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.

On December 26, 2019, the Department of State, Directorate of Defense Trade Controls (DDTC) published an Interim Final Rule (84 FR 70887) describing when data controlled by the International Traffic in Arms Regulations (ITAR) may be transmitted electronically without triggering a requirement for an export authorization.  The new rule is intended to clearly permit the use of cloud services and other electronic transmissions when technical requirements are met.

Rule Proposed in 2015 Effective March 2020

In an effort to modernize and harmonize export regulations, the Departments of Commerce and State originally published parallel proposed rules on June 3, 2015 (80 FR 31505 and 80 FR 31525).  One year later, on June 3, 2016, the Department of Commerce published a final rule (81 FR 35586) establishing that secured, unclassified transmissions would not be considered exports, reexports, or transfers when specific conditions were met.  The Department of State revised the ITAR at that time as well, but did not implement parallel definition until this notice.  The revision will go into effect nearly five years after the original proposal.

As revised, the Department of Commerce’s Export Administration Regulations (EAR) now allows the use of cloud services with EAR-controlled technology by excluding the following from the definition of exports, reexports, or transfers (EAR §734.18(a)(5)):

Sending, taking, or storing “technology” or “software” that is:

(i) Unclassified;

(ii) Secured using ‘end-to-end encryption;’

(iii) Secured using cryptographic modules (hardware or “software”) compliant with Federal Information Processing Standards Publication 140-2 (FIPS 140-2) or its successors, supplemented by “software” implementation, cryptographic key management and other procedures and controls that are in accordance with guidance provided in current U.S. National Institute for Standards and Technology publications, or other equally or more effective cryptographic means; and

(iv) Not intentionally stored in a country listed in Country Group D:5 (see Supplement No. 1 to part 740 of the EAR) or in the Russian Federation.

Note that the EAR’s Country Group D:5 incorporates ITAR §126.1 prohibited destinations.

The new ITAR rule is nearly identical, creating ITAR §120.54 “Activities that are not exports, reexports, retransfers, or temporary imports.”  §120.54(a)(5) excludes:

Sending, taking, or storing technical data that is:

(i) Unclassified;

(ii) Secured using end-to-end encryption;

(iii) Secured using cryptographic modules (hardware or software) compliant with the Federal Information Processing Standards Publication 140–2 (FIPS 140–2) or its successors, supplemented by software implementation, cryptographic key management, and other procedures and controls that are in accordance with guidance provided in current U.S. National Institute for Standards and Technology (NIST) publications, or by other cryptographic means that provide security strength that is at least comparable to the minimum 128 bits of security strength achieved by the Advanced Encryption Standard (AES–128);

(iv) Not intentionally sent to a person in or stored in a country proscribed in § 126.1 of this subchapter or the Russian Federation; and

(v) Not sent from a country proscribed in § 126.1 of this subchapter or the Russian Federation.

(Substantial variations from EAR text are underlined.)

One noteworthy variation is that while the EAR allows for “other equally or more effective cryptographic means” the ITAR rule specifies AES-128 as a minimum standard.  The ITAR rule also adds paragraph (v) regarding transmissions from §126.1 countries or Russia.

Both the EAR and ITAR rules note that “data in-transit via the internet is not deemed to be stored,” define end-to-end encryption, and state that the ability to access encrypted data is not considered a release or export.

The rule also makes minor changes to other ITAR definitions in order to reference the new section.

An Interim Final Rule?

The Interim Final Rule combines a request for comments like the original 2015 Proposed Rule with a rule that is scheduled to be effective March 25, 2020.  The new definitions are subject to revision based on comments received.  This is a valuable opportunity to submit substantive comments on how the ITAR revision will affect your business, particularly if you can suggest possible changes that could make the rules more workable.

Comments may be submitted through January 27, 2020.  Refer to the Federal Register Notice for the full revision, responses to previous comments, and how to comment.

As always seems to be the case, changes are coming to export compliance.  ECS is monitoring developments, particularly including the following issues that we expect to see more on over the next few months and into the New Year:

From the Department of State, Directorate of Defense Trade Controls (DDTC):

• Movement on Export Control Reform of USML Categories I-III;
• ITAR revisions to improve definitions and organization;
• DECCS deployment for registration and licensing;
• More guidance on the revised 126.4 ITAR Exemption  – Shipments by or for U.S. Government agencies;
• Revised and condensed agreements guidelines; and
• A final encryption/cloud storage rule.

From the Department of Commerce, Bureau of Industry and Security (BIS), we are watching for proposed rules to tighten export controls on emerging technologies.   The Commerce Department is under Congressional pressure to move forward with the rules, required by the Export Control Reform Act of 2018.  If you expect these to impact your business, be ready to review and comment.

From the Department of Treasury, the comment period closed on proposed new CFIUS regulations required by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).  Watch for action on those rules, including what investors can qualify as excepted investors (a whitelist, with limitations).  The proposed rules can be found here and here.

Export compliance is always changing.  Subscribe to Our “EAR”… to the ITAR to keep up!

USML Category XI Revised – Radars, XI(b), and Integrated Circuits

On August 30, 2019, the Department of State, Directorate of Defense Trade Controls (DDTC) published a notice (84 FR 45652) revising United States Munitions List (USML) Category XI – Military Electronics.  This action follows a February 2018 comment request.

Most notably, USML Category XI(a)(3)(ix) is removed and reserved.  XI(a)(3)(ix) previously controlled “Air surveillance radar with multiple elevation beams, phase or amplitude monopulse estimation, or 3D height-finding.”  Public comments had “identified current and imminent commercial uses” for these radars, including use in “driver-assisted and self-driving ground vehicles and in detect and avoid systems for autonomous aerial systems.”

The notice also adds a comment to Category XI regarding transmit/receive modules and transmit/receive monolithic microwave integrated circuits (MMICs).

Items previously controlled on the USML are now subject to the Export Administration Regulations (EAR).

Finally, the notice also amends USML Category XI(b) to continue the current text which was scheduled to be replaced on August 30, 2019.  XI(b) currently controls:

*(b) Electronic systems, equipment or software, not elsewhere enumerated in this subchapter, specially designed for intelligence purposes that collect, survey, monitor, or exploit, or analyze and produce information from, the electromagnetic spectrum (regardless of transmission medium), or for counteracting such activities.

This text was scheduled to be replaced on August 30, 2019, but with the amendment the replacement will be delayed until August 30, 2021.  At that time, unless otherwise amended, Category XI(b) will read:

*(b) Electronic systems or equipment, not elsewhere enumerated in this subchapter, specially designed for intelligence purposes that collect, survey, monitor, or exploit the electromagnetic spectrum (regardless of transmission medium), or for counteracting such activities.

The change now scheduled for 2021 removes “software” as well as the capability to analyze and produce information from the electromagnetic spectrum.

The current language is meant to maintain control of “certain intelligence-analytics software” until a long-term solution is developed.  The rule gives the government time to include the revision of XI(b) within an overall revision of Category XI.

DDTC published a similar amendment last year.

DDTC separately published a FAQ on integrated circuits controlled by USML Category XI(c)(1).

Brazil a Major Non-NATO Ally

On July 31, 2019 (84 FR 43035 published August 19^th), Brazil was designated a Major Non-NATO Ally (MNNA).  DDTC published an announcement on their website that Brazil “effective immediately is included within the definition of major non-NATO ally at ITAR section 120.32.”  DDTC has not yet officially amended §120.32.

For ITAR purposes, the MNNA designation relates directly to §124.15 “Special Export Controls for Defense Articles and Defense Services Controlled under Category XV: Space Systems and Space Launches.”

DTAG to Meet September 26

The Defense Trade Advisory Group (DTAG) will meet on September 26, 2019 to discuss the following topics:

1. Consent agreements, including remedial measures and areas for improvement to compliance programs;
2. Authorizations involving third party technical data; and
3. Licensing challenges for participation in international cooperative programs.

The DTAG meeting is open to the public, with seating limited to 125 persons.  For meeting and registration information, click here for the meeting notice.

Click here for more information about DTAG.

DRL Published Guidance on Surveillance Exports

On September 4, 2019, the Department of State, Bureau of Democracy, Human Rights, and Labor (DRL) published draft guidance on the export of surveillance hardware, software, and technology.  DRL is accepting comments on the draft guidance through October 4, 2019 and stated that the draft will be removed from the website at that time.  DRL is a frequent staffing point (reviewing office) for many export license applications.  This guidance is of particular interest to exporters of with “intended or unintended surveillance capabilities.”

Commerce Publishes Pakistan Due Diligence Guidance

The Department of Commerce, Bureau of Industry & Security (BIS) published due diligence guidance regarding Pakistan.  The guidance highlights red flag guidance and the EAR’s end-use and end-user based restrictions.  It also includes specific examples of problematic entities and transactions in Pakistan.

Comment on Redundant or Ambiguous ITAR Exemptions

On July 26, 2019, the Department of State, Directorate of Defense Trade Controls (DDTC) published a notice (84 FR 36040) requesting comments on how to consolidate and clarify exemptions found throughout the International Traffic in Arms Regulations (ITAR).

Specifically, DDTC is seeking comments on the following questions for exemptions:

1. Which exemptions, if any, are redundant or could be consolidated?
2. Which exemptions, if any, contain language that introduces significant ambiguity or hinders the exemption’s intended use? 123.16 (b)(2) for components or spare parts under $500 is no longer feasible–$1500 makes much more sense.

This is an important opportunity to contribute to streamlined and more usable ITAR exemptions.  Comments may be submitted through August 26, 2019 at www.regulations.gov (Docket No. DOS–2019–0022), by email to DDTCPublicComments@state.gov, or by mail.  Refer to the Federal Register Notice for additional information.

ACES Certificate Decommission

On July 17, 2019, DDTC announced the phase-out of ACES Certificates used to access the DTrade export licensing system:

ACES Certificates are required to access the DTrade defense export licensing system.  Per GSA instruction, all ACES Certificates must expire before August 1^st, 2020.  The ACES provider, IdenTrust, will continue to issue certificates, but they must be posted with an expiration date of July 31^st, 2020 or earlier.  If you purchase an ACES certificate after July 31^st, 2019, the validity period will be truncated to less than a full year.

DTrade’s replacement by the Defense Export Control and Compliance System (DECCS) application has been under development, with a current status of “Will Launch in 2019.”

DDTC Registration Becomes Registration Compliance & Analysis (RCA) 

DDTC also posted the following announcement renaming the Registration division of Defense Trade Controls Compliance:

Effective July 15, 2019, the DTCC Registration division’s name will change to the Registration Compliance & Analysis (RCA) division.  There is no change to Registration organization structure.  All registration letters issued on and after July 15, 2019 will reflect the RCA division.  All active registration letters issued prior to July 15, 2019, will remain valid and no changes are required.  Updates to the DDTC Website will also occur on July 15, 2019, to be consistent with DTCC Registration name change.

While the DDTC street addresses remains the same, any correspondence with the former Registration Division should be updated to reflect the new name.