By: David S. Gallacher

2011 was a banner year for U.S. export control laws. The Obama administration has vowed to streamline and reform the bloated U.S. export control system – promising to build "higher walls" around a narrower universe of goods and technologies requiring export licenses. Following is a summary of ten of the key reforms to U.S. export laws that took place (or were proposed) in 2011. 
 

New Regulations
 

1.      Consolidated List of Prohibited End-Users. In early-January 2011, the government issued a new, easier to use, "Consolidated Screening List," which combines all of the different prohibited end-user lists published by the U.S. Government (e.g., the Specially Designated Nationals List, the Entity List, the Denied Persons List, the Unverified List, and the Debarred List).

2.      Loosening Encryption Controls. In January 2011, the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") amended the licensing requirements for encryption controls, removing many publicly available "mass market" encryption items from jurisdiction under the Export Administration Regulations ("EAR"). See 76 Fed. Reg. 1059. 

3.      New STA License Exception. In June 2011, BIS created a new Strategic Trade Authorization (STA) license exception, which allows exports for certain low-risk products and technologies in certain circumstances to more than 36 countries. See 76 Fed. Reg. 35,276. BIS expects that this will eliminate the need for thousands of licenses, streamlining nearly $1.4 billion in exports. 

4.      ITAR Exports to Dual- and Third-Country Nationals. Effective August 2011, the International Traffic in Arms Regulation ("ITAR") authorized the export of ITAR-controlled technical data or defense articles to certain dual- and third-country nationals when a pre-screened employee is employed by an authorized company, and when effective procedures are in place to ensure that the sensitive technologies are suitably protected. See 76 Fed. Reg. 28,174.
 

Proposed Rules

5.      Consolidation of the USML and CCL. Throughout 2011, BIS and the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC") proposed a number of significant reforms that would move large numbers of products and technologies from the ITAR’s U.S. Munitions List ("USML") to the EAR’s Commerce Control List ("CCL"), creating a hybrid "Commerce Munitions List." The movement of these products and technologies is an intermediate step, designed (ultimately) to create a "positive control" list for both the CCL and USML that is more narrowly drawn, with the USML focused on those products and technologies that truly raise national security concerns.

  • In December 2010, DDTC proposed moving nearly three-quarters of the products from USML Category VII, Tanks and Other Military Vehicles, to the CCL. See 75 Fed. Reg. 76,930. These proposed rules were further updated in December 2011. See 76 Fed. Reg. 76,085, 76,100.
     
  • In May 2011, the U.S. Department of Defense and DDTC issued an interim report recommending changes to USML Category XV, Spacecraft Systems and Associated Equipment, including considering moving commercial communications satellites and related components and technologies, subject to specific exceptions, to the CCL and loosening other satellite-related restrictions.
     
  • In July 2011, BIS continued the plan to make significant revisions to the USML and CCL – proposing a new 600-series as the new Commerce Munitions List, and (among other things) adding a new ECCN as a place holder for miscellaneous items migrating off of the USML. See 76 Fed. Reg. 41,958.
     
  • In November 2011, BIS proposed new rules relating to aircraft and related items (USML Category VIII), including classification of these products and technologies on the new Commerce Munitions List. See 76 Fed. Reg. 68,675.
     
  • In December 2011, BIS proposed new classifications relating to gas turbine engines (USML Categories VI, VII or VIII). See 76 Fed. Reg. 76,072. Simultaneously, DDTC proposed the creation of a new USML Category XIX, Gas Turbine Engines, which would retain the products and technologies that are not ultimately moved to the Commerce Munitions List. See 76 Fed. Reg. 76,097.
     
  • And in late December 2011, BIS proposed new classifications relating to ships, vessels of war, and other submersibles (USML Categories VI and XX). See 76 Fed. Reg. 80,282, 80,291.
     
  • Additional changes to the USML and CCL are expected throughout 2012. The Obama administration has stated that it intends to have all of these proposed rules finalized by November 2012. While that is, no doubt, an ambitious goal, we hope that it can be accomplished.

6.      Defining "Specially Designed" for Military Uses. In December 2010, DDTC proposed for the first time a definition of what it means it means to be "specially designed" for military use. See 75 Fed. Reg. 76,935. In July 2011, BIS proposed its own, lengthier definition of "specially designed." See 76 Fed. Reg. 41,958. In December 2011, DDTC acknowledged the different definitions, but indicated that they would be reconciled when a final rule is eventually issued. See 76 Fed. Reg. 76,098.

7.      Exceptions For ITAR Components Incorporated into Commercial Products. In March 2011, DDTC proposed relaxing licensing requirements for ITAR components incorporated into commercial products, which would create a new de minimis exception under the ITAR. See 76 Fed. Reg. 13,928. Many foreign manufacturers simply "design out" U.S. components to avoid ITAR licensing requirements; this proposed change would attempt to limit this trend.

8.      Narrowing Definition of "Defense Services" Under the ITAR. In April 2011, DDTC proposed a new rule that would narrow the definition of "defense services" to exclude publicly available information and data, even if provided in connection with defense articles. See 76 Fed. Reg. 20,590. 

9.      Implementation of U.K. and Australian Cooperation Treaties. In November 2011, DDTC proposed a series of new rules to implement two different defense cooperation treaties signed in 2007 between the U.S. and the United Kingdom and between the U.S. and Australia. See 76 Fed. Reg. 72,246. While these treaties were originally signed nearly five years ago, they were only recently ratified by the Senate in September 2010. While the proposed rules at ITAR §§ 126.16 and 126.17 are not as expansive as the Canadian exemptions at ITAR § 126.5, the proposed rules represent the first step in a more streamlined process for sharing defense articles and technical data with our U.K. and Australian allies.

10.    Proposed Updates to ITAR Brokering Requirements. In December 2011, DDTC proposed new rules to clarify restrictions on brokering activities, including clarifications relating to registration requirements and the scope of brokering activities, as well as the types of activities that require prior approval from DDTC. See 76 Fed. Reg. 78,578.

 

Conclusion

These new and proposed changes have been put forward with an eye toward improving the administration of the U.S. export requirements and reducing the licensing burden for U.S.-origin products and technologies. These changes attempt to advance the four key goals of the administration’s export reform agenda:
 

A.     Creation of a single list of controlled items and technologies, replacing the two lists currently in place – the USML and CCL. The proposed creation of the new "Commerce Munitions List" under the CCL is an intermediate step to the dream of a final, single control list. 

B.     Consolidation of export licensing in a single agency, replacing the numerous agencies that currently authorize licenses, including DDTC, BIS and the Office of Foreign Assets Control (among others).

C.     Consolidation of export enforcement in a single agency, replacing the numerous agencies that currently enforce the export and sanction restrictions.

D.     Use of a single IT system to submit and process license applications, replacing the different systems used by each of the different agencies. In 2011, the U.S. State Department announced the expanded use of an upgraded USXPORTS system (previously used only by the Department of Defense), which many hope will provide an eventual government-wide IT solution. While exporters will still submit licenses through separate portals (such as SNAP-R, DTrade, or ELLIE), it is hoped that use of USXPORTS will streamline the intra-governmental coordination on licensing. 
 

In order to reach these laudable goals, many more changes will still be required. Some reforms will require new legislation, and others will require political compromises as one agency cedes authority to another. Regardless, thus far the government has made good on its promise to involve industry in the reforms, and the developments in 2011 are a positive sign that the promised improvements may actually occur. It may not be happening as quickly as many in industry and the government would like, but slow, forward motion like that seen throughout 2011 is clearly much better than no motion at all. 

Authored by:

David S. Gallacher
(202) 218-0033
dgallacher@sheppardmullin.com