Company Confidential 1

Surviving US Export Controlregulations: The ITAR and EAR

Don Buehler - SAEApril 16, 2010

IAQG Workshop: Washington DC General Assembly

2

Topics we will cover:

•Why should aerospace companies care?

•How does the US government control exports?

•How are companies affected by these laws?

3

Why should aerospace companies care?

1. Most aerospace companies work on U.S. origin items

2. Many of these items are restricted by US Export laws and regulations

3. The laws and regulations apply to all companies or

individuals who have possession of restricted items

4

Why should aerospace companies care?

4. Aerospace companies and individuals are regularly prosecuted – fined or debarred for violations of the laws and regulations

5

EXAMPLES:

1. DHL fined $9.44 million

DHL Owned by: Deutsche Post World Net / Deutsche Post DHL – a German company

This was the largest fine in history for a freight forwarder.

Their violations: primarily record keeping (Aug 2009)

6

EXAMPLES:

2. Thermon Mfg Co fined $176,000

Three affiliates (in India & the UK) committed 33 violations – re-exporting restricted items without a license and exporting to embargoed countries and to debarred companies

(Sept 2009)

7

EXAMPLES:

3. Quoptiq fined $25 MillionA Luxembourg LLC163 violations of the ITARExported night vision technology without proper licenses to various European and Asian companies

(December 2008)

88888

Between June 1999 and January 2004, Bass Pro, Inc. exported gun sights to a variety of destinations without a license in violation of the EAR.

Gun sights are controlled pursuant to U.S. treaty obligations, as well as for human rights and anti-terrorism reasons.

Bass Pro agreed to pay an administrative penalty of $510,000.

4. Bass Pro Shops fined Violation: Gun Sights

EXAMPLES:

TFC Mfg – aerospace fabrications company

• TFC Manufacturing, Inc. The Violation: Between March and April 2006, TFC Manufacturing, Inc. (TFC), a Lakewood, California- based aerospace fabrication facility, released U.S-origin technology for the production of aircraft parts (classified under ECCN 9E991) to an Iranian national employee in the U.S. without the required license under the EAR. The Penalty:TFC agreed to pay a $31,500 administrative penalty.

9

EXAMPLES:

10

1010

EAR Civil penalties may be the greater of

$250,000 or twice the value of the transactions

Criminal violations may be up to $1,000,000 and/or 20 years imprisonment

ITAR Civil fines up to $500,000 per violation

Criminal fines up to $1,000,000 per violation and/or 10 years imprisonment

Maximum Penalties

11

The question:

• Does your company work on U.S. origin products or have possession of US technical data?

• Does your company understand the US laws and regulations?

• Is your company vulnerable to violations?

The purpose of this presentation is to raise your awareness of the laws and regulations which may be affecting your company right now – and to give you some basic information on the regulations.

12

The BASICS

•There are two major regulations which affect US exports:

- The International Traffic in Arms Regulations (22 CFR Chapter I, Subchapter M) - ITAR

And

- The Export Administration Regulations (15 CFR Part 700 – 799) - EAR

13

The BASICS - ITAR

• The ITAR is administered by the US Department of State – Office: Directorate of Defense Trade Controls (DDTC)

• The ITAR controls defense articles and defense services which are listed on the United States Munitions List (USML)

(Part 121)

14141414

The United States Munitions List (USML) (Part 121)

Category I

Firearms, Close Assault Weapons and Combat Shotguns

Category VI

Vessels of War and Special Naval Equipment

Category II

Guns and Armament

Category VII

Tanks and Military Vehicles

Category III

Ammunition/Ordnance

Category VIII

Aircraft and Associated

Equipment

Category IVLaunch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs and Mines

Category IX

Military Training Equipment

and Training

Category VExplosives and Energetic Materials, Propellants, Incendiary Agents and Their Constituents)

Category X

Protective Personal Equipment and Shelters

15151515

The United States Munitions List (USML) (Part 121)

Category XI

Military Electronics

Category XVI

Nuclear Weapons, Design and Testing and Related Items

Category XII

Fire Control, Range Finder, Optical and Guidance and Control Equipment

Category XVII

Classified Articles, Technical Data and Defense Services Not Otherwise Enumerated

Category XIII

Auxiliary Military Equipment

Category XVII

Directed Energy Weapons

Category XIV

Toxicological Agents, Including Chemical Agents, Biological Agents, and Associated Equipment

Category XIX Reserved Category XX

Submersible Vessels, Oceanographic and Associated Equipment

Category XV

Spacecraft Systems and Associated Equipment

Category XXI

Miscellaneous Articles

16161616

ITAR Licensing

If the item you are exportinghas been designed for a military

application

And

is listed on the USML

you will have to get a license for the export (unless there is an exemption)

17

DDTC registration requirement

• Does your company work on defense items or perform defense services (as described in the United States Munitions List)?

• If so, your company is required to be registered with the U.S. Department of State, Directorate of Defense Trade Controls (DDTC).

• Refer to Section 122 of the ITAR

18

The BASICS - EAR

• The EAR is administered by the US Commerce Dept – Office: Bureau of Industry & Security (BIS)

• The EAR controls commercial and “dual use” (commercial and military use) items and technology which are listed in the Commerce Commodity List (part 774)

19191919

• Includes five product groups

• Extensive system for classification of products – Export Control Classification Numbers (ECCNs)

• Complex rules about what requires a license (depends on product, technology and end use)

The Commerce Control List (CCL)Part 774 of the EAR

20202020

• The purpose of the ECCN is to clearly identify the component, material, or technology so that proper licenses, restrictions and exemptions may be applied.

• If you are going to export items under the EAR, knowing the ECCN is critical.

Export Control Classification Numbers(ECCNs)

2121

9A991Aircraft and gas turbine engines not

controlled by 9A001 or 9A101

9A992Complete canopies, harnesses and

electronic release mechanisms

Examples of ECCNs

22

The BASICS

• What do we mean when we say “restricted item?”

•This a general term we use to describe products, goods, technical data, software , and technology which is under some kind of restriction by any of the US laws

•It does not just refer to parts and products being shipped outside the US

2323232323

Any item sent from the United States to a foreign destination (company or person) is an export. All items leaving the United States are exports and, therefore, may be subject to controls and restrictions.

Items include hardware (parts, materials, sub assemblies), information (drawings, specifications, test data, calculations) software and technologies (e.g., composites).

We use “item” to refer to all three categories (hardware, information or technologies).

What is an export?

2424242424

Exports can be …

• physical (sending items to a foreign country or person)

• verbal (telling someone information about a controlled item)

• visual (a non U.S. person sees controlled items – even if they see them on your laptop in a public place)

How can items be exported?

252525

Not an export

The shipment or transmission of restricted items subject to the ITAR or EAR from one U.S. person to another U.S. person is not an export. (As long as the “receiving person” is not employed by a foreign company.)

U.S. Person

U.S. Person

2626262626

Export Examples

The shipment or transmission of restricted items subject to the ITAR or EAR from a U.S. Person (company) to a Foreign Person (company).

U.S. Company

French company

2727272727

Re - Export Example

The shipment or transmission of items subject to the ITAR or EAR from one Foreign Person (company) to another.

Germany JapanU.S.A.

EXPORT RE-EXPORT

2828282828

Re- Transfer Example

The shipment or transmission of restricted items subject to the ITAR or EAR from one Foreign Person (company) to another Foreign Person (company) within the same country.

Company A(Germany)

Company B (Germany)

U.S.A.

EXPORT RE-TRANSFER

2929292929

Deemed Export

The shipment or transmission of restricted items subject to the ITAR or EAR from a U.S. Person (individual) to a Foreign Person (individual).

U.K. Citizen

U.S. Citizen

(or green card

holder)

EXPORT

3030303030

Restriction: license

If the item in any of the previous examples is restricted by the ITAR or the EAR, a license may be required for the transaction.

Granting (or denying) licenses for the export, re-export, or re-Granting (or denying) licenses for the export, re-export, or re-transfer of restricted items is the transfer of restricted items is the first way first way that the laws that the laws control exports.control exports.

3131313131

Restriction: embargoed countries & denied parties

The second major way that the US government controls exports is through lists of countries, companies, and individual citizens who are not allowed to engage in exports of US items.

We refer to these as “denied parties”

3232323232

Denied Parties lists

Numerous Governmental agencies have “denied parties” lists. The major lists are maintained by DDTC; BIS and OFAC (Office of Foreign Assets Controls)

OFAC is the office in the Treasury Department which maintains a variety of lists including embargoed countries.

Lists to check

ITAR embargoes

OFAC lists

35

3636363636

They are serious!

A 5 person company – East Ways Shipping (a NY based freight forwarder) was fined $70,000 by the BIS for the shipment of 3 orders of scrap metal to a company listed on one of BIS’s entity lists.

(August 2009)

3737373737

So what should you do?

• Learn More

– Do some research into the regulations

– Find out your vulnerability to violations

• Evaluate Your current work

– Is it covered by one of the US regulations?

– Do we export these items in any way?

– Discover your vulnerabilities to violations

• Develop and Implement a Compliance System

• Train Employees

• Market Your System

38

For more information:

•GO to any of the 3 public web sites:

•ITAR (DDTC) http://www.pmddtc.state.gov/index.html

•EAR (BIS): http://www.bis.doc.gov/

•OFAC http://www.treas.gov/offices/enforcement/ofac/

3939393939

QUESTIONS?

Send your questions to Don Buehler donb@exportsolutionsinc.com and I will be glad to address them.

Or call me at

513-662-5190 (US office)

Or 513-305-7493 (mobile)

4040404040

Thank you for attending

The IAQG workshop on

Export Control.

We hope you enjoy your time in

Washington.