Top Ten Things to Know About Export Control Reform

June 1, 2011 - via Reed Smith

U.S. export controls directly or indirectly affect a large portion of trade in commercial and military goods throughout the world. The activities of U.S. persons wherever located are subject to export controls and the U.S. Government asserts jurisdiction over foreign persons involved in the trade of certain U.S.-origin goods. The current export control system operates under two different control systems: the International Traffic in Arms Regulations, 22 CFR Parts 120-130 (“ITAR”) and the Export Administration Regulations, 15 CFR Parts 730-774 (“EAR”).
The ITAR is administered by the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”). DDTC’s mission is to safeguard national security and promote foreign policy objectives. The EAR is administered by the U.S. Department of Commerce, Bureau of Industry & Security (“BIS”). BIS’ mission is to advance national security, foreign policy, and economic objectives. Perhaps due to the different missions of these agencies, the ITAR and EAR have fundamentally different approaches to licensing, enforcement, and regulatory interpretation. Both agencies also administer separate control lists: the U.S. Munitions List (ITAR/DDTC) and the Commerce Control List (EAR/BIS).

In addition to the EAR and ITAR, exporters must consider a third agency with jurisdiction over transactions. The U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) administers a number of sanctions programs based on the destination, end-user, or end-use for the proposed export.

The Obama Administration has decided to reform the system largely through harmonization, consolidation, and lessening of export controls to encourage U.S. exports and narrow the focus of U.S. Government control efforts to the most critical goods and technologies. Here are the Top Ten things you should know about the Export Control Reform Initiative:

1. What is the Export Control Reform Initiative?
In August 2010, the Obama Administration announced an ambitious plan to fundamentally reform the current U.S. export control system. This plan, the Export Control Reform Initiative, was launched following an interagency review of the current export control system. The interagency review determined that the current export control system was “overly complicated,” redundant, and “in trying to protect too much, diminishes our ability to focus our efforts on the most critical national security priorities.”

The plan includes three phases of reform resulting in a consolidation of four key aspects of export controls: (1) a single control list; (2) a single licensing agency; (3) a single information technology system; and (4) a single primary enforcement agency. If successful, it appears that the reform would result in an end of the International Traffic in Arms Regulations, 22 CFR Parts 120-130 (“ITAR”). The reform would also likely lead to a significant loosening of controls on a large number of items that currently require authorization from the U.S. Government prior to export.

The reform will be rolled out in three phases. Phases I and II will involves reconciliation of definitions, regulations, and policies primarily relating to the ITAR and EAR. Phase III will be implementation of the single control list, licensing agency, enforcement coordination, and a single IT system. Progress of the reform can be monitored on the U.S. Government’s Export Control Reform website.

2. Single Control List
Currently, there are two primary lists of export-controlled items: the EAR’s Commerce Control List (“CCL”) and the ITAR’s U.S. Munitions List (“USML“). The graphic below, taken from the U.S. Government’s website for the Export Control Reform Initiative, illustrates the proposed reform of the two control lists:
Current Export Control System*
Export Control System*
* Source: http://www.export.gov/ecr/eg_main_027617.asp

The new export control system will include the development of “new criteria for determining what items need to be controlled and corresponding policies for determining when a license is required.” The new list will be “positive” -- that is, the list will describe items “using objective criteria (e.g., technical parameters such as horsepower or microns) rather than broad, open-ended, subjective, catch-all, or design intent-based criteria.” Id.. The list will also be tiered such that the most critical or sensitive items will be subject to the highest controls (Tier One) with a sliding scale of controls for items that might be more broadly available overseas and therefore less sensitive (Tier Three). It is not clear whether the export controls administered by other federal agencies, including controls affecting the nuclear industry, food and drugs, and controlled substances, will be included in the proposed consolidated list.

3. Single Restricted Party List
The current system includes a number of different restricted party lists -- those lists of persons with whom U.S. persons may be prohibited from doing business or have other restrictions on transactions. These lists are maintained by the Commerce Department, the State Department, and OFAC. Despite some overlaps, the lists are unique and none is a comprehensive resource for exporters. A match on one list may not mean the same thing as a match on another -- i.e., some designations prohibit transactions while others merely require analysis of the proposed end use. Variation among the lists and efficiency costs in screening names against each of the lists has given rise to an industry of vendors that provide restricted party screening solutions and outsourced screening functions.

As part of the Export Control Reform Initiative, the U.S. Government has consolidated the restricted party screening lists into a consolidated list. The U.S. Government’s consolidated list is not yet automated to ensure that it has the most up-to-date information from the various lists.

4. Single Information Technology System
All three of the primary agencies involved in U.S. export controls maintain separate internal information technology (“IT”) systems for managing export license applications and a separate external portal through which exporters can apply for licenses. For the internal systems, the U.S. Government has decided to migrate licensing to the U.S. Department of Defense’s USXPorts system. Work has already begun to migrate DDTC to USXPorts and completion of the migration is expected in 2012. A consolidated IT system is expected to result in increased efficiency, cooperation, and transparency in the export licensing process. The Initiative is not currently addressing the different export license application portals of BIS (SNAP-R) and DDTC (D-Trade), which presumably would be resolved by consolidation of DDTC’s and BIS’ licensing authorities into a single agency.

5. Single Primary Enforcement Agency
On November 9, 2010, Executive Order 13558 established the Export Enforcement Coordination Center. The Center is expected to coordinate and strengthen export enforcement by the U.S. Government by minimizing duplication of efforts and increasing inter-agency cooperation on enforcement. The creation of the Center follows earlier efforts to coordinate enforcement with the creation of the Department of Justice’s National Export Control Coordinator and the Department of Homeland Security’s National Export Enforcement Coordination Center. At this point, there is no indication that DDTC, BIS, or other agencies will lose enforcement responsibilities, although that would seem likely if a single licensing agency is actually created.

6. Single Licensing Agency
The Export Control Reform Initiative also includes a goal to establish a consolidated export licensing agency. Currently, DDTC, BIS, and OFAC each have their own responsibility for export licensing and, although rare, some transactions require licenses to be approved by more than one agency depending on the mix of items included in the transaction (ITAR-EAR) or the destination, end-use, or end-user (EAR-OFAC). To increase transparency, cooperation, and to minimize bureaucratic waste, the Initiative proposes to consolidate the licensing jurisdiction of these agencies, which would have the added benefit of a single license application form, rather than the multiple forms that exist under the current system. Find additional information about the plan for the single licensing agency here.

7. Export Control Reform Has Begun
Export control reform is currently underway with a number of proposed rules and requests for comments released by DDTC. Interested parties should closely monitor the proposed rules to ensure that they have an opportunity to comment on rules that will affect their business. Proposed rules are published in the Federal Register and available online at the Export Control Reform website and the homepages for the responsible agencies.

8. The Ultimate Goal for Export Control Reform is Unclear
The ultimate goals of the Export Control Reform Initiative are unclear. The current stated objective for the Initiative is “to enhance U.S. national security and strengthen the United States’ ability to counter threats such as the proliferation of weapons of mass destruction.” Officials from DDTC and BIS have often remarked that the goal is “to build higher fences around fewer products,” although no proposals have yet emerged relating to increased controls (i.e., “higher fences”) on any products or technologies. Instead, the Initiative appears to be largely based on a desire to deregulate certain aspects of defense and commercial trade which the Obama administration believes are outdated, and, in doing so, enhance the position of U.S. industry to promote exports of U.S.-manufactured goods. Although the full intended scope of the deregulation is also still taking shape, Secretary Gates has suggested that the U.S. needs “a system that dispenses with the 95 percent of ‘easy’ cases and lets us concentrate our resources on the remaining 5 percent.”

Similarly, whether the Initiative will result in regulations that limit or facilitate the ability of U.S. companies to outsource manufacturing of defense or commercial items remains to be seen, as does the final disposition of Congress and conditions it may require in any necessary legislation to implement the changes being sought by the Administration.

According to the U.S. Government’s website, the Initiative is “not related to the President’s National Export Initiative,” which is designed to promote (double) U.S. exports by 2014. However, in the 2010 National Security Strategy released by the White House, reforming the export control system was part of the effort to double U.S. exports by 2014. (See reference- page 40). Also, the Administration has been consulting with the President’s Export Council on matters relating to the ECR Initiative and the Council’s charter is to “advise the President on matters relating to U.S. export trade and report to the President on [the Council’s] activities and on its recommendations for expanding U.S. exports.” The Export Council is composed of Members of Congress, Executive Agency officials, and CEOs from a number of prominent U.S. companies, including Boeing, Xerox, Walt Disney, and Verizon, to name a few. Earlier releases about the Initiative also indicate that the Initiative has two goals: increase national security and “enhancing the competitiveness of key U.S. manufacturing and technology sectors.”

Mixed messages on the ultimate motivations and goals of the Initiative may be due to political or public relations reasons. However, these mixed messages could also indicate a tension between the security and economic goals of the Initiative that will require careful handling to avoid upsetting supporting constituencies.

9. The Export Control Reform Initiative Might Not be Successful
Since the widely-applauded announcement of the Export Control Reform Initiative it seemed a foregone conclusion that the Initiative would have at least some success where prior reform attempts had failed.  Until recently, there was very little indication that the U.S. Congress would oppose the Initiative. However, in May 2011, House Foreign Affairs Committee Chairman Ileana Ros-Lehtinen (R-Fla.) remarked that “[t]o date, a compelling case has not been made for the wholesale restructuring of our current system, especially one that would include the creation of a costly and perhaps unaccountable new federal bureaucracy.” Successful completion of the Initiative will require Congressional action. Given possible implications of the reform efforts on outsourcing of U.S. manufacturing jobs, increased trade with China (including trade in items currently subject to the U.S. arms embargo on China), and for various other political reasons, Chairman Ros-Lehtinen’s remarks may be only the beginning of opposition to the Initiative in Congress.

10. Export Control Enforcement Continues
Despite the concerted effort to deregulate many aspects of defense and commercial trade, the administrative agencies continue to investigate and penalize companies for violations of the export controls. Recent cases highlight the significant risks of non-compliance with these laws. For instance, during 2011, DDTC has settled allegations of ITAR violations by BAE for $79 million and agreed to remedial activities; BIS has published more than 10 administrative settlements; and, OFAC has settled eight cases for an aggregate of over $400,000 in fines.

External link: http://www.acc.com/legalresources/publications/topten/Export-Control-Reform.cfm

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Author:Leigh T. Hannson, Michael J. Lowell