Author Archives: Export Compliance Solutions

New Season, New Controls, New Sanctions: New CCL Chem/Bio Controls, Firearms FAQs & Treasury Implements Caesar Act Sanctions Against Syria

In our last post, we covered a series of breaking developments in export compliance towards China and Hong Kong. While those developments have received a lot of attention, summer has brought us even more export compliance updates.

New CCL Chem/Bio Controls

On June 17, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a final rule (85 FR 36483) to amend Commerce Control List (CCL) Export Control Classification Numbers (ECCNs) 1C350, 1C351 and 2B352. These changes implement decisions by the Australia Group by adding a list of precursor chemicals and mixtures to 1C350, Middle East respiratory syndrome-related coronavirus (MERS-related coronavirus) to 1C351, and a technical note to 2B352 (Equipment capable of use in handling biological materials) that indicates 2B352.b.2.b includes single-use cultivation chambers with rigid walls. Related technology would be controlled in the relevant ECCNs.

The Australia Group is a forum of 43 countries which seek to harmonize export controls related to chemical and biological weapons.

BIS Issues Firearms FAQs

BIS recently posted a series of FAQs on firearms and related items moved from the United States Munitions List (USML) to the CCL in March. The document, dated January 23, 2020 was published on the BIS website on July 7, 2020 and contains 62 pages of FAQs and other guidance on the transition.

Treasury Implements Caesar Act Sanctions

Also on June 17, 2020, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) sanctioned the first set of individuals and entities under the Caesar Syria Civilian Protection Act of 2019 (the Caesar Act). Named for a Syrian photographer who documented torture in the regime of Syrian President Bashar al-Assad, the Caesar Act targets “foreign persons who facilitate the Assad regime’s acquisition of goods, services, or technologies that support the regime’s military activities as well as its aviation and oil and gas production industries.”

Executive Order Establishes ICC Sanctions

On June 11, 2020, the President issued Executive Order 13928, “Blocking Property of Certain Persons Associated with the International Criminal Court.” This executive order is a response to assertions of jurisdiction over U.S. and allied personnel by the International Criminal Court (ICC), countries which are “are not parties to the Rome Statute or have not otherwise consented to ICC jurisdiction.” This is the latest stage of a conflict that dates back the establishment of the ICC and 2002’s American Service-Members’ Protection Act. The Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General may sanction ICC personnel under this executive order, who would then be included on the Specially Designated Nationals and Blocked Persons List (SDN List) and subject to a series of financial sanctions. No individuals or entities have yet been sanctioned under this order.

CFIUS Proposes Export License Requirement as Filing Threshold

On May 21, 2020, the Department of Treasury published a proposed rule (85 FR 30893) which would notably revise the category of business acquisitions subject to mandatory Committee on Foreign Investment in the United States (CFIUS) review. The proposed revision establish mandatory review of acquisitions and some non-controlling investments when an export license would be required to release a company’s technology to the relevant foreign parties. Relevant export licenses are defined under “U.S. regulatory authorization” to 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.

Previously, CFIUS had published a list of North American Industry Classification System (NAICS) codes identifying businesses subject to this requirement. The proposed revision would replace that list with the export licensing threshold. Comments were accepted through June 22, 2020 and a final rule has not yet been published.

IMPORTANT–Breaking Developments in Export Policies Towards China and Hong Kong. DOD Releases List of Communist Chinese Military Companies which should be of significant interest to your company!

On June 24, 2020, the Department of Defense released the following list of “Communist Chinese military companies”:

Aviation Industry Corporation of China (AVIC)
China Aerospace Science and Technology Corporation (CASC)
China Aerospace Science and Industry Corporation (CASIC)
China Electronics Technology Group Corporation (CETC)
China South Industries Group Corporation (CSGC)
China Shipbuilding Industry Corporation (CSIC)
China State Shipbuilding Corporation (CSSC)
China North Industries Group Corporation (Norinco Group)
Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
Huawei
Inspur Group
Aero Engine Corporation of China
China Railway Construction Corporation (CRCC)
CRRC Corp.
Panda Electronics Group
Dawning Information Industry Co (Sugon)
China Mobile Communications Group
China General Nuclear Power Corp.
China National Nuclear Corp.
China Telecommunications Corp.

This list, required by section 1237 of the National Defense Authorization Act for FY 1999, has not previously been released and does not immediately affect export controls. The listed companies, however, could potentially be the subject of future sanctions and inclusion on the list should be considered a “red flags” under the expanded restrictions on Chinese military end-users. Some companies, such as Huawei, are already sanctioned under other authorities.

Commerce Issues Military End User FAQs

The revised rule on Chinese Military End Users (MEUs) in the Export Administration Regulations (EAR) came into effect on June 29, 2020. The Department of Commerce, Bureau of Industry and Security (BIS) released a series of FAQs on those changes.

The FAQs refer frequently to the revised definitions and the importance of due diligence, but do not provide a list of known military end users. The answer to Q21 does state that a request for an Advisory Opinion may be submitted if there is a question about whether a specific end user or end use is restricted under the new rule. We expect BIS to be swamped with these requests as companies begin to deal with exports under the new rules.

It is worth noting that BIS’s existing know your customer guidance states: “You can rely upon representations from your customer and repeat them in the documents you file unless ‘Red Flags’ oblige you to take verification steps.” This does not allow conscious disregard or willful avoidance of facts, however, and an appropriate effort must be made to ascertain the true end user and end use. As noted above, inclusion on the list of Communist Chinese military companies is a definite red flag, but there will be many others.

EEI Filing Requirement Partially Delayed

The requirement for Electronic Export Information (EEI) filings for any items destined China, Russia, or Venezuela regardless of value, unless shipped under License Exception GOV took effect on June 29^th for ECCNs listed in Supplement No. 2 to Part 744. According to the FAQs, the requirement for EEI filings for all other CCL items has been delayed for 90 days until September 27, 2020. The new rule does not require EEI filings for EAR99 items or intangible exports.

Hong Kong’s Special Status Ending

On June 29, 2020, the Department of State and Department of Commerce released statements on the revocation of Hong Kong’s special status under U.S. export controls. This follows the “G7 Foreign Ministers’ Statement on Hong Kong” from June 17^th which expressed concern with China’s imposition of a new “national security law” that reduces Hong Kong’s preexisting autonomy.

Both departments previously distinguished between Hong Kong and the People’s Republic of China for export control purposes.

The Department of State, Directorate of Defense Trade Controls (DDTC) previously approved licenses for Hong Kong on a case by case basis. China was already listed as a prohibited destination under the International Traffic in Arms Regulations (ITAR) §126.1.

BIS listed Hong Kong separately in its country chart and country groups. While BIS licensing requirements were largely the same as China (minus CB column 3), Hong Kong’s listing in Country Group A:6 and Country Group B made it eligible for some license exceptions, including Shipments to Country Group B (GBS), Shipments of Limited Value (LVS), some use of the Strategic Trade Authorization (STA). These exceptions will no longer be available for exports to Hong Kong.

Huawei Cleared for Standards Organizations

On June 18, 2020, the BIS released an interim final rule (85 FR 36719) which authorizes the release of certain technology to Huawei in support of international standards organizations. The rule replaces a previous advisory opinion and a Temporary General License, by amending the Huawei Entity List entries to include the following under “License requirement”:

For all items subject to the EAR, see §§ 736.2(b)(3)(vi), and 744.11 of the EAR, EXCEPT for technology subject to the EAR that is designated as EAR99, or controlled on the Commerce Control List for anti-terrorism reasons only, when released to members of a “standards organization” (see § 772.1) for the purpose of contributing to the revision or development of a “standard” (see § 772.1).

This is intended to prevent regulatory roadblocks to U.S. participation in international standards setting in areas such as 5G and autonomous vehicles.

The rule was effective upon publication and comments will be accepted through August 17, 2020. BIS also issued a press release on this topic.

Xinjiang Supply Chain Business Advisory

On July 1, 2020, the Department of State issued a supply chain business advisory related to forced labor human rights abuses in the Xinjiang Uyghur Autonomous Region (Xinjiang) of the People’s Republic of China:

Businesses, individuals, and other persons, including but not limited to academic institutions, research service providers, and investors… that choose to operate in Xinjiang or engage with entities that use labor from Xinjiang elsewhere in China should be aware of reputational, economic, and, in certain instances, legal, risks associated with certain types of involvement with entities that engage in human rights abuses, which could include Withhold Release Orders (WROs), civil or criminal investigations, and export controls.

The advisory provides substantial background to the situation in Xinjiang, red flags, and due diligence advice. The document relates both to activities known to be occurring in Xinjiang and facilities in other regions using labor or goods from Xinjiang. Page 15 of the advisory includes a map identifying 19 developed cities and provinces that have established satellite factories in Xinjiang.

Industries of concern include:

Agriculture (including such products as hami melons, korla pears, tomato products, and garlic)
Cell Phones
Cleaning Supplies
Construction
Cotton Yarn, Cotton Fabric, Ginning, Spinning Mills, and Cotton Products
Electronics Assembly
Extractives (including coal, copper, hydrocarbons, oil, uranium, and zinc)
Fake Hair and Human Hair Wigs, Hair Accessories
Food Processing Factories
Hospitality Services
Noodles
Printing Products
Footwear
Stevia
Sugar
Textiles (including such products as apparel, bedding, carpets, wool)
Toys

The advisory does not create any new export compliance obligations, but is intended to assist with the due diligence needed to avoid problems ranging from reputational risk to export compliance violations.

OFAC Issues “Syria-Related” Sanctions Regulations, Targeting Turkey

On June 5, 2020, the Department of Treasury, Office of Foreign Assets Control (OFAC), published a final rule (85 FR 34510) establishing the Syria-Related Sanctions Regulations (31 CFR Part 569), which implement Executive Order 13894. The new regulations are in addition to OFAC’s existing Syria Sanctions Regulations (31 CFR Part 542).

Although titled “Syria-Related Sanctions,” the sanctions regulations are targeted at Turkish entities involved in the Turkish military offensive in northern Syria. The criteria for listing includes (among others) Turkish government officials and agencies and persons operating in targeted sectors of the Turkish economy determined by the Secretary of the Treasury to be contributing to various destabilizing activities or human rights abuses in relation to Syria.

The current notice does not create any newly sanctioned parties, but implements Executive Order 13894 and provides the criteria for the Secretary of Treasury, in consultation with the Secretary of State, to make these designations. Sanctions include blocked property and other related financial sanctions.

OFAC’s Syria-Related Sanctions page includes additional information on the new rule, including information previously published regarding Executive Order 13894 (October 14, 2019). Executive Order 13894 was used to briefly add the Turkish Ministry of National Defence, the Turkish Ministry of Energy and Natural Resources, and three senior Turkish government officials to OFAC’s Specially Designated Nationals List (SDN List).

The issuance of the Syria-Related Sanctions Regulations provide a valuable reminder that sanctions programs affect transactions beyond the obvious countries of concern. Raising similar issues a few days earlier, three companies and vessels from the Marshall Islands and one company and vessel from Greece were listed under OFAC’s Venezuela-Related sanctions program. Denied party screening for all countries is a must-do to prevent serious compliance problems.

Commerce Expands Direct Product Rule to Target Huawei

On May 19, 2020, the Department of Commerce, Bureau of Industry and Security (BIS), published an interim final rule (85 FR 29849) amending the Export Administration Regulations (EAR) to expand the Direct Product Rule to apply to specific members of the Entity List—at this time China’s Huawei Technologies and 114 non-U.S. affiliates. The rule was effective May 15, 2020, the date on which it was made available for public inspection.

Huawei Technologies and 114 of its overseas affiliates were added to the Entity List in 2019. However, Huawei has continued to use U.S. software and technology to design semiconductors, undermining the national security and foreign policy purposes of the Entity List by commissioning their production in overseas foundries using U.S. equipment.

The rule amends the Direct Product Rule (General Prohibition Three) at EAR §736.2(b)(3) to bar the transfer of items specified in a footnote to the Entity List

(vi) Criteria for prohibition relating to parties on Entity List. You may not reexport, export from abroad, or transfer (in-country) without a license or license exception any foreign-produced item controlled under footnote 1 of Supplement No. 4 to part 744 (“Entity List”) when there is “knowledge” that the foreign-produced item is destined to any entity with a footnote 1 designation in the license requirement column of the Entity List.

The interim rule is intended to block global chip supplies to Huawei by specifying direct products of U.S. origin technology in Export Control Classification Numbers (ECCNs) 3E001, 3E002, 3E003, 3E991, 4E001, 4E992, 4E993, 5E001, or 5E991 as well as U.S. origin software specified in ECCNs 3D001, 3D991, 4D001, 4D993, 4D994, 5D001 or 5D991.

U.S. manufacturers must comply with the interim rule by:

Due diligence “denied parties screening” of all parties to an overseas transaction.

Obtaining signed End User Statements acknowledging that the goods (technology, software and articles) are controlled by the U.S. Department of Commerce, Export Administration Regulations, and any in-country retransfer or reexport of these goods to another party requires prior authorization by the U.S. Department of Commerce, Bureau of Industry Security.

Comments on the interim final rule may be submitted through July 14, 2020. Review the Federal Register Notice for the full rule and how to submit comments. The Commerce Department also issued a press release on this action.

Related Actions Related to China and Huawei

This action follow three notices published in April expanding restrictions on exports to military end-users, the elimination of the License Exception Civil End Users (CIV), and modification of the License Exception Additional permissive Reexports (APR).

BIS also extended the Temporary General License for Huawei and its listed affiliates on March 18, 2020 (85 FR 29610). The General License, which authorizes activities “including those necessary for the continued operations of existing networks and equipment as well as the support of existing mobile services, including cybersecurity research critical to maintaining the integrity and reliability of existing and fully operational networks and equipment,” is now valid through August 13, 2020.

Commerce Targets Chinese Military with Expanded Export Restrictions

On April 28, 2020, the Department of Commerce, Bureau of Industry and Security (BIS), published three notices revising the Export Administration Regulations (EAR). These changes are intended to increase restrictions on exports to China, but will affect transactions involving other countries as well:

85 FR 23459 – Expansion of Export, Reexport, and Transfer (in-Country) Controls for Military End Use or Military End Users in the People’s Republic of China, Russia, or Venezuela

85 FR 23470 – Elimination of License Exception Civil End Users (CIV)

85 FR 23496 – Modification of License Exception Additional Permissive Reexports (APR)

This rule comes after much delay as these changes have been anticipated since 2018 and we now have two final rules and one proposed rule from BIS.

Chinese Military End Use

Effective June 29, 2020 (85 FR 23459), EAR Part 744 will be amended to further restrict exports and reexports to China, as well as to Russia and Venezuela, when destined for a military end user or end use.

744.21 previously restricted exports to China for military end use, as well as exports to Russia or Venezuela for military end use or end users. By adding military end users in China, the new rule will apply the same limitations to all three countries. The new rule also broadens the definition of military end use to include additional items.

Items subject to the military end use or end user restrictions are identified by Export Control Classification Number (ECCN) in Supplement No. 2 to Part 744. The following ECCNs will be added to the supplement or their controls expanded: 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, 8A992, 9A991 and 9B990.

Items restricted under the revised §744.21 will require a BIS license and be subject to a policy of denial. Previously, such applications were reviewed on a case-by-case basis, considering whether an export would make a material contribution to military capabilities and result in advancing military activities contrary to U.S. national security interests.

The rule also establishes a Regional Stability (RS) license requirement for any 9×515 or 600 series paragraph .y items destined for China, Russia, or Venezuela. There is an exception for the export or reexport of items to Russia for the International Space Station (ISS).

Finally, the rule amends the EAR to require Electronic Export Information (EEI) filings for any items destined China, Russia, or Venezuela regardless of value, unless shipped under License Exception GOV.”

Between the expanded definitions and “China’s widespread civil-military integration,” these revisions will require increased due diligence when evaluating end users in China.

For additional detail, refer to the Federal Register Notice.

Removal of License Exception CIV

Also effective June 29, 2020 (85 FR 23470), the §740.5 License Exception Civil End Users (CIV) will be removed from the EAR.

License Exception CIV currently allows exports and reexports of specifically identified CCL items controlled for National Security reasons to twenty three countries of national security concern when “destined to civil end-users for civil end-uses.”

License Exception CIV is not generally available—the license exception must be positively identified in the ECCN entry for the item in question. License Exception CIV is generally a counterpart to the Shipments to Country Group B Countries (GBS) or Technology and Software Under Restriction (TSR) exceptions, which allow similar exports to the EAR’s Country Group B.

In removing License Exception CIV, BIS is primarily concerned by “the increasing integration of civilian and military technology development in these countries of concern.” The removal of the license exception means that BIS licenses will be required for such transactions for all D:1 countries.

The rule also makes conforming changes to the EAR, largely removing the “CIV: Yes” or “CIV: No” indications from ECCNs.

The Commerce Country Groups are listed in Supplement No. 1 to Part 740.

For additional detail, refer to the Federal Register Notice.

Modification of License Exception APR

Finally, BIS issued a proposed rule (85 FR 23496) to modify the §740.16 License Exception Additional Permissive Reexports (APR).

License Exception APR currently allows the reexport of some controlled items from Country Group A:1 or Hong Kong, given certain conditions including an export authorization from the reexporting country. Because of concerns about these countries’ licensing review standards, APR may allow the reexports that would have been denied for export directly from the U.S.

The BIS proposal removes Country Group D:1 as eligible destinations under License Exception APR so that the U.S. government approval would be required for reexports to these countries of national security concern.

Comments may be submitted through June 29, 2020. In particular, BIS requests comments on how the proposal would impact current use of License Exception APR and the volume of transactions affected. Review the Federal Register Notice for the full proposed rule and how to submit comments.

Compliance in a Pandemic – Updates from DDTC and OFAC

DDTC Adjusts to Social Distancing

As we noted recently on this blog, the Department of State, Directorate of Defense Trade Controls (DDTC) remains open, but will be making adjustments in response to the Coronavirus Disease 2019 (COVID-19) pandemic. This includes an electronic process for submitting disclosures to the office of Defense Trade Controls Compliance (DTCC).

Since that announcement, DDTC has:

Cancelled its Wednesday, April 29 In-House Seminar
Suspended pick-up/drop off courier services while continuing to send and accept U.S. mail
Indicated that it is considering a one-time temporary reduction in registration fees for “certain categories of DDTC registrants”
Implemented procedures to send DSP-85 and General Correspondence (GC) responses by email when possible
Began accepting FMS Part 130 reports via email at DDTC-Part130Notices@state.gov
Moved to electronic submissions of Congressional Notifications.

DDTC has also provided extensions as follows:

Temporarily extended ITAR registrations expiring on February 29 through June 30, 2020 for two months from the original date of expiration
Extended licenses expiring “between March 13, 2020 and May 31, 2020 for six (6) months from the original date of expiration”
Granted an additional 30 days for responses to request-for-information letters related to DTCC disclosures.

Finally, DDTC made the following announcements to address remote working and expedited licenses:

Suspended “the requirement that a regular employee, for purposes of ITAR § 120.39(a)(2), work at the company’s facilities, to allow the individual to work at a remote work location, so long as the individual is not located in Russia or a country listed in ITAR § 126.1” through July 31, 2020.
Suspended a similar requirement for regular employees of licensed entities working under a TAA, MLA, or exemption.
Reissued guidance for requests submitted in support of U.S. Operations (USOP) (exports in support of U.S. and coalition forces that are deployed or scheduled to be deployed within 90 days).

Please monitor the DDTC website for additional announcements.

OFAC Publishes Pandemic Guidance

On April 20, 2020, the Department of the Treasury, Office of Foreign Asset Control (OFAC) released a statement on compliance concerns during the COVID-19 pandemic.

The announcement addresses exemptions and authorizations that allow humanitarian assistance to countries subject to OFAC sanctions. It specifically addresses the Iran, Venezuela, North Korea, Syria, Cuba, and Ukraine/Russia sanctions programs.

OFAC also requests anyone affected by the pandemic to contact OFAC as soon as practicable if delays associated with OFAC’s regulatory requirements (e.g., various reporting requirements and responding to administrative subpoenas).

OFAC has also established an e-mail account for electronic submission of disclosures at OFACdisclosures@treasury.gov. OFAC has previously published specific guidance on how to organize and submit electronic correspondence.

Finally, OFAC acknowledged that the pandemic “can cause technical and resource challenges for organizations” that will be evaluated as a factor in potential violations on a case-by-case basis.

Compliance During the Pandemic – ECS Can Help

The U.S. government offices are making efforts to alleviate some difficulties in dealing with them, but this is not an excuse to ignore export compliance. Enforcement may be hampered now, but any compliance problems left to fester are just going to get worse for when they are back to “normal.”

We continue to offer training, with live streaming two-day seminars and an eight-part webinar series currently in progress. Click here for more on ECS training options.

Our consulting practice continues to operate remotely and can assist with license drafting and review, Technical Assistance Agreements (TAAs), product classifications, risk assessments, and any other assistance you may need to keep your compliance program in order and business moving along.

Four Cs of Export Compliance Updates – COVID-19, Cloud, Country Groups, and CFIUS

DDTC Open and Accepting Electronic Disclosures

On March 9, 2020, the Department of State, Directorate of Defense Trade Controls (DDTC) announced that it remains open, but will be making staffing and other adjustments in response to the Coronavirus Disease 2019 (COVID-19) pandemic.

Electronic licensing and registration processes are operating as normal, but may be subject to additional processing delays. The same applies to Commodity Jurisdiction (CJ) and General Correspondence (GC) requests.

Most notable, disclosures submitted pursuant to ITAR §127.12 may now be submitted by email. Disclosures and related information should be emailed in pdf format on company letterhead to DTCC-CaseStatus@state.gov. Duplicate hard copies are not required, but hard copies may continue to be submitted if necessary.

Please monitor the DDTC website for additional announcements.

ITAR Cloud Rule Almost Here

The new International Traffic in Arms Regulations (ITAR) cloud rule is scheduled to go into effect March 25, 2020. DDTC has release a two-page pdf handout summarizing the changes.

Commerce Changes Country Groups for Russia and Yemen

On February 24, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (85 FR 10274) revising the Country Chart and Country Groups for Russia and Yemen in the Export Administration Regulations (EAR). A subsequent rule (85 FR 13009) made a minor correction.

The rule removes Russia from more favorable treatment under Country Groups A:2 (Missile Technology Control Regime) and A:4 (Nuclear Suppliers Group) and adds it to Country Groups D:2 and D:4 to reflect nuclear and missile technology proliferation concerns. It also adds an “X” in the “NP 1” column of the Commerce Country Chart for Russia, establishing a license requirement for items controlled for those purposes.

The rule removes Yemen from more favorable treatment under Country Group B and adds it to Country Group D:1 based on national security concerns.

Under these changes, certain license exceptions are no longer available for Russia and Yemen. For transactions that would previously have been authorized under a license exception, a BIS license will be required (exports, reexports, and transfers of certain controlled items).

CFIUS Filing Fees Proposed

On March 9, 2020 (85 FR 13586, corrected in 85 FR 14837), the Department of the Treasury issued a proposed rule to establish a filing fee for voluntary notices submitted for by the Committee on Foreign Investment in the United States (CFIUS). The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) provided for, but did not immediately require, filing fees.

The proposed rule adds implementing regulations including the following fee schedule:

$750 for transactions valued at greater than $500,000 but less than $5,000,000;
$7,500 for transactions valued at equal to or greater than $5,000,000 but less than $50,000,000;
$75,000 for transactions valued at equal to or greater than $50,000,000 but less than $250,000,000;
$150,000 for transactions valued at equal to or greater than $250,000,000 but less than $750,000,000; and
$300,000 for transactions valued at equal to or greater than $750,000,000.

Comments will be accepted through April 3, 2020. Refer to the original Federal Register Notice for more information and how to comment.

ECS Working Remotely Since 2003

While events have turned our next scheduled seminar from on-site in Park City, Utah to on-site on your computers nationwide, ECS remains available to assist with your export compliance needs. Contact us today and keep your business moving despite recent disruptions.

Firearms Reforms Effective, Except 3D Printer Technical Data

On Monday, March 9, 2020, as scheduled, the Export Control Reform rules for United States Munitions List (USML) Categories I, II, and III (firearms, artillery, and ammunition) took effect.

As described in our earlier blog post and the Federal Register Notices, items that the U.S. government has determined not to provide the U.S. with critical military or intelligence advantages or perform an inherently military function have been transferred to the Department of Commerce and will be subject to the Export Administration Regulations (EAR).

This concludes the initial review of the United States Munitions List (USML) that started in 2011.

3D Printer Data Excluded

Due to a court-ordered preliminary injunction issued Friday, March 6^th as a part of ongoing litigation, “technical data and software directly related to the production of firearm or firearm parts using a 3D-printer or similar equipment” remain subject to the International Traffic in Arms Regulations (ITAR). The injunction did not block the rest of the rule from taking effect.

The Department of State, Directorate of Defense Trade Controls (DDTC) has published a statement on the court order and may publish additional guidance. Please refer to the DDTC website for additional information.

At Last – USML Category I, II, and III Revisions Are Here!

Concluding the initial review of the United States Munitions List (USML) that started in 2011, the Departments of State and Commerce have released their companion Export Control Reform rules USML Categories I, II, and III (firearms, artillery, and ammunition). Click here for the Department of State rule and click here for the Department of Commerce rule. The rules were published in the Federal Register on January 23, 2020 and would be effective 45 days after publication (March 9, 2020).

The new rules largely reflect proposals published in May 2018, with corrections, conforming changes, and some notable updates.

On the day of publication, 21 states filed a lawsuit against the new regulations that could delay or cancel the new rules. Assuming that the rules stay in place, read on for what to expect.

Background

Items listed on the USML are controlled by the included in the State Department’s International Traffic in Arms Regulations (ITAR). Items removed from the USML are controlled by the Commerce Department’s Export Administration Regulations (EAR).

The years-long effort is meant to limit the USML to those items that provide the U.S. with critical military or intelligence advantages as well as those items that perform an inherently military function. All of the other USML categories had been reviewed and revised between 2011 and 2016.

ITAR/USML Revisions

Previously written broadly, USML Categories I, II, and III cover most firearms, artillery systems, and ammunition. They also include catch-all parts and components categories (e.g., I(h) “Components, parts, accessories and attachments for the articles in paragraphs (a) through (g) of this category.”). Items no longer controlled under the USML will be controlled by the Department of Commerce’s Export Administration Regulations (EAR) and listed on the Commerce Control List (CCL).

As revised, USML Category I includes the following, notably excluding most non-automatic or semi-automatic firearms:

*(a) Firearms using caseless ammunition.

*(b) Fully automatic firearms to .50 caliber (12.7 mm) inclusive.

*(c) Firearms specially designed to integrate fire control, automatic tracking, or automatic firing (e.g., Precision Guided Firearms).

Note 1 to paragraph (c): Integration does not include only attaching to the firearm or rail.

*(d) Fully automatic shotguns regardless of gauge.

*(e) Silencers, mufflers, and sound suppressors.

(f) [Reserved]

(g) Barrels, receivers (frames), bolts, bolt carriers, slides, or sears specially designed for the articles in paragraphs (a), (b), and (d) of this category.

(h) Parts, components, accessories, and attachments, as follows:

(1) Drum and other magazines for firearms to .50 caliber (12.7 mm) inclusive with a capacity greater than 50 rounds, regardless of jurisdiction of the firearm, and specially designed parts and components therefor;

(2) Parts and components specially designed for conversion of a semi-automatic firearm to a fully automatic firearm.

(3) Parts and components specially designed for defense articles described in paragraphs (c) and (e) of this category; or

(4) Accessories or attachments specially designed to automatically stabilize aim (other than gun rests) or for automatic targeting, and specially designed parts and components therefor.

(i) Technical data (see §120.10 of this subchapter) and defense services (see §120.9 of this subchapter) directly related to the defense articles described in this category and classified technical data directly related to items controlled in ECCNs 0A501, 0B501, 0D501, and 0E501 and defense services using the classified technical data. (See §125.4 of this subchapter for exemptions.)

(x) Commodities, software, and technology subject to the EAR (see §120.42 of this subchapter) used in or with defense articles.

Note to paragraph (x): Use of this paragraph is limited to license applications for defense articles where the purchase documentation includes commodities, software, or technology subject to the EAR (see §123.1(b) of this subchapter)

Note 1 to Category I: The following interpretations explain and amplify the terms used in this category:

(1) A firearm is a weapon not over .50 caliber (12.7 mm) which is designed to expel a projectile by the deflagration of propellant;

(2) A fully automatic firearm or shotgun is any firearm or shotgun that shoots, is designed to shoot, or can be readily restored to shoot, automatically more than one shot, without manual reloading, by a single function of the trigger; and

(3) Caseless ammunition is firearm ammunition without a cartridge case that holds the primer, propellant, and projectile together as a unit.

Except for scopes controlled in Category XII (night vision), riflescopes manufactured to military specifications move to the CCL where they will join other, already EAR-controlled riflescopes.

The Category II revision includes expanded technical notes and specifications for control and enumerate the parts and components that will remain on the USML. The Category III is rewritten to control ammunition based on technical attributes rather than merely being “for the articles in Categories I and II.” Both Category I and Category II include paragraphs controlling developmental products funded by the Department of Defense.

ITAR revisions also include conforming changes throughout where references to firearms needed to be removed or updated. Some Part 129 brokering rules continue to apply to firearms moved to the CCL by adding a reference to the ATF’s United States Munitions Import List (USMIL).

EAR/CCL Revisions

Concurrently, the Department of Commerce rule creates seventeen new Export Control Classification Numbers (ECCNs) for the items leaving the USML. Reorganizing to put similar items already controlled on the CCL with new related entries, the rule revises eight ECCNs and removes nine. Items currently controlled in Category II would be controlled under new “600 series” ECCNs “to control items of a military nature” and Category I and III items would be controlled under new “500 series” ECCNs “because, for the most part, they have civil, recreational, law enforcement, or other non-military applications.”

The rule also revises various sections of the EAR to accommodate the new items and establish licensing policies where needed. Among these, a policy of denial is in place for 500 series items to the Peoples Republic of China and Country Group E:1.

Furthermore, to address the controversy over 3D printing files, EAR §734.7(c) is added to maintain EAR controls even when “published”:

The following remains subject to the EAR: “software” or “technology” for the production of a firearm, or firearm frame or receiver, controlled under ECCN 0A501, that is made available by posting on the internet in an electronic format, such as AMF or G-code, and is ready for insertion into a computer numerically controlled machine tool, additive manufacturing equipment, or any other equipment that makes use of the “software” or “technology” to produce the firearm frame or receiver or complete firearm.

This is intended to resolve the controversy related to the EAR’s release from control for “published” information, including information posted on the internet (a policy that the ITAR does not share, leading DDTC to consider posting information on the internet to be an “export.”).

Effects of Export Control Reform

Both departments noted that neither one regulates the domestic sale or use of firearms in the United States, or the transfer of firearms or related software or technology between U.S. persons within the United States. They also noted that the Department of Commerce has already been licensing similar items including shotguns, shotgun ammunition, and sighting devices for decades.

Exports still require DOC authorization, with licenses subject to interagency national security and foreign policy review as well as subject to the laws of importing countries.

The main benefits of the reforms are administrative—fewer resources will need to be devoted to licensing and registration.

The State Department expects a decrease of 10,000 licenses per year. Of those, 4,000 will be eligible for license exceptions and 6,000 will require Commerce licenses. When Commerce licenses are needed, the absence of a purchase order requirement will allow some licenses for regular customers to be consolidated. Some license exceptions will also be available, largely for minor parts and components.

This reform is especially advantageous to manufacturers of minor components as these were the only three USML categories have maintained catch-all parts and components subcategories. Under the reform, parts and components not specifically listed will be controlled on the CCL.

Manufacturers and exporters whose products are now all EAR-controlled no longer have to register with DDTC and pay the minimum $2,250 registration fee. The Commerce Department’s SNAP-R licensing system includes free registration and free license applications.

The reform also benefits gunsmiths. The State Department noted that:

…gunsmiths that do not manufacture, export, or broker articles that remain subject to the ITAR after this rule’s effective date will no longer need to determine if they are required to register under the ITAR. They may, however, still be required to comply with ATF licensing requirements.

The Commerce Department also noted that while reporting of fees and commissions under ITAR Part 130 will not apply to EAR-controlled items, “the Foreign Corrupt Practices Act (FCPA) already prohibits this type of corruption activity and provides a robust regulatory scheme. FCPA applies to all items subject to the EAR, including items that will be moved from the USML to the CCL.”

De minimis rules will also encourage foreign sales as incorporation of parts into foreign items will not necessarily subject the foreign item to U.S. export-controls.

State Department authorizations (licenses and agreements) may continue to be used after the transition of items from the USML to the CCL.

For companies that work with firearms, guns, and ammunition, this is a huge development that will pay dividends in the long run. ECS is here to help with the transition, offering training seminars and on-site training, classification assistance, and DDTC and BIS license drafting. Contact us for help.

January Export Compliance Updates – DDTC, BIS, and More!

Following the big Christmas vacation announcement of the new International Traffic in Arms Regulations (ITAR) cloud rule, even more changes have materialized for export compliance.

DECCS is Coming

In a January 14^th webinar, the Department of State, Directorate of Defense Trade Controls (DDTC) announced another long-awaited change: DDTC’s cloud-based Defense Export Control and Compliance System (DECCS) will launch licensing and registration applications in February. The target date is currently February 3^rd with deployment anticipated no later than February 17^th. The DTrade licensing application will be taken offline for data migration prior to the DECCS launch.

DECCS will feature:

An updated DS-2032 registration form with a new payment process and no request for Social Security numbers
Current license forms from DTrade
Access to existing, unexpired DTrade licenses
New GC forms for brokering and retransfer requests
More digital certificate options (DTrade ACES certificates will work with DECCS until their July 2020 expirations)

Users can enroll now, but will not be able to view or use the new features until the upgrade is deployed. Visit the DECCS Industry Portal for more information or to begin the enrollment process: https://deccspmddtc.service-now.com/deccs

DDTC Releases Defense Services FAQs

DDTC released a series of FAQs on the provision of defense services by U.S. persons abroad. The FAQs are intended to assist with determining whether an authorization is required for a U.S. person to assist a foreign entity with defense articles, technical data, or military training and to outline for process for requesting approval. Notably, when authorization is required for such services, the request should be submitted as a General Correspondence (GC) request under ITAR §126.9(b).

Commerce Controls Geospatial Imagery Analysis Software

On January 6, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published an interim final rule (85 FR 459) controlling “software specially designed to automate the analysis of geospatial imagery” under the Export Administration Regulations (EAR) Export Control Classification Number (ECCN) 0D521.

ECCN 0D521 controls “Any software subject to the EAR that is not listed elsewhere in the CCL, but which is controlled for export because it provides at least a significant military or intelligence advantage to the United States or for foreign policy reasons” and requires a license for export or reexport to all countries other than Canada. Items in the 0Y521 series (0A521, 0B521, 0C521, 0D521, and 0E521) are specified in Supplement No. 5 to Part 774 of the EAR.

The rule was effective January 6, 2020 and comments will be accepted through March 6, 2020. Please refer to the Federal Register Notice for how to submit comments.

Commerce Seeks Technical Advisory Committee Representatives

BIS also announced that it is recruiting representatives from industry, academia, and the U.S. government to serve on one of seven Technical Advisory Committees (TACs). These committees advise the Department of Commerce on the technical parameters and administration of dual-use export controls.

The TACs advise on the following areas:

Information Systems: Categories 3 (electronics), 4 (computers), and 5 (telecommunications and information security);
Materials: Category 1 (materials, chemicals, microorganisms, and toxins);
Materials Processing Equipment: Category 2 (materials processing);
Sensors and Instrumentation: Category 6 (sensors and lasers);
Transportation and Related Equipment TAC: Categories 7 (navigation and avionics), 8 (marine), and 9 (propulsion systems, space vehicles, and related equipment);
Emerging Technology: identification of emerging and foundational technologies; and
Regulations and Procedures: Export Administration Regulations (EAR) and EAR implementation.

TAC members must obtain secret-level clearances prior to their appointment. See their Federal Register Notice (84 FR 72292) for more information.

Civil Monetary Penalties Adjusted for Inflation

Inflationary adjustments to civil monetary penalties were issued by both the Department of Commerce (85 FR 207) and the Department of State (85 FR 2020). Maximum penalties depend on the specific kind of violation.

The ITAR §127.10 civil penalties were amended as follows:

§ 127.10(a)(1)(i) increased from $1,163,217 to $1,183,736.
§ 127.10(a)(1)(ii) increased from $845,764 to $860,683 (or five times the amount of the prohibited incentive payment, whichever is greater).
§ 127.10(a)(1)(iii) increased from $1,006,699 to $1,024,457.

The Department of Commerce increased the maximum penalty for a violation of the Export Control Reform Act of 2018 from $300,000 to $305,292.

New CFIUS Regulations Issued

On January 13, 2020, the Department of the Treasury issued regulations to implement changes to the Committee on Foreign Investment in the United States (CFIUS) required by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). One notable development is the definition of excepted investors which, subject to some restrictions, starts with persons and entities from Australia, Canada, and the United Kingdom.

Please refer to the CFIUS website for the new regulations, fact sheets, and FAQs.

Watch this Space – USML Categories I-III Reforms Moving Again

After even longer review than the ITAR cloud rule, the Departments of State and Commerce are moving forward with reforms to USML Categories I-III (firearms, guns, and ammunition). We will have a summary of the new rule and what it means for manufacturers and exporters.