Archive for the ‘Defense Trade Controls’ Category

America’s Largest Business Lobby Endorses Trump’s Arms Export Plan

2018/08/30

(Source: Defense News, 21 Jul 2018.)

The U.S. State Department recently announced its plan to put into effect the Conventional Arms Transfer policy, which adds economic security as a factor when the government considers whether to approve arms exports.

The goal of the plan is to boost American weapons exports. Council President Keith Webster, President Obama’s last director of international cooperation at the Pentagon, called the policy “a major first step toward improving government decision processes and policies.” Aerospace and defense firms rely on innovation and U.S. government support to compete on a global scale, he added.

The export council offered around 30 recommendations on how to hardwire economic security and defense-industrial base considerations into the government’s international arms sale decisions.

Despite the positive feedback, there have been concerns from arms control advocates who say the policy could fuel conflicts around the world and aid regimes that do not respect human rights.

“If the administration is serious about claims that these changes make for responsible policy, it should add much greater transparency into the arms transfer and monitoring process,” Forum on the Arms Trade’s founder and coordinator, Jeff Abramson, wrote.

Leading the world in arms transfers, the U.S. is expected to reach $47 billion government-to-government sales this year, whereas $42 billion sales were approved by the State Department for all of 2017.

Lt. Gen. Charles Hooper, head of the Defense Security Cooperation Agency, said during the Farnborough International Airshow on July 18, “Defense exports are good for our national security, they’re good for our foreign policy. And they’re good for our economic security. And as the administration and our leadership has said, economic security is national security.”

Source: https://www.defensenews.com/industry/2018/07/20/business-org-hails-trump-arms-export-plan/


Analysis of Settlement Agreement Reached In 3D Gun Printing Case

2018/07/30

By:  Johanna Reeves, Esq., jreeves@reevesdola.com, 202-715-994; and Katherine Heubert, Esq., 202-715-9940, kheubert@reevesdola.com. Both of Reeves & Dola LLP.

(Source: Reeves & Dola LLP Alert, 18 Jul 2018. Available via jreeves@reevesdola.com.)

Last week, news broke that a settlement agreement had been reached in the Defense Distributed v. United States Department of State case. Several news articles reported the outcome as a major victory to First and Second Amendment advocates, as well as a “stunning shift” in State Department policy in how it applies export controls to information available on the Internet. This is an important case, and we examine the potential implications of the Settlement Agreement, especially in how the State Department treats certain information made openly available on the Internet.

Background

In December 2012, Defense Distributed posted certain three-dimensional (“3D”) printing files on its website, DEFCAD.org, for a number of firearm-related items, including “Ghost Gunner” files, and certain CAD files (the “Published Files”). Some of the Published Files included downloadable instructions to produce a fully functional firearm on a 3D printer. In May 2013, Defense Distributed received a letter from the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), directing the company remove the Published Files from its website. DDTC is the federal agency responsible for compliance and enforcement of the Arms Export Control Act (22 USC 2778) and the implementing regulations known as the International Traffic in Arms Regulations (ITAR), published in 22 C.F.R. Pts. 120-130. In its letter, DDTC explained the Published Files may constitute ITAR-controlled “technical data” related to firearms and if so, the act of making the Published Files widely available on the Internet constituted an export of technical data without the required prior authorization from DDTC.

For those unfamiliar with the ITAR, controlled “technical data” includes information required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of “defense articles,” and includes information in the form of blueprints, drawings, photographs, plans, instructions or documentation (ITAR section 120.10). Currently, almost all firearms up to and including .50, as well as parts, components, attachments and accessories for said firearms are captured by the ITAR’s U.S. Munitions List (USML) under Category I. The only exceptions to this broad coverage are so-called “noncombat shotguns” with barrels 18 inches or longer, BB, pellet, and muzzle loading firearms, as well as attachments or accessories that do not enhance the usefulness, effectiveness, or capabilities of the firearm, component and parts. Such items are controlled under the Department of Commerce export controls, known as the Export Administration Regulations (EAR).

DDTC explained in its letter to Defense Distributed, “[p]ursuant to 127.1 of the ITAR, it is unlawful to export any defense article or technical data for which a license or written approval is required without first obtaining the required authorization from the DDTC. Please note that disclosing (including oral or visual disclosure) or transferring technical data to a foreign person, whether in the United States or abroad, is considered an export under 120.17 of the ITAR.”  To resolve the matter “officially,” DDTC requested Defense Distributed submit a Commodity Jurisdiction (CJ) request for the following data files:

  • Defense Distributed Liberator pistol
  • .22 electric
  • 125mm BK-14M high-explosive anti-tank warhead
  • 56/.223 muzzle brake
  • Springfield XD-40 tactical slide assembly
  • Sound Moderator – slip on
  • “The Dirty Diane” 1/2-28 to 3/4-16 STP S3600 oil filter silencer adapter
  • 12 gauge to .22 CB sub-caliber insert
  • Voltlock electronic black powder system
  • VZ-58 sight

A copy of the DDTC letter is available in a  2013 Forbes article (last visited on Jul. 18, 2018).

In compliance with the DDTC letter, Defense Distributed removed the Published Files from its website and in June 2013, submitted a CJ request. Almost two years later, with no response to the CJ request and an unsuccessful attempt to obtain public release approval from the Department of Defense Office of Prepublication Review and Security for the subject files, Defense Distributed along with the Second Amendment Foundation (“SAF”), sued DDTC in the Western District of Texas, alleging the ITAR prior approval requirement for posting technical data on the Internet was an unconstitutional prior restraint on protected First Amendment speech, along with other constitutional violations under the Second and Fifth Amendments.

While the case was pending, the Plaintiffs filed a motion with the court seeking a preliminary injunction against DDTC, wherein the court would suspend enforcement of the ITAR prepublication approval requirement pending final resolution of the underlying case. The District Court denied the motion, holding the national security interests of the United States outweighed the potential harm to Defense Distributed. Defense Distributed and SAF appealed the decision to the U.S. Court of Appeals for the Fifth Circuit, which affirmed the District Court decision, noting, however, that its decision was limited and did not address the merits:

This case presents a number of novel legal questions, including whether the 3D printing and/or CNC milling files at issue here may constitute protected speech under the First Amendment, the level of scrutiny applicable to the statutory and regulatory scheme here, whether posting files online for unrestricted download may constitute “export,” and whether ITAR regulations establish an impermissible prior restraint scheme. These are difficult questions, and we take no position on the ultimate outcome other than to agree with the district court that it is not yet time to address the merits. On remand, the district court will eventually have to address the merits, and it will be able to do so with the benefit of a more fully developed record.” Defense Distributed v. U.S. Department of State, 838 F.3d 451, 464 (5th Cir. 2016).

Defense Distributed then petitioned the U.S. Supreme Court for writ of certiorari, which the Court denied on January 8, 2018. On June 29, 2018, the parties executed the Settlement Agreement, resolving all claims in the case. We reviewed the text of the Settlement Agreement circulated in The Daily Bugle, a free export/import daily newsletter from Full Circle Compliance, on July 12, 2018.

The Settlement Agreement 

In the Settlement Agreement, the parties agree to resolve all issues, including any issues “that could have been asserted” by Defense Distributed without further litigation, and without any admission of liability on either side. The Settlement Agreement goes on to stipulate in Paragraph 4 that it shall not be construed as an admission by DDTC of the veracity or validity of any of Defense Distributed’s allegations. Further, the Settlement Agreement does not hold any precedent, as the parties are explicitly prohibited from using it as evidence and from referring to the Settlement Agreement in any way in proceedings that may be needed to enforce it.

In consideration of Plaintiffs’ agreement to dismiss its claims against DDTC with prejudice, DDTC agreed to five requirements:

(1) DDTC’s commitment to draft and fully pursue, to the extent authorized by law, a proposed and final rule revising U.S. Munitions List (USML) Category I to exclude “the technical data that is the subject of the Action.” (Settlement Ag., para. 1(a)).

It should be noted that by the time the Settlement Agreement was signed on June 29, 2018, DDTC had already published more than a month prior in 83 Fed. Reg. 24198 (May 24, 2018) its proposed rule to transition most firearms and ammunition, along with certain parts, components, attachments, and accessories, away from ITAR controls over to EAR controls. For more information on the State and Commerce companion proposed rules, please refer to our alerts of June 1, 8, and 13.

(2) While the above-referenced final rule is in development, DDTC will publish on its website an announcement by July 27, 2018, of a temporary modification, consistent with ITAR section 126.2, to exclude “the technical data that is the subject of the Action.” (Settlement Ag., para. 1(b)).

Section 126.2 permits the Deputy Assistant Secretary for Defense Trade Controls to order the temporary suspension or modification of any or all regulations in the ITAR in the interest of the security and foreign policy of the United States.

(3) DDTC will issue a letter a letter to Defense Distributed by July 27, 2018, advising that the Published Files are approved for public release in any form and are exempt from export licensing requirements of the ITAR because the files satisfy the criteria of ITAR section 125.4(b)(13). (Settlement Ag., para. 1(c)).

Section 125.4 in the ITAR lists various exports of technical data that do not require approval from DDTC. Paragraph (b)(13), cited in this particular consideration, covers “[t]echnical data approved for public release (i.e. unlimited distribution) by the cognizant U.S. Government department or agency or Office of Freedom of Information and Security Review. This exemption is applicable to information approved by the cognizant U.S. Government department or agency for public release in any form. It does not require that the information be published in order to qualify for the exemption.”

(4) DDTC acknowledges and agrees that the temporary modification of USML Category I [per Consideration #2 above] permits any U.S. person, including Defense Distributed customers and SAF members, to access, discuss, use, reproduce, or otherwise benefit from the “technical data that is the subject of the Action.”… (Settlement Ag., para. 1(d)).

(5) Payment of $39,581.00 to Plaintiffs. “This figure is inclusive of any interest and is the only payment that will be made to Plaintiffs or their counsel by Defendants under this Settlement Agreement.” (Settlement Ag., para. 1(e)).

Analysis of Settlement

What impact will the Settlement Agreement have on industry, if any? Strikingly, the Settlement Agreement does very little to advance the argument that the ITAR’s prior restraints on publication are a violation of the First Amendment or any other constitutional rights. Indeed, as the Settlement Agreement makes very clear, the parties stipulate that DDTC’s entering into the agreement is in no way an acknowledgment of the validity or veracity of those arguments. Further, all conditions are silent on the constitutional rights issues raised in the case – the Settlement Agreement addresses only the manner in which DDTC will authorize Defense Distributed to release just the Published Files, nothing more.

While DDTC agreed to “draft and fully pursue” the proposed rulemaking to revise USML Category I, in the interim, the temporary amendment to USML Category I will exclude ONLY the “technical data that is subject of the Action.” The “technical data that is subject of the Action” is not a limitless bucket containing all ITAR-controlled technical data pertaining to firearms. Rather, the Settlement Agreement defines the words, “technical data that is subject of the Action” specifically to mean only the following: “(1) the Published Files; (2) the Ghost Gunner files; (3) the CAD Files; and (4) the Other Files insofar as those files regard items exclusively: (a) in Category I(a) of the [USML], as well as barrels and receivers covered by Category I(g) of the USML that are components of such items, or (b) items covered by Category I(h) of the USML solely by reference to Category I(a), excluding Military Equipment [as defined in the Settlement Agreement].”

DDTC did not agree to amend the USML to exclude all similar technical data or related hardware, or make any other revisions to Category I, much less any other USML Category. In fact, DDTC agreed to revise the USML Category I “to the extent authorized by law (including the Administrative procedures Act)” to exclude only “technical data that is subject of the action.” A cynic could say that’s quite a caveat.

It is also important to note that nowhere in the Settlement Agreement does DDTC indicate the Published Files are not considered ITAR-controlled technical data. In fact, the agreement to utilize the powers of § 126.2 to exclude the Published Files from the ITAR by using the §125.4(b)(13) public release process clearly supports the argument that DDTC still considers the files to be technical data. If the information was not technical data, then there would be no need to go through these regulatory hoops to authorize its release. Simply put, DDTC did not ever move from its position that the Published Files were technical data, and the Settlement Agreement does more to underscore this position than to prove otherwise.

This, coupled with the clear language of the Settlement Agreement that this document cannot be used as precedent in further cases, means the release from ITAR controls applies only to the “technical data that is subject of the Action,” as defined in the Settlement Agreement. Other individuals or companies with similar Technical Data should not rely on the fact that Defense Distributed was authorized to release the Published Files as a blanket permission to do the same. To be sure, it seems one must still seek authorization from DDTC or public release approval from another cognizant U.S. Government agency before publishing similar Technical Data to the Internet.

As for the arguable coincidence of this Settlement Agreement and the timing of the publication of the proposed revisions to USML Category I, II, and III, one could speculate the Settlement Agreement was the catalyst for DDTC finally publishing the revisions – the case forced DDTC’s hand as it were. However, one could also argue that DDTC simply agreed to do what it was already planning to do as the revisions were, by then, drafted and through the internal review process, thereby losing nothing yet gaining a great deal by settling a lawsuit that could have ultimately decided the interplay between the First Amendment and the ITAR. And, as a result, the ITAR prior approval requirements remain in place and intact, and persons seeking to publish technical data to the Internet must first obtain DDTC approval to do so.

Closing Thoughts

The only guaranty in court is that there are no guarantees. There was a lot riding on this case, for both sides. This was apparent in the number of amicus (“friend of the court”) briefs weighing in on the potential implications for the constitutional freedoms guaranteed under the First and Second Amendments, gun rights, gun control, world peace and national security interests. Arguably, neither side could afford a negative court decision on the merits of the case. However, with the Settlement Agreement, it appears that both sides won. Defense Distributed is able to reinstate its DEFCAD.org website at the end of this month without having to wait until 2019 when the proposed transition rules will become final, presumably, and DDTC has not done anything to change its approach to ITAR licensing controls over technical data, including the requirement for approval for public release prior to posting such information on the Internet.


U.S. Departments of State and Commerce Propose Rules to Transition Firearms and Ammunition from the USML to the CCL

2018/06/29

(Source: Reeves & Dola LLP Alert, 1 June 2018. Available via jreeves@reevesdola.com)

By: Johanna Reeves, Esq., jreeves@reevesdola.com, 202-715-994; and Katherine Heubert, Esq., 202-715-9940, kheubert@reevesdola.com. Both of Reeves & Dola LLP

On May 24, 2018, the U.S. Departments of State and Commerce officially published proposed rules to transition most firearms and ammunition away from the export controls of the Department of State’s International Traffic in Arms Regulations (ITAR) over to the controls of the Department of Commerce’s Export Administration Regulations (EAR). In this alert, the second of four installments, we will examine the proposed revisions to the ITAR control list, the U.S. Munitions List (USML) Category I, and the Department of Commerce’s proposed companion rule amending the Commerce Control List (CCL).

Both the State and Commerce Departments are seeking written comments on the proposed rules, which will be accepted until July 9, 2018.  We strongly encourage industry to take time to carefully review the revised categories and provide actionable commentary to the proposed rules. This is a critical opportunity for industry to provide comments that would assist the government in reducing jurisdictional ambiguities and clarifying the articles that will remain subject to the ITAR. The specific instructions for submitting comments are included in each proposed rule.

Proposed Transitions from USML Cat. I to CCL

Title for this category will change from “Firearms, Close Assault Weapons and Combat Shotguns” to “Firearms and Related Articles.”

Articles Removed from USML Cat. I – State’s rule proposes to transition away from the USML non-automatic and semi-automatic firearms up to and including .50 caliber currently controlled under paragraph (a), as well as all parts, components, accessories and attachments specially designed for those firearms. These items will be subject to the EAR under newly created “500 series” Export Control Classification Numbers (ECCNs).

Commerce originally created the “500 series” as part of “Export Control Reform” under the Obama Administration to control items that had been from the USML or certain items on the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual Use Goods and Technologies Munitions List (the “Wassenaar List” or WAML). Compared to the “600 series” ECCNs, which control items of a military nature removed from the USML, the “500 series” contain items not appropriate for the 600 series control because they have predominant civil, recreational, law enforcement, or other non-military applications.

To capture the firearms and ammunition in USML Cats. I-III that will transition to the CCL, Commerce proposes in its companion rule to create a total of 17 new ECCNs. For the firearms, parts, components, accessories and attachments that will transition from USML Cat. I, the proposed new ECCNs are:

– 0A501 (Firearms and related commodities)

– 0A502 (Shotguns and certain related commodities)

– 0A504 (Optical sighting devices and certain related commodities)

– 0E501 (Technology for firearms and certain related items)

– 0E502 (Technology for shotguns)

– 0E504 (Technology for certain optical sighting devices)

Articles Still Controlled Under USML Cat. I – items that would remain under Category I are positively listed as follows, including the corresponding paragraph (Significant Military Equipment (SME) is designated with an asterisk (*)):

*(a) Firearms using caseless ammunition.

*(b) Fully automatic firearms to .50 caliber (12.7 mm) inclusive.

*(c) Firearms specially designed [emphasis added] to integrate fire control, automatic tracking, or automatic firing (e.g., Precision Guided Firearms (PGFs)), and specially designed parts and components therefor.

Note to paragraph (c): Integration does not include only attaching to the firearm or rail.

*(d) Fully automatic shotguns regardless of gauge.

*(e) Silencers, mufflers, and sound suppressors, and specially designed [emphasis added] parts and components therefor (flash suppressors move to CCL).

(f) [Reserved]

(g) Barrels, receivers (frames), bolts, bolt carriers, slides, or sears specially designed [emphasis added] for the articles in paragraphs (a), (b), and (d) of this category.

(h) Parts, components, accessories, and attachments, as follows:

(1) Drum and other magazines for firearms to .50 caliber (12.7 mm) inclusive with a capacity greater than 50 rounds, regardless of jurisdiction of the firearm, and specially designed [emphasis added] parts and components therefor;

(2) Parts and components specially designed for conversion of a semiautomatic firearm to a fully automatic firearm[emphasis added].

(3) Accessories or attachments specially designed to automatically stabilize aim (other than gun rests) or for automatic targeting, and specially designed parts and components therefor [emphasis added].

Technical Data and Defense Services – paragraph (i) specifies “technical data,” as defined in ITAR §120.10, and “defense services,” as defined in ITAR §120.9, directly related to the defense articles described in paragraphs (a), (b), (d), (e), (g), and (h) of Cat. I, and classified technical data directly related to items controlled in ECCNs 0A501, 0B501, 0D501, and 0E501 and defense services using the classified technical data. Exemptions will continue to be covered in ITAR §125.4.

Revised USML Cat. I will also include several notes to explain what items are excluded by the category (non-automatic and semi-automatic firearms up to and including .50 caliber; non-automatic shotguns; BB, pellet, and muzzle loading (e.g., black powder) firearms; and parts, components, accessories, and attachments of firearms and shotguns in paragraphs (a), (b), (d), and (g) of Cat. I that are common to non-automatic firearms and shotguns) and what is meant by firearm, fully automatic firearm or shotgun, or caseless ammunition.

The proposed rule also adds a new paragraph (x) to Cats. I, II and III to allow for ITAR licensing of commodities, software and technology subject to the EAR, which paragraph has already been added to all of the other USML categories that have gone through the rewrite process.  It is important to note that paragraph (x) is only available if those items EAR items are to be used in or with defense articles controlled in USML Cat. I, and the items are described in the purchase documentation submitted with the ITAR license application. Further, it is important to understand that such EAR items, even if included on an ITAR export license under USML Cat. I(x), would remain subject to the controls of the EAR, despite the appearance of the ITAR license.  Use of paragraph(x) is a licensing convenience only; it does not change the jurisdictional status of an item. Consequently, it will be incumbent on the U.S. exporter to properly educate its customers on the proper licensing authority, especially for reexport and retransfer requests.

CCL Controls

A key fact in the proposed rules is that the transition from USML to CCL will NOT result in a decontrol of firearms or ammunition. Firearms transitioning from the USML to CCL will be subject to controls under National Security (NS), Regional Stability (RS), Crime Control and Detection (CC), Firearms Convention (FC), United Nations Sanctions (UN) and Anti-Terrorism (AT). Indeed, the proposed rules make it abundantly clear that BIS will require licenses to export or reexport to ANY country firearms or other weapons that transitions from the USML to the CCL.

License exceptions, such as limited value shipments (LVS), government (GOV), baggage (BAG) and strategic trade authorization (STA) will be very limited for small arms formerly on the USML, so industry should carefully review the ECCNs in the proposed rule to see what license exceptions are available for each ECCN and the limitations.

Each new ECCN will be made up of technically specific subparagraphs in an enumerated “List of Items Controlled.” For example, the list of items controlled under ECCN 0A501 is comprised of paragraphs .a – .w, which identify the items classified under the particular paragraph. The ECCN also includes .x and .y paragraphs for parts and components. The .x paragraph operates like a catch-all, as it lists specially designed parts and components that are not controlled elsewhere. Conversely, the .y paragraph lists only those parts, components, accessories, and attachments that are controlled only for UN and AT reasons. Such items may be exported to nearly all destinations without a license. The parts and components captured by the .x paragraph, on the other hand, are subject to NS, RS, FC, UN, and AT and will likely require a license for most destinations.

It will be incumbent on the exporter (or temporary importer) to review every firearm and firearm part, component, accessory, and attachment in which it deals so as to determine the new classification once the rules become final. The specific license requirements, and the applicability of license exceptions, as well as any end-use or end-user restrictions, will depend on the specific subparagraph classification of the governing ECCN.

Specially Designed

A critical concept in the proposed revisions to the control lists is the term “Specially Designed.” This term has been reviewed, criticized, discussed, and analyzed in depth since it was first incorporated into the ITAR and the EAR in the initial implementation rules for Export Control Reform, which DDTC and BIS published in the Federal Register on April 16, 2013.

This term is NOT up for public comment at the present time, but to understand the proposed revisions to the USML and CCL control lists for firearms and ammunition, it is imperative to comprehend the term. Both the ITAR and EAR use the term, “Specially Designed” to remove the catch-all controls currently present in the USML Cats. I-III and to designate what parts, components, accessories and attachments are subject to either the ITAR or the EAR. We have highlighted the proposed use of “specially designed” in USML Cat. I in the list above.

It is important to note that the “specially designed” analysis is not applicable to the entire USML Category, as it can be used only if it is specified within a particular paragraph. As the revisions to Cat. I are intended to make the list a positive list and include only those articles that warrant control under the ITAR for the reasons stated previously, there should be a bright line between those articles subject to the ITAR and those subject to the EAR. Industry therefore must carefully review the full definition of “Specially Designed” and the application to the proposed revisions of Cat. I and provide comments that would assist the government in reducing jurisdictional ambiguities and clarifying the articles subject to the ITAR.

Industry should also review the ITAR order of review outlined in 22 C.F.R. § 121.1(b)), and the Order of Review Decision Tool available on DDTC’s website. BIS also provides an Order of Review Decision Tool on its website.

Industry should be forewarned not to underestimate the time intensive process of classifying the parts, components, attachments and accessories for firearms under the proposed rules. A critical component is the specially designed analysis, which itself is complex and difficult to understand immediately. It would be foolish to skip over classification, as license requirements, applicability of license exceptions, and restrictions are dependent on the classification, down to the specific ECCN paragraph. Further, export license applications will require identification of the specific subparagraph of control as well.  The days of simply identifying “paragraph (h)” for any and all parts and components are quickly coming to an end.

Brokering

In addition to the proposed revisions to the USML Cats. I-III, DDTC’s proposed rule identifies several “conforming changes” in other parts of the ITAR to remove references to firearms that will be controlled on the CCL. One such revision is to section 129.1 to clarify that regulations on brokering activities apply to defense articles and defense services designated on the USML as well as items described on the U.S. Munitions Import List (USMIL) for permanent import controls. The USMIL is promulgated by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) pursuant to the permanent import provisions of the Arms Export Control Act. ATF’s regulations are in 27 C.F.R. Pt. 447, and the USMIL is in 27 C.F.R. § 447.21.

According to DDTC, “the items that will move to the CCL for export control purposes, yet are on the USMIL for permanent import purposes, remain subject to the brokering requirements of [ITAR] part 129 with respect to all brokering activities, including facilitation in their manufacture, export, permanent import, transfer, reexport, or retransfer.” 83 Fed. Reg. at 24199 (May 24, 2018). Approaching this from the catch and release analysis that has permeated export control reform, this is the “catch.” The proposed revision in section 129.2, however, adds the following release in a new paragraph (vii) for activities that are NOT considered brokering activities:

“Activities by persons to facilitate the export, reexport, or transfer of an item subject to the EAR that has been approved pursuant to a license or license exception under the EAR or a license or other approval under this subchapter.”

As written, this language is very broad because the clause “that has been approved” does not limit past approvals to the person engaging in the subject activities. Further, the past approvals may be from either an EAR or an ITAR authorization.

Electronic Export Information Filings to Automated Export System

A critical change in the proposed rules lies within the Department of Commerce proposed rule relating to the Electronic Export Information (EEI) filings to Automated Export System (AES). According to the proposed rule, AES filings would be required for exports of all firearms transitioned to the CCL from the USML, regardless of value or destination. This requirement would also extend to temporary exports under license exceptions TMP or BAG.

In addition, the rule proposes to expand the required data elements of AES filings to include serial numbers, make, model, and caliber for such firearms. Industry should carefully evaluate the impact this requirement will have on operations and include in comments to the proposed rules.

Temporary Imports

The proposed Commerce rules set out a new process in 15 C.F.R. 758.10 for temporary imports of items subject to both the EAR and the USMIL. The process would impose entry clearance requirements for firearms temporarily imported into the United States for a period not to exceed 1 year, and then would require the use of the TMP license exception for the return export.

For the inbound transaction, U.S. Customs and Border Protection would be charged with collecting identifying information necessary to track the items temporarily imported, such as the list of firearms with serial numbers, model, make, quantity, and value, as well as other import and supporting documents. For the export, a license would not be required, but CBP would match the export to the information received upon entry. Firearms may not be imported from or ultimately destined to certain proscribed or restricted countries, and the proposed rule includes language that would instruct importers to contact CBP at the port of import or export for the proper procedures to provide any data or documentation required by BIS. Commerce is seeking comment from industry on this proposed new process.

This brings to a close this second installment of our four-part series on the proposed rules transitioning firearms and ammunition from the USML to the CCL. In our next two alerts we will examine the proposed revisions to USML Cats. II and III and the new EAR controls.


A Primer on the Export Administration Regulations

2018/06/29

(Source: Reeves & Dola LLP Alert, 1 June 2018. Available via jreeves@reevesdola.com)

By: Johanna Reeves, Esq., jreeves@reevesdola.com, 202-715-994; and Katherine Heubert, Esq., 202-715-9940, kheubert@reevesdola.com. Both of Reeves & Dola LLP

 

On May 14, 2018, the U.S. Department of State posted on its website proposed rules to transition most firearms and ammunition off the International Traffic in Arms Regulations (ITAR) control list, known as the U.S. Munitions List (USML), over to the U.S. Department of Commerce’s export control list, known as the Commerce Control List (CCL). The reason for the change is to revise the scope of the ITAR to control only those articles that provide the United States with a critical military or intelligence advantage or, in the case of weapons, are inherently for military end use. Such items will remain on the USML, while items no longer warranting control under the ITAR will be transitioned to the CCL and be subject to the licensing provisions of the Export Administration Act (EAR), administered and enforced by the U.S. Department of Commerce, Bureau of Industry and Security (BIS).

In anticipation of the official publication of the proposed rules, scheduled for May 24, 2018, we thought it advisable to offer an overview of the EAR. Once the rules publish on May 24, we will circulate an in-depth 3-part review of the proposed amendments to the ITAR and to the EAR and the potential impacts on industry.

The following overview of the EAR is intentionally broad, and is intended to serve only as a backdrop to the proposed rules to transition most firearms and ammunition, along with certain parts, components, attachments and accessories, from ITAR controls to EAR controls.

Scope of Controls – Subject to the EAR

Items – the Commerce Control List

While the Department of State controls over exports, reexports, and temporary imports are confined to “defense articles” and “defense services” listed on the USML, the Department of Commerce controls over exports and reexports are much broader. The EAR, found in 15 C.F.R. Pts. 730-780, control the export and reexport of “items” (commodities, software, and technology, each term separately defined in the EAR) and certain activities that are NOT exclusively controlled for export or reexport by another agency of the U.S. government which regulates exports or reexports for national security or foreign policy purposes, such as the U.S. Department of State.

Items subject to the EAR consist of the items listed on the CCL in Part 774 of the EAR, and all other items that meet the definition of “subject to the EAR” in section 734.3. The CCL is made up of ten Categories that are further broken into Export Control Classification Numbers (ECCNs). An ECCN is an alpha-numeric code that describes an item or types of items and shows the controls on that item and available license exceptions. The ECCN is not a Harmonized Tariff Schedule (HTS) number, and is not a Schedule B number. To determine whether an item requires an export license from BIS, the exporter must know how the item is classified on the CCL.

As noted above, the CCL is divided into 10 categories, with each category subdivided into five groups, designated by the letters A through E as follows: (A) Equipment, assemblies and components; (B) Test, inspection and production equipment; (C) Materials; (D) Software; and (E) Technology. Within each group is where you will find the ECCNs that enumerate the items that are controlled on the CCL. The firearms and ammunition currently classified on the USML in Categories I, II and III that have been selected to transition to the EAR will be enumerated in new ECCNs created under Category 0 (nuclear materials, facilities and equipment, and miscellaneous items) and product groups A, B, D and E. We will review the proposed rules and the new ECCNs in detail in our forthcoming alerts.

Items subject to the EAR which are not listed on the CCL are generally designated as “EAR99.” Often, items classified as EAR99 do not require an export license, but EAR99 is a classification, not a license exemption! Further, EAR99 does not automatically mean that no license is required. If the export violates any of the general prohibitions listed in EAR section 736.2, such as prohibited end-user, end-use, or sanctioned or embargoed country, a license is required.

The above discussion relates only to the question of what is subject to the EAR. Being subject to the EAR does not automatically mean a license is required for an export or reexport. This is a separate analysis that we will examine below.

Parts and Components – De Minimis

Foreign-made commodities that incorporate controlled U.S.-origin commodities may also be subject to the EAR if they have de minimis level of U.S. content. What constitutes the de minimis level depends on the commodity and the destination country for the reexport, and may range from no de minimis levels (for items subject to higher controls), to 10% or 25% de minimis.  The rules for calculating de minimis levels are found in section 734.4 of the EAR.

Technology

The EAR defines “technology” as “information necessary for the “development,” “production,” “use,” operation, installation, maintenance, repair, overhaul, or refurbishing (or other terms specified in ECCNs on the CCL that control “technology”) of an item. Each of the quoted terms are defined in Part 772 of the EAR.

EAR controls over “technology” are more narrowly focused than the ITAR controls over technical data, and apply in limited contexts. To determine whether the technology for an ECCN is also enumerated on the CCL, the corresponding “E” ECCN for the platform should be reviewed. For example, in the proposed rules for firearms currently in USML CAt. I, there will be a new ECCN 0E501 that controls technology for firearms and certain related items. However, the technology controlled would be that which is required for the “development” and “production” of firearms other than shotguns. This new ECCN also would apply the anti-terrorism and United Nations reasons for control (see below) to “technology” “required” for the operation, installation, maintenance, repair, or overhaul of such firearms. As the proposed Commerce rule explains, “controlling this “technology” under the EAR rather than the ITAR is appropriate because the “technology” for the “development,” “production,” operation, installation, maintenance, repair, and overhaul of the firearms to be described in 0A501 is widely available throughout the world and its possession does not confer a significant military or intelligence advantage on the United States.”

It is important to point out that the EAR’s carve-out from controls for published works or information in the public domain is much broader in scope compared to the ITAR carve-out for public domain. In section 734.7, “published” technology or software is carved out from EAR controls “when it has been made available to the public without restrictions upon its further dissemination….” For example, subscriptions available without restriction, libraries or other public collections open to the public and from which the public can obtain tangible or intangible documents, unlimited distributions at a conference, seminar, trade, show, or exhibition generally accessible to the public, public/unlimited distribution in any form, including posting on the Internet on sites available to the public. Many may rejoice over this, as the ITAR still does not recognize the Internet as being in the “public domain.”

As further illustration of technology not controlled under the EAR, the BIS proposed rule cites the example of a gun manufacturer posting a firearm’s operation and maintenance manual on the Internet, making it publicly available to anyone interested in accessing it and without restrictions on further dissemination. According to the proposed rule explanation, such operation and maintenance information included in that published manual would no longer be “subject to the EAR.” Nonproprietary system descriptions, including for firearms and related items, are another example of information that would not be subject to the EAR.

Reasons for Control

The reasons for control for exports under the EAR include the following:

– CB (Chemical & Biological Weapons)

– NP (Nuclear Proliferation)

– NS (National Security)

– MT (Missile Technology)

– RS (Regional Stability)

– CC (Crime Control)

– AT (Anti-Terrorism)

– UN (United Nations)

– EI (Encryption Item)

– CW (Chemical Weapons Convention)

The specific reasons for control for a particular item is identified within each specific ECCN. Unlike the blanket ITAR requirement for a license to anywhere in the world, BIS license requirements are unique to each individual ECCN. Whether a license is required for a particular export will depend on the destination country.

Licensing Under the EAR

Each ECCN is made up of four sections: a heading(description of the items controlled), the license requirements(including all possible reasons for control, such as AT, UN, NS, CC, and RS) the available license exceptions, and list of items controlled.

To determine the export and reexport license requirements for most items on the CCL, you must identify the reasons for control in the relevant ECCN and consult the Commerce Country Chart in Supp. No. 1 to Part 738 to see whether the applicable reasons for control are checked for the specific country. If so, then a license is required unless a license exception applies. Whether a license exception is available will depend on the ECCN and the Country Groups in Supplement No. 1 to Pt. 740.

Unlike the ITAR, the EAR does not require registration of exporters (so no registration fee), and there are no fees to apply for licenses through the SNAP-R. In addition, unlike the ITAR, the EAR does not include a concept of “defense services,” so there is no registration or licensing for the provision of defense services like there is under the ITAR.

The process for establishing a SNAP-R account is relatively easy, and no digital signature certificate is required. Further, unlike the ITAR, which contains several license forms depending on the transaction, the EAR prescribes one single form for each type of export (permanent, retransfer, reexport).

Covering Items Subject to the EAR on DDTC Licenses

With the rewrite of Categories I, II, and III, DDTC will add a “Paragraph (x)” to each of the revised categories. This paragraph has been added to all other USML Categories as they have gone through the rewrite process, and allows for the export of items subject to the EAR under ITAR licenses so long as the conditions of paragraph (x) are met (see ITAR §§ 120.5(b) and 126.6(c)). These conditions include:

(1) An ITAR license may only include items subject to the EAR that are for use in or with the listed defense articles;

(2) The purchase documentation must specify both the defense articles with the items subject to the EAR (no separate purchase orders breaking out the defense articles from the EAR items);

(3) The exporter must ship the EAR items together with the ITAR articles; and

(4) Items subject to the EAR that are included on an ITAR license do not lose their jurisdictional status as EAR-controlled items and remain subject to the EAR for any subsequent transactions.

In light of the last requirement, it is incumbent on the U.S. exporter to properly educate its customers and end-users when using an ITAR license for both defense articles and EAR items to be used in or with the defense articles. In the event the end-user need reexport approval, the approval must come from BIS for items subject to the EAR, not DDTC.

Below is a reference chart comparing some aspects of the EAR to the ITAR.

ITAR EAR
Statutory Authority Arms Export Control Act Export Administration Act of 1979 50 USC 4601-4623 [lapsed]
Federal Agency U.S. Department of State, Directorate of Defense Trade Controls U.S. Department of Commerce, Bureau of Industry and Security
Citation 22 C.F.R. Pts. 120-130 15 C.F.R. Pts. 730 – 774
What is Covered Export, reexport, and temporary import of “defense articles” and “defense services” Items subject to the EAR
Control List U.S. Munitions List
22 C.F.R. 121.1
Commerce Control List
15 C.F.R. Pt. 774
Registration Required? Yes – manufacturers, exporters, temporary importers, and brokers of defense articles and defense services. Annual fees apply. Manufacturers of defense articles must register regardless of export activity. No
License Portal D-Trade SNAP-R
Fee for Licenses Yes – rolled into registration fee No
Types of Licenses/ Authorization Several types/forms – permanent export, temporary export, temporary import, agreements, brokering One form for export, Reexport, In-Country Transfer
Brokering? Yes – 22 C.F.R. Pt. 129 No – but see proposed rules for Cats. I-III
Technology Controls Yes – “technical data” licensing and “defense services” licensing Yes, but not as broad as ITAR; EAR controls only transmission
of technology, so no EAR concept of defense service

This overview of the EAR is the first installment of a four-part series on the proposed rules to transition firearms and ammunition from the USML to the CCL. Our next alert will examine the transition of certain firearms and their parts, components, accessories and attachments from USML Cat. I items to the CCL. Please stay tuned.


Smoking Hot: Proposed Changes to USML Categories I, II, and III

2018/05/30

By: Rick Phipp

On top of the background buzz regarding the ZTE zigzag, the latest shoe has dropped in the ongoing export control reforms. Three shoes actually, since we can now read about the proposed move of certain items controlled in Categories I, II, and III on the U.S. Munitions List (USML) over to the Commerce Control List (CCL). Long awaited by U.S. gun and ammunition manufacturers and exporters, these proposed rules describe how articles the President determines no longer warrant control under USML would be controlled on the CCL and by the Export Administration Regulations (EAR) and describe more precisely articles warranting export and temporary import control on the USML.

As part of export control reforms under the Obama administration, the executive branch completed transfers of items in the following categories from the USML to the CCL and created Category XIX (gas turbine engines):

  • Category IV (launch vehicles, guided and ballistic missiles, rockets, torpedoes, bombs, and mines);
  • Category V (explosives and energetic materials, propellants, incendiary agents, and their constituents);
  • Category VI (surface vessels of war and special naval equipment);
  • Category VII (ground vehicles);
  • Category VIII (aircraft and related articles);
  • Category IX (military training equipment and training);
  • Category X (personal protective equipment);
  • Category XI (military electronics);
  • Category XII (fire control, laser, imaging, and guidance equipment);
  • Category XIII (materials and miscellaneous articles);
  • Category XIV (toxicological agents, including chemical agents, biological agents, and associated equipment);
  • Category XV (spacecraft and related articles);
  • Category XVI (nuclear weapons related articles);
  • Category XVIII (directed energy weapons); and
  • Category XX (submersible vessels and related articles).

Left remaining were changes to Categories I-III (firearms, close assault weapons and combat shotguns, guns and armament, and ammunition/ordnance).

Under the proposed rules published by BIS and the State Department, a number of new ECCNs are created to address transferred items and the relevant USML categories are revised to describe more precisely the articles warranting continued control on the USML. The interagency review process focused on identifying items that were either (i) inherently military and otherwise warranted control on the USML, or (ii) if of a type common to non-military firearms applications, possessed parameters or characteristics that provide a critical military or intelligence advantage to the U.S., and are almost exclusively available from the U.S. If one or both points were met, the article remained on the USML.  Essentially, commercial items widely available for purchase and less sensitive military items were transferred in the proposed rules. Links to the proposed rules are as follows: State Department and Commerce Department.

There will be a 45-day period following publication in the Federal Register in which the agencies will accept comments regarding the proposed rules. Exporters and manufacturers of articles currently controlled under USML Categories I-III should review the proposed rules to consider how they may be impacted. Comments may be submitted via the Federal eRulemaking Portal: http://www.regulations.gov or via email to DDTCPublicComments@state.gov with the subject line, “ITAR Amendment – Categories I, II, and III.”

Source


State/DDTC Reminder: DTrade Super Users Need to Update their Email Address in the System

2018/04/04

(Source: State/DDTC)

DTrade Super users should ensure their email address in DTrade is accurate and correct. Please log in to DTrade and verify your email address. To change or update your DTrade email address, follow these instructions: Update Your DTrade Email Address Instruction Form.


Seiler Instrument to Pay $1.5 Million in Forfeiture to the United States

2018/02/08

Source: Department of Justice

Seiler Instrument & Manufacturing Company, Inc., a Kirkwood-based defense contractor, admits fault to the company’s use of optical materials imported from China in the weapons sights which the company improperly certified as compliant with the Buy American Act and will pay the United States $1,500,000.00 in forfeiture. The company manufactured the parts under a series of contracts with the Department of Defense. Pursuant to a pretrial diversion agreement Seiler Instrument has made an initial payment of $500,000.00 and will make additional payments of $500,000.00 in each of the next two years. The company also agrees to enter a plea of guilty to a false statement charge in the event that the company does not meet the full terms of the agreement.

Seiler Instrument is a long-time defense contractor which specializes in the production of fire control systems, including sighting devices for weapons, which are used on all United States Military Howitzer and mortar systems.  The pretrial agreement concluded after an investigation into the company’s business practices and how its proceedings reflect import and export regulations governing the procurement of materials used to manufacture defense systems. Two of these provisions include the Buy American Act and the International Traffic in Arms Regulations which place limitations on the export of restricted technical data used in the procurement and manufacturing process to countries such as China. The agreement states that Seiler Instrument took actions to correct problems and has further agreed to have its compliance program monitored by the Department of Defense.

This case was investigated by the Defense Criminal Investigative Service (Department of Defense, Office of Inspector General), the U.S. Immigration and Custom Enforcement’s (ICE) Homeland Security Investigations (HSI), the Army CID Major Procurement Fraud Unit and the U.S. Department of Commerce, Bureau of Industry and Security – Office of Export Enforcement, Chicago Field Office. The Defense Contract Management Agency also provided substantial assistance in this investigation.

More Details: https://www.justice.gov/usao-edmo/pr/seiler-instrument-pay-15-million-forfeiture-united-states


Failing to Keep Current with Classifications Leads to Civil Penalty for NJ-based Company

2017/10/16

By: Ashleigh Foor

During the second week of September, Bright Lights USA, a Barrington, NJ-based company, received a $400,000 civil penalty from the State Department’s Directorate of Defense Trade Controls (DDTC) for exporting unauthorized defense components and technical data, which violates the International Traffic in Arms Regulations (ITAR).

Bright Lights notified DDTC of two ITAR violations in voluntary self-disclosures filed with the agency in April 2013 and June 2016.

Bright Lights failed to stay current with the former Obama administration’s Export Control Reform (ECR) regarding  the transition of ITAR-related commodities/technology from the State Department’s US Munitions List to the Commerce Control List. The wrong commodity jurisdiction was selected and resulted in export violations for both the physical export of the items and the illegal transfer of technology made by the company.

Want to make sure your company is staying compliant? We have an upcoming webinar on classifications:

EAR Hardware and Materials Classifications: Learning By Doing

Practice Makes Perfect—A Two-Part Webinar that Combines Hands-On Exercises, Discussions, and Instruction. October 25, 2017 & November 8, 2017


Repeal of Pratt & Whitney Canada Corporation’s Statutory Debarment

2017/10/16

By: Ashleigh Foor

As of July 12, 2017, the statutory debarment of Pratt & Whitney Canada Corporation has been lifted and the company reinstated, according to the Department’s authorities under the Arms Export Control Act and the International Traffic in Arms Regulations.

In June 2012, Pratt & Whitney Canada Corporation plead guilty to violating the AECA (US District Court, District of Connecticut, 12-CR-146-WWE), making the company statutorily debarred in accordance with section 120.1 of the ITAR with certain exceptions, pursuant to section 127.7(b). Section 38(g)(4) of the AECA, 22 U.S.C. 2778(g)(4) prohibits any party that has violated the AECA from issuing export licenses or other approvals for the export of defense articles or services. The notice debarring Pratt & Whitney Canada Corporation in all its locations was published in the Federal Register July 6, 2012.

According to section 127.7 of the ITAR, a statutory debarment may be repealed once appropriate US agencies concur that the violating company has taken appropriate steps to alleviate any law enforcement concerns. The Department of State consulted with other US agencies and concluded that Pratt & Whitney Canada Corporation has appropriately addressed the causes of violations and mitigated any law enforcement concerns.

Effective July 12, 2017, the statutory debarment is removed and Pratt & Whitney Canada Corporation may now participate in any activities subject to the ITAR , in accordance with section 38(g)(4) of the AECA and sections 127.7(b) and 127.11(b) of the ITAR.


House Budget Committee Proposes Moving BIS to State

2017/08/03

(Source: U.S. House Budget Committee Report)

The following is an excerpt (pages 49-50) from the U.S. House Budget Committee, Building a Better America: A Plan for Fiscal Responsibility.

Building a Better America recommends a different path for the Department of Commerce.

Our budget supports the recent Presidential directives established by the Trump Administration to combat the regulatory burden placed on manufacturers and streamline the permitting review and approval processes. The Memorandum on Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing (“Memorandum on Manufacturing”) provides for stakeholder engagement and feedback from the nation’s domestic manufacturers, in an effort to highlight unnecessary regulatory burdens and other administrative policies, practices, and procedures that inhibit economic growth and job creation. Our budget makes the following recommendations:

* Eliminate Corporate Welfare Programs in the Department of Commerce. Subsidies to businesses distort the economy, impose unfair burdens on taxpayers, and are especially problematic given the federal government’s fiscal situation. Programs under consideration for elimination could include the following:

  • The Hollings Manufacturing Extension Program. This program subsidizes a network of nonprofit extension centers that provide technical, financial, and marketing services for small and medium-size businesses. The private market generally provides these services. The program, which was supposed to be self-supporting, derives two-thirds of its funding from non-Federal sources.
  • The International Trade Administration [ITA]. This Department of Commerce agency provides trade-promotion services for U.S. companies. The fees it charges for its services do not cover the costs. Businesses can obtain similar services from state and local governments and the private market. Congress should eliminate the ITA or require it to charge for the full cost of these “Trade Promotion Authority” services.
  • The National Network for Manufacturing Innovation. This program, previously known as the Advanced Manufacturing Technology Consortia, provides federal grants to support research for commercial technology and manufacturing. As stated in the Heritage Foundation’s The Budget Book: “Businesses should not receive taxpayer subsidies; these long-lived and unnecessary subsidies increase federal spending and distort the marketplace. Corporate welfare to politically connected corporations should end.”

 

* Eliminate Overlap and Consolidate Necessary Department of Commerce Functions Into Other Departments. Since its establishment in 1903, the Commerce Department has expanded in size and scope to include many activities better suited at other agencies. The Department of Commerce and its various agencies and programs are rife with waste, abuse, and duplication. This budget recommends the following dissolution, delegation of authority, and consolidation measures:

  • Consolidate National Oceanic and Atmospheric Administration functions into the Department of the Interior;
  • Establish the U.S. Patent and Trademark Office as an independent agency;
  • Eliminate the International Trade Administration; o Delegate trade enforcement activities to the International Trade Commission;
  • Consolidate the Bureau of Industry and Security into the Department of State;
  • Eliminate the Economic Development Administration;
  • Consolidate trade adjustment activities within the Department of Labor, which has a duplicate program;
  • Consolidate the Minority Business Development Agency into the Small Business Administration;
  • Consolidate the National Institute of Standards and Technology and the National Technical Information Services within the National Science Foundation; o Consolidate the National Telecommunication and Information Administration into the Federal Communications Commission as an independent agency; and
  • Consolidate the United States Census Bureau and the Bureau of Economic Analysis into the Department of Labor’s Bureau of Labor Statistics.