Monthly Archives: September 2018

“U.S. Persons” Include More Than Just Citizens

What is a “U.S. Person”?  If you are hiring for ITAR-controlled programs, you need to know.

The U.S. Department of Justice recently settled a hiring discrimination investigation against a large international law firm, Clifford Chance US LLP:

The Department’s investigation determined that Clifford Chance’s unlawful practice of excluding otherwise qualified non-U.S. citizens and dual U.S. citizens from the document reviewer positions was based on the law firm’s misunderstanding of the requirements of the International Traffic in Arms Regulations (ITAR). The Department found that the law firm improperly terminated or removed three individuals from their positions based on their citizenship status.

The settlement includes a $132,000 civil penalty, lost wages, compliance training, and two years of monitoring and reporting.

The problem for Clifford Chance was that the ITAR does not require that export-controlled projects be restricted to US citizens in order to avoid unauthorized exports.

The ITAR definition of a “U.S. person,” to which a release of technical data is not an export, is:

§120.15 U.S. person.
U.S. person means a person (as defined in §120.14 of this part) who is a lawful permanent resident as defined by 8 U.S.C. 1101(a)(20) or who is a protected individual as defined by 8 U.S.C. 1324b(a)(3). It also means any corporation, business association, partnership, society, trust, or any other entity, organization or group that is incorporated to do business in the United States. It also includes any governmental (federal, state or local) entity. It does not include any foreign person as defined in §120.16 of this part.

For individuals, including the categories in 8 U.S.C. 1324b(a)(3), U.S. persons include:

  1. US Citizens
  2. Lawful permanent residents (i.e., Green Card holders)
  3. Other narrow categories including some refugees and asylees.

Coming at it from the other side, foreign persons are defined as the inverse of US persons:

§120.16 Foreign person.
Foreign person means any natural person who is not a lawful permanent resident as defined by 8 U.S.C. 1101(a)(20) or who is not a protected individual as defined by 8 U.S.C. 1324b(a)(3). It also means any foreign corporation, business association, partnership, trust, society or any other entity or group that is not incorporated or organized to do business in the United States, as well as international organizations, foreign governments and any agency or subdivision of foreign governments (e.g., diplomatic missions).

While ITAR § 120.17(a)(2) defines releasing technician data to a foreign person in the United States as a deemed export, dual U.S. citizens and permanent residents (as well as other “protected individuals”) are not foreign persons.  As U.S. persons, they would not require export authorization and should not be categorically excluded.

The Export Administration Regulations (EAR) use the same basic definitions of U.S. and foreign persons for the purposes of deemed exports (see § 734.13(a)(2) for deemed exports and Part 772 for definitions).

So next time your company has an ITAR or EAR-related job listing, keep this case in mind.  Misunderstanding the category of “U.S. persons” could lead to steep penalties and time-consuming training.

(None of the information is intended to be authoritative official or professional legal advice. Consult your own legal counsel or compliance specialists before taking actions based upon this blog or other unofficial sources.)

Big Changes Coming to CFIUS, EAR No Longer an Emergency

This year’s defense authorization bill didn’t just fund the Department of Defense, but also set the stage for big changes to foreign investment and export controls.  Signed on August 13, 2018, the John S. McCain National Defense Authorization Act (NDAA) included the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and the Export Control Reform Act (ECRA).

Foreign Investment Risk Review Modernization Act

The Foreign Investment Risk Review Modernization Act (FIRRMA) expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS).  CFIUS, an interdepartmental committee chaired by the Treasury Department, was already authorized to review certain business transactions involving foreign investment in the United States that involve national security considerations.

FIRRMA expands the scope of transactions subject to CFIUS review to include transactions involving foreign persons including:

  • real estate located in proximity to airports, maritime ports, or sensitive government facilities such as military bases;
  • critical infrastructure, critical technologies, or sensitive personal data of US citizens;
  • membership on the board of directors or other decision-making rights;
  • changes in a foreign investor’s rights resulting in foreign control; and
  • other transactions designed to circumvent CFIUS jurisdiction.

FIRRMA also revises filing and review processes and timelines, expanding the ordinary review period from 30 to 45 days, effective when FIRRMA became law.  Notices received before August 13th will remain subject to the 30 day review period.  FIRRMA also provides for the option for CFIUS to implement filing fees.

The most significant provisions will not be effective until the earlier of eighteen months after the enactment (February 2020) or 30 days after the Secretary of the Treasury publishes a notice that the necessary regulations and resources are in place.  CFIUS may also conduct pilot programs under the new law.

CFIUS has advised businesses to continue to notify transactions as provided in current CFIUS regulations.

The Treasury Department has released a summary of FIRRMA and FIRRMA FAQs.

The International Traffic in Arms Regulations (ITAR) continue to require notification when there are changes to ownership or control (as well as other material changes) under 122.4.  Notification of transfer of ownership or control to a foreign person is required 60 days in advance and is independent of CFIUS processes.  See the State Department’s Directorate of Defense Trade Controls Mergers/Acquisition/Divestitures page for more information.

Export Control Reform Act

The new Export Control Reform Act (ECRA) provides statutory authority for the Export Administration Regulations (EAR) and Antiboycott rules, which have been maintained by emergency executive orders under the International Emergency Economic Powers Act (IEEPA) since the Export Administration Act (EAA) expired in 1994.

Notably, the ECRA also directs the Departments of Commerce, Defense, Energy, and State to “identify emerging and foundational technologies” that may warrant export controls, including CFIUS and export licensing.

Continuing developments from the last year, the ECRA establishes a US government procurement ban on telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation.  It does not reinstate the Department of Commerce’s denial order for ZTE which was lifted in July.  The procurement ban also includes video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company.

The ECRA also increases potential civil penalties to $300,000 (from the most recently inflation-adjusted $295,141).

ECS will continue to monitor developments as new CFIUS regulations and the reviews of “emerging and foundational technologies” are discussed, proposed for comment, and implemented.

(None of the information is intended to be authoritative official or professional legal advice. Consult your own legal counsel or compliance specialists before taking actions based upon this blog or other unofficial sources.)

A Smorgasbord of Summer Export Compliance Updates

EAR Amendment: India Eligible for STA, License Requirements Revised

On August 3, 2018 (83 FR 38018), the Department of Commerce amended the Export Administration Regulations (EAR) to reflect India’s membership in the Wassenaar Arrangement and status as a Major Defense Partner.  Under this amendment, India moves from Country Group A:6 to Country Group A:1 and A:5.  Country Group A:5 “provides the benefit of greater availability of License Exception Strategic Trade Authorization (STA) for exports and reexports to, and transfers within India under the EAR.”

The Commerce Country Chart was also amended, removing the license requirement for National Security Column 2 (NS2) for India.  The amendment also makes conforming changes related to footnotes and AES filings.  This follows updates earlier this year to reflect India’s admission to the Australia Group.

Click here for the revised Commerce Country Chart (Supplement No. 1 to Part 738).

Click here for the Strategic Trade Authorization (STA) Exception (EAR §740.20, currently starting on page 59 of the pdf).

EAR Amendment: South Sudan Arms Embargo

Also on August 3, 2018 (83 FR 38021), the Department of Commerce amended the EAR to reflect the addition of South Sudan as a prohibited destination under ITAR §126.1(w).  South Sudan is now listed in Country Group D:5: Countries subject to U.S. arms embargoes.  Because the State Department list controls, the addition of South Sudan to ITAR §126.1 in February already had this affect.  The Commerce Department amendment conforms Country Group D:5 to the current ITAR §126.1.

EAR Amendment: MTCR Conforming Changes

On August 30, 2018 (83 FR 44216), the Department of Commerce amended the EAR to conform to changes to the Missile Technology Control Regime (MTCR), a voluntary multilateral anti-proliferation arrangement.  The following seventeen ECCNs have been revised to align CCL controls with changes made to the MTCR Annex in 2017 (ECCN headings summarized for readability may include additional specifications and related commodities):

1B117 – Batch mixers
1B118 – Continuous mixers
1C111 – Propellants and constituent chemicals
1C118 – Titanium-stabilized duplex stainless steel
2B109 – Flow-forming machines
2B120 – Motion simulators or rate tables
2B121 – Positioning tables
2B122 – Centrifuges
6A107 – Gravity meters or gravity gradiometers
7A105 – Airborne receiving equipment for ‘navigation satellite systems’
7A107 – Three axis magnetic heading sensors
7A116 – Flight control systems
9A012 – Non-military UAVs
9A101 – Turbojet and turbofan engines
9A115 – Apparatus, devices and vehicles for transport, handling, control, activation and launching of rockets, missiles, and UAVs
9A515 – Spacecraft
9A610 – Military aircraft

Additional details of changes can be found in the Federal Register Notice and the revised CCL.

Commerce Requests Comments on Spraying and Fogging Systems

On August 13, 2018 (83 FR 39921), the Department of Commerce published a request for comments on the effectiveness of its controls on spraying or fogging systems controlled under Commerce Control List (CCL) Category 2, ECCN 2B352.i.  The items are subject to Chemical & Biological Weapons Controls (CB column 2) because they are identified on the Australia Group’s “Control List of Dual-Use Biological Equipment and Related Technology and Software.”  The notice proposes alternative control criteria, particularly to aid classification and avoid controls of commercial (e.g., agricultural) systems.

Comments are due by October 12, 2018 and may be submitted via regulations.gov (docket number BIS–2018–0013), by email, or by paper submission.  Please see the Federal Register Notice for more details.

State Requests Comments on Part 130 Statements

On August 15, 2018 (83 FR 40618), the Department of State published a request for comments on the ITAR Part 130 “Statement of Political Contributions, Fees, and Commissions Relating to Sales of Defense Articles and Defense Services.”  Part 130 statements require information about fees, commissions, and political contributions from

“any person who applies to the Directorate of Defense Trade Controls for any license or approval… for the export, reexport, or retransfer of defense articles or defense services valued in an amount of $500,000 or more which are being sold commercially to or for the use of the armed forces of a foreign country or international organization.”

Comments may be submitted until September 14, 2018.  Please see the Federal Register Notice for additional details.

USML Category XI(b) Amended (Again) to Continue Current Text

On August 30, 2018 (83 FR 44228), the Department of State published an amendment to USML Category XI(b) that continues the current text which was scheduled to be replaced on August 30, 2018.  XI(b) currently controls:

*(b) Electronic systems, equipment or software, not elsewhere enumerated in this subchapter, specially designed for intelligence purposes that collect, survey, monitor, or exploit, or analyze and produce information from, the electromagnetic spectrum (regardless of transmission medium), or for counteracting such activities.

This text was scheduled to be replaced on August 30, 2018, but with the amendment the replacement will be delayed until August 30, 2019.  At that time, unless otherwise amended, Category XI(b) will read:

*(b) Electronic systems or equipment, not elsewhere enumerated in this subchapter, specially designed for intelligence purposes that collect, survey, monitor, or exploit the electromagnetic spectrum (regardless of transmission medium), or for counteracting such activities.

The change now scheduled for 2019 removes “software” as well as the capability to analyze and produce information from the electromagnetic spectrum.

The current language is meant to maintain control of “certain intelligence-analytics software” until a long-term solution is developed.  The rule gives the government additional time “to finalize its review of USML Category XI, with rulemaking to follow, to include any further modifications to the USML Category XI paragraph (b) as may be warranted.”

DDTC published a similar amendment last year.

DTAG to Meet in October

The Defense Trade Advisory Group (DTAG) will meet on October 25, 2018 to discuss the following topics:

  1. Oversight of technical data under the ITAR and NISPOM;
  2. Challenges regulated entities face in advising the Department of ownership changes that implicate existing licenses and foreign persons, and processes the Department may implement to facilitate the provisions of this information;
  3. Possible schedule for future ongoing periodic review of USML categories;
  4. Developing a definition for common carrier; and
  5. Issues that exist with licensing of defense articles, including intelligence related products, related technical data, and defense services to the ‘‘Five Eyes’’ countries of the U.S., UK, Australia, Canada and New Zealand.

The DTAG meeting is open to the public, with seating limited to 125 persons.  For meeting and registration information, click here for the meeting notice.

Click here for more information about DTAG.

Finally, watch for our next blog post on the NDAA and big changes coming to the Committee on Foreign Investment in the United States (CFIUS)!

(None of the information is intended to be authoritative official or professional legal advice. Consult your own legal counsel or compliance specialists before taking actions based upon this blog or other unofficial sources.)