“First you must travel a long and difficult road, a road fraught with peril.”
Blind Seer, “O Brother, Where Art Thou?”
Businesses that seek to sell goods or services to the U.S. Department of Defense or foreign governments – i.e., defense contractors and subcontractors – know this reality all too well. After all, U.S. export controls are as voluminous as they are complex. Some controls even defy common sense—yet they are the rules and must be followed. Consequently, defense contractors and subcontractors often feel overwhelmed by a litany of issues, including:
- Which export controls are necessary to comply with, and which don’t apply in a given business’ particular case?
- What controls should be prioritized over others—and how would a business know that?
- How can a defense contractor or subcontractor have confidence that their efforts to comply with export control laws are comprehensive, correct and thus, successful?
The challenges don’t end there. Through the years, many defense contractors and subcontractors have incorrectly assumed that having a Department of Defense or other government contract in hand automatically allows them to make related exports. While this may seem logical, it’s an incorrect assumption. Businesses must, in fact, either determine that the export qualifies for an exemption or exception from license requirements or otherwise obtain an export license for the goods and/or services they seek to provide as part of any contract—and that occurs via the U.S. State Department or Commerce Department. Failure to do so can trigger serious administrative, civil and criminal consequences, including but not limited to:
- Seized shipments
- Loss of export privileges
- Up to $1.2M per civil violation
- Up to 20 years imprisonment and/or $1,000,000 in penalties
- Suspension and debarment from government contracting
- Reputational damage
- Harm to U.S. national security
All this is a prelude to an inevitable truth: Defense companies deal with unique export compliance concerns—yet 100% compliance with all relevant export controls is essential. Nothing less puts your business at substantial risk.
At the Export Compliance Training Institute, we understand the challenges that defense contractors and subcontractors face. We have built our business around the goals of simplifying U.S. export control compliance and helping defense and defense-related businesses of all sizes and scopes achieve compliance and maintain it over time.
A Brief Export Control System Primer for Defense Contractors
So, what comprises the U.S. export control system? In reality, it’s actually an interrelated series of major export control regulations, augmented by several secondary regulatory tiers. The most prominent of these is the International Traffic in Arms Regulations—most commonly known as the ITAR.
International Traffic in Arms Regulations (ITAR) for Defense Contractors and Subcontractors
The ITAR is the logical starting point to determine if your products, technologies or services fall under its jurisdiction. Essentially, the ITAR is a set of rules which regulates various activities related to defense articles and defense services. Anyone in the U.S. who manufactures, exports or temporarily imports defense articles, or provides defense services, must register with the Department of State’s Directorate of Defense Trade Controls (DDTC) (www.pmddtc.state.gov). Exports, reexports, retransfers and temporary imports of defense articles, and furnishing defense services require DDTC authorization, as do manufacturing abroad and arms brokering.
The defense services and defense articles regulated by the ITAR are identified on the U.S. Munitions List (USML), which includes a broad array of items which DDTC has determined provide a critical military or intelligence advantage. The USML itself consists of 21 distinct categories organized around broad platforms or groupings such as aircraft, ground vehicles and firearms. Each of these categories includes tangible items, software, technical data and defense services. Confusion often arises over whether all “defense-related” items are subject to the ITAR. This is not the case, but a careful review of the USML is essential in ascertaining if the ITAR is relevant to your business.
The other prominent export control framework is the Export Administration Regulations, or EAR for short.
Export Administration Regulations (EAR) for Defense Contractors and Subcontractors
Envision a circle that represents the universe of export compliance regulations and controls, then draw a small wedge within it. That wedge, metaphorically, represents items controlled by the ITAR. Of all the export activities and issues people consider, that small wedge garners a great deal of attention because it’s highly regulated and challenging to comply with in many ways.
However, the remainder of the circle – i.e., the large majority – represents items that are subject to the EAR. Indeed, the EAR controls nearly everything under the authority of the U.S. government which is not subject to the ITAR. To be specific, the EAR controls commercial goods, dual-use items and many military items that are not on other export control lists such as the USML. Be aware, though, that some items fall outside the ITAR or EAR’s jurisdiction and are subject to control by other federal agencies.
In terms of the EAR, the controlling agency overseeing it is the Bureau of Industry and Security (BIS) in the Department of Commerce (www.bis.doc.gov).
The EAR requires a license based on the relevant items, end use, parties and countries involved in a potential export. That said, most exports under EAR jurisdiction may be made without a license—the challenge is in correctly identifying the transactions which require a license. If you seek to export, and do so compliantly, the burden of analyzing transactions to determine if a license is required falls on you. In this regard, you must implement procedures for analyzing exports to determine when a license is required.
To determine whether your item is subject to the EAR, and how stringently it is controlled for export, you must carefully review the Commerce Control List (CCL). Within the CCL there are 10 distinct categories, each with five product groups. Each individual entry in the CCL is an Export Control Classification Number (ECCN). Look for the ECCN that matches your item—and if you’re unsure, you should get the right training or consult with an experienced export professional to be absolutely certain.
Related article: The Export Compliance Basics of ITAR and EAR – Understanding Key Terms, Issues, Similarities and Differences
One final note: We often field questions from defense businesses that seek to learn more about government contracting rules such as Federal Acquisition Regulations (FAR) and Defense Federal Acquisition Regulations (DFAR). Like export controls, these regulations can be unwieldy, complex and difficult to comply with for those lacking the proper knowledge. While we don’t work with defense businesses specifically in helping them comply with FARs and DFARs, they do sometimes intersect with export controls. So, if your defense business seeks assistance, the Export Compliance Training Institute can help you understand and comply with the export control piece of this puzzle.
We hope this article helps you understand key compliance considerations for defense companies. As we said earlier, export compliance is a complex and detailed undertaking. Your company’s investments rely on achieving 100% compliance with all applicable export regulations and controls. That said, it is absolutely achievable—you can do it, provided you take the necessary time up front to align with an established and widely acclaimed export compliance training partner who can guide you step by step toward compliance success.
Do you have questions about export compliance challenges for your defense business? Visit www.learnexportcompliance.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars and live webinars and browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You can also call the Export Compliance Training Institute at 540-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.