Waiver May Permit Non-Lethal Exports to Cyprus
On September 28, 2020, the Department of State, Directorate of Defense Trade Controls (DDTC), published an amendment (85 FR 60698) to the International Traffic in Arms Regulations (ITAR) updating the defense trade policy towards the Republic of Cyprus. Cyprus is listed as a prohibited destination, with certain exceptions, at ITAR §126.1(r).
The effect of the amendment is to potentially authorize non-lethal defense articles and defense services for the Government of the Republic of Cyprus.
The §126.1 entry for Cyprus now reads (new text in bold):
(r) Cyprus. It is the policy of the United States to deny licenses or other approvals for exports or imports of defense articles and defense services destined for or originating in Cyprus, except that a license or other approval may be issued, on a case-by-case basis, for the United Nations Forces in Cyprus (UNFICYP) or for civilian end-users. This policy of denial does not apply to exports, reexports, retransfers, and temporary imports of non-lethal defense articles and defense services destined for or originating in Cyprus if:
(1) The request is made by or on behalf of the Government of the Republic of Cyprus;
(2) The end-user of such defense articles or defense services is the Government of the Republic of Cyprus; and
(3) There are no credible human rights concerns.
This change implements a one-year waiver authorized under the National Defense Authorization Act for Fiscal Year 2020 and the Eastern Mediterranean Security and Energy Act. The amendment was effective on October 1, 2020 and expires on September 30, 2021 if not subsequently extended. DDTC has previously stated on their website that authorizations issued during this time will not automatically be revoked if the waiver is not extended.
Cyprus was originally listed in §126.1 out of concern that arms exports to Cyprus could contribute to an arms race and hinder efforts to reach a permanent settlement on the island, the northern portion of which has been occupied by Turkey since 1974. In the absence of a resolution, the Republic of Cyprus entered the European Union in May 2004 and is the only EU member in §126.1.
North Korea Ballistic Missile Procurement Advisory
On September 1, 2020, the U.S. Department of State’s Bureau of International Security and Nonproliferation (ISN), the Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the Department of Commerce’s Bureau of Industry and Security (BIS) released a North Korea Ballistic Missile Procurement Advisory.
This guidance provides background to North Korean ballistic missile procurement efforts as well as various laws and regulations that affect U.S. exporters. The advisory notes that:
North Korea relies on foreign-sourced ballistic missile-related components that it cannot produce domestically. To obtain these components, North Korea uses an extensive overseas network of procurement agents, including officials who operate from North Korean diplomatic missions or trade offices, as well as third country nationals and foreign companies.
In particular, the guidance notes that North Korea seeks to acquire the following types of products:
- Multi-axle heavy vehicles, such as 8 or 9-axle forestry vehicles, used as Transporter Erector Launchers (TELs) for ballistic missiles.
- Steels, aluminum, and specialty materials containing titanium.
- Filament winders and winding equipment.
- Carbon fiber for composite motor cases.
- Solid propellant, including aluminum powder and ammonium perchlorate, to the scale of 100 tons over the next 10 years.
The guidance emphasizes that exporters of all products, but especially those listed above should have strong export compliance programs including know your customer policies, denied party screening, and consideration of red flags and due diligence.
State Department Releases Surveillance and Human Rights Guidance
On September 30, 2020, the Department of State, Bureau of Democracy, Human Rights, and Labor (DRL) released “Guidance on Implementing the UN Guiding Principles for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities.” Click here for the 22-page pdf file. DRL previously published draft guidance on the issue in September 2019.
While this document does not impose any new requirements under U.S. export control laws or regulations, it could be the foundation of future regulation. It is similar to DRL’s current review process for export license applications and may help companies to predict potential issues with license applications prior to submission.
This “voluntary guidance” is meant to support companies’ ability to evaluate the human rights impacts of exports that do not currently require an export license. Products and services of concern include, but are not limited to:
- Sensors (e.g., specialized computer vision chips, thermal imaging systems, electronic emissions detection systems, products designed to clandestinely intercept live communications)
- Biometric identification (e.g., facial recognition software, automated biometric systems, rapid DNA testing, gait analysis software)
- Data analytics (e.g., social media analytics software, predictive policing systems)
- Internet surveillance tools (e.g., “spyware,” products with certain deep packet inspection functions, penetration-testing tools, products designed to defeat cryptographic mechanisms in order to derive confidential variables or sensitive data including clear text, passwords, or cryptographic keys)
- Non-cooperative location tracking (e.g., products that can be used for ongoing tracking of individuals’ locations without their knowledge and consent, cell site simulators, automatic license plate readers)
- Recording devices (e.g., body-worn or drone-based, network protocol surveillance systems, devices that record audio and video and can remotely transmit or can be remotely accessed)
The document identifies due diligence considerations, red flags, and other resources that may be taken into consideration in evaluating the human rights impact of a transaction. To compliment this, the State Department plans to include information on surveillance issues for each country in its 2021 human rights reports.
CFIUS Review Now Based on Export Controls
On September 15, 2020, Department of the Treasury, Office of Foreign Assets Control (OFAC) published a rule (85 FR 57124) which, among other changes, modifies the mandatory declaration provision for foreign investment transactions in U.S. businesses. This rule is based on a rule originally proposed on May 21, 2020. The new rule is effective on October 15, 2020.
As revised, CFIUS review is required when a “U.S. regulatory authorization” would be required to transfer the U.S. business’s critical technologies to the foreign persons involved in the transaction or ownership chain. U.S. regulatory authorizations include:
(a) A license or other approval issued by the Department of State under the ITAR;
(b) A license from the Department of Commerce under the EAR;
(c) A specific or general authorization from the Department of Energy under the regulations governing assistance to foreign atomic energy activities at 10 CFR part 810 other than the general authorization described in 10 CFR 810.6(a); or
(d) A specific license from the Nuclear Regulatory Commission under the regulations governing the export or import of nuclear equipment and material at 10 CFR part 110.
This determination is generally made without reference to license exceptions or exemptions, except three EAR license exceptions cited in the rule.
Mandatory declarations were previously required based on specific industries identified by North American Industry Classification System (NAICS) codes. This change highlights the importance of thoroughly determining export classifications for a company’s products, even if they are not being exported, when foreign investment is involved that could be subject to CFIUS review.