The Obama Administration’s ongoing effort to simplify the complex maze of export regulatory regimes, dubbed the Export Control Reform initiative, has given rise to a proposed amendment to the International Traffic in Arms Regulations (“ITAR”), published by the Department of State on August 11, 2010. The ITAR generally prohibits the unlicensed export of defense articles, data and services, unless an exemption applies.
For many years, the exporting community has been forced to cope with the ITAR’s provisions concerning dual- and third-country nationals that work for foreign consignees or end users, which provide that such dual- and third-country nationals must be specifically approved by DDTC to either have access to or receive U.S.-origin defense articles and data, even though the company they work for is a licensed consignee or end user itself. Unless the dual- or third-country national was approved by DDTC in advance, DDTC has taken the position that providing access to the licensed article or data by the dual- or third-country national by the licensed corporation is an unauthorized transfer, or diversion. This longstanding rule has caused issues with U.S. allies such as Canada, where labor laws prohibit employers from discriminating against workers according to nationality with respect to job performance. It also raises issues insofar as a U.S. exporter that exports licensed goods to a foreign consignee or end user, which thereafter provides unauthorized access to an unlicensed dual- or third-country national, may find themselves in the middle of an export control violation over which they had no, or little, control.
The proposed amendment to this rule published by DDTC on August 11, 2010, would allow for in-company transfers of defense articles and data so long as the employee is a “bona fide, regular employee, directly employed by the foreign business entity.” For such an employee, a transfer may take place without a license, but only within the territory where the end user is licensed. The transfer cannot exceed the scope of the underlying license or exemption. To take advantage of the proposed rule, certain preconditions must be satisfied. First, a foreign end user or consignee must commit to abide by U.S. laws and regulations, including the ITAR, or both have a screening process in place and require that the foreign employee execute a non-disclosure agreement that provides assurances that the employee will not further transfer the defense article or data in question. Second, the licensed foreign end user or consignee must implement a security clearance procedure approved by the foreign host government for its employees, or utilize screening for its employees to detect their “substantive contacts” with restricted or prohibited countries under the ITAR’s Section 126.1, such as China, Cuba and the Sudan. Substantive contacts include recent or regular travel to such countries, continued allegiance to such countries, or “acts otherwise indicating a risk of diversion.” An employee with substantive contacts to such countries creates a presumptive risk of diversion, and the transfer cannot occur.
In other action, on August 4, 2010, DDTC formally adopted a final rule to allow for online commodity jurisdiction requests through its D-Trade portal. Soon, starting in October, electronic filing of commodity jurisdiction requests will be mandatory, and paper submissions will no longer be accepted. A commodity jurisdiction request is a request made by a putative exporter to DDTC to determine whether a good is subject to the ITAR regime, applicable to defense articles, or subject to the Export Administration Regulations (EAR), which applies to dual-use goods. Importantly, just because a putative exporter submits a product classification request to the Department of Commerce, Bureau of Information and Security, the agency that administers the EAR, and thereafter receives a CCATS (Commodity Classification Automated Tracking System) classification assigning an Export Control Classification Number (ECCN) to their good, the issuance of that classification by BIS does not act to determine BIS’s jurisdiction over the good. The Department of Commerce, on August 2, 2010, adopted an interim rule wherein it amended Section 748 of the EAR “to remind the public of the longstanding principle that commodity classifications and advisory opinions are not and may not be relied upon as U.S. Government determinations that the items described therein are subject to the EAR as opposed to the jurisdiction of another U.S. Government agency.” The publication observes that BIS does not have the authority to issue commodity jurisdiction determinations, as this is the purview of DDTC. Pursuant to the interim rule, BIS will soon be placing reminders on all commodity classifications that it issues to the effect that its classification is not a determination as to whether the good in question may be exclusively controlled for export by another U.S. Government agency, such as DDTC. In sum, as BIS’s publication makes clear, “prior to seeking a commodity classification [from BIS], the applicant should have already determined – through a self-determination or with thte assistance of another U.S. Government agency – that the item is not subject to the exclusive export control jurisdiction of another U.S. Government agency [such as DDTC].”
There is speculation that BIS issued its August 2, 2010 interim rule because exporters accused of ITAR violations had previously argued that, because they sought and received a BIS classification, they had performed due diligence and confirmed that their good was subject to the EAR. Now that exporters have been explicitly warned not to rely on BIS classifications for purposes of determining whether the ITAR might control their goods’ export, this type of defense will plainly be rejected in any enforcement proceeding. Exporters are encouraged to take advantage of DDTC’s new streamlined commodity jurisdiction procedures to conclusively ascertain the export control regulation regime applicable to their good.