Dear Friend of Snell & Wilmer,
We have written over the years about export control laws and other regulatory controls related to international trade. We have also discussed the comparative advantages that some countries have over others, including the United States, in relation to the implementation and enforcement of the international trade laws. In response to these concerns, we have previously reported on the United States’ efforts pursuant to the National Export Initiative to work towards revising United States export control laws. On October 15, 2013, the Departments of Commerce and State will rollout the Export Control Reform, which will significantly impact the export of goods, technology and services around the world. In addition, there are significant events occurring at the International Trade Court of which any business operating globally should be aware.
The articles contained in this newsletter provide an overview of some the changes concerning international trade. Although “change” is sometimes difficult, understanding the changes and properly preparing for any impact on business operations will assist in the efforts to obtain competitive advantages in the international marketplace. As always, this Global Connection edition contains a wealth of information, and we hope that it proves useful as you continue to seek out new global opportunities. Please feel free to contact me if you have any suggestions for topics to be covered in future editions of the Global Connection or if you would like to be included in future international events hosted by the Firm.
Brett W. Johnson
Understand the “EAR”: Making the Transition from the ITAR to the Export Administration Regulations
by Brett W. Johnson
One of the main reasons for the government’s Export Control Reform initiative (“ECR”) was to ensure that the United States’ comparative advantage in certain technologies against the rest of the global marketplace is maintained. The United States has taken a two-pronged approach on this issue. First, it has encouraged countries to enhance their export controls so that like-minded countries are on par with one another to ensure that international security is maintained. Second, the United States has determined to transfer certain “controlled” items currently on the United States Munitions Lists (“USML”) to the Commerce Control List (“CCL”). The USML is part of the International Traffic in Arms Regulations (“ITAR”). The CCL is part of the Export Administration Regulations (“EAR”). Therefore, many companies that have always operated under the stringent requirements of the ITAR must now understand the somewhat less stringent requirements of the EAR.
In addition to proper classification under the EAR’s CCL, which is discussed in a related article in this publication, it is important to understand the basic mechanics of the EAR. In anticipation of the many changes which will occur under the ECR initiative, the Departments of Commerce and the State have created numerous online resources to assist companies in achieving compliance. The government websites contain free tutorials and materials discussing ECR and the upcoming changes. The Department of Commerce is offering weekly teleconferences with key administrators to discuss the changes. An “Exporter Portal” link provides general information about the EAR, various useful lists, decision tools, access to SNAP-R, online training videos, best practices, red flags news and contact information. Upcoming seminars on compliance will also be offered in various cities throughout the country.
As an initial step, the Department of Commerce recommends creating a SNAP-R account online as soon as possible. License applications are submitted to the Department of Commerce through these SNAP-R accounts. Parts 748 and 750 of the EAR should be consulted in order to ensure compliance with all necessary requirements of the license application process. Creating a SNAP-R account and submitting a license application to the Bureau of Industry and Security using SNAP-R is free. In order to ease companies into compliance with the new rules taking effect on October 15, 2013, the Department of Commerce is allowing pre-positioning of licenses. These licenses will not be issued until October 15; however, companies may apply at any time before then and complete all of the necessary requirements ahead of time.
However, before applying for a license, information about the relevant transaction such as items, end uses, end users and quantity should be known. Part 748 of the EAR should also be consulted to determine whether an application will require documentation. An application may be more readily approved when all required questions can be answered fully and clearly. Incomplete applications may lead to delays. Information as to whether a license is likely to be approved can be obtained by reviewing parts 742, 744 and 746 of the EAR. Additionally, the status of an application can be checked in SNAP-R and follow-up questions from the BIS will be sent to SNAP-R accounts.
Furthermore, companies should also be aware of a recently developed tool, the Consolidated Screening List, compiled by the Departments of Commerce, the State and the Treasury in order to assist companies in screening parties in export, re-export and transfer transactions. This list is a compilation of the Denied Persons List, Unverified List, Entity List, Nonproliferation Sanctions List, AECA Debarred List and Specially Designated Nationals List.
If a party to a transaction matches a name on the consolidated screening list, the official lists of restricted parties on the applicable department’s website, the Commerce, State or Treasury Department, should be checked. Alternatively, the official publication of restricted parties in the Federal Register may also be referenced. The consolidated screening list may be found online.
During this time of change, the recommended BIS “best practices” for compliance and export management should be reviewed and incorporated into any company’s export control policy. These best practices include: (1) paying heightened attention to BIS’s Red Flag Indicators and communicating concerns internally; (2) seeking to utilize only those trade facilitators and freight forwarders that administer sound export control management and compliance programs that include trans-shipment trade best practices; (3) obtaining detailed information on the credentials of foreign customers to assess diversion risk; (4) establishing and maintaining a trusted relationship with parties to mitigate risks for routed transactions; (5) communicating export control classification and destination information to end-users and consignees on government and commercial export documentation; (6) providing the ECCN or the EAR99 classification to freight forwarders for all export transactions and reporting the classifications in the Automated Export System (“AES”), if applicable; and (7) using information technology to the maximum extent feasible to augment “know your customer” and other due diligence measures in order to combat the threats of diversion and increase confidence that shipments will reach authorized end users for authorized end uses.
The government has taken great effort in trying to have a smooth roll-out of ECR. But, change forces companies to operate outside of their comfort zones. To take advantage of the United States’ comparative advantage in technological advancement and a company’s own competitive advantage, companies should embrace the changes and adapt as quickly as possible to the ECR.
The Time Has Come To Dust Off The Export Control Policies
by Brett W. Johnson
The Export Control Reform (“ECR”) initiative is in full swing. On October 15, 2013, businesses will wake up operating under a completely revised export control system. Some the changes have been in works for several years, but will quickly gain notoriety in the near future. The intended effect of the ECR is to simplify the regulatory structure for the export of defense articles and services, as well as to reduce the number of export licenses required. However, changes are not always smooth, appreciated or completely understood. Companies and other stakeholders should take the opportunity to understand the ECR and make necessary changes to any export control policies and procedures.
There is not a law or regulation that actually requires a company to have an export control policy or even written procedures. Rather, the government has multiple laws and regulations that control exports and it is up to the individual company to determine the best way to comply. So, although policies are not “required,” governmental guidelines on the topic and “best practices” reflect that such policies are de facto required. Almost every governmental inquiry related to a possible violation of the export control laws and regulations starts out with a request for the company’s export control policies.
Having formal, written export control policies are even more necessary now. The ECR changes are meant to increase exports by limiting the need to seek licenses. However, although the purpose is to ease export controls, the fact is that many of the regulations are difficult to decipher. Therefore, a good policy will provide a “layman’s” perspective of how the export control regulations are applied to a business unit.
There is no “one size fits all” export compliance program. But, the foundation for a good export control policy remains the same even after the implementation of ECR. Most importantly, the policy must reflect the senior management’s goal of developing a “culture of compliance” within the company. Thus, the policy should include a statement from senior management about the importance of compliance, a listing of resources the company is dedicating toward compliance and the consequences related to failing to comply.
In addition to the global policy statements, a good policy also includes specific procedures the company requires to be carried out in regard to export controls. This includes determining the proper jurisdiction and classification of the company’s items or services. In addition, to the extent that items are export-controlled, a good policy would delineate the process and responsibility for determining whether an export license is required or whether an exemption or exception is warranted. Furthermore, a good policy would reflect the necessity for proper documentation of a transaction. To the extent that the policy (or the law) may be violated, a company should include a mechanism for anonymous reporting and a company determination process in deciding whether a voluntary disclosure to the applicable government authority is warranted.
A policy is only as good as management, employees and other stakeholders are trained on that policy, including its procedures and expectations. Due to ECR, this is an optimal time to have key employees trained outside of the company and all affected employees re-trained with respect to any changes to the law (and related company policies). The training should be documented and maintained. The main reason is that, in addition to a request for applicable policies, the government, in its course of audit or other enforcement activities, also requires and expects detailed information about the company’s training activities. The existence of a training program will help mitigate any potential violations of the export controls. The failure to have a training program has the opposite effect.
During times of change, companies usually look inward to determine the impact of the change. However, in complying with the export controls, a company must be aware of what its stakeholders are doing. Therefore, agreements with third parties (especially in regard to the ITAR changes related to “brokering”) should be reviewed and possibly updated. Notices to stakeholders about ECR and what changes the company is taking in regard to its supply chain may also be warranted. In fact, it may well be a third-party agent representing the company’s interests in a remote part of the world for which the greatest non-compliance risk exists.
Although there are several other actions that should be taken in regard to ECR, a company should seriously consider conducting an audit once any changes are made. If possible violations have occurred in the past and were only caught due to the changes, it may be appropriate to file a voluntary disclosure with the government. Such voluntary disclosures may also be appropriate if ECR is not properly implemented. Although many companies utilize consultants for external audits, companies should consider having the audits done under the supervision of an outside law firm to ensure that privileges are properly protected and that the intent and requirements of new regulations are understood.
Although it may not be fully appreciated during the change period, ECR does provide an opportunity for a company to start fully appreciating export compliance. The criminal and civil ramifications (let alone the lost business opportunities) resulting from any export violation can be severe. A company should appreciate the opportunity, take advantage of the changes and gain a competitive advantage in expanding its overseas business in full compliance with the law.
Export Control Reform: Ready, Set, Go
by Richard C. Katz
For the past several decades, and especially since the heightened security enforcement in international trade, the global business community has railed against the complex, overlapping U.S. export controls laws and regulations that have limited our share of defense and high tech global markets. U.S. Regulations, including primarily the International Traffic in Arms Regulations or (“ITAR,”) have been blamed as a major obstacle to American firms participating in overseas sales. Overseas defense firms have sought to keep their products “ITAR-free” to avoid the harsh, extra-territorial effect of U.S. laws enforced to control the sale or transfer of our proprietary defense technologies.
In 2009, the Obama administration announced a major overhaul of the country’s export control laws with the primary intent being an increase in U.S. sales abroad while maintaining strict control of only our highest level defense technologies. After several years of hard work by government officials and plenty of input from the affected business community, the Departments of State and Commerce are now poised to implement final rules that radically change the universe of export controls that has existed for the past 30 years.
On October 15, 2013, the first set of final rules will be implemented. These relate to the rules first proposed on April 16, 2013, covering changes in ITAR U.S. Munitions List (“USML”) Categories VIII (aircraft) and XIX (gas turbine engines). Under these changes, many items currently regulated under the ITAR will move to the Department of Commerce control under the Commerce Control List (“CCL.”) These new Commerce categories are referred to as “600 Series” items, named for the middle digit (“6”) of the new item numbers.
The Department of Commerce’s export control regulation of these military “600 series” items will be significantly different than the current regulations of ITAR controls by the Department of State. It is estimated that 50% of current ITAR licenses will eventually be controlled under the Commerce Department “600 Series” regime. In response, any company utilizing an ITAR license will need to determine whether they are staying within the State Department system, moving to Department of Commerce control or having a mix of products some of which are controlled by each agency. Regardless, if the items remain on the USML or are transferred to the “600 Series,” it is likely the items will still require export licenses. But, it is possible that the items’ parts and components will no longer require any export license.
Therefore, companies subject to US export controls should take the opportunity to review their matrices of products and technologies to determine whether the item’s jurisdiction (State or Commerce) is still correct. Further, the item still needs to be properly categorized under either regulation. Companies should work with its vendors and its customers to ensure that this process is completed correctly. If a company is unable to derive the items’ jurisdiction and/or classification, the company should seek guidance from the government. Although there are grace periods under existing export licenses, a company should proactively have a full appreciation of how the government classifies and controls the particular item before requesting government input.
The revision of ITAR categories with transfer to the “600 Series” Commerce list will continue into 2014. Final export control reform rules governing USML Categories VI (Surface Vessels of War and Special Naval Equipment), VII (Ground Vehicles), XIII (Materials and Miscellaneous Articles) and XX (Submersible Vessels and Related Articles) become effective January 6, 2014. The revision of other USML categories will follow throughout the year.
While the long-awaited reform of the USML and its integration with the dual-use CCL may be the centerpiece of export control reform, many other significant changes are also set to go into effect which will affect the business of exporting from the United States. These changes will impact the basic mechanics of filing export documents, the use of various license exceptions and the government’s enforcement efforts to insure compliance and punish willful violations. Because of the extensive changes going into effect over the next year or two, exporters should take this opportunity to review their entire export control compliance procedures, policies and agreements to make sure they conform to the new requirements.
International Trade Commission’s “Fast-Track” Pilot Program: Be Prepared For More Speed
by Elizabeth M. Weldon and Marjorie A. Witter
In June 2013, the International Trade Commission (“ITC” or “the Commission”) announced that it had launched a pilot program to test whether early rulings on certain dispositive issues in some Section 337 investigations could limit unnecessary litigation and conserve the resources of the Commission and litigants (the “Pilot Program”). Prior to even announcing the Pilot Program, the Commission employed elements of the Pilot Program in Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof (Certain Products Having Laminated Packaging), terminating the investigation six months after institution. This month, the Commission handed down its opinion in that investigation, reaffirming its authority to institute the Pilot Program in section 337 investigations and potentially changing the landscape of such investigations.
ITC Pilot Program
Under the Pilot Program, the Commission will identify, at institution, investigations that are likely to present a potentially dispositive issue that is amenable to early resolution. Examples of such issues include lack of domestic industry, importation or standing. The Commission will then direct the assigned Administrative Law Judge (“ALJ”) to issue an early initial determination (“ID”) within a shortened time, typically within 100 days after institution of the investigation.
In these Pilot Program investigations, the Commission will set forth timelines for the issuance of an early ID and expedited Commission review in the Notice of Institution. To help manage the process, the presiding ALJ may limit or stay discovery on issues other than the potentially dispositive issue before the early evidentiary hearing. An extension of the deadlines set forth by the Commission may only be granted with good cause shown.
Once the ALJ issues the early ID, the parties have five calendar days to file a petition for review. Replies to such petitions are due three business days following service. The Commission will determine whether to review the early ID within 30 days.
Certain Products Having Laminated Packaging
The Commission employed the Pilot Program on March 22, 2013 when it instituted Certain Products Having Laminated Packaging, Inv. No. 337-TA-874. There, in addition to the usual language instituting the investigation, the Notice of Institution stated something very new:
Notwithstanding any Commission Rules that would otherwise apply, the presiding Administrative Law Judge shall hold an early evidentiary hearing, find facts, and issue an early decision, as to whether the complainant has satisfied the economic prong of the domestic industry requirement. Any such decision shall be in the form of an initial determination (“ID”). Petitions for review of such an ID shall be due five calendar days after service of the ID; any replies shall be due three business days after service of a petition. The ID will become the Commission’s final determination 30 days after the date of service of the ID unless the Commission determines to review the ID. Any such review will be conducted in accordance with Commission Rules 210.43, 210.44, and 210.45, 19 CFR 210.43, 210.44 and 210.45.
The Commission then set forth a deadline for the early disposition phase of the investigation, requiring the issuance of an early ID within 100 days of institution.
On March 28, 2013, the presiding ALJ, Judge Essex, issued an order requiring the parties to meet and confer toward establishment of a procedural schedule. The ALJ’s suggested schedule provided two weeks for fact discovery, 11 days for expert discovery, three days to draft prehearing briefs and prepare exhibits for the hearing, four days for pre-hearing motions, and two days for the hearing. While expressing sympathy for the parties, the ALJ noted in a footnote that the Commission’s “decision to depart from its own rules and regulations” was “of questionable legality.”
Prior to the hearing, complainant filed an objection to the Commission’s Notice of Institution, arguing that the order was “arbitrary and capricious” and not in accordance with the law. The ALJ conducted a hearing on May 16-17, 2013. The ALJ overruled the objection, but invited Staff and respondents to offer comments on the legal propriety of expedited proceedings. Staff and respondents both submitted briefs in support of the Commission’s authority to direct the ALJ to issue an early ID.
On July 5, 2013, Judge Essex issued an ID. In the ID, the ALJ changed his ruling on complainant’s objection to the expedited proceedings. In a detailed analysis, the ALJ found the Commission’s directive in the Notice of Institution violated the Administrative Procedures Act (“APA”) and deprived complainant of due process under the 5th and 14th amendments to the Constitution. The ALJ stated: “[T]he Commission has sought to deviate from its rules to achieve a desired result; however the Commission has not articulated what the desired result is … Absent the instructions contained in the Notice in this matter, the judge would find the proceedings as conducted to be in violation of law and would proceed to hearing consistent with the rules of the ITC and APA.”
Despite the ALJ’s finding about the validity of the expedited proceeding, on the merits, the ALJ found the complainant failed to satisfy the economic prong of the domestic industry requirement.
On August 7, 2013, the Commission issued its Notice of Commission Decision to Review an Initial Determination, in which it terminated the investigation on the basis that there was no violation of Section 337 due to the complainant’s failure to establish domestic industry. The Commission issued its Opinion on September 3, 2013, which explained its reasoning underlying its decision to end the investigation. In its Opinion, the Commission rejected the ALJ’s constitutional arguments, reasoning that the ID failed to provide any authority to support its conclusion that a complainant in a Section 337 investigation has a constitutionally protected interest in obtaining a hearing to address all the issues presented in an investigation. The Commission likewise rejected the ALJ’s reliance on the APA, noting that procedural rules have always been exempt from the APA requirement of informal rulemaking.
The Commission’s Opinion and the ITC’s Pilot Program sends a clear message to all prospective complainants: be prepared to prove your case immediately.
On domestic industry, in particular, the ITC has stated that “[w]hile some complainants rely on licensees’ activities to satisfy the domestic industry requirement, such complainants should have acquired the necessary information from licensees prior to filing the complaint and have a well-developed plan for obtaining any necessary discovery immediately upon institution.” The well-prepared complainant will heed such advice with respect to all potentially dispositive issues amenable to early resolution, and be prepared to identify witnesses, conduct discovery and prepare for hearing promptly following institution of the investigation.
 http://www.usitc.gov/press_room/news_release/2013/er0624ll1.htm; http://www.usitc.gov/press_room/documents/featured_news/337pilot_article.htm.
 http://www.usitc.gov/press_room/news_release/2013/er0624ll1.htm; http://www.usitc.gov/press_room/documents/featured_news/337pilot_article.htm.
 Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 337-TA-874, Notice of Institution of Investigation (March 22, 2013) (emphasis added).
 Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 337-TA-874, Order No. 3 (March 28, 2013).
 Id. at fn. 1.
 Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 377-TA-874, Order No. 15 (July 5, 2013), 2013 WL 3756326 at *2 (July 5, 2013).
 Id. at *3.
 Id.; Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 337-TA-874, Brief Filed with ALJ (June 6, 2013); Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 337-TA-874, Brief Filed with ALJ (May 31, 2013).
 Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 377-TA-874, Order No. 15 (July 5, 2013), 2013 WL 3756326 (July 5, 2013).
 Id. at *4-17.
 Id. at *17.
 Id. at *30.
 Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 377-TA-874, Notice of Comm’n (Aug. 7, 2013).
 Certain Products Having Laminated Packaging, Laminated Packaging, and Components Thereof, Inv. No. 377-TA-874, Comm’n Opinion (September 3, 2013).
 Id. at p. 6-7.
 Id. at p. 8.