DDTC Proposes Revised Definition of “Regular Employee”

On May 27, 2021, the Department of State, Directorate of Defense Trade Controls (DDTC) issued a proposed rule (86 FR 28503) to revise the International Traffic in Arms Regulations (ITAR) §120.39 definition of “regular employee.”  Following temporary measures adopted for the COVID-19 pandemic, the proposed amendment would permanently “allow certain individuals to work remotely, and further proposes to clarify the contractual relationships that meet the definition of regular employee.”  Significantly, the “criterion that an individual must work at a company’s facilities will be removed in the revised definition to allow for remote work.”  The proposed rule also clarifies the treatment of contract employees and the meaning of “long term contractual relationship” as well as consideration of security clearances and secondment.

“Regular employee” is a key definition in the ITAR §126.18 exemptions for dual nationals and third country nationals (DN/TCNs).  Under the 126.18 exemptions, foreign companies can allow access to ITAR-controlled articles and technical data by employees who are nationals of other countries without DDTC approval when the specific conditions are met.

Comments on the proposed definition will be accepted through July 26, 2021.  Please refer to the Federal Register Notice for the full proposal and how to comment.

In a related action, DDTC published a rule (86 FR 30778) on June 10, 2021 temporarily extending the suspension of certain ITAR provisions “to provide for continued telework operations during the current SARS-COV2 public health emergency.”  The suspension is intended to continue until the regular employee final rule is published.

Russia: 126.1 Policy and Country Group D:5

Following the addition of Russia to ITAR §126.1, DDTC has released a fact sheet summarizing the effect of the listing and several FAQs, with particular attention to the effect on commercial space launches.

The Department of Commerce has not yet amended the Export Administration Regulations (EAR) Country Group D:5, which parallels ITAR §126.1.  However, Country Group D:5 includes the following note:

If there are any discrepancies between the list of countries in this table and the countries identified by the State Department as subject to a U.S. arms embargo (in the Federal Register), the State Department’s list of countries subject to U.S. arms embargoes shall be controlling.

Even without a formal EAR amendment, D:5 should be understood to contain Russia.

CCL Wassenaar Updates

On March 29, 2021, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (86 FR 16482) to revise the Commerce Control List (CCL) to implement changes to the Wassenaar Arrangement List of Dual-Use Goods and Technologies (WA List) that were decided upon at the December 2019 Wassenaar Arrangement Plenary meeting.  Other changes from the December 2019 meeting were published in 2020.

The recent changes are largely related to eliminating reporting requirements and license exceptions for some encryption items, but also include revisions to twenty-two Export Control Classification Numbers (ECCNs) (0A502, 0A503, 0A606, 1A002, 1A005, 1A006, 1A613, 1B002, 1C001, 1C002, 1C006, 1C010, 2A001, 3B001, 3E002, 5A002, 6A004, 6A005, 6A008, 9A011, 9D515, and 9E003).

Opportunity to Influence Export Controls: BIS Seeks Technical Advisory Committee Members

On April 28, 2021, BIS published a notice (86 FR 22390) announcing the recruitment of candidates for its seven Technical Advisory Committees (TACs).  These committees advise the Commerce Department on the technical parameters and administration of export controls in the following areas of responsibility:

1. Information Systems TAC: CCL Categories 3 (electronics), 4 (computers), and 5 (telecommunications and information security)
2. Materials TAC: CCL Category 1 (materials, chemicals, microorganisms, and toxins)
3. Materials Processing Equipment TAC: CCL Category 2 (materials processing)
4. Sensors and Instrumentation TAC: CCL Category 6 (sensors and lasers)
5. Transportation and Related Equipment TAC: CCL Categories 7 (navigation and avionics), 8 (marine), and 9 (propulsion systems, space vehicles, and related equipment)
6. Emerging Technology TAC (identification of emerging and foundational technologies that may be developed over a period of five to ten years with potential dual-use applications)
7. Regulations and Procedures TAC (focuses on the EAR and its implementation)

TAC members are appointed by the Secretary of Commerce, serve terms of not more than four years, and must obtain secret-level security clearances prior to appointment.  Resumes will be accepted through September 30, 2021.  For more information, including how to apply, please refer to the Federal Register Notice.

UAE Removed from Treasury Antiboycott List

On April 8, 2021, the Department of the Treasury published a notice (86 FR 18374) removing the United Arab Emirates (UAE) from the list of countries which “require or may require participation in, or cooperation with, an international boycott.”

This list is routinely published for the purposes of compliance with Part 999 of the Internal Revenue Code of 1986, which includes reporting requirements for certain activities in the listed countries.

The UAE was removed following its August 2020 repeal of a law mandating a boycott of Israel and subsequent actions.  Last December’s version of the antiboycott list included a comment that anticipated the UAE’s removal following its normalization of relations with Israel.

The remaining countries on the list are:

• Iraq
• Kuwait
• Lebanon
• Libya
• Qatar
• Saudi Arabia
• Syria
• Yemen

While this removes one set of requirements specifically required for the UAE, EAR Part 760 (Restrictive Trade Practices or Boycotts) continues to apply to transactions with any country.

In addition, on June 9, 2021, BIS published an interpretation to Supplement No. 17 to Part 760 (86 FR 30535) which clarifies that some requests from the UAE are no longer presumed to be boycott-related if made after August 16, 2020.  This only addresses a presumption and the general requirements of Part 760 continue to apply.

Russia to Rejoin 126.1, Individuals and Entities Face Additional Sanctions

On March 2, 2021, the U.S. Department of State announced a series of new sanctions related to “The Russian Federation’s Use of a Chemical Weapon in the Attempted Assassination of Russian Opposition Figure Aleksey Navalny in August 2020 and his Subsequent Imprisonment in January 2021.”

The addition of Russia to the International Traffic in Arms Regulations (ITAR) §126.1 prohibited destination list, with limited exceptions for government space cooperation, expands on chemical weapons sanctions imposed in 2018, among others.  Including parallel actions by the Department of Commerce, Bureau of Industry and Security (BIS) and the Department of Treasury, Office of Foreign Assets Control (OFAC), new sanctions include:

• New individuals and entities sanctioned under the Countering America’s Adversaries Through Sanctions Act (CAATSA).
• New individuals and entities added to OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List).
• New individuals and entities added to the Entity List.

While Russia has been treated more or less as a §126.1 country through both license review policies and its specific exclusion from the ITAR cloud rule at §120.54(a)(5), the listing will affect a number other ITAR compliance areas:

• Proposed and final sales: Broad prohibition ranges from proposals and presentations to actual sales and exports.
• Disclosures: An affirmative duty to immediately inform the Directorate of Defense Trade Control (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.

The Department also published a fact sheet on the new sanctions.  Russia had been listed in §126.1 until April 3, 2006.  The new §126.1 listing will take effect through a Federal Register Notice that has not yet been published.

Burma Sanctioned Over Military Coup

On February 17, 2021, BIS published a notice (86 FR 10011) of a more restrictive license review policy and suspension of some license exceptions following the February 1^st military coup in Burma.  On March 8, 2021, this was followed by two new rules (86 FR 13173 and 86 FR 13179).

The first rule amends the Export Administration Regulations (EAR) to:

• Move Burma from Country Group B to Country Group D:1, rendering many license exceptions unavailable;
• Subject Burma to military end use and end user restrictions; and
• Move Burma from Computer Tier 1 to Computer Tier 3 in the Computers (APP) license exception.

The second rule adds four Burmese entities to the Entity List, which imposes a license requirement for all items subject to the EAR under a license review policy of denial.

Sanctions on Burma had been relaxed in recent years, following improvements in human rights and democracy.  Burma was moved from Country Group D:1 to Country Group B in 2016, while remaining in Country Groups D:3 and D:5 (related to chemical and biological weapons proliferation concerns and arms embargoes).  In 2017, OFAC removed the Burmese Sanctions Regulations following the termination of the underlying Executive Order.

Burma has long been and remains ITAR §126.1 prohibited destination.

In separate, but related, December actions, the Department of Commerce’s Bureau of Industry and Security (BIS) and the Department of the Treasury’s Office of Foreign Assets Control (OFAC) published new sanctions lists largely aimed at companies tied to the Chinese military.

The new lists build on the 2020 releases of the Department of Defense list of Communist Chinese military companies.  When first released, the presence of a company on that list was a “red flag,” but not a direct export restriction.  The use of the list by the Departments of Commerce and Treasury changes that.

Commerce Military End User List – NEW ADDITION UNDER SUPPLEMENT #7 OF EAR!

On December 23, 2020, BIS published a rule (85 FR 83793) adding the Military End User (MEU) List to the Export Administration Regulations (EAR).  The list identifies 102 entities, fifty-seven in China and forty-five in Russia, that have been identified by the U.S. government as “military end users” subject to EAR §744.21.  §744.21 restricts the export, reexport, or transfer (in country) of items identified in Supplement No. 2 to part 744 to military end users in China, Russia, and Venezuela.  The restriction takes the form of a license requirement with a presumption of denial.  License exceptions other than GOV may not be used for those entities.

While long-awaited and very helpful for exporters, the MEU List is not an exclusive list of parties subject to the restrictions of §744.21.  Careful evaluation of potential exports to China, Russia, and Venezuela is advised as 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.’”  In the event that a member of the Department of Defense list of Communist Chinese military companies is not included on the MEU list, it should be considered a “red flag” for export compliance review.

The new list is located at Supplement No. 7 to Part 744 of the EAR.

OFAC Chinese Military Companies Investment Ban

On November 12, 2020, the President issued Executive Order 13959 (85 FR 73185) titled “Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies,” prohibits trading in securities of any “Communist Chinese military company” effective January 11, 2021.

The order includes an annex listing Communist Chinese military companies based on the Department of Defense list and provides for expanding the list in the future.  As of January 8, 2021, the list reflects the three 2020 releases of the Department of Defense list.

To implement the order, OFAC has established the Non-SDN Communist Chinese Military Companies List (NS-CCMC) and has been regularly issuing FAQs on the topic.

Seventy-Seven MORE Added to Entity List

In another notable update, on December 22, 2020, BIS published a rule (85 FR 83416) which added seventy-seven entities to the EAR’s Entity List.  The new entries are located in the People’s Republic of China (China), Bulgaria, France, Germany, Hong Kong, Italy, Malta, Pakistan, Russia, and the United Arab Emirates (U.A.E.).  The bulk of the new entries (60) are located in China.  The rule also removed four entities in Israel and the U.A.E. and revised two entries.  The Federal Register Notice contains the rationale for the additions, typically activity that is considered “contrary to the national security interests of the United States.”

BIS also issued a press release and a statement from Secretary Ross with additional background on the new Chinese entries.

Continuous Screening Recommended ACT NOW!

With the new Military End User List and the continued expansion of the Entity List, denied party screening requires the ongoing attention of export compliance personnel and programs.  Customers, as well as intermediate parties and end users must be screened before an export can take place.  With sanctions lists being updated on a nearly daily basis, continuous screening of those parties is the best way to keep up to date with changes.

Waiver May Permit Non-Lethal Exports to Cyprus

On September 28, 2020, the Department of State, Directorate of Defense Trade Controls (DDTC), published an amendment (85 FR 60698) to the International Traffic in Arms Regulations (ITAR) updating the defense trade policy towards the Republic of Cyprus.  Cyprus is listed as a prohibited destination, with certain exceptions, at ITAR §126.1(r).

The effect of the amendment is to potentially authorize non-lethal defense articles and defense services for the Government of the Republic of Cyprus.

The §126.1 entry for Cyprus now reads (new text in bold):

(r) Cyprus. It is the policy of the United States to deny licenses or other approvals for exports or imports of defense articles and defense services destined for or originating in Cyprus, except that a license or other approval may be issued, on a case-by-case basis, for the United Nations Forces in Cyprus (UNFICYP) or for civilian end-users. This policy of denial does not apply to exports, reexports, retransfers, and temporary imports of non-lethal defense articles and defense services destined for or originating in Cyprus if:

(1) The request is made by or on behalf of the Government of the Republic of Cyprus;

(2) The end-user of such defense articles or defense services is the Government of the Republic of Cyprus; and

(3) There are no credible human rights concerns.

This change implements a one-year waiver authorized under the National Defense Authorization Act for Fiscal Year 2020 and the Eastern Mediterranean Security and Energy Act.  The amendment was effective on October 1, 2020 and expires on September 30, 2021 if not subsequently extended.  DDTC has previously stated on their website that authorizations issued during this time will not automatically be revoked if the waiver is not extended.

Cyprus was originally listed in §126.1 out of concern that arms exports to Cyprus could contribute to an arms race and hinder efforts to reach a permanent settlement on the island, the northern portion of which has been occupied by Turkey since 1974.  In the absence of a resolution, the Republic of Cyprus entered the European Union in May 2004 and is the only EU member in §126.1.

North Korea Ballistic Missile Procurement Advisory

On September 1, 2020, the U.S. Department of State’s Bureau of International Security and Nonproliferation (ISN), the Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the Department of Commerce’s Bureau of Industry and Security (BIS) released a North Korea Ballistic Missile Procurement Advisory.

This guidance provides background to North Korean ballistic missile procurement efforts as well as various laws and regulations that affect U.S. exporters.  The advisory notes that:

North Korea relies on foreign-sourced ballistic missile-related components that it cannot produce domestically. To obtain these components, North Korea uses an extensive overseas network of procurement agents, including officials who operate from North Korean diplomatic missions or trade offices, as well as third country nationals and foreign companies.

In particular, the guidance notes that North Korea seeks to acquire the following types of products:

• Multi-axle heavy vehicles, such as 8 or 9-axle forestry vehicles, used as Transporter Erector Launchers (TELs) for ballistic missiles.
• Steels, aluminum, and specialty materials containing titanium.
• Filament winders and winding equipment.
• Carbon fiber for composite motor cases.
• Solid propellant, including aluminum powder and ammonium perchlorate, to the scale of 100 tons over the next 10 years.

The guidance emphasizes that exporters of all products, but especially those listed above should have strong export compliance programs including know your customer policies, denied party screening, and consideration of red flags and due diligence.

State Department Releases Surveillance and Human Rights Guidance

On September 30, 2020, the Department of State, Bureau of Democracy, Human Rights, and Labor (DRL) released “Guidance on Implementing the UN Guiding Principles for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities.”  Click here for the 22-page pdf file.  DRL previously published draft guidance on the issue in September 2019.

While this document does not impose any new requirements under U.S. export control laws or regulations, it could be the foundation of future regulation.  It is similar to DRL’s current review process for export license applications and may help companies to predict potential issues with license applications prior to submission.

This “voluntary guidance” is meant to support companies’ ability to evaluate the human rights impacts of exports that do not currently require an export license.  Products and services of concern include, but are not limited to:

• Sensors (e.g., specialized computer vision chips, thermal imaging systems, electronic emissions detection systems, products designed to clandestinely intercept live communications)
• Biometric identification (e.g., facial recognition software, automated biometric systems, rapid DNA testing, gait analysis software)
• Data analytics (e.g., social media analytics software, predictive policing systems)
• Internet surveillance tools (e.g., “spyware,” products with certain deep packet inspection functions, penetration-testing tools, products designed to defeat cryptographic mechanisms in order to derive confidential variables or sensitive data including clear text, passwords, or cryptographic keys)
• Non-cooperative location tracking (e.g., products that can be used for ongoing tracking of individuals’ locations without their knowledge and consent, cell site simulators, automatic license plate readers)
• Recording devices (e.g., body-worn or drone-based, network protocol surveillance systems, devices that record audio and video and can remotely transmit or can be remotely accessed)

The document identifies due diligence considerations, red flags, and other resources that may be taken into consideration in evaluating the human rights impact of a transaction.  To compliment this, the State Department plans to include information on surveillance issues for each country in its 2021 human rights reports.

CFIUS Review Now Based on Export Controls

On September 15, 2020, Department of the Treasury, Office of Foreign Assets Control (OFAC) published a rule (85 FR 57124) which, among other changes, modifies the mandatory declaration provision for foreign investment transactions in U.S. businesses.  This rule is based on a rule originally proposed on May 21, 2020.  The new rule is effective on October 15, 2020.

As revised, CFIUS review is required when a “U.S. regulatory authorization” would be required to transfer the U.S. business’s critical technologies to the foreign persons involved in the transaction or ownership chain.  U.S. regulatory authorizations include:

(a) A license or other approval issued by the Department of State under the ITAR;

(b) A license from the Department of Commerce under the EAR;

(c) A specific or general authorization from the Department of Energy under the regulations governing assistance to foreign atomic energy activities at 10 CFR part 810 other than the general authorization described in 10 CFR 810.6(a); or

(d) A specific license from the Nuclear Regulatory Commission under the regulations governing the export or import of nuclear equipment and material at 10 CFR part 110.

This determination is generally made without reference to license exceptions or exemptions, except three EAR license exceptions cited in the rule.

Mandatory declarations were previously required based on specific industries identified by North American Industry Classification System (NAICS) codes.  This change highlights the importance of thoroughly determining export classifications for a company’s products, even if they are not being exported, when foreign investment is involved that could be subject to CFIUS review.

Huawei Restrictions Expanded

On August 20, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (85 FR 51596) which added thirty-eight non-U.S. Huawei affiliates to the Entity List, removed a temporary general license for Huawei, and amended the Direct Product Rule.

The listing of thirty-eight Huawei affiliates is in addition to 114 listed in 2019 and includes companies in Europe, Asia, Africa, South America, and North America.

A Temporary General License, which authorized 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,” was allowed to expire on August 13, 2020.  A new footnote was added to the Entity List to permit cybersecurity research and vulnerability disclosure involving Huawei and its non-U.S. affiliates.

General Prohibition Three also known as the Foreign Produced Direct Product Rule, was amended to control certain foreign-produced items that are a direct product of U.S. technology when there is knowledge the items will be used to support a member of the Entity List (with a “footnote 1” designation) or if such an entity is a party to the transaction.  This is a follow-on to an interim final rule published in May 2020, with expanded criteria for controlling transactions.  For additional detail, see the revised §736.2(b)(3) of the Export Administration Regulations (EAR).

BIS also issued a press release with additional background on the additional thirty-eight Huawei affiliates and the Department of State issued a statement of support.

An additional rule (85 FR 51335) was also published by BIS on August 20 revising EAR §744.11(a) “to specify that supplemental license requirements for entities included on the Entity List apply regardless of the role that the listed entity has in the transaction (i.e., purchaser, intermediate consignee, ultimate consignee or end-user).”

BIS Adds Sixty to Entity List

On August 27, 2020 (85 FR 52898), BIS added 60 entities to the Entity List and revised five existing entries for various reasons including proliferation and diversion concerns as well as involvement in South China Sea territorial disputes.  The new and revised entries are listed under People’s Republic of China (China), France, Hong Kong, Indonesia, Malaysia, Oman, Pakistan, Russia, Switzerland, the United Arab Emirates (U.A.E.), Canada, Germany, and Iran.

Twenty-four of these entries were based on activities which have enabled China to construct and militarize disputed outposts in the South China Sea.  BIS also issued a press release providing additional background on the topic of disputed and artificial islands.

Additional List of Communist Chinese Military Companies Released

August 28, 2020, the Department of Defense released the following list of “Communist Chinese military companies”:

• China Communications Construction Company (CCCC)
• China Academy of Launch Vehicle Technology (CALT)
• China Spacesat
• China United Network Communications Group Co Ltd
• China Electronics Corporation (CEC)
• China National Chemical Engineering Group Co., Ltd. (CNCEC)
• China National Chemical Corporation (ChemChina)
• Sinochem Group Co Ltd
• China State Construction Group Co., Ltd.
• China Three Gorges Corporation Limited
• China Nuclear Engineering & Construction Corporation (CNECC)

This list, required by section 1237 of the National Defense Authorization Act for FY 1999, is a follow-on to the list of Communist Chinese military companies issued in June 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 flag” under the expanded restrictions on Chinese military end-users.  Some companies are already sanctioned under other authorities.

Screening Matters

With these significant expansions of the Entity List and the Direct Product Rule, the importance of denied party screening throughout supply chain networks takes on added significance.  Customers, as well as intermediate parties and end users must be screened before an export can take place.  With lists like the Entity List being updated on a nearly daily basis, continuous screening of those parties is the best way to keep up to date with changes.

On July 17, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a request for comments (85 FR 43532) on Commerce Control List (CCL) items controlled for crime control and detection (CC) reasons.  CC controls are intended to promote human rights throughout the world by restricting the export of products that can be used to facilitate the abuse of human rights.

The notice is a part of periodic review of CCL controls and may be used to add or remove CC licensing requirements for CCL items.

Specifically, BIS requests comments on the following items, both CCL-controlled and EAR99:

1. Facial recognition software and other biometric systems
2. Non-lethal visual disruption lasers (“dazzlers”)
3. Long-range acoustic devices and related components, software, and technologies for the above items.
4. Police helmets—0A979
5. Fingerprint readers—3A981, and components—(3A981, 4A980), software (3D980, 4D980), and technology (3E980, 4A980) thereof
6. Fingerprint powders, dyes, and inks (1A985)
7. Voice print identification systems (3A980) and components (3A980), software (3D980), and technology (3E980) thereof
8. Polygraphs and psychological stress analysis equipment (3A981) and components (3A981), software (3D980), and technology (3E980) thereof
9. Nonmilitary mobile crime science laboratories (9A980)
10. Miscellaneous CC controls in ECCNs and sub-paragraphs of ECCNs 4A003, 4A980, 4D001, 4D980, 4E001, 4E980, 6A002, 6E001, and 6E002.

Additional information on these items is included in the notice.  Helpful comments would address the following:

1. Information (including performance criteria) that may distinguish purely or predominantly consumer or commercial applications from applications purely or predominantly for use by law enforcement or security services and/or used in mass surveillance, censorship, privacy violations or otherwise useful in committing human rights abuses;
2. The impact of adding to, modifying, or removing items from the CCL on U.S. support of human rights throughout the world; and
3. The impact that changes of controls would have upon the competitiveness of U.S. business and industry.

Country-specific licensing requirements are determined by the Commerce Country Chart.  Items controlled under CC Column 1 or 3 require licenses for most countries, while items controlled under CC Column 2 require licenses for much of the former Soviet Union and a handful of other countries.

Please refer to the Federal Register Notice for more information and submit your  comments  by September 15, 2020.