Global Connection - October 2013: Export Control Reform: Ready, Set, Go

by Snell & Wilmer

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.

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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