By: Johanna Reeves, Esq., firstname.lastname@example.org, +1 202-715-9941; and Katherine Heubert, Esq., email@example.com, +1 202-715-9940. Both of Reeves & Dola, LLP. (Source: R/D Report)
Earlier this year, the U.S. Department of State, Directorate of Defense Trade Controls (DDTC) published a proposed rule in the Federal Register to amend the International Traffic in Arms Regulations (ITAR) and revise U.S. Munitions List (USML) Categories I, II, and III to better identify the articles the U.S. government believes warrants export and temporary import control on the USML. Those items deemed not to require control under the ITAR are proposed to be removed from the USML and would become subject to the U.S. Department of Commerce, Bureau of Industry and Security’s (BIS) Export Administration Regulations (EAR). BIS published a companion proposed rule at the same time to identify where those items removed from the USML will be controlled on the Commerce Control List (CCL). We covered the proposed transition rules in our alerts, dated May 23, June 1, June 8, and June 13, 2018, all of which can be accessed at reevesdola.com.
Soon the highly anticipated rules containing the final rewrites of U.S. Munitions List Categories I, II, and III should be published. In advance of their publication, companies should begin to prepare now in order to be best positioned to take advantage of the change in regulations as soon as they become effective. In this alert we seek to answer some basic questions about the transition and walk through the review process that companies will need to undertake to determine which set of controls will now apply to their goods and services.
What Will the Rewrites Do?
As many of you already know, USML Categories I, II, and III are the last USML categories to go through the revision process. All other USML Categories have been revised, some multiple times already as part of the previous Administration’s Export Control Reform (ECR) effort. What the upcoming final rules will do is to remove from the USML those items the U.S. government has determined to be of less military significance or of a more commercial nature. As explained in the proposed rule, DDTC’s intent is to revise these categories so that the scope of the respective USML Category is limited to those defense articles that provide the United States with a “critical military or intelligence advantage or are inherently for military end use.” (83 FR 24198). DDTC further explains in the proposed rule that the articles that would be removed from the USML do not meet this standard, and notes that many items are widely available in retail outlets in the United States and abroad. Those items removed from the USML will be subject to the EAR in new Export Control Classification Numbers (ECCNs) on the CCL.
Despite what many have claimed, this is not a decontrol of the items identified for removal from the USML. Rather, it is a right-sizing of U.S. export controls. Items that have historically required a license from DDTC will now be subject to the export licensing requirements of the EAR. However, this does not mean that companies will be able to ship firearms and ammunition throughout the world without a license. To the contrary, many items moving to the CCL will require an export license from BIS, even to Canada. It is also important to remember that the revisions to the USML have no impact on how the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) controls firearms and ammunition for permanent import into the United States under its regulations at 27 C.F.R. Part 447.
Has the Transition Already Taken Effect?
No! As of today, the revisions have not yet been published as a final rule and the USML currently remains unchanged for Categories I, II, and III. When the final rules are published in the Federal Register, they will provide an effective date for the implementation of the changes. If the previous USML Category rewrites are any indication, the rules will likely become effective 180 days after the final rule publishes, though the agencies could decide to provide a shorter implementation period. A delayed effective date, which has been provided in all the previous USML Category revisions, is intended to give impacted industry members the time to implement the revisions by reclassifying their inventory, making changes to internal processes and procedures, train employees on the new controls, update databases, notify customers, and other necessary compliance actions.
Is There Anything to do to Prepare for this?
Yes! Companies now can begin reviewing their inventory and internal procedures to identify those items and functions that may be impacted. While the proposed rules aren’t set in stone, they do provide a good roadmap of what is likely going to move off the USML and onto the CCL. Companies can use that to redline processes and procedures and identify any necessary changes to databases and systems that house jurisdictional determinations for products. The proposed rules can also help companies start walking through the jurisdictional review analysis to determine what export control regime will likely apply to their products after the revisions become effective. For a refresher on the proposed rules, please review our previous alerts.
The process for walking through this jurisdictional review is called the Order of Review. The Order of Review is the process by which one makes a jurisdiction and classification decision with respect to the export control regulation applicable to any piece of hardware, software, technology, or service. The Order of Review is completed by first reviewing the USML, followed by the CCL, and essentially asking a series of yes/no questions. The following outline is designed to walk you through the basic decision process for an Order of Review analysis.
Step 1: Review the ITAR
* If your item is enumerated by name or capability in a USML control paragraph, your review has ended. The item is ITAR controlled.
* If your item is described in a control paragraph that contains the “specially designed” modifier, you must perform the specially designed analysis in 22 C.F.R. §120.41 to determine whether your item is captured.
– If after performing the “specially designed” analysis the item is determined to be “specially designed,” then the item is controlled in that subparagraph of the USML. Your review has ended.
– If after performing the “specially designed” analysis the item is released (i.e., determined not to meet the “specially designed” criteria), then the item is not controlled on the USML and a review of the EAR is required. Proceed to Step 2 below.
* If the item is not described in any control paragraph on the USML, then the item is not captured by the ITAR and a review of the EAR is required. Proceed to Step 2 below.
Note: if an item appears to be listed in multiple paragraphs, any paragraph that is designated Significant Military Equipment (SME) takes precedence over a non-SME paragraph. In other words, always follow the highest applicable level of control.
Step 2: Review the EAR
Note: the EAR does not have a “see through” rule like the ITAR, so do not consider the individual parts inside of an item when classifying it. Instead, consider overall functions and characteristics to classify the item under review. Compare the characteristics of the item to the 10 CCL categories and then determine the applicable product group A-E.
* Start your CCL review with the “500-series” and “600-series” ECCNs. If your item is enumerated by name or capability in a “500-series” or “600-series” ECCN on the CCL, your review has ended. The item is controlled in that control paragraph of the CCL.
* If your item is described in a control paragraph that contain the “specially designed” modifier, then perform the “specially designed” analysis, described in Part 772 of the EAR.
– If after performing the “specially designed” analysis the item is determined to be “specially designed” then the item is controlled in that control paragraph of the CCL. Your review has ended.
– If after performing the “specially designed” analysis the item is released, then a review of the rest of the CCL is required.
* If you have reviewed the “500-series” and “600-series” ECCNs and your item is not captured, then proceed to review the rest of the CCL. If your item is enumerated by name or capability in a “non-600/500 series” ECCN on the CCL, then your item is controlled in that paragraph of the CCL. Your review has ended.
* If your item is described in a control paragraph that contains the “specially designed” modifier, then perform the “specially designed” analysis, described in Part 772 of the EAR.
– If after performing the “specially designed” analysis the item is determined to be “specially designed” then the item is controlled by the that paragraph of the CCL. Your review has ended.
– If after performing the “specially designed” analysis the item is released, proceed to Step 3.
* If your item is not described in any ECCN on the CCL, then proceed to Step 3 below.
Step 3: Item Not Captured by Specific ECCN
If the Order of Review is performed and the item is not captured by the USML and is not captured by any ECCN on the CCL, then the item is classified as ECCN EAR99. The Order of Review analysis has ended.
If, after performing the Order of Review, questions remain as to the proper jurisdiction and classification of an item, consider submitting a Commodity Jurisdiction (CJ) request to DDTC for an official jurisdictional determination for a product. When submitting a CJ request to DDTC, it is recommended to include a description of the Order of Review analysis that was conducted and a clear explanation as to why confusion remains. Also, indicate the USML Category(ies) or ECCN(s) that you believe is/are most likely applicable to the item under review. DDTC provides step-by-step instructions for preparing and submitting Commodity Jurisdiction requests on its website.
Additionally, both DDTC and BIS have developed Order of Review tools to aid industry in making a jurisdiction and classification analysis.
DDTC’s web-based decision tools:
* Order of Review: Use this tool to help you figure out where your item(s) is controlled on the USML.
* Specially Designed: Use this tool to help you determine if a particular item is “specially designed” or meets one of the five carve-outs. This tool applies ONLY to commodities and software related to USML Categories that have been revised in accordance with the President’s Export Control Reform initiative. DO NOT USE if your USML category has not yet been revised.
BIS web-based decision tools:
* CCL Order of Review: This tool will assist in understanding the steps to follow in reviewing the Commerce Control List when determining the classification of their item. (See Supplement No. 4 to part 774 of the EAR).
* Specially Designed: This tool will assist users in determining if an item is “specially designed” under the Export Administration Regulations. (See § 772.1 of the EAR).
Of course, each jurisdictional determination is unique, with some being more complex than others. Additionally, the “specially designed” review is its own separate catch-and-release analysis. We will address the “specially designed” review in an upcoming alert. Please note that the “specially designed” analysis is slightly different between the two regulations, so do not assume that if an item is released from the ITAR, it is automatically classified as EAR99.
Even though the transition is not a decontrol of firearms and ammunition exports, the process will be radically different from what many are already accustomed. The rules of the game are about to change, and so it is vitally important that companies get ready. Many will need to learn a new set of export controls regulations (the EAR) that may never have applied to their products before. Whether it’s reclassifying products or retooling corporate policies and procedures, businesses must be prepared to adapt to the new rules to ensure export transactions remain compliant.