Streamlining the System: More Baby Steps Toward Reducing Export Compliance Burdens

by Sheppard Mullin Richter & Hampton LLP
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Since 2011, President Barack Obama’s administration has actively pursued export control reform designed to reduce the regulatory burdens on U.S. companies and enhance U.S. national security (as reported here).  On March 7, 2013, the Administration notified Congress of the first in a series of amendments to the U.S. Munitions List.  The next day, March 8, 2013, the White House released Executive Order 13637 to update delegations of presidential authority over the administration of export and import controls.  Also on March 8, the White House issued a fact sheet on the implementation of export control reform.  These steps, though small, mark clear progress in the President’s Export Reform Initiative.

Background

U.S. exports are controlled primarily under two different systems with different purposes and different regulatory structures.  Generally, the U.S. State Department regulates the export of goods, services, and technical data specifically designed or modified for military or satellite applications.  Those items are controlled under the International Traffic in Arms Regulations (ITAR) and the United States Munitions List (USML).  The U.S. Department of Commerce controls the export of virtually all other goods with primarily commercial uses but with potential security or defense applications.  Those items are controlled by the Export Administration Regulations (EAR) and the Commerce Control List (CCL).

The existence of two regulatory schemes can create administrative burdens and unnecessary costs for U.S. exporters.  The controls are vast and unwieldy and have not been comprehensively updated in nearly four decades.  Therefore, many observers are looking forward to the President’s efforts to streamline regulations with keen anticipation.

One of the difficulties that manufacturers and exporters of defense items and technology face is that the ITAR restricts the export of all items on the USML equally.  For example, a military helicopter and a tiny bolt designed or modified for that helicopter each typically requires an individual ITAR license from the State Department for export to any destination.  This system has created significant burdens on U.S. exports.  Moreover, as the White House fact sheet points out, these inefficiencies harm U.S. national security by creating “obstacles and delays in providing equipment to Allies and partners for interoperability with U.S. forces.”

The proposed changes are aimed at streamlining the system by transferring some less sensitive items from the USML to the CCL.  As a result, the entire USML will be transformed from its current state of being a catchall list of military items in broadly worded categories to a more focused positive list of identifiable items.

Changes Created by Executive Order 13637

Elimination of Possible Double Licensing Requirements.  The Department of State licenses entire systems on the USML, including any accompanying spare parts, accessories, and attachments.  Many of those smaller items will be moved to the CCL (and Commerce jurisdiction), while the larger systems will remain on the USML.  This may mean that an exporter of large systems would need two licenses instead of one.  The Executive Order authorizes State to approve the export of parts or accessories on the CCL when it approves export of the system as a whole.  Those parts and accessories licensed by State will nevertheless be subject to the jurisdiction of Commerce for enforcement purposes.

Consolidation of Brokering Regulation Responsibilities with State.  A “broker” is defined to include a person or entity that acts as a paid agent for others in transactions involving defense items.  Currently, responsibility for registration and licensing of brokers is shared between the State Department (for exports) and the U.S. Department of Treasury, Bureau of Alcohol, Tobacco, Firearms and Explosives (for imports).  The Executive Order consolidates and delegates that responsibility to the Secretary of State.

Congressional Notification Process.  The Order directs that, although a certain subset of items are moved from the USML to the CCL, the Executive Branch will continue to notify Congress about those export licenses that, though no longer subject to the statutory notification requirement, warrant continued transparency and notification to Congress.

USML Changes

The March 8 notification to Congress is the first in a series of changes to the USML.  The first proposed changes are related to State Department controls on Aircraft and Gas Turbine Engines.  The Arms Export Control Act requires that a 30 day notification period elapse before publication of the changes.  When the changes are published (presumably on or about April 8, 2013) they will have an effective date of 180 days after publication (or about October 5, 2013).  Further changes to the USML will be published on a rolling basis throughout 2013.

The White House states that the revised USML will “enable the United States to better focus its resources on items that deserve the highest levels of export protection and on destinations of concern, while providing American companies with a streamlined export authorization process for thousands of parts and components.”

We will continue to provide updates on export reform here as details become available.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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