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Export Regulatory and Policy Update Roundup: Summer 2023

Since our last post, U.S. export control agencies have continued take actions that may impact your business.  Ranging from the huge multi-agency settlement agreement raising supply chain issues to tweaks to the USML to updated guidance and reports, we have the highlights below.

Multi-Agency Actions

3D Systems Corporation Multi-Agency Settlement

  • New consent agreement and settlements highlight supply chain concerns (February 27, 2023)
  • Violations by Quickparts subsidiary:
    • Exports of controlled data to China and Taiwan for sourcing on-demand manufacturing services (some related to NASA & DOD contracts)
    • Controlled data on German server
    • Unlicensed access by Foreign Person Employees
    • Inadequate recordkeeping
  • Additional issues:
    • No formal compliance program or employees until 2017
    • No written export compliance procedures
    • No export compliance training
    • No export compliance strategy for IT
    • No document retention policy
  • Department of State (AECA/ITAR)
    • $20 million civil penalty
    • Special Compliance Officer (SCO)
    • 2 external audits
  • Department of Commerce (IEEPA/EAR)
    • $2.77 million civil penalty
    • 2 external audits
  • Department of Justice (False Claims Act)
    • Up to $4.54 million civil penalty

Guidance to Industry on Iran’s UAV-Related Activities

  • Describes key items sought by Iranian UAV programs and relevant controls and sanctions.
  • OFAC website, June 9, 2023

Department of State: DDTC / ITAR

ITAR Amendment expands scope of Canadian Exemption, Australia Treaty, and UK Treaty:

  • Supplement No. 1 to part 126 amended to expand the list of eligible defense articles and defense services that may be exported.
  • Changes relate to torpedoes, submarine combat control system mounting racks and cabinets, underwater acoustic decoy countermeasures, and Category IV and XII defense services.
  • 88 FR 21910, April 12, 2023

Interim final rule removes certain high-energy storage capacitors removed from USML Category XI:

  • Adds a voltage rating of one hundred twenty-five volts (125 V) criterion to XI(c)(5) (high-energy storage capacitors), formalizing a temporary suspension from 2022.
  • Requests comments on the implementation practical effects of the new threshold, as well as potential alternatives.
  • 88 FR 25488, April 27, 2023

Open General License Nos. 1 and 2 updated and extended:

  • Cover qualifying retransfers within and reexports among Australia, Canada, and the United Kingdom
  • Validity extended by 3 years, plus clarifying edits
  • 88 FR 35992, June 1, 2023

Blue Lantern and Golden Sentry Reports Released

Department of Commerce: BIS / EAR & CCL

Voluntary Self-Disclosure (VSD) Policy

  • Intended to incentivize submission of VSDs by highlighting potential costs of not filing and encouraging disclosures about the conduct of others.
  • BIS website, April 18, 2023

As always, if you need more information or assistance in any of these areas, ECS is here to help!

State Department Compliance Guidelines Part 1 of 2: Management Commitment, ITAR Activities, Recordkeeping, & Violations

In December 2022, the U.S. Department of State’s Directorate of Defense Trade Controls issued updated Compliance Program Guidelines. These Guidelines are an overview of an effective ITAR Compliance Program (ICP) and an introduction to defense trade controls.

The Guidelines are divided into eight sections:

  1. Management Commitment
  2. DDTC Registration, Jurisdiction & Classification, Authorizations, & Other ITAR Activities
  3. Recordkeeping
  4. Detecting, Reporting, & Disclosing Violations
  5. ITAR Training
  6. Risk Assessment
  7. Audits & Compliance Monitoring
  8. ITAR Compliance Manual

This article will focus on the first four sections: Management Commitment,

DDTC Registration, Jurisdiction & Classification, Authorizations, & Other ITAR Activities, Recordkeeping, and Detecting, Reporting, & Disclosing Violations.

This guidance is not an official part of the International Traffic in Arms Regulations. Instead, it serves as a way for the Directorate of Defense Trade Controls to express their expectations for export compliance. DDTC also understands that different companies have unique levels of ITAR activity and may need different approaches.

Management Commitment

Management commitment to export compliance sets the tone for the entire organization.  Management commitment can be expressed through communications to employees, as well as integration into performance evaluations, including both rewards and disciplinary actions. It can also be expressed through the maintenance of the ICP and its management commitment statement, as well as sufficient and well-organized staff who are given thorough training (to be discussed in our next article). Empowered Officials must be truly empowered. They must also be sufficiently trained to understand and perform their compliance responsibilities.

DDTC Registration, Jurisdiction & Classification, Authorizations, & Other ITAR Activities

The Directorate of Defense Trade Controls provides an overview of registration requirements and processes. They also go over the need to determine jurisdiction and classification of products, and obtain authorizations when required.  A written ICP should provide an overview of each of these areas as they pertain to the specific organization.  Important reminders include:

  • Timely renewal of DDTC registrations
  • Informing DDTC of material changes to registration (within five days of the event, or in some cases, 60 days before)
  • Determining jurisdiction and classification of any product manufactured, exported, temporarily imported, or brokered (including self-classifications and Commodity Jurisdiction requests)
  • How to prepare for and obtain authorizations, including export licenses, Technical Assistance Agreements, Manufacturing License agreements, retransfer requests, and license exemptions
  • Restricted party screening (ECS offers the ECScreening service, which expands on and provides additional features not found in the Consolidated Screening List) and screening for proscribed countries (ITAR 126.1).
  • Registration and authorization requirements for brokering (ITAR Part 129)
  • Recording and reporting political contributions, fees, and commissions (ITAR Part 130)

There is also guidance on cybersecurity. The ITAR does not require organizations to have specific cybersecurity measures such as encryption. However, organizations are expected to take steps to protect technical data. ITAR §120.54 does include some specific standards for how technical data can be stored and transmitted internationally without being considered an ITAR “export.”

Recordkeeping

The ITAR requires recordkeeping in §122.5, but how it is implemented is up to your organization. However, records must be:

  • Reproducible in paper format, if digital;
  • Legible and readable;
  • Unaltered once recorded or, if altered, with any alterations properly recorded, including who made them and when;
  • Readily accessible if digital images; and
  • Maintained for a period of five years from the expiration of the license or other approval, to include exports using an exemption, or from the date of the transaction.

Records must be maintained for:

  • Licenses or other approvals;
  • Licenses exemptions (including the Australia and UK treaties);
  • Technical data exports;
  • Oral, visual, or electronic exports;
  • Certain information related to special comprehensive export authorizations;
  • Exemptions involving employees who are dual and third-country nationals;
  • Voluntary disclosures;
  • Brokering recordkeeping requirements; and
  • Political contributions, fees, and commissions.

If your organization is using ITAR exemptions, internal recordkeeping is the only way to justify the use of an exemption. Recordkeeping is both a specific and general responsibility and may be subject to a Technology Control Plan (TCP). If you are unsure of where to start, the Guidelines include a list of recordkeeping suggestions.

Detecting, Reporting, & Disclosing Violations

While the major goal of a compliance program is to avoid violations, it is also important to detect violations when they happen, encourage reporting throughout the organization, and submit voluntary disclosures to DDTC when appropriate. The quality of the organization’s compliance program and efforts to report and contain violations are very important.  Management should communicate the seriousness of export violations by reminding employees of civil and criminal penalties and other potential consequences.  This should be balanced with the need to encourage reporting without retribution.

Additional detail on all of these elements is available in the Guidelines themselves.  Watch this space for our review of the remaining elements: ITAR training, risk assessment, audits and compliance monitoring, and the ITAR compliance manual.  Every element is crucial to the success of your export compliance program.

As always, if you need help with meeting, understanding, or tailoring any export compliance obligations, ECS is here to help!

Export Regulatory and Policy Update Roundup

Since our last post, there have been actions throughout the various export control agencies that may impact your business.  Ranging from the new Conventional Arms Transfer Policy to tweaks to the USML and CCL to CFIUS country policies to new sanctions, we have the highlights below.

White House: CAT Policy

The White House released an updated Conventional Arms Transfer (CAT) Policy on February 23, 2023.  Formalizing the administration’s current practice, the new policy covers ITAR-controlled defense articles as well as EAR-controlled 600-series items and commercial firearms.  It increases emphasis on human rights concerns while continuing to take in to account other considerations such as effects on partner capacity, regional stability, risk of diversion, and the defense industrial base.  The State Department also published a fact sheet on the CAT Policy.

Department of State: DDTC / ITAR

The Department of State, Directorate of Defense Trade Controls (DDTC) issued International Traffic in Arms Regulations (ITAR) Compliance Program Guidelines (pdf) on December 5, 2022.  See our newsletter for a summary!

Cyprus temporarily removed from § 126.1:

  • Republic of Cyprus’ status as a proscribed destination is suspended from October 1, 2022, through September 30, 2023
  • 87 FR 71250, November 22, 2022

ITAR controls temporarily suspended for certain capacitors described in the U.S. Munitions List (USML) Category XI.

  • Applies to capacitors that have a voltage rating of one hundred twenty-five volts (125 V) or less
  • Effective November 21, 2022 to May 22, 2023
  • 87 FR 74967, December 7, 2022

Proposed Amendment to the Definition of Activities That Are Not Exports, Reexports, Retransfers, or Temporary Imports

  • “First, subject to certain conditions, the taking of defense articles outside a previously approved country by the armed forces of a foreign government or United Nations personnel on a deployment or training exercise is not an export, reexport, retransfer, or temporary import.”
  • “Second, a foreign defense article that enters the United States, either permanently or temporarily, and that is subsequently exported from the United States pursuant to a license or other approval under this subchapter, is not subject to the reexport and retransfer requirements of this subchapter, provided it has not been modified, enhanced, upgraded, or otherwise altered or improved or had a U.S.-origin defense article integrated into it.”
  • 87 FR 77046, December 16, 2022

Consolidation and Restructuring of Purposes and Definitions

  • Finalizes 2022’s interim final rule reorganizing ITAR definitions
  • Includes review of comments and minor changes
  • 88 FR 12210, February 27, 2023

Department of Commerce: BIS / EAR & CCL

Pakistan Due Diligence Guidance

Implementation of Additional Export Controls: Certain Advanced Computing and Semiconductor Manufacturing Items; Supercomputer and Semiconductor End Use; Entity List Modification

  • New ECCNs 3A090 and 4A090
  • Changes to license requirements, license exceptions, and foreign direct product rule
  • New End-Use and End-User Control for “Supercomputers” Under § 744.23 of the EAR
  • Additions to Entity List
  • 87 FR 62186, October 13, 2022
  • BIS background page, including press release, presentations, webcast, and FAQs
  • Updated to apply to Macau (88 FR 2821, January 18, 2023)

Revisions to the Unverified List; Clarifications to Activities and Criteria That May Lead to Additions to the Entity List

Implementation of Australia Group Decisions From 2021 and 2022 Virtual Meetings: Controls on Marine Toxins, Plant Pathogens and Biological Equipment

  • Affects ECCNs, 1C350, 1C351, 1C353, 1C354, 1E001, 2B352
  • 88 FR 2507, January 17, 2023

Implementation of 2021 Wassenaar Arrangement Decisions

  • Implements the remaining controls agreed to during the December 2021 WA Plenary meeting by revising the CCL, as well as certain EAR provisions, including License Exception Adjusted Peak Performance (APP). This final rule also makes corrections to align the scope of Significant Item (SI) license requirements throughout the EAR and makes a revision to License Exception Strategic Trade Authorization (STA).
  • Affects ECCNs 0A988, 1A613, 1C006, 2E003, 3A001, 3A002, 4A003, 4D001, 4E001, 5A003, 6A005, 6A008, 6D003, 7D003, 9A004, 9B001, and 9E003.
  • 88 FR 12108, February 24, 2023

Additional Sanctions on Russia, Belarus, and Iran

  • Russia & Belarus: expands industry sector sanctions and luxury goods sanctions. Refines existing export controls on Russia and Belarus. (88 FR 12175, February 27, 2023)
  • Iran: imposes license requirements for a subset of EAR99 items identified by HTS code that are destined to Iran, regardless of whether a U.S. person is involved in the transaction, due to potential use on Iranian Unmanned Aerial Vehicles (UAVs). The rule also adds a new foreign direct product (FDP) rule specific to Iran.  (88 FR 12150, February 27, 2023)

Committee on Foreign Investment in the United States (CFIUS)

Excepted Foreign States and Excepted Real Estate Foreign States now include Australia, Canada, New Zealand, and the United Kingdom

2023 Inflation Adjustments for Commerce, State, and OFAC Penalties

Department of State

  •  127.10(a)(1)(i) change from $1,272,251 to the greater of $1,200,000 or the amount that is twice the value of the transaction that is the basis of the violation
  •  127.10(a)(1)(ii) increase from $925,041 or five times the amount of the prohibited payment, whichever is greater to $996,685, or five times the amount of the prohibited payment, whichever is greater.
  •  127.10(a)(1)(iii) increase from $1,101,061 to $1,186,338.
  • 88 FR 1505, January 11, 2023

Department of Commerce

  • International Emergency Economic Powers Act (2007) increase from $330,947 to $356,579
  • Export Controls Act of 2018 (2018) increase from $328,121 to $353,534
  • 88 FR 3, January 3, 2023

Office of Foreign Assets Control (OFAC)

  • Trading With the Enemy Act increase from $97,529 to $105,083
  • International Emergency Economic Powers Act (2007) increase from $330,947 to $356,579
  • 88 FR 2229, January 13, 2023

As always, if you need more information or assistance in any of these areas, ECS is here to help!

DDTC General Licenses for Australia, Canada & the UK, NATO Expansion, and More!

DDTC Publishes First Long Awaited Open General Licenses

On July 20, 2022, the Department of State, Directorate of Defense Trade Controls (DDTC) issued a Federal Register Notice (87 FR 43366) establishing two open general licenses.

Open General License No.1 and Open General License No. 2 authorize the retransfer and reexport of unclassified defense articles “the Governments of Australia, Canada, or the United Kingdom, and to members of the Australian and United Kingdom communities (as defined in ITAR §§ 126.16(d) and 126.17(d)) and Canadian-registered persons (as defined in ITAR § 126.5(b)).”  Both are subject to recordkeeping requirements and specific restrictions.

DDTC considers the open general licenses to be part of a pilot program, from August 1, 2022 to July 31, 2023 and may be extended or amended.  According to DDTC FAQs, they “are designed primarily to support the mission readiness of Australia, Canada, and the UK by facilitating defense trade activity related to the maintenance, repair, and storage of unclassified defense articles deployed or in-inventory, rather than supporting the acquisition of new equipment or capabilities.”

For more information, refer to DDTC’s fact sheet, new FAQs, and the Federal Register Notice.

CCL Updates: Wassenaar Implementation and Marine Toxin Proposal

On August 15, 2022, the Department of Commerce, Bureau of Industry and Security published a rule (87 FR 49979) amending the Commerce Control List (CCL) to reflect controls agreed to at the December 2021 Wassenaar Arrangement Plenary meeting.

The changes are centered on four technologies which BIS considers “emerging and foundational technologies” under the Export Control Reform Act (ECRA).  Specifically, the new controls relate to:

  • Two substrates of ultra-wide bandgap semiconductors (Gallium Oxide (Ga2 O3) and diamond);
  • Electronic Computer Aided Design (ECAD) software specially designed for the development of integrated circuits with any Gate-All-Around Field-Effect Transistor (GAAFET) structure; and
  • Pressure gain combustion (PGC) technology for the production and development of gas turbine engine components or systems.

The rule affects the following Export Control Classification Numbers (ECCNs):

  • Revises 3C001.d-.f, 3C005.a and .b, 3C006, and 3E003 for two substrates (Ga2 O3 and diamond) of ultra-wide bandgap semiconductors
  • Revises 9E003.a.2.e for PGC technology.
  • Creates new ECCN 3D006 for Software for ECAD for the development of Integrated Circuits (ICs) with GAAFET.

Future changes based on the 2021 Plenary meeting are still anticipated.  For more information, refer to BIS’s press release on the topic and the Federal Register Notice.  The rule is effective August 15, 2022, except for instruction 5, concerning the addition of Export Control Classification Number (ECCN) 3D006, which is effective October 14, 2022.  Comments regarding the implementation of ECCN 3D006 must be received by BIS no later than September 14, 2022.

On May 23, 2022, BIS published a proposed rule (87 FR 31195) which would add certain naturally occurring marine toxins to ECCN 1C351 due to concerns about potential exploitation for biological weapons purposes.  Specifically, the ECCN would include the marine toxins brevetoxin, gonyautoxin, nodularin and palytoxin and conforming changes would be made to the EAR.  Comments were accepted through June 22, 2022.

NATO Accession Anticipated for Finland and Sweden

With NATO accession for Finland and Sweden underway, we are seeing questions about how this will affect the ITAR.  While Finland and Sweden are expected to join NATO, the process has not been finalized.  The ITAR definition of NATO will also need to be amended to include the addition of these two strategically important countries.  Once that is complete, some of the notable sections that will be affected include:

  • § 123.9(e) “Reexports or retransfers of U.S.-origin components incorporated into a foreign defense article to NATO, NATO agencies, a government of a NATO country, or the governments of Australia, Israel, Japan, New Zealand, or the Republic of Korea”
  • § 123.15(a) Higher Congressional Notification thresholds for NATO, Australia, Israel, Japan, New Zealand, and the Republic of Korea
  • § 123.27 Special licensing regime for export to U.S. allies of commercial communications satellite components, systems, parts, accessories, attachments and associated technical data.
  • § 124.2 defense services exemption

As Finland and Sweden are European Union members, they are already eligible for the § 126.18(d) exemption for transfers by foreign entities to nationals of NATO, the EU, Australia, Japan, New Zealand, or Switzerland.

Sudan Business Advisory Issued

The Department of State, together with the Departments of the Treasury, Commerce, and Labor issued a business advisory for U.S. businesses operating in Sudan.  The primary concern involves human rights issues that may arise when conducting business with Sudanese State-Owned Enterprises (SOEs), including companies under military control.

Of note:

Businesses and individuals operating in Sudan and the region should undertake increased due diligence related to human rights issues and be aware of the potential reputational risks of conducting business activities and/or transactions with SOEs and military-controlled companies.  U.S. businesses and individuals should also take care to avoid interaction with any persons listed on the Department of the Treasury’s Office of Foreign Assets Controls’ (OFAC) list of Specially Designated Nationals and Blocked Persons (SDN List).

This advisory relates specifically to SOEs and military-controlled companies. The U.S. government does not seek to curtail or discourage responsible investment or business activities in Sudan with civilian-owned Sudanese counterparts.

The advisory provides important background on the role of the military and SOEs in Sudan, particularly following the military’s seizure of power in October 2021.

While Sudan is no longer subject to Anti-Terrorism (AT) controls for items on the CCL, it is still subject to an arms embargo under ITAR §126.1(v) and EAR Country Group D:5

Reminder: ITAR Reorganization Rule 1 to Take Effect September 6

The first ITAR reorganization rule, which will consolidate most definitions into Part 120, will take effect September 6, 2022.

The rule primarily consolidates and organize definitions currently distributed throughout the ITAR into Part 120, eliminating redundant text in the process.  While DDTC has stated that the rule does not make substantive revisions or impose new requirements, there are some changes that reflect longstanding policy.

The DDTC website and Defense Export Control and Compliance System (DECCS) are in the process of being revised to reflect the reorganization and are expected to be fully updated by September 9, 2022.

For more information on the changes, please refer to our previous blog post on the topic.

ITAR Definitions to be Reorganized, New Agreement Guidelines Released, Even More Commerce Russia Sanctions!

ITAR Reorganization Begins With Definitions in Part 120

On March 23, 2022, the Department of State, Directorate of Defense Trade Controls (DDTC) issued an interim final rule (87 FR 16396) that will consolidate International Traffic in Arms Regulations (ITAR) definitions into ITAR Part 120.  The long-awaited rule is effective September 6, 2022 and begins what DDTC describes as “the first of a multi-year, multi-rule project to better organize the ITAR.”

The rule primarily consolidates and organize definitions currently distributed throughout the ITAR into Part 120, eliminating redundant text in the process.  While DDTC has stated that the rule does not make substantive revisions or impose new requirements, there are some changes that reflect longstanding policy, for example (all citations to the revised ITAR):

  • § 120.11(c) – Integration of controlled items. Defense articles described on the USML are controlled and remain subject to this subchapter following incorporation or integration into any item not described on the USML, unless specifically provided otherwise in this subchapter.
  • § 120.17 – End-use monitoring
  • Pursuant to section 40A of the Arms Export Control Act (22 U.S.C. 2785) and related delegations of authority, the Department of State is required to establish a monitoring program in order to improve accountability with respect to defense articles and defense services, sold, leased, or exported under Department of State licenses or other approvals under section 38 of the Arms Export Control Act and this subchapter.
  • All exports of defense articles, technical data, services, and brokering activities made pursuant to this subchapter are subject to end-use monitoring by the Department of State through the Blue Lantern program.
  • § 120.23(c) –Wassenaar Arrangement background and country list
  • § 120.57 – Includes exemptions included within definition of authorization

To assist with the transition, DDTC also published the following documents on their website:

For additional information and how to submit comments, please refer to the Federal Register Notice.  Comments will be accepted through May 9, 2022.  The rule is scheduled to take effect September 6, 2022, but may be revised before then.

New Agreement Guidelines

On February 14, 2022, DDTC released Revision 5.0 of the “Guidelines for Preparing Agreements.”  The revised guidelines are 105 pages in length, down from 225 in 2016’s Revision 4.4b.  The new guidelines include some substantive changes, while reducing redundancy and moving some items to separate guidance documents.  A summary of noteworthy changes is included on page 1, including:

  • Under certain circumstances, cover letters are no longer required with executed copies of TAAs and WDAs (see Section 5.2.1)
  • Expedited Execution is expanded to include the removal of sublicensees (see Section 13.1)
  • The U.S. Sublicensing statement is no longer required (see Section 9.1)
  • Optional language when utilizing § 126.18 is now provided (see Section 10.3.1)
  • Clarification that the description of end-use includes the identification of platforms (throughout Part 1)
  • Clarification on identifying and documenting foreign end users (see Section 12)
  • Clarification on the “deployment clause” (see Section 17)
  • Update to documentation of space launch territories on the DSP-5 vehicle (see Section 18)
  • Clarify that the 124.4(b) letter must provide an estimate of the quantity of the articles authorized to be produced. Additionally, MLAs involving the licensed manufacture of defense article abroad should identify the estimated quantity as part of the scope of the agreement (see Section 1.1.1, 2.1.1, and 5.2)

The summary also notes that:

Applicants are not required to submit an amendment for the sole purpose of conforming an agreement to any language or format change presented in these Guidelines. Any changes presented in the Transmittal Letter or Agreement format are intended as an aid to the applicant. These changes are not mandatory. Applications that contain additional information or a different format will still be processed.

The new guidelines and other guidance can be found in the agreements section of the DDTC website.

Commerce Expands Russia/Belarus Sanctions

On April 14, 2022, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (87 FR 22130) which expands the license requirements for Russia and Belarus to include all items on the Commerce Control List (CCL).  Effective April 8, 2022, the rule also removes license exception eligibility for Belarusian aircraft.

Our previous Russia sanctions roundup had noted that the Export Administration Regulations (EAR) §746.8 imposed a license requirement on Categories 3-9, with a presumption of denial.  This now applies to Categories 0-9, or all items identified with an Export Control Classification Number (ECCN) on the CCL.

For additional information, please refer to the Federal Register Notice.  BIS also maintains a policy guidance page on Russia-Belarus.

Russia Sanctions Roundup

Blizzard of Sanctions Hits Russian Businesses: US Government Restrictions Continue to Expand

Following the Russian invasion of Ukraine in February, we saw a near-daily ratcheting-up of sanctions intended to target the Putin regime, Russian oligarchs, and others identified as supporters.  The highlights of this ever-changing effort are outlined below.

Two Crucial Takeaways

  1. Continuous screening of customers and other business connections is a must-do.  Sanctions lists are subject to significant change on a daily basis.
  2. For any transaction involving or destined for Russia or Belarus, very careful review and analysis is required.  If other countries are involved (particularly Canada, the UK, and the EU), additional sanctions programs may also apply.

Executive Orders

The White House released several executive orders, including investment and financing bans related to the Russian energy sector; import bans on Russian fish, seafood, alcoholic beverages, and non-industrial diamonds; export bans on luxury goods:

  • Prohibiting Certain Imports and New Investments With Respect to Continued Russian Federation Efforts To Undermine the Sovereignty and Territorial Integrity of Ukraine (Executive Order 14066 of March 8, 2022)
  • Executive Order on Prohibiting Certain Imports, Exports, and New Investment with Respect to Continued Russian Federation Aggression (Executive Order 14068 of March 11, 2022)

As of March 31, 2022, the Secretary of the Treasury, in consultation with the Secretary of State, has determined that the financial services sector and the aerospace, electronics, and marine sectors of the Russian economy to sectoral sanctions under Executive Order 14024 (April 15, 2021).

Department of the Treasury/OFAC

The Department of the Treasury, Office of Foreign Assets Control (OFAC) has implemented sanctions on specific Russian individuals and entities.  These affect transactions by U.S. persons anywhere in the world, any persons in the U.S., and others with a U.S. nexus (e.g., clearing transactions through a U.S. bank).

Countries affected include Russian Belarus, and Russian-controlled areas in Ukraine, as well as Russian-linked entities worldwide.  General licenses may be available, but are generally focused on wind-down and divestment.

For more information, refer to the following OFAC pages which contain comprehensive information on listings, regulations, and general licenses:

Department of Commerce/BIS

The Department of Commerce, Bureau of Industry and Security (BIS) has been very actively implementing new sanctions related to the conflict through revisions to the Export Administration Regulations (EAR):

  • §734.9 Revised Foreign Direct Product (FDP) Rule for Russia and Belarus.
    • 734.9(f) – Russia/Belarus FDP rule
    • 734.9(g) – Russia/Belarus-Military End User FDP rule
  • For both rules, BIS is publishing a positive list of countries not subject to the rule because they have implemented substantially similar restrictions on their own.
  • §744.21 Russia & Belarus Military End User rules – now cover all items subject to the EAR “other than food and medicine designated EAR99.”
  • §746.5 Russian Industry Sector Sanctions: now include Russian oil refinery sector.
  • §746.8 Sanctions Against Russia: Impose a license requirement for all items in Commerce Control List (CCL) Categories 3-9, with a presumption of denial.
  • Moved forty-five Russian entities from the Military End-User (MEU) List to the Entity List with an expanded license requirement of all items subject to the EAR (including foreign-produced items subject to the Russia-MEU FDP rules).
  • Added 91 entities to the Entity List, located in Belize, Estonia, Kazakhstan, Latvia, Malta, Russia, Singapore, Slovakia, Spain, and United Kingdom.
  • New limits on license exceptions for Russia & Belarus
  • Finally amended Supplement No. 1 to Part 740 Country Groups to add Russia to Country Group D:5.  This change was technically already in effect since the ITAR §126.1 listing February 2021.  Ethiopia is still missing, but technically part of Country Group D:5.

Most changes are reflected directly in the EAR, often with Federal Register Notices published with retroactive effective dates.  For additional background, notable Federal Register Notices and press releases include:

  • U.S. Department of Commerce & Bureau of Industry and Security Russia and Belarus Rule Fact Sheet (Press Release) (February 24, 2022)
  • Commerce Imposes Sweeping Export Restrictions on Belarus for Enabling Russia’s Further Invasion of Ukraine (Press Release) (March 2, 2022)
  • Implementation of Sanctions Against Russia Under the Export Administration Regulations (EAR) (87 FR 12226) (March 3, 2022)
  • Expansion of Sanctions Against the Russian Industry Sector Under the Export Administration Regulations (EAR) (87 FR 12856) (March 8, 2022)
  • Imposition of Sanctions Against Belarus Under the Export Administration Regulations (EAR) (87 FR 13048) (March 8, 2022)
  • Further Imposition of Sanctions Against Russia With the Addition of Certain Entities to the Entity List (87 FR 13141) (March 9, 2022)
  • Commerce Restricts the Export of Luxury Goods to Russia and Belarus and to Russian and Belarusian Oligarchs and Malign Actors in Latest Response to Aggression Against Ukraine (Press Release) (March 11, 2022)
  • Imposition of Sanctions on `Luxury Goods’ Destined for Russia and Belarus and for Russian and Belarusian Oligarchs and Malign Actors Under the Export Administration Regulations (EAR) (87 FR 14785) (March 11, 2022)
  • Resources on Export Controls Implemented in Response to Russia’s Invasion of Ukraine (Webpage) (Updated March 18, 2022)

Department of State/DDTC

The Department of State, Directorate of Defense Trade Controls (DDTC) returned Russia to the International Traffic in Arms (ITAR) §126.1 prohibited destinations list in February 2021.  On February 25, 2022, DDTC announced that the areas of the “so-called Donetsk People’s Republic (DNR) or Luhansk People’s Republic (LNR) regions of Ukraine” are also considered prohibited destinations.  Belarus was already a longstanding member of the §126.1 list.  Since the §126.1 listing amounts to a general prohibition on ITAR activity, we are watching for updates but not expecting significant changes.  No official policy has been announced for prioritizing license review for end-users in Ukraine.  Transactions should also be reviewed for risk of diversion to Russia or Russian-held areas.

DDTC Proposes to Align ITAR Foreign Nationality Rules with EAR

On February 2, 2022, the Department of State, Directorate of Defense Trade Controls (DDTC) issued a proposed rule (87 FR 5759) that would make multiple revisions to the International Traffic in Arms Regulations (ITAR).  The most significant of these revisions would scale back the longstanding approach toward determining the nationality of foreign persons, to an approach more in line with the Export Administration Regulations (EAR).

Currently, the ITAR definitions of export and reexport include the statement:

Any release… of technical data to a foreign person is deemed to be an [export or reexport] to all countries in which the foreign person has held or holds citizenship or holds permanent residency.

Under these definitions, current nationality is considered as well as any other nationality, even if no longer held.  The result of this is that foreign persons originally from a third country, particularly those from § 126.1 prohibited destinations, are either barred from ITAR work or require more complex authorizations.

The revised definitions state:

Any release… of technical data to a foreign person is deemed to be an export to all countries in which the foreign person holds citizenship or permanent residency.

It will remain possible for a foreign person to have multiple nationalities, but will not require consideration of former nationalities.

The proposed approach is much closer to the EAR definitions, which state:

Any release… is a deemed [export or reexport] to the foreign person’s most recent country of citizenship or permanent residency…

The proposed definition is also in line with the definition of U.S. person, which looks only at whether someone is a U.S. citizen, permanent resident, or one of a limited set of other immigration statuses.  A lawful permanent resident of the U.S. who once held another foreign nationality, including from a § 126.1 country, is unambiguously a U.S. person.

The proposed rule also makes a series of corrections and clarifications to:

  • 126.5(b) (Canadian exemptions),
  • 126.18(c)(2) (Exemptions regarding intra-company, intra-organization, and intra-governmental transfers to employees who are dual nationals or third-country nationals), and
  • 127.12 (Voluntary disclosures).

For additional information and how to submit comments, please refer to the Federal Register Notice.  Comments will be accepted through April 4, 2022.  As it is a proposed rule, the changes will not take effect until a final rule is published.

New Export Restrictions for Cambodia: § 126.1 Prohibited Destination and EAR Military End User Rule Now Apply!

Cambodia Added to ITAR §126.1 Prohibited Destinations

On December 9, 2021, the Department of State, Directorate of Defense Trade Controls (DDTC) issued a new rule (86 FR 70053) that adds Cambodia to the International Traffic in Arms Regulations (ITAR) § 126.1 list of prohibited destinations.  After Russia and Ethiopia, this is the third country added to § 126.1 this year.

The primary rationale of the new listing is the military presence and other activities in Cambodia by the People’s Republic of China, particularly the construction of exclusive-use facilities on the Gulf of Thailand.  Corruption and human rights abuses were also identified as concerns leading to the § 126.1 listing (see the OFAC advisory below for more background).

Cambodia is now listed in § 126.1(o) with case-by-case exceptions related to conventional weapons destruction and humanitarian demining activities.

While the main effect of this change will be that defense articles may no longer be exported or reexported to or imported from Cambodia, there are a number of follow-on effects of the §126.1 listing that companies need to be aware of, including:

  • Proposed and final sales: Broad prohibition includes proposals and presentations as well as actual sales and exports.
  • Disclosures: An affirmative duty to immediately inform DDTC of any “proposed, final, or actual sale, export, transfer, reexport, or retransfer of articles, services, or data.”
  • Exemptions: Most exemptions are not available for § 126.1 countries.
  • Dual/Third Country Nationals: § 126.18(c)(2) will require screening for substantive contacts with Cambodia.
  • Brokering: Additional restrictions under Part 129.

The listing was effective on the date of publication, December 9th.  Cambodia had previously been removed from the list of prohibited destinations in 1994.

Cambodia Faces New EAR Restrictions

Also on December 9, the Department of Commerce, Bureau of Industry and Security (BIS) issued a new rule (86 FR 70015) making parallel changes to the Export Administration Regulations (EAR).

Based on the same rationale provided in the § 126.1 notice, Cambodia has been added to the following EAR lists:

  1. Countries subject to the licensing policy in EAR § 742.4(b)(7) (review policy for national security controlled items, based on risk of diversion to military end user or end use),
  2. Countries subject to military end use and end user controls in § 744.21,
  3. Countries subject to military intelligence end use and end user controls in § 744.22, and
  4. Countries subject to a U.S. arms embargo under Country Group D:5.

Five Countries Now Subject to MEU

Cambodia joins Burma, China, Russia, and Venezuela as subject to the military and military intelligence end use and end user controls.  Although no entity in Cambodia has yet been identified as a “Military End User” (MEU) in Supplement No. 7 to Part 744, it is important to note that the MEU List is not an exclusive list of parties subject to the MEU restrictions.  Careful evaluation of potential exports to those five countries is advised.  Even business entities may be considered “military end users” which are defined broadly to include “any person or entity whose actions or functions are intended to support ‘military end uses.’”

Although apparently due to oversight, BIS has not formally added Russia or Ethiopia to Country Group D:5, they are both considered D:5 countries because the ITAR § 126.1 list is controlling (see Footnote 1 to Country Group D).

OFAC Publishes Cambodia Business Advisory

In a related development, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) published a business advisory for Cambodia on November 10, 2021.

The “Cambodia Business Advisory on High-Risk Investments and Interactions” was issued “to caution U.S. businesses currently operating in or considering operating in Cambodia to be mindful of interactions with entities and sectors potentially involved in human rights abuses, criminal activities, and corrupt business practices.”  Specific business sectors include financial, real estate, casino, infrastructure, manufacturing, and timber as well as entities involved in trafficking persons, wildlife, and narcotics.  Forced labor is a particular concern for manufacturing.

The advisory details known problems in Cambodia, as well as relevant U.S. laws and regulations related to financial and supply chain and links to a number of U.S. government reports on the situation in Cambodia.  This report preceded the ITAR and EAR actions described above, but remains relevant for activities that are not specifically prohibited.

More Controls Emerging from BIS—Cybersecurity, Brain-Computer Interface Technology Controls -SAVE THIS ONE!

Since our last update, the Department of Commerce, Bureau of Industry and Security (BIS) has released a small flurry of new and proposed technology controls, continuing its review of emerging technologies required by ECRA and ongoing negotiations within the Wassenaar Arrangement.

BIS Expands Controls on Cybersecurity Items, Creates New License Exception ACE

On October 21, 2021, BIS published an interim final rule with request for comments (86 FR 58205) which would expand controls on cybersecurity items, but also creates a new license exception authorizing exports in many circumstances.

The new rule would create new Export Control Classification Numbers (ECCNs) 4A005 and 4D004, new paragraph 4E001.c, and a revised 4E001.a and 5A001.j.  According to BIS, “These items warrant controls because these tools could be used for surveillance, espionage, or other actions that disrupt, deny or degrade the network or devices on it.”

License Exception Authorized Cybersecurity Exports (ACE) would be created in the Export Administration Regulations (EAR) §740.22.  The new exception would allow “the export, reexport and transfer (in-country) of ‘cybersecurity items’ to most destinations, except to destinations listed in Country Groups E:1 and E:2” (currently Cuba, Iran, North Korea, and Syria), with some differentiation between government and non-government end-users and end-use restrictions.

For additional information and how to submit comments, please refer to the Federal Register Notice.  Comments will be accepted through December 6, 2021.

The interim final rule is effective January 19, 2022 if not revised.

BIS Proposes Restrictions on STA Exception

On October 22, 2021, BIS published a proposed rule (86 FR 58615) which would “clarify and expand restrictions on the availability of License Exception Strategic Trade Authorization” (STA).

The proposed rule would affect certain Category 9 ECCNS, restrict the availability of STA for ECCNs 1E001 and 2E003.f, and make conforming changes to STA and the affected ECCNs.  The proposed changes are largely related to gas turbine engine hot section parts and components, but may also affect other industries such as optics.

For additional information and how to submit comments, please refer to the Federal Register Notice.  Comments will be accepted through December 6, 2021.

BIS Requests Comments on Brain-Computer Interface Controls

On October 26, 2021, BIS published an Advance Notice of Proposed Rulemaking (ANPRM) (86 FR 59070) regarding potential emerging technologies controls on Brain-Computer Interface (BCI) technology.

Examples of BCI technology include neural-controlled interfaces, mind-machine interfaces, direct neural interfaces, and brain-machine interfaces.  This follows a November 19, 2018 ANPRM, the comments of which are summarized in the current notice.

BIS is seeking comments on the impact of BCI on U.S. national security and how to ensure that any controls would be “effective (in terms of protecting U.S. national security interests) and appropriate (with respect to minimizing their potential impact on legitimate commercial or scientific applications).”

Comments are specifically requested on the following topics:

  1. What specific uniform standards for BCI technology would need to be adopted to ensure their application on a global basis (i.e., as international standards for BCI technology)?
  2. Where does the development of BCI in the United States stand with respect to other countries (e.g., is the United States on the forefront of BCI technology development)?
  3. Is BCI technology currently available for commercial use in certain foreign countries and, if so, where and for what specific purposes (e.g., have foreign companies already developed devices or chips for specific commercial applications)?
  4. Has the current stage of development with respect to invasive and/or non-invasive BCI technology reached the point at which such technology is ready for commercial production and use?
  5. Is the main progress with respect to non-invasive brain signal sensors being made in terms of real-time algorithms designed to transform neural signals into commands ( i.e., what is developing faster: “software” (algorithms) or hardware (sensors))?
  6. What impact would the establishment of export controls on BCI technology have on U.S. technological leadership (i.e., not only in the field of BCI technology, but overall) and would this impact be distinctly different if controls were placed primarily on “software” as opposed to hardware, or vice versa?
  7. How is the future development of artificial intelligence (AI) technology or other emerging technologies likely to impact the development of BCI technology, or vice versa ?
  8. What types of ethical or policy issues are likely to arise from the use of BCI technology (e.g., for medical or military purposes)?
  9. What kinds of risks and benefits currently exist, or are likely to arise, as a result of the application of BCI technology?
  10. What are the potential advantages or disadvantages of using invasive and non-invasive BCI chips/sensors and related “software” (e.g., algorithms for signal processing) for specific applications? To what extent would these advantages or disadvantages correspond (or differ) based upon whether invasive or non-invasive BCI chips/sensors and related “software” were being used?
  11. Are there any BCI technologies that are significantly more vulnerable than others to cybersecurity threats (e.g., military systems employing BCI technologies that could adversely impact U.S. biodefense)?
  12. What is the potential for transmitted BCI data to be hacked or manipulated to influence the user or machine? Is such data inherently more vulnerable to hacking or manipulation than other forms of data? Would the invasive or non-invasive characteristics of BCI data have any impact on the potential vulnerability of such data?

BIS also encourages comments that would help it to determine:

  1. Which aspects of BCI technology would be more likely to require monitoring by the U.S. Government (USG); and
  2. Whether specific USG policies and regulations, as well as industry standards, need to be established before this technology becomes widely available for use in commercial applications.

Other related comments may also be welcome.  For additional information and how to submit comments, please refer to the Federal Register Notice.  Comments will be accepted through December 10, 2021.

ITAR Update: Ethiopia Formally Added to 126.1

On November 1, 2021, the Department of State, Directorate of Defense Trade Controls (DDTC) published a rule (86 FR 60165) officially adding Ethiopia to the International Traffic in Arms Regulations (ITAR) §126.1 list of prohibited destinations.  This change has been anticipated since September 17, 2021.

Ethiopia is now listed under §126.1(n) with the following policy:

(n) Ethiopia. It is the policy of the United States to deny licenses or other approvals for exports of defense articles or defense services destined to or for the armed forces, police, intelligence, or other internal security forces of Ethiopia.

The entry for Eritrea under §126.1(h) was also revised to reflect a similar policy:

(h) Eritrea. It is the policy of the United States to deny licenses or other approvals for exports of defense articles or defense services destined to or for the armed forces, police, intelligence, or other internal security forces of Eritrea.

Minor revisions were also made to the table heading for §126.1(d)(1) and §126.1(d)(2).  The addition of Ethiopia was originally announced on September 17, 2021 on the DDTC website and the new §126.1 entries took effect immediately with the November 1st Federal Register Notice.

Export Compliance Recap: Ethiopia to be added to ITAR 126.1 and EAR Country Group D:5. Changes to Policy for Cyprus, EAR Controls, and More!

Ethiopia Sanctions and 126.1

Following the announcement of sanctions targeting the conflict in Ethiopia on September 17, the Department of State, Directorate of Defense Trade Controls (DDTC) announced on its website that it intends to add Ethiopia to ITAR §126.1 and revise the entry for Eritrea.

While the main effect of this change will be that defense articles may no longer be exported or reexported to Ethiopia (where approvals would already have been unlikely), there are a number of follow-on effects of the §126.1 listing that may catch some companies by surprise.  Such effects include the following:

  • Proposed and final sales: Broad prohibition includes proposals and presentations as well as actual sales and exports.
  • Disclosures: An affirmative duty to immediately inform DDTC of any “proposed, final, or actual sale, export, transfer, reexport, or retransfer of articles, services, or data.”
  • Exemptions: Most exemptions are not available for §126.1 countries.
  • Dual/Third Country Nationals: §126.18(c)(2) will require screening for substantive contacts with Russia.
  • Brokering: Additional restrictions under Part 129.

Through its addition to §126.1, Ethiopia will also be added to the Commerce Department’s Export Administration Regulations (EAR) Country Group D:5.

Ethiopia will be the second addition to §126.1 this year, following Russia’s listing in March.

Cyprus §126.1 Revision Extended

In other ITAR §126.1 news, last year’s temporary modification of the policy towards Cyprus was extended for another year.  The modification potentially allowing the export of non-lethal defense articles and services is now in effect until September 30, 2022, unless extended (86 FR 54044).

Cyprus, a member of the European Union since 2004, was originally listed in §126.1 with the objective to prevent an arms race on the island.  Cyprus is currently divided between the Republic of Cyprus and the internationally unrecognized Turkish Republic of Northern Cyprus, a division which followed the 1974 Turkish invasion.  The relaxed §126.1 policies are based on the cooperation of Cyprus on additional U.S. foreign policy objectives of anti-money laundering and denial of ports for Russian military vessels.

USML Category XI(b) Extended for Five Years

In what had become an annual or biennial event, on August 30, 2021 DDTC published a notice (86 FR 48021) continuing the current text controlling intelligence-analytics software in USML Category XI(b).  DDTC and its interagency partners have been unable to resolve how Category XI controls such software, and are now deferring to a wholesale revision of the category expected by 2026.

Export Control Reform measures were originally scheduled to remove “software” from XI(b) as well as the capability to analyze and produce information from the electromagnetic spectrum.  Some software would remain controlled under XI(d).  Based concerns that a revised category would no longer clearly control “certain intelligence-analytics software,” DDTC has continued to “amend” XI(b) to maintain the original text.

DTAG Meeting Announced

On September 24, 2021, DDTC published a notice (86 FR 53137) announcing that the next Defense Trade Advisory Group (DTAG) open meeting will be on November 4, 2021.  The meeting will be held virtually with discussion on the following topics:

(1) Advise on best practices for conducting internal audits to evaluate ITAR compliance programs, and

(2) provide sources for recordkeeping and reporting requirements for all licenses, agreements, and exemptions, as well as industry perceptions of the return on investment of said requirements, plus any recommendations for improvement.

The meeting is open the public and accepts questions by email.  For more information on the meeting including how to register, please refer to the Federal Register Notice.

Commerce Revises EAR Controls

On August 19, 2021, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (86 FR 46590) making corrections and clarifications to the “0x5zz” firearms Export Control Classification Numbers (ECCNs), including edits, new notes, and some changes to the ECCNs effective September 30, 2021.  Refer to the Federal Register Notice for more information.

On October 5, 2021, BIS published two separate rules (86 FR 54807 and 86 FR 54814).  The first rule makes a series of targeted editorial corrections and clarifications throughout the Export Administration Regulations (EAR).  The second establishes controls on nucleic acid assembler and synthesizer software under new ECCN 2D352, implementing an Australia Group decision from May 2021.  BIS also issued a press release on the new control.

On October 6, 2021, BIS and the Nuclear Regulatory Commission (NRC) issued companion rules (86 FR 55492 and 86 FR 55476) transferring responsibility for licensing exports of deuterium for non-nuclear end use from the NRC to BIS.  Exports of deuterium for nuclear end use remain under NRC jurisdiction.  The revision affects ECCN 1C298, which currently includes graphite, and will take effect December 6, 2021.