Archive for the ‘State Dept’ Category

DDTC New Advisory Opinions Application is Live

2019/02/20

Earlier this month the Directorate of Defense Trade Controls (DDTC) released the new Advisory Opinions Application which is supposed to offer users faster, more convenient submission and status tracking. The application can be found in the Defense Export Control and Compliance System (DECCS).

All current DTrade Super Users with valid email addresses will be automatically enrolled in DECCS in the coming weeks and receive an email to activate their DECCS accounts in order to use the new application. If you are not a Super User, or do not want to wait to receive your account activation you can enroll and create a new DECCS account at: https://www.pmddtc.state.gov/?id=ddtc_kb_article_page&sys_id=652e00b7db78d300d0a370131f961946.

More information about DECCS and the new application is available at: https://www.pmddtc.state.gov/?id=ddtc_public_portal_homepage


Export News: The Rules Are about to Change, What You Can Expect?

2019/01/31

By: Johanna Reeves, Esq., jreeves@reevesdola.com, +1 202-715-9941; and Katherine Heubert, Esq., kheubert@reevesdola.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).

Closing Thoughts

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.


Exporters and the Shutdown

2019/01/31

The US Government was shutdown for 35 days and it affected approximately 800,000 federal workers, nine departments and several agencies. As many export compliance professionals may have noticed, The US Department of Treasury’s Office of Foreign Assets Control (OFAC), the US Department of Commerce’s Bureau of Industry and Security (BIS) and The US Department of State’s Directorate of Defense Trade Controls (DDTC) were all affected by the shutdown.

All guidance from these departments was very limited, meaning questions went unanswered as most compliance officers received out of office replies citing the shutdown. The Department of Commerce’s free Consolidated Screening List tool was even shutdown for a few days, leaving exporters to find alternate ways to screen their customers. The BIS licensing portal, Simplified Application Process-Redesign (SNAP-R) was also unavailable. DDTC’s DTrade portal which is used for requesting and receiving license requests, was automatically rejecting new submissions, and the DDTC’s daily pick-up and drop-off service was cancelled.

With the government now funded for a short period of time (3 weeks to be exact), OFAC, BIS and DDTC will resume operations as usual.

DDTC issued the following statement: Priority will be placed on issuance of licenses in the system at the time of implementation of lapse of funding operations on December 22, 2019. New licenses will be accepted; however, industry is advised of the likelihood of longer than normal processing times due to the high volume of licenses DDTC expects to receive. The “Emergency License” process described in DDTC’s December 22, 2019 announcement below is hereby suspended.

DDTC Full Notice: https://www.pmddtc.state.gov/?id=ddtc_public_portal_news_and_events


DDTC Offering Industry Testing for New Registration and Advisory Opinion Applications

2018/11/26

DDTC’s test versions for their new Registration and Advisory Opinion applications, which are housed on the cloud-based Defense Export Control and Compliance System (DECCS), are available for industry and testing and feedback. DDTC is encouraging testing and there will be additional applications for testing in the coming weeks. You must have a test account and a complete test registration in order to access any of the applications.

If you are interested in participating in the testing contact the DDTC Test Support Team below:

DDTC Test Support Team:

Email: PM-DDTC-DECCS@state.gov

Phone: (202) 663-1282 / (202) 663-2838

The DDTC Test Support Team will be available during the week from 10am to 4pm EST.

Full Details: https://www.pmddtc.state.gov/?id=ddtc_public_portal_news_and_events


Owner of Defense Firm Charged with Defrauding DOD out of 7 Million in Contracts

2018/09/27

By: Danielle Hatch

Ferdi Murat Gul (Fred Gul), 42, of Turkey has been indicted by a grand jury on the following counts:

  • One count of conspiracy to commit wire fraud
  • Six counts of wire fraud
  • One count of conspiracy to violate the Arms Export Control Act (AECA)
  • Once substantive count of violating the Arms Export Control Act

Gul is the principal owner, chief executive office, and general manager of Bright Machinery Manufacturing Group Inc. (BMM), a defense contracting company in New Jersey and FMG Machinery Group (FMG), a purported manufacturing company in New York. He also has an ownership interest in HFMG Insaat (HFMG), a manufacturing company located in Turkey.

Between October 2010 and June 2015 Gul would submit bids for DoD contracts for BMM, he would submit quotes based on BMM providing military goods manufactured in the US. BMM actually relied on Gul’s Turkish company, HFMG for the goods. Over the course of 5 years BMM was awarded approximately $7 million in DoD contracts. BMM fraudulently won 346 contracts to manufacture torpedoes for the US Navy, bomb ejector racks, and armament utilized in US Air Force aircraft, and firearms and mine clearance systems used by US military abroad. Later testing by the DoD exposed the some parts had several design flaws and were unusable.

Gul and his conspirators hid the fraudulent activity from the government by submitting forged certifications and fabricated information by email to DoD. They also falsely claimed that they performed quality control on the procedures and parts sold to DoD. To have HFMG create the parts for BMM, Gul exported drawings and technical data to Turkey. Some of this information was subject to the International Traffic in Arms Regulations (ITAR) and required a license form the State Department.

The wire fraud counts carry a maximum penalty of 20 years in prison and a fine of $250,000. The Arms Export Control Act violations carry a maximum penalty of 20 years in prison and a $1 million fine.

Ferdi Murat Gul is currently at large and believed to be in Turkey. Also remember…The charges and allegations of this indictment are merely accusations, and the defendant is considered innocent until proven guilty (cue sound from Law & Order).

Department of Justice: https://www.justice.gov/usao-nj/pr/owner-defense-firm-charged-conspiracy-defraud-department-defense-7-million-violate-arms


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/


Jet Sale to Egypt Is Being Blocked By a U.S. Regulation, And France Is Over It

2018/08/30

(Source: Defense News, 1 Aug 2018.) [Excerpts.]

The U.S. is currently withholding clearance of an American component on the French Scalp cruise missile, which prevents the sale of additional Rafale fighter jets to Egypt. France is looking for ways to reduce its dependence on U.S. approval, but lacks the means to be completely autonomous.

“It is true that we depend on this [U.S. International Traffic in Arms Regulations] mechanism: We are at the mercy of the Americans when our equipment is concerned,” French Armed Forces Minister Florence Parly told the Committee for National Defense and Armed Forces of the lower-house National Assembly, according to recently released transcripts from July 4.

Parly said that the ministry needs “to analyze” French dependence on the U.S. and should be discussing with industry as well as the Economy and Finance Ministry ways for France to protect itself from American legislation.

When French President Emmanuel Macron attempted to convince President Donald Trump to provide clearance for the cruise missile component Trump recommended French experts talk to their American counterparts to work out the clearance, but the issue was not resolved according to a French defense source.

The U.S. has been the world leader in arms exports for more than 70 years, accounting for more than a third of total foreign military sales, Parly told parliamentarians. She added that European nations need to buy less American equipment to help reduce U.S. supremacy and take actions to promote European defense.

Macron has requested a French equivalent of the U.S. Foreign Military Sales program, which handles government-to-government deals, she said. Client nations prefer this approach rather than dealing with companies. The French Armed Forces and Economics and Finance ministries have created a framework agreement that will likely be adopted as the model for an intergovernmental arms contract, backed by a public tender and observing national and European law, she said.

The U.S. has been relaxing its rules on arms exports, with the State Department adopting the Conventional Arms Transfer policy, which eases the way for companies to directly pitch some types of weapons and drones without having to go to Washington for official approval.

Source: https://www.defensenews.com/global/europe/2018/08/01/a-jet-sale-to-egypt-is-being-blocked-by-a-us-regulation-and-france-is-over-it/


Sanctions in Name Only Imposed on Russia for Nerve Gas Attack

2018/08/30

(Source: Export Law Blog, 8 Aug 2018. Reprinted by permission.)

By: R. Clifton Burns, Esq., Bryan Cave LLP, Washington DC, Clif.Burns@bryancave.com, 202-508-6067.

Clif Burns, Bryan Cave Leighton Paisner, Washington, DC. Copyright Clif Burns 2018

According to a State Department press release released today, the United States has made a determination that Russia used novichok, a chemical warfare agent, in an attack on British soil and, as a result, the US will impose sanctions on Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the “CBWC Act”), 22 U.S.C. § 5601 et seq.  The text of these sanctions was not released.  Instead, the text will be in a Federal Register notice expected to be published on or around August 22.  The sanctions will be effective as of the date of the publication of that notice.

Because these sanctions are being imposed under the CBWC Act, we can already get a good idea of what these sanctions will be.   The Act contemplates sanctions being imposed in two stages.  The first stage, described in section 5605(a), sets forth the following sanctions, all of which are required to be imposed upon the offending country:

  • Termination of all foreign assistance
  • Termination of all arms sales
  • Termination of all foreign military financing
  • Denial of U.S. government credit or assistance
  • Termination of all exports of items controlled on the Commerce Control List for NS reasons

To be honest, none of these sanctions will have any significant impact on Russia.  Arms sales to Russia have been prohibited for some time now.   The country chart already has Russia controlled for both columns of NS controls.  Of course, you could say that the new sanctions will mean that NS items will not be considered for licenses under any circumstances.  But I don’t think licenses to export NS items to Russia are being readily granted now.

The second stage, if it happens, would take place on November 8 of this year unless the President determines that Russia is no longer using chemical or biological weapons.  If that determination is not made, the President is required to impose three sanctions from a set of six possible sanctions.  Those six possible sanctions are:

  • Opposing multilateral bank financial assistance to Russia
  • Prohibition of U.S. bank loans to the government of Russia
  • Prohibition of all exports of all U.S. goods and technology to Russia
  • Downgrading or suspending diplomatic relations with Russia
  • Termination of all service to and from the United States by Russian airlines

Whether the President will make the findings necessary to impose this second stage and which three of the six will be imposed is anyone’s guess, although I suspect that most people likely have a pretty good guess.   The upcoming Federal Register notice will probably not even address the second stage sanctions.   If the United States does in fact impose the three second stage sanctions, the best guess is probably that he will impose the least restrictive of those, i.e., opposing multilateral bank loans, prohibiting U.S. bank loans, and expelling a few more diplomats.

 


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.


Export Control Amendments Proposed for Commercial Firearms, Ammunition and Related Products

2018/06/29

By: Thomas B. McVey, Esq., tmcvey@williamsmullen.com; Camden R. Webb, Esq., crwebb@williamsmullen.com; and Charles E. “Chuck” James, Jr., Esq., cjames@williamsmullen.com. All of Williams Mullen.

On May 24, 2018 the State and Commerce Departments issued proposed regulations regarding the transfer of export jurisdiction for commercial firearms and ammunition from the International Traffic In Arms Regulations (“ITAR”) to the Export Administration Regulations (“EAR”).[1]  Specifically, the proposals would amend Categories I, II and III of the U.S. Munitions List (“USML”) to remove certain commercial firearms products, ammunition, and certain parts, components, accessories and attachments and transfer these items to the Commerce Control List (“CCL”) under the EAR.  This is the first step in the long-awaited process under export control reform to transfer firearms products that no longer warrant control as military products from ITAR to the less restrictive EAR.  This is welcome news to our clients and many in the firearms and firearms accessory market.  The following is a summary of a number of the proposed changes and the impact on companies dealing in these products.

At the outset, it should be recognized that these are proposed amendments – they are not the final versions of the regulations.  State and Commerce have provided these in proposed form and are requesting comments from interested parties during a 45-day comment period.  Upon the receipt of comments, the agencies may make further modifications to the proposals and must still issue final regulations.  Consequently, companies should be alert to any additional changes and not act on the proposed regulations until they become final.  Nevertheless, companies can become engaged in the process now by submitting comments with recommendations for further revisions and begin planning for the transition to the new regulatory program.  Many industry groups and advocacy organizations are encouraging their members to offer comments in support of the proposed regulations.

Amendments Under ITAR.  Under the proposed State Department rule, USML Category I, covering firearms and related articles, will be amended to remove non-automatic and semi-automatic firearms up to caliber .50 (12.7 mm) inclusive and certain parts, components, accessories and attachments “specially designed” for such articles.  The goal of such amendments is to remove common items like modern sporting rifles while continuing to control under ITAR “only defense articles that are inherently military or that are not otherwise widely available for commercial sale.”[2]  Such products would be transferred to be controlled under the EAR (discussed further below).  Certain products, however, would continue to remain on USML Category I and subject to ITAR that fit within the above parameters, including the following:

  • Firearms that fire caseless ammunition;
  • Fully automatic firearms to caliber .50 inclusive;
  • Firearms specially designed to integrate fire control, automatic tracking and automatic firing systems;
  • Fully automatic shotguns;
  • Silencers, mufflers, sound suppressors, and specially designed parts and components;
  • Barrels, receivers (frames), bolts, bolt carriers, slides, and sears, specially designed for the firearms in Category I;
  • High capacity (greater than 50 rounds) magazines, and parts and components to convert a semi-automatic firearm into a fully automatic firearm; and
  • Accessories and attachments specially designed to automatically stabilize aim (other than gun rests) or for automatic targeting.

Category II, covering guns and armaments, would be amended to specifically list the items subject to controls and to establish a “bright line” between the USML and the CCL for the control of these items.  Items removed and transferred to the CCL include engines for self-propelled guns and howitzers,[3] tooling and equipment for the production of articles controlled in USML Category II[4] and certain test and evaluation equipment.[5]  Items specifically remaining on the USML and subject to ITAR would include certain apparatus and devices for launching or delivering ordnance,[6] certain autoloading systems currently controlled under USML Category II paragraph (i), developmental guns and armaments funded by the Department of Defense[7] and specially designed parts and components of such developmental products.

Category III, covering ammunition and ordinance, would be amended to be consistent with Category I, including the removal of ammunition for small arms that were transferred out of Category I.  Category III would also be amended to remove the broad “catch-alls” previously covered and to specifically enumerate the remaining items to be controlled.

New Controls Under the EAR.  Items removed from the USML as described above would be transferred to be controlled under the EAR which is administered by the Bureau of Industry and Security (“BIS”) within the Commerce Department.  As part of this transfer, BIS has established 17 new export control classification numbers (“ECCN’s”) on the CCL to control items that were removed from the USML.

Items covered by these ECCN’s will continue to be subject to significant export restrictions.  For example, these items will require export licenses for exports, reexports and in-country transfers.  In addition, certain “technology” related to the transferred firearms, ammunition and related products will be controlled on the CCL – in many cases licenses will be required for the transfer of controlled technology out of the U.S. and the transfer or disclosure of controlled technology to foreign persons in the U.S.  Certain license exceptions would also be available for the transferred items (although the license exceptions under the EAR frequently differ from the license exemptions under ITAR).  As with ITAR licenses issued by DDTC, items exported under a license would only be authorized for the end user and end use specified on the license – any reexports or in-country transfers of such items beyond such authority will require specific additional license authorization from BIS.

Continued ITAR Controls On Brokering of Commercial Firearms.  Notwithstanding the changes described above, commercial firearms and ammunition would continue to be covered under the ITAR brokering requirements.  Specifically, the State Department proposed rule states that products listed on the U.S. Munitions Import List (used by the Bureau of Alcohol, Tobacco, Firearms and Explosives for administering controls on the permanent import of firearms products) will continue to be subject to the ITAR brokering requirements set forth in 22 CFR Part 129.  Category I(a) of the USMIL includes nonautomatic and semiautomatic firearms, to caliber .50 inclusive, and USMIL Category III(a) includes ammunition for such products.  Thus, despite the broad changes to USML Categories I and III under the proposed amendments, parties will still be subject to ITAR regulation for brokering and “facilitation” in the sale of commercial firearms products, including requirements for registration, obtaining advanced authorizations for certain transactions, reporting, recordkeeping and restrictions on brokering transactions involving the “proscribed” countries identified in 22 CFR §126.1.

Impact On Firearms Companies.  The proposed changes will most likely affect many companies in the firearms industry in a number of ways including:

  • Export Classifications.  Companies will review the export jurisdiction and classification of their products to determine if they have been transferred to BIS jurisdiction and, if so, to determine the correct ECCN’s for their products.  This will apply to firearms, ammunition, parts, components, accessories and attachments.
  • Licenses For Products, Technology and Software.  As referenced above, companies will still be required to obtain export licenses for exports, reexports and in-country transfers for controlled products, technologies and software.  However, in many cases these will be from a different licensing agency under different licensing procedures.  Consequently, many companies will be amending their export compliance procedures to conform to these new requirements.
  • Registration.  There is no requirement for companies to register under the EAR, as exists under ITAR.  Of course, if companies still engage in activities regulated under ITAR (such as brokering commercial firearms products or the sale of items remaining in USML Categories I, II and III), they will be required to maintain their DDTC registration.
  • Defense Services.  There are reduced controls on performing services under the EAR as compared with those under ITAR.[8]
  • Temporary Imports.  The EAR does not contain controls on the temporary import of items subject to the EAR as required under ITAR.
  • Reports for Payments of Fees, Commissions and Political Contributions.  The EAR does not require exporters to file reports on the payment of political contributions, fees and commissions as under ITAR Part 130.
  • Items Still Regulated Under ITAR.  For items that remain listed on the USML after the amendments, such items will still be subject to ITAR and the requirements thereunder.

Status of Amendments.  As stated above, the amendments described in this alert are proposed changes only and not final amendments.  Parties have until July 9, 2018 to submit comments to State and Commerce on the proposed regulations.  Companies are encouraged to review the proposals carefully to assess how they will apply to their businesses as there is still opportunity to propose further amendments.  Officials at DDTC and BIS typically review the comments carefully and often adopt changes recommended by commenters.

While the transfer of commercial firearms products from ITAR to EAR controls is not yet concluded, the process has begun.  This is the time for companies to become engaged – in reviewing, commenting on and planning ahead for these changes.

[1] The proposed State Department rule is available here, and the proposed Commerce Department rule is available here.

[2] See State proposed rule p. 24,198.

[3] To be transferred to the CCL under ECCN 0A606.

[4] To be transferred to the CCL under ECCN 0B602

[5] To be transferred to the CCL under ECCN 0B602.

[6] To be included in a new USML paragraph (a)(4).

[7] To be included in new USML paragraph (a)(5).

[8] The performance of services is addressed in the EAR in 15 CFR §744.6(a)(1)(ii) and §744.6(a)(2).  In addition, the BIS proposed rule states as follows regarding defense services: “The EAR does not include a concept of “defense services,” and the “technology” related controls are more narrowly focused and apply in limited contexts as compared to the ITAR.”  See BIS proposed rule at p. 24,167.