Monthly Archives: October 2018

CFIUS EXTENDS LONG ARM TO INCLUDE REVIEW OF DEFENSE ARTICLES/ DEFENSE SERVICES ON THE USML

As anticipated following the August enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the Department of the Treasury has issued new regulations implementing changes to the Committee on Foreign Investment in the United States (CFIUS).

CFIUS Amendments

The first, an interim rule issued October 11, 2018 (83 FR 51316), primarily makes technical amendments to the CFIUS Part 800 regulations.  These changes include:

  • Extending CFIUS review period from 30 to 45 days,
  • Revising various definitions to be consistent with FIRRMA,
  • Providing examples of covered transactions,
  • Implementing electronic submissions,
  • Allowing parties to stipulate that a transaction is a covered transaction, and
  • Revising language regarding violations and remedies.

This rule was effective immediately and comments may be submitted through November 10, 2018.  Please see the Federal Register Notice for more information on how to comment.

Pilot Program

The second notice, also issued on October 11, 2018 (83 FR 51322) implements a “pilot program” expanding CFIUS review and mandatory declarations to a specific list of covered industries when dealing with “critical technologies.”

Under the new rule, “critical technologies” include:

  • Defense articles or defense services included on the United States Munitions List (USML) controlled by the Department of State,
  • Commerce Control List (CCL) items controlled pursuant to multilateral regimes, for regional stability, or surreptitious listening by the Department of Commerce,
  • Nuclear equipment and technology controlled by the Department of Energy,
  • Nuclear facilities, equipment, and material controlled by the Nuclear Regulatory Commission, and
  • Select agents and toxins controlled by the Department of Agriculture or the Department of Health and Human Services.

Companies in or developing products for the industries listed in the new Annex A to Part 801 are covered by the pilot program as follows, including North American Industry Classification System (NAICS) codes:

Industry NAICS Code
Aircraft Manufacturing 336411
Aircraft Engine and Engine Parts Manufacturing 336412
Alumina Refining and Primary Aluminum Production 331313
Ball and Roller Bearing Manufacturing 332991
Computer Storage Device Manufacturing 334112
Electronic Computer Manufacturing 334111
Guided Missile and Space Vehicle Manufacturing 336414
Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing 336415
Military Armored Vehicle, Tank, and Tank Component Manufacturing 336992
Nuclear Electric Power Generation 221113
Optical Instrument and Lens Manufacturing 333314
Other Basic Inorganic Chemical Manufacturing 325180
Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing 336419
Petrochemical Manufacturing 325110
Powder Metallurgy Part Manufacturing 332117
Power, Distribution, and Specialty Transformer Manufacturing 335311
Primary Battery Manufacturing 335912
Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing 334220
Research and Development in Nanotechnology 541713
Research and Development in Biotechnology (except Nanobiotechnology) 541714
Secondary Smelting and Alloying of Aluminum 331314
Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing 334511
Semiconductor and Related Device Manufacturing 334413
Semiconductor Machinery Manufacturing 333242
Storage Battery Manufacturing 335911
Telephone Apparatus Manufacturing 334210
Turbine and Turbine Generator Set Units Manufacturing 333611

Transactions in these areas are covered by the pilot program when the investment would give a foreign investor:

  • Access to material nonpublic technical information;
  • Membership, observer, or nomination rights on the board of directors; or
  • Involvement in substantive decision-making regarding critical technology.

This rule will take effect on November 10, 2018 and comments may be submitted through that date.  Please see the Federal Register Notice for more information on how to comment.

The Department of the Treasury has also published a press release and fact sheet that summarize these changes.

The pilot program is scheduled to end no later than March 5, 2020, once replaced by a full expansion of CFIUS review.

(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.)

State Department Tweaks ITAR, Requests Comments

On October 4, the Department of State, Directorate of Defense Trade Controls (DDTC) published a notice (83 FR 50003) that made several immediate, but minor, changes to the International Traffic in Arms Regulations (ITAR) and United States Munitions List (USML).  The revisions are in response to a July 2017 request for comments implementing the President’s Executive Order 13771, “Reducing Regulation and Controlling Regulatory Costs” and other industry feedback.

Other than USML revisions and notes, the only ITAR change was the removal of the requirement to return expired or exhausted licenses for technical data under 123.22(b)(3)(i) and (c)(2).

The USML revisions are as follows:

  • A note to USML Category IV(d) clarifies that it does not control satellite and spacecraft thrusters (instead, refer to XV(e)(12) and ECCN 9A515).
  • A note to USML Category V clarifies that, except for materials in V(c)(6), (h) or (i), the Department of Commerce licenses materials when incorporated into an item classified under ECCN 1C608 (“Energetic materials and related commodities”).
  • VIII(h)(12) – The description of UAV flight control systems is revised so that collision avoidance alone does not lead to ITAR controls:

(12) Unmanned aerial vehicle (UAV) flight control systems and vehicle management systems with swarming capability (i.e. UAVs that operate autonomously (without human input) to interact with each other to avoid collisions and stay together, fly in formations, and are capable of adapting in real-time to changes in operational/threat environment, or, if weaponized, coordinate targeting) (MT if for an aircraft, excluding manned aircraft, or missile that has a ‘‘range’’ equal to or greater than 300 km);

  • Notes to XI(a)(3)(i) and (xii) add additional technical specifications and a reference to Commodity Jurisdiction determinations to avoid control of airborne radars used by commercial drones.
  • Revisions to XI(c)(4) implement power thresholds to exclude components necessary for 5G wireless technology, including four required criteria and eight explanatory notes.
  • XV(f) is revised to include “to a foreign person” in its definition of satellite and spacecraft defense services.

DDTC also noted that it is working on a possible temporary export exemption for repair/replacement by foreign Original Equipment Manufacturer (OEM) as well as revised definitions proposed in 2015 (80 FR 31525) that were not included in the 2016 interim final rule (81 FR 35611) or final rule (81 FR 62004).

The Federal Register Notice includes additional background and responses to comments that may be of interest.  While these changes are effective immediately, comments may be submitted until November 19, 2018.

In separate notices, DDTC has also requested comments on three existing information collections for Office of Management and Budget (OMB) approval.  Click on the Federal Register Notices for more information and docket and control numbers needed for comments:

  • §123.9 Request to Change End-User, End-Use and/or Destination of Hardware (83 FR 47235).  The notice acknowledges that DDTC is working on a DS-6004 form to be submitted through the Defense Export Control and Compliance System (DECCS).  Comments will be accepted up to November 19, 2018.
  • Part 129 Annual Brokering Reports (83 FR 47390). Comments will be accepted up to November 19, 2018.
  • DS-2032 Statement of Registration (83 FR 48496).  Comments will be accepted up to November 26, 2018.

As always, these are important opportunities to comment on how your business views and is affected by export regulations.

(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.)