By: John Black
It’s here. The ITAR exemption for the UK. After years and years of failed attempts to get the US Congress to change the Arms Export Control Act to allow an exemption for the UK, the Bush Administration decided to use US-UK treaty as the basis for the exemption because the US House of Representatives does not have the authority to block treaties. Then the US and the UK negotiated the treaty. Then we waited while the two governments worked out the details involved in implementing the treaty. There were preliminary regulations, draft regulations, proposed regulations.
Now we have the real regulations. We have the ITAR exemption for the UK. So now it is time to export away!
Maybe your boss or your sales department heard the new exemption gets rid of ITAR issues for the UK. Unfortunately, the ITAR exemption for the UK is not a free ticket to export. Instead it is a complex exemption with multiple requirements, limitations, and burdens.
As I approach my 28th year in export compliance I wonder if I have ever seen anything as complicated as this. Certainly many exporters right now still prefer to get an export license over trying to use the new exemption. I guess the first test of whether the exemption is for you, is to see whether you can even finish reading this article.
Before you use this new exemption in ITAR 126.17, you need to ask, answer and act on at least these questions:
- What are the eligible exports from the US to the UK?
- What are the eligible transfers within the UK?
- What are the eligible retransfers from the UK?
- What are the eligible defense articles and defense services?
- What are the eligible parties—The “UK Community”?
- What are the eligible end-uses?
- What are the mandatory marking and destination control statement requirements?
- What are the mandatory recordkeeping requirements?
- What are the mandatory EEI requirements?
- What compliance procedures should I put in place to make sure we use this properly?
Let’s get some background before we start. The general idea is that UK exemption authorizes movements of ITAR items within a trusted community, which consists of the “US Community” and the “UK Community,” as long as the item and the end-use are eligible.
The exemption has some special definitions that apply only for the exemption:
“Export” means the initial export from the US to the UK.
“Transfer” means the movement of an item inside of the UK Community or between a member of the US Community and the UK Community.
“US Community” is the US Government and US persons registered with DDTC and eligible to export under the ITAR.
“UK Community” is UK Government entities identified on the DDTC website and UK non-governmental entities identified on the DDTC website. (Funny that DDTC will publish the names of eligible UK companies on its website but it will not publish the names of eligible US companies.)
“Intermediate Consignee” is an entity that receives defense articles, but does not have access to them, for the purpose of effecting movement to members of the approved Community.
Special Webpage: The exemption and this article frequently refer to something being on the DDTC website. That “Treaties” webpage is: http://pmddtc.state.gov/treaties/index.html. The Federal Register notice is http://www.pmddtc.state.gov/FR/2012/77FR16592.pdf.
Now let’s take a look at answering some of these questions
What are the eligible exports from the US to the UK? ITAR 126.17(a)(3)
An export from an entity registered with DDTC to a member of the UK Community involving only intermediate consignees who are not ITAR ineligible. The export must be for an eligible end-use as defined in 126.17(e) and (f). The item must not be excluded from eligibility by 126.17(g) or the new Supplement No. 1 to Part 126. If Congressional Notification is required, you have to satisfy the requirements of 126.17(o) before you export.
What are the eligible transfers within the UK?
You may only transfer items exported pursuant to 126.17(a)(3) or transitioned from an approved license or other approval according to the requirements of 126.17(i). The transferor and transferee must be members of the UK Community. The end use must be eligible per 126.17(e) and (f). The item must not be excluded from eligibility by 126.17(g) or the new Supplement No. 1 to Part 126. If Congressional Notification is required, you have to satisfy the requirements of 126.17(o) before you export.
What are the eligible retransfers from the UK? 126.17(h)
First, as you probably guessed the item and end use have to be eligible as discussed above for exports and transfers. Also, the authorized retransfer does not apply to items excluded by 126.17(g) or Supplement No. 1 when they are embedded into a larger system that is eligible—for example, an electronically scanned array radar embedded in a ship or aircraft. Here are the eligible retransfers/reexports:
Eligible items from a member of the US Community or the UK Community to UK Ministry of Defence (MOD) elements deployed outside of the UK and engaged in an authorized end use.
Eligible items from a member of the US Community or the UK Community to another member of the US Community or the UK Community operating in direct support of UK Ministry MOD elements deployed outside of the UK and engaged in an authorized end use.
Eligible items for delivery to the UK MOD for an authorized end use. The UK MOD may use the items for official business inside or outside of the UK. The items must remain under the effective control of the UK MOD and access may not be given to unauthorized third parties.
What are the eligible defense articles and defense services? 126.17(g)
ITAR 126.17(g) defines the items excluded from the exemption and says that the items in the new Supplement No. 1 to Part 126 are not eligible. This new Supplement No. 1 is a lengthy document that identifies the items ineligible for the ITAR exemptions for Canada and the UK, and eventually Australia.
You really need to read the entire Supplement No. 1 before you decide whether your defense article or defense service is eligible. Do not fail to read the Notes at the end of Supplement No. 1 because they often play a critical role in defining the scope of what is eligible. Also, the way the supplement works is an item might appear to be eligible if you read only one area of the supplement, when in fact it may be made ineligible by another area in the supplement. For example, you may open up the supplement and jump to the USML Category VIII and see that your marketing technical data related to complete aircraft in Category VII are eligible. The problem with that approach is that at the very beginning of the supplement, long before you get to the Category VIII, there is an exclusion that says you may not use the exemption for technical data in every Category (I-XXI) if it is going to be used for marketing items that DDTC has not previously licensed for export.
In addition to saying the items in Supplement No. 1 are ineligible, paragraph 126.17(g) has these limitations on eligible items:
- You may export eligible items for marketing defense articles only if DDTC has previously approved the export of the eligible item.
- Defense articles specific to the existence of (e.g., reveals the existence of or details of) anti-tamper measures made at the direction of the US Government are ineligible.
- 126.17(g)(3) has special rules for classified items.
- 126.17(g)(4) has special rules for development systems that have not obtained Milestone B approved for the US Department of Defense.
- 126.17(g)(5) has special rules for certain items that are eligible but incorporate an item that is ineligible—for example, an electronically scanned array radar embedded in an eligible aircraft or ship.
- 127.17(g)(8) explains that items that are on the European Union Dual Use List are not eligible. These items are actually in Supplement No. 1. This just points out that if the EU (and the UK) does not apply their military export controls to something that the US controls with the ITAR, the US is going to exclude them from the exemption.
What are the eligible parties—The “Approved Community”?
At the beginning of this article we defined the US Community and the UK Community. The exemption applies only when the parties involved are in the approved communities or an eligible intermediate consignee.
ITAR 126.17(k) defines when and which intermediaries may be involved in an eligible transaction.
Don’t forget the ITAR requires that a party is eligible at the time of shipment. The ITAR warns you that some UK parties may be removed from the UK Approved Community. That means you might not want to just check the list once for Company X and assume that Company X is always ok.
What are the authorized end-uses? 126.17(e) and (f)
126.17(e) talks about the types of end uses that will be eligible. 126.17(e) gives you an idea of the eligible end uses but for an actual end use to be eligible for your export or transfer, it has to be listed on the DDTC webpage, identified in a DDTC letter, or a DOD contract as required by 126.17(f).
126.17(e) says these end uses are the types that will be authorized
(1) United States and United Kingdom combined military or counter-terrorism operations;
(2) United States and United Kingdom cooperative security and defense research, development, production, and support programs;
(3) Mutually determined specific security and defense projects where the Government of the United Kingdom is the end-user; or
(4) U.S. Government end-use.
126.17(f) tells you how to determine if an end-use is eligible. It says that only these end uses are eligible:
- Operations, programs and projects that can be publicly identified will be posted on the DDTC website.
- Operations, programs and projects that cannot be publicly identified will be confirmed in written correspondence from DDTC.
- US Government end-use will be identified specifically in a US Government control or solicitation as eligible under the Treaty.
So if your end use is described by 126.17(e) but does meet the 126.17(f) requirement that it be listed on the DDTC website, identified in a DDTC letter, or in a DOD contract, you may not use the exemption.
What are the mandatory marking and labeling requirements? 126.17(j)
When you use the exemption for exports or transitions, you have to mark the defense articles and services with a special marking. The two primary markings are:
1) [126.17(j)(1)(i)] For exports of classified defense articles and defense services the standard marking or identification shall read: “//CLASSIFICATION LEVEL USML//REL GBR and USA Treaty Community//.” For example, for defense articles classified SECRET, the marking or identification shall be “//SECRET USML//REL GBR and USA Treaty Community//.”
2) [126.17(j)(1)(ii)] For exports of unclassified defense articles and defense services exported under or transitioned pursuant to this section shall be handled while in the UK as “Restricted USML” and the standard marking or identification shall read “//RESTRICTED USML //REL GBR and USA Treaty Community//.”
There is a third marking to be used in a special circumstance:
Where U.S.-origin defense articles are returned to a member of the United States Community, any defense articles marked or identified pursuant to paragraph (j)(1)(ii) above as “//RESTRICTED USML //REL GBR and USA Treaty Community//” will be considered unclassified and the marking or identification shall be removed;
Different types of items have to be marked in these ways:
- For defense articles other than tech data, the items must be individually labeled with appropriate statement from above. If you cannot label an individual item (e.g., a powder or propellant) then you must include with such items documents (e.g., contracts or invoices) that have the marking.
- Technical data must be individually labeled with appropriate statement from above. If you cannot label an individual item (e.g., a powder or propellant) then you must include with such items documents (e.g., contracts or invoices) that have the marking or by a verbal notification of the marking.
- Defense services must be accompanied by documentation (contracts, invoices, shipping bills or bills of lading) clearly labeled with the marking.
In addition to the above marking, there is a special destination control statement required for exports:
“These U.S. Munitions List commodities are authorized by the U.S. Government under the U.S.-UK Defense Trade Cooperation Treaty for export only to United Kingdom for use in approved projects, programs or operations by members of the United Kingdom Community. They may not be retransferred or reexported or used outside of an approved project, program, or operation, either in their original form or after being incorporated into other end-items, without the prior written approval of the U.S. Department of State.”
What are the mandatory recordkeeping requirements? 126.17(l)
The exemption says that US exporters must keep records for their exports and transfers. Interestingly, the paragraph 126.17(l) does not say that UK parties have to keep records.
US exporters who use the exemption must keep these records:
(i) Port of entry/exit;
(ii) Date of export/import;
(iii) Method of export/import;
(iv) Commodity code and description of the commodity, including technical data;
(v) Value of export;
(vi) Reference to this section and justification for export under the Treaty;
(viii) Identification of all U.S. and foreign parties to the transaction;
(ix) How the export was marked;
(x) Security classification of the export;
(xi) All written correspondence with the U.S. Government on the export;
(xii) All information relating to political contributions, fees, or commissions furnished or obtained, offered, solicited, or agreed upon as outlined in paragraph (m) of this section;
(xiii) Purchase order or contract;
(xiv) Technical data actually exported;
(xv) The Internal Transaction Number for the Electronic Export Information filing in the Automated Export System;
(xvi) All shipping documentation (including, but not limited to the airway bill, bill of lading, packing list, delivery verification, and invoice); and
(xvii) Statement of Registration (Form DS-2032
What are the mandatory EEI requirements? ITAR 126.17(l)
When you file your Electronic Export Information (EEI) for your US export “shipments” you must fill in the appropriate field in your EEI as follows:
- For exports in support of United States and United Kingdom combined military or counter-terrorism operations identify §126.17(e)(1) (the name or an appropriate description of the operation shall be placed in the appropriate field in the EEI, as well);
- For exports in support of United States and United Kingdom cooperative security and defense research, development, production, and support programs identify § 126.17(e)(2) (the name or an appropriate description of the program shall be placed in the appropriate field in the EEI, as well);
- For exports in support of mutually determined specific security and defense projects where the Government of the United Kingdom is the end-user identify 126.17(e)(3) (the name or an appropriate description of the project shall be placed in the appropriate field in the EEI, as well); or
- For exports that will have a U.S. Government end-use identify 126.17(e)(4) (the U.S. Government contract number or solicitation number (e.g., “U.S. Government contract number XXXXX”) shall be placed in the appropriate field in the EEI, as well). Such exports must meet the required export documentation and filing guidelines, including for defense services, of §§123.22(a), (b)(1), and (b)(2) of this subchapter.
What compliance procedures should I put in place to make sure we use this properly?
If you are still reading, you may have decided that you will just stick to the old fashioned DSP-5s, TAAs, and the like. If you want to use the new exemption, you need to put in place compliance procedures to make sure you comply with the complex, complicated and lengthy requirements. Before you put in place procedures or use the exemption, you need to spend time reading and studying the exemption.
- Procedures for determining if a specific export or transfer is eligible by assessing the items, parties, and end use. You may want to check some or all of these things on a shipment-by-shipment basis.
- Procedures for doing the proper markings, destination control statement, EEI information.
- Procedures for recordkeeping.
- Procedures for other things such as Congressional Notification and reporting political contributions, fees and commissions.
- Procedures for training your export compliance people and everybody else who will be involved in your activities under the exemption. You need to train your management too because implementing these procedures will require significant resources. You may also want to train the other companies and entities that will be involved in your activities under the new exemption.
Honestly, I am just highlighting the tip of the iceberg on compliance procedures. You most likely already do things that are similar to what you have to do under the exemption—for example, you already do EEI filing so you just have to modify the existing procedure to do EEI properly for the exemption.
These things may be similar to what you already do, but significantly different. For example, you already screen for prohibited parties and at first glance you might think you could tweak that system to screen for approved parties. The prohibited parties lists are published and you can do batch screening. The UK Community list is not published. You have to get the UK party’s ACID and enter it into the tool on the DDTC website to find out if it is valid. It might be valid today and invalid tomorrow so you might have to check an ACID on a case-by-case basis.
(Note: It is an ACID, not an ACID number, because ACID number would be an Approved Community Identification Number number.)
Off the record, a couple of days ago I actually went to the tool and since I didn’t have an ACID, I made up a few using what I thought would be reasonable combinations of letters and numbers. I got a couple replies that the ACID was invalid and then the tool told me if I entered another invalid ACID I would be in a heap of trouble. Just now, as I was writing this article, I went back to the tool to try again and this time I got this message when the tool opened: “Recursion too deep; the stack overflowed.”
Be careful using the new UK exemption. If you are not careful the next thing you know you will be up to your eyeballs in recursion with no hope of capping your stack.