAR section 124.16 special retransfer authorizations. They permit retransfers of defence articles and technical data to employees of foreign (including Canadian) entities who are nationals exclusively of NATO or EU countries or Australia, Japan, New Zealand or Switzerland. DDTC initially proposed to eliminate 124.16 with the implementation of the new rule. In its final rule, however, DDTC reconsidered its position and noted a major concern expressed by commenting parties was that the proposed dual national rule did not include transfer to approved sub-licencees (which are included under section 124.16). Under the new amendments, section 124.16 is now retained and its definition of "regular employee" has been amended to include workers who have long-term employment relationships with end-users as discussed above.
Academic institutions in Canada have encountered particular challenges with compliance issues arising in the context of ITAR-controlled goods and technology. Any uncertainty regarding the application of the new rule to Canadian universities was put to rest by DDTC when it noted in its commentary that it is not prepared to extend the exemption to academic institutions at this time.

Interaction with Canada’s Controlled Goods Programs

Despite DDTC’s refusal to allow an explicit exemption for CGP-registrants at this time, Canada is developing measures to accommodate these new ITAR requirements in an attempt to facilitate compliance for Canadian companies. Following a security threat and risk review, Canada’s Controlled Goods Directorate at Public Works and Government Services (CGD) recently implemented its Enhanced Security Strategy which includes the development of a risk matrix for identifying individuals at risk of unauthorized transfer of controlled goods.

New Questionnaire Developed for Canadian Companies

CGD has indicated that a screening questionnaire is being developed and will be provided to Canadian companies to assist them to identify risks during the security assessment of their employees under the CGP. Factors to be considered in such an assessment are not unlike those in the "substantive contact" analysis under the new ITAR rule and include the following:

contacts with government officials, agents or proxies;
business and/or family contacts;
continuing allegiance to a foreign country;
relationship with a foreign country government (e.g., employment);
frequent travel:
residence and/or bank accounts in a foreign country; and
affiliations within or outside Canada.

CGD has also indicated that the nature and substance of these contacts will be used to determine if an individual should be subject to broader security assessment or denied registration. Where the risk threshold is exceeded, CGD, working with a number of other government departments, will undertake a risk assessment of the individual to determine whether or not access should be granted.

Additional Measures Under the Enhanced Security Strategy

Also included in CGD’s Enhanced Security Strategy are measures to tighten security requirements for Canadian registrants under the CGP in a number of areas, including: students, interns and collectors; broader security assessments of foreign temporary workers and visitors; broader security assessments of transportation companies (together with Transport Canada); additional requirements for a company’s security plan, especially relating to cyber-security risks; more in-depth inspection processes; and the development of a list of debarred individuals and companies.

Next Steps

The new ITAR rule becomes effective August 15, 2011. This, along with Canada’s new CGP requirements, will require Canadian companies to implement enhanced security measures, including screening of all employees requiring access to controlled items. What this exactly entails will have to be determined on a case-by-case basis for each particular employer. It is expected that there will be challenges for Canadian companies undertaking these measures to ensure their procedures satisfy the diligence required by ITAR but at the same time do not expose them to risk of non-compliance with human rights and privacy laws in Canada.

It will be important for Canadian companies in the military, aerospace and satellite sectors that access controlled goods and technology to work closely with their US and Canadian counsel to ensure compliance with the applicable defence control regimes in both countries as well as the requirements for employment, privacy and human rights laws.

McCarthy Tétrault’s International Trade and Investment Law Group has extensive experience in dealing with defence trade control measures and is available to advise on related enforcement, compliance and strategic planning issues.

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