The Directorate of Defense Trade Controls (“DDTC”) has issued a proposed regulation under the International Traffic In Arms Regulations (“ITAR”) that will have a significant impact on government contracts firms.  Under the proposal, the license exemption at 22 CFR §126.4 will be expanded to permit permanent exports and temporary imports made to departments and agencies of the U.S. Government without a license.  This expands the current license exemption that permits temporary exports and imports without a license, and exports where an “urgency” exists that an export license could not otherwise have been obtained.  If adopted in final form, this will simplify ITAR compliance requirements for defense contractors and other firms that conduct business with the federal government.

Background.  Under current law, the export of ITAR-controlled products, technical data and software requires an export license issued by DDTC, an agency within the State Department.  This requirement is quite broad - licenses are required even for exports to U.S. Government agencies in many instances.¹  This creates significant confusion and compliance headaches for government contractors that export ITAR-controlled products, technical data and software to U.S. Government customers – many are not aware of these requirements or how to comply with them.  Similar issues arise in connection with exports by U.S. contractors to their U.S. employees in foreign offices that perform work for U.S. Government customers overseas.

Proposed Regulation.  Under the proposed regulation, issued on May 22, 2015, DDTC is proposing to amend and expand 22 CFR §126.4 to provide that a license will not be required for the export or temporary import of a defense article or performance of a defense service when made to a department or agency of the U.S. Government for official use.  Under the current version of the exemption under 22 CFR §126.4(a), the exemption is limited to temporary exports/imports and only when all aspects of the export transaction (export, carriage, and delivery abroad) are affected by a U.S. Government agency or are covered by a U.S. Government bill of lading.  Under a current companion exemption under §126.4(b), the exemption is only available when the “urgency” of the U.S. Government is such that “the appropriate export license … could not have been obtained in a timely manner.” 

The proposed amendment expands the scope of the exemption to cover permanent exports (and not just temporary imports) and to remove the “urgency” requirement.  Specifically, under the proposed §126.4(a)(1) a license would not  be required for the export or temporary import of a defense article or performance of a defense service when made to a department or agency of the U.S. government “for official use.”  In order to be eligible for the exemption, the export must be provided to a regular employee or “contractor support personnel” of the U.S. government.   The proposed regulation provides the following definition of “contractor support personnel”:

Contractor support personnel means those U.S. persons who provide administrative,  managerial, scientific or technical support under contract with a U.S. government department or agency within a U.S. government owned or operated facility or under the direct supervision of a regular U.S. government employee (e.g., Federally Funded Research and Development Center or Systems Engineering and Technical Assistance contractors). For purposes of this section, private security contractors are not considered contractor support personnel, and ‘‘direct supervision’’ refers to the control over the manner and means in which contractor support personnel conduct their day-to-day work activities as well as control over the contractor’s access to defense articles authorized under this paragraph.

In addition, a second companion exemption is proposed under §126.4(a)(2) that provides that a license would not be required if the export is made by or on behalf of a U.S. Government department or agency for carrying out any foreign assistance, cooperative project or sales program authorized by law, subject to certain conditions. For this exemption to apply, the U.S. Government agency must “perform or direct” all aspects of the transaction (export, carriage, and delivery abroad) or the export must be covered by a U.S. Government bill of lading.  In addition, items subject to the EAR and controlled for Missile Technology (MT) reasons (see 15 CFR §742.5) are not authorized for export under this provision.²

A copy of the proposed regulation can be found at: http://www.pmddtc.state.gov/FR/2015/2015-12295_05_22_2015.pdf .

As with the existing version of the §126.4 exemption, a number of conditions will likely apply to use of the amended exemption when it is adopted in final form:

• ITAR Registration – DDTC has long taken the position that parties cannot take advantage of ITAR license exemptions unless they have registered with DDTC under 22 CFR Part 122;
• Ineligible Parties - The exemption does not apply to transactions in which the exporter or any other party to the export is generally ineligible under the criteria set forth under 22 CFR §120(c).
• Congressional Certification.  See 22 CFR §123.5 regarding exports requiring Congressional Certification under §36(c) of the Arms Export Control Act;
• Missile Technology Control Regime.  See §126.4(a)(2) Note To Paragraph (a)(2) of the proposed regulation for exports covered under the Missile Technology Control Regime Annex.

Compliance Requirements.  To take advantage of the exemption, an Electronic Export Information (EEI) filing under 22 CFR §123.22 and a written statement by the exporter certifying that the applicable requirements have been met must be presented at the time of export to the appropriate Port Directors of U.S. Customs and Border Protection or Department of Defense transmittal authority. For any export made pursuant to the proposed revised paragraph 126.4(a)(1), the shipment documents (bill of lading, airway bill, or other transportation documents) must include a special destination control statement set forth in §126.4(c).  In addition, exporters are always advised to maintain records of their use of ITAR license exemptions in accordance with 22 CFR §122.5 and § 123.26.

Items Subject to the EAR.  If a commodity, technology or software is subject to the Export Administration Regulations (“EAR”) rather than ITAR and requires an export license, the license exemption at 22 CFR §126.4 will not apply in most instances – parties will need to identify an applicable license exception under the EAR or apply for a license from the Bureau of Industry and Security.  This is particularly important in light of Export Control Reform as licensing jurisdiction for many items have recently been transferred from ITAR to EAR. 

Status of Proposed Regulation.  As referenced above, the proposal was issued by DDTC as a proposed regulation on May 22, 2015.  DDTC has accepted written comment through July 6, 2015 and is expected to issue a final version of the regulation in approximately 2-4 months.

Note:  This article contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes.  It is not intended and should not be construed as legal advice.