Archive for the ‘Export Reform’ Category


Aug

22

The Export Control Reform Act: Long on Control, Short on Reform


Posted by at 2:19 pm on August 22, 2018
Category: BISCCLCivil PenaltiesExport Reform

John McCain Official Portrait via https://commons.wikimedia.org/wiki/File:John_McCain_official_portrait_2009.jpg [Public Domain - Work of U.S. Government]The John McCain National Defense Authorization Act of 2018,  in addition to passing the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which reforms the CFIUS process, also enacted the Export Control Reform Act of 2018 (“ECRA”). That name is, I think, something of a misnomer given what the ECRA actually does. Perhaps a better name would have been the Export Administration Act Reenactment Act. After Congress in 1994 was unable to renew the Export Administration Act (“EAA”), which was the statutory authority for the parts of the U.S. export control regime covering dual use items and administered by the Commerce Department’s Bureau of Industry and Security (“BIS”), every U.S. President has resurrected the dead statute each year with an executive order under the International Emergency Economic Powers Act. With the passage of ECRA, that is one less executive order that the White House will need to issue each year.

Most of what ECRA does is provide the statutory authority for BIS that it previously had under the EAA and the yearly executive orders, although now with higher penalties for violations, which have been upped to $300,000 per violation. Why, after all, pass a law if you can’t raise the penalties? The only thing in ECRA which might be called a reform in a traditional sense of making life easier for regulated parties is section 1757 which says the President may authorize BIS to provide export counseling to exporters. This provision has generated so much excitement among exporters that U.S. exporters were popping bottles of Dom Perignon in celebration. Sorry, just kidding.

Rather than making life easier for exporters, the ECRA contains new controls certain to make exporters’ lives more difficult.  (In addition to the higher penalties.  Did I already mention those?) License applications will now have to explain why the export of an item will not have a negative impact on the U.S. defense industrial base. The law also mandates that BIS consider stopping exports of items on the Commerce Control List to countries that are subject to State Department arms embargoes. (Ahem, does anybody think that’s a dog whistle for restricting more exports to China?)

But the biggest change, and potential headache for exporters aside from higher penalties, is section 1758, which requires BIS, in cooperation with the Departments of State, Energy and Defense to identify and control “emerging and foundational technologies.” What on earth, you rightly wonder, is an emerging and foundational technology? The act only says that they are technologies that are “essential to the national security of the United States” but not already subject to export controls. Basically, since all export controls are based on national security, the only real definition of an emerging and foundational technology is something that is not already export controlled but should be. Your guess is as good as mine (and Congress’s) as to what these four agencies will decide to control under this new rubric.

Once the list of these new export controlled items is in force, then the ECRA requires as a minimum level of control that export of this technology to a “country subject to an embargo, including an arms embargo, imposed by the United States” would require a license. (Hello, China!) Embargo is not defined, so it’s not clear if a license would be required for these technologies with respect to a country to which the United States prohibited only a few types of goods or arms. A more significant issue is how this requirement, which applies to any “country” subject to an embargo would affect exports of emerging technologies to the Crimean territory, which is subject to a comprehensive embargo. This provision would impose the license requirement on either Russia or Ukraine depending on which country is considered to own Crimea and whether an embargo of a territory of a country means that the country is subject to an embargo.

The last thing to note about section 1758 is that the license requirement would not apply to what the Senate version referred to as “ordinary business transactions.” In the legislation as passed, these ordinary business transactions are described, for example, as

The sale or license of a finished item and the provision of associated technology if the United States person that is a party to the transaction generally makes the finished item and associated technology available to its customers, distributors, or resellers.

For those used to the EAR’s treatment of technology this provision seems odd and unnecessary. “Associated technology” generally made available to customers would be “published,” as defined in section 734.7 of the EAR, and thus not subject to the EAR or any license requirement, making this exception completely unnecessary. I suspect that the ECRA, which never defines “technology,” is using the term in a loose sense that would cover physical goods in addition to information. In any event, count on these exceptions to cause much confusion when the list of emerging and foundational technologies finally appears.

Oh, and did I mention the higher penalties?

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Copyright © 2018 Clif Burns. All Rights Reserved.
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Jul

16

Chronicle of a Death Foretold


Posted by at 4:40 pm on July 16, 2018
Category: BISDDTCExport Reform

Printed Guns via http://defdist.tumblr.com/post/85127166199/i-have-often-been-asked-who-the-first-person-to-be [Fair Use] Of course, the Interwebs are all abuzz with the news that the Directorate of Defense Trade Controls (“DDTC”) settled the Defense Distributed case as if that were somehow remarkable.  Of course, it was about as remarkable as 100 degree days in DC in August or the All Star Game being a pointless, mind-numbing bore.  DDTC’s position in this case was on life support, if not already dead, since last May when DDTC and BIS finally announced export control reform which would result in the transfer of most firearms and related technical data, including the types of firearms described in the 3-D printing plans at issue in the  case, from the jurisdiction of DDTC to that of the Bureau of Industry and Security (“BIS”).

It is no secret that BIS and DDTC have radically different ideas about the consequences of putting something of the Internet.   As far as DDTC is concerned, putting anything of the Internet is an export of that item to every foreign country with access to the Internet, i.e.,  everywhere but the outer reaches of Mongolia.  BIS, on the other hand, takes the position that publication on the Internet means that an item is no longer subject to export controls.  As BIS said in its proposed notice of rulemaking:

[I]f a gun manufacturer posts 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 (i.e., unlimited distribution), the operation and maintenance information included in that published operation and maintenance manual would no longer be “subject to the EAR.”

So once the Category I transition is complete, the fat tenor has sung and the game is over.

DDTC, of course, could have waited until the last notes of Nessun Dorma, but instead agreed to move ahead. To do that before the transition of the firearms in question to BIS was complete, there are several housekeeping matters that the settlement agreement needed to address. First, DDTC agreed to continue with the announced proposed rules and to adopt a final rule that would remove the plans at issue from Category I of the USML. Second, DDTC would announce a temporary modification of the rules to exempt the plans prior to the transition from the USML to the Commerce Control List becoming effective. Third, DDTC agreed to issue a letter saying that the plans had been approved for public release — something not really necessary in light of the temporary modification of the rules to exempt the plans. Fourth, an acknowledgment that the letter permitted people to do whatever they wanted with those plans — again something not really necessary in light of the temporary modification and the letter itself.

What comes as a surprise to me was not that DDTC dropped the case, or that it did so before the guns at issue were removed from the USML, but that it agreed to fork over $39,581 to the plaintiffs. Granted that’s not a huge sum. Still, DDTC has not conceded that its position that putting USML technical data on the Internet is an export is wrong. Indeed, that will continue to be the case for items remaining on the USML. Well, I guess lawyers have to eat too.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

May

15

Export Control Reform Finally Announced for Guns and Ammo


Posted by at 7:04 pm on May 15, 2018
Category: BISCCLDDTCExport ReformUSMILUSML

Guns by Al [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/6gPGbx [cropped]The Directorate of Defense Trade Controls and the Bureau of Industry and Security today announced the proposed rules for the long awaited export control reform of Categories I, II and III of the United States Munitions List.  The proposed rules for DDTC are here; the proposed rules for BIS are here.

Under the proposed rules, the only items remaining in Category I will be firearms that fire caseless ammunition, are fully automatic, or are specially designed to integrate fire control, automatic tracking, or automatic firing.  Other small arms that were once in Category I will be moved to 0A501 and 0A502.  Small arms that are on Category I of the USMIL will still be subject to the brokering rules of the ITAR even if they have been moved to 0A501 or 0A502.

These new proposed ECCNs will be controlled by, among others, RS1 and FC meaning that licenses will be required for all destinations.  (RS1 captures every country but Canada and FC captures Canada).  The BIS proposed rules also exclude the use of most license exceptions so that the new regime will closely parallel the available exemptions that were available under the ITAR.   So the result of the transition of these items from the USML to the CCL will mostly be a change in the agency with licensing authority.

There are a few significant changes, however, worth noting.  First, the proposed rules would eliminate a particular bugbear of mine relating to the classification of rifle scopes.  Currently, rifle scopes are ITAR if they are “manufactured to military specifications,” whatever that means.   Foreign manufacturers of rifle scopes routinely decline to state whether their scopes are Category I(f) or 0A987 and do not provide enough information to decide whether a particular scope is manufactured to military specifications.  Under the proposed rules, a scope is on the USML only if it has night vision or infrared capabilities that would cause it to be captured under Category XII.  Everything else is now 0A987.

Second, these new rules will reverse the questionable position that DDTC has taken in the Defense Distributed case.   In that case, DDTC argued that posting 3D gun plans on the Internet is an export of controlled technical date on Category I firearms to every foreign person with access to the Internet.  BIS has a somewhat different take on posting things to the Internet.   Here’s what the proposed BIS rules say:

The EAR also includes well-established and well understood criteria for excluding certain information from the scope of what is “subject to the EAR.” (See part 734 of the EAR.) Items that would move to the CCL would be subject to existing EAR concepts of jurisdiction and controls related to “development” and “production,” as well operation, installation, and maintenance “technology.” While controlling such “technology,” as well as other “technology” is important, the EAR includes criteria in part 734 that would exclude certain information and software from control. For example, if a gun manufacturer posts 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 (i.e., unlimited distribution), the operation and maintenance information included in that published operation and maintenance manual would no longer be “subject to the EAR.”

Part 734 makes clear that publication of technology on the Internet is not an export of that technology to the rest of the world; rather it is a release of that technology from export controls.

Third, the new rules will eliminate the issue as to whether firearms training is a defense service that cannot be provided by a U.S. person to a foreign individual without a license.  Both the existing and latest proposed DDTC rule defining defense services would require a license to provide basic firearms training to a foreign individual.  (The latest proposed rule permits basic training but only if there is an approved license to export the firearm to that individual.)  The BIS analysis of this is somewhat different.  The BIS notice of proposed rulemaking somewhat wryly states:

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.

In fact, of course, under the proposed rules training a foreign individual in firearms use would require a license only if it involved a control of technology covered by proposed ECCNs 0E501 or 0E502.  However, neither ECCN covers information related to the use of 0A501 or 0A502 firearms.   As a result, firearms training that would have required a license under the old rules will not require a license if the new rules are adopted.

Photo Credit: Guns by Al [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/6gPGbx [cropped]. Copyright 2009 Al

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Apr

3

The Export Control Nightmare Act of 2018 (UPDATED)


Posted by at 6:08 pm on April 3, 2018
Category: BISExport Control ProposalsExport Reform

Ed Royce via https://royce.house.gov/uploadedphotos/mediumresolution/320ee60e-b83a-4f74-9767-a0e68f3095f6.png [Fair Use]
ABOVE: Rep. Ed Royce

When the Export Administration Act lapsed years ago, it meant that every year the President had to issue an executive order under the International Emergency Economic Powers Act (“IEEPA”) resurrecting the Export Administration Regulations for another year.  (Declarations of emergency, the premise for any IEEPA resuscitation of the EAR, can only last one year under the National Emergencies Act.)  The proposed bi-partisan Export Control Reform Act of 2018, sponsored by Rep. Ed Royce (R-Ca) is mostly designed to give the President the authority to re-promulgate the Export Administration Regulations on a more permanent basis.  He or she will still have to renew annually the Executive Orders that impose economic sanctions on people, places, and things (mostly boats).

Nobody can really argue with the elimination of the annual renewal requirement for the EAR.  Presumably the President has better things to do, like Easter Egg rolls, Thanksgiving turkey pardons and the such.  But Congress took the opportunity to meddle with the definition of a U.S. person to create a whole new class of exports that are certain to cause headaches, if not nightmares.  Under the proposed new definition, a U.S. business entity is not a U.S. person for export purposes if foreign citizens or corporations own 50 percent or more of the corporation.  Under the old definition, a business entity was a U.S. person if  it was organized under the law of any jurisdiction in the United States.

If you previously thought that “deemed exports”  already were the stuff of nightmares, well, as they say, you ain’t seen nothin’ yet.  Here are some scenarios that I’m optioning to start a new horror series on Netflix.

  • Company A in Chicago wants to sell some microprocessors classified as ECCN classified as 3A001 to Company C, a U.S. corporation, in Detroit.  It can’t do that until Company C gives it information on foreign ownership and, if Company C is owned 51% by Chinese corporation, then Company A cannot send the items from Chicago to Detroit without a [bad word] export license.  Scared yet?
  • Company D, a manufacturer of computers in Seattle wants to use Company F in Boston to manufacture certain components specially designed for its computers.  The computers and the specially designed parts are classified as ECCN 4A001.  In order to do that, Company D must transfer 4E001 technology relating to the production of these parts to Company F.   Company F is owned 60 percent bought by a Russian-Italian joint venture.  Is Company F Russian or Italian?  If the latter, no license is required; if the former, it is.  This gives Freddie Kruger a run for his money.
  • Company G, which is 60 percent French owned, creates designs for a CNC-machine.   That technology can be exported without license to France.  Can the French parent build the machine and ship it to China without license?  That will depend on whether the designs created by the U.S. company that is now a foreign person in the United States are U.S. technology or foreign technology.  Warning: violent ending for mature audiences only.

You have to imagine that these nightmare scenarios never crossed the minds, such as they were, of the drafters of this legislation.  Nor did they focus on the numerous compliance questions and problems that the new definition would create.  But not to worry:  section 108 is designed to provide “compliance assistance.”   Whew.  In fact, in section 108(c)(1), Congress mandates that the President “shall develop and submit to Congress a plan to assist small- and medium-sized United States [sic] in export licensing and other processes under this title.”  I always thought we were a big, indeed great, United States, so I’m not so sure who are the small- and medium-sized United States that Congress hopes to help.

UPDATE: Kevin Wolf, who you may remember was running export control reform at BIS during the Obama administration, points out, in the comments, that the definition of U.S. person which resulted in the nightmares described above was, ahem, a mistake:

Everyone should relax. The definition of US person in the bill was a drafting error. The title I export definition got combined with the title II antiboycott definition. Committee staff is aware of the issue and will fix it during mark-up to get it back to the EAR status quo. You were not wrong in pointing out the absurdities as written, btw. When things seem weird though, it is good to ask the drafters if that is what they really meant. They did not in this case. Reg and leg writers do make mistakes.

That’s good news. It also goes to show that we all would have been better off if the antiboycott regulations had been left to die a deserved death. Those regulations never put even a dent in the Arab boycott but instead merely enriched lawyers (myself included) who had to decipher their ridiculously byzantine complexity and seventeenth-century syntax to advise clients on what language could and could not appear in letters of credit.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Sep

22

Export Control Reform Arrives (Soon?) For Small Arms


Posted by at 4:00 pm on September 22, 2017
Category: BISDDTCExport Reform

Gun Show by M&R Glasgow [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/EfXLa [cropped]Rumors have begun to circulate that export control reform is coming to USML Category I small arms despite thoughts that this might never happen. The reporters in this Reuters article, who clearly have little background in export policy and reform, have fallen on their fainting couches, clutched their pearls, and conjured up terrifying images of an out-of-control international arms bazaar that will result. This is, of course, silliness. Thousands of items have transitioned from the USML to the 600 series of the Commerce Control List without military items falling willy-nilly into the hands of foreigners.

There are two issues I think are worthy of comment without histrionics. The first relates to brokering issues. I have been a critic of DDTC’s brokering rules, not because of their concept, but mostly because of their implementation. The rules have been improved by restricting the registration and licensing requirements to brokers who are U.S. citizens or who are located in and acting from the United States. But I think that potentially removing small arms shipments from the restrictions of the brokering rules is not necessarily a good idea. Remember that the reason that these were passed in the first place was that U.S. persons were shipping small arms from foreign countries to regional disputes and rebellions outside the United States where those arms were used for genocide or otherwise against the foreign policy of the United States. The EAR has no controls on brokering and would not control export of foreign-manufactured arms (without U.S. content) to areas outside the United States by U.S. citizens or persons in the United States. The brokering issue is negligible when we talk about other transitioned items, like certain military aircraft parts. But the issue is front and center when it comes to small arms.

Another interesting effect of transitioning small arms to the CCL, and one that will be probably a beneficial one, relates to the issue of providing firearms training to foreign persons. As it stands, the definition of defense services in section 120.9 covers ” training … foreign persons … in the … maintenance, … operation, … or use of defense articles.” So a U.S. person could not show a foreign person how to clean a rifle but could provide a copy of the publicly available rifle manual with cleaning instructions to the foreign person. After transition of the rifle as a 600 series item to the EAR, since the information on how to clean the rifle is published, a U.S. person could show the foreign person how to clean the rifle rather than just provide a copy of the manual. This, of course, seems a much more sensible result.

Photo Credit: Gun Show by M&R Glasgow [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/EfXLa [cropped]. Copyright 2007 M&R Glasgow/span>

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Copyright © 2017 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)