ITAR for Defense Industry Executives

© Williams Mullen 2013

ITAR FOR DEFENSE INDUSTRY EXECUTIVES

June 12, 2013

Thomas McVeyWilliams MullenWashington, DC(202) 293-8118

[email protected]

2 © Williams Mullen 2013

Thomas B. McVeyWilliams Mullen

Thomas McVey practices in the area of the federal regulation of international business transactions. He advises clients on the Export Administration Regulations, the International Traffic In Arms Regulations, Sanctions Programs administered by the Office of Foreign Assets Control, the Foreign Corrupt Practices Act, anti-boycott laws and CFIUS.


Note Regarding Export Control Reform

Certain provisions of the U.S. export control laws are in the process of being amended under the Export Control Reform. Many of these amendments will become effective on October 15, 2013. While we will be discussing certain of these amendments in this presentation, we will not be discussing every amendment, and many of the final regulations have not yet been issued as of the date of this webinar. Provisions in these final regulations could vary from the material in this presentation. Viewers reviewing this presentation after June12, 2013 are advised to check if amendments have become effective that apply to them. For questions regarding possible amendments please contact Thomas McVey at [email protected].


U.S. Export Control Laws

• ITAR - International Traffic In Arms Regulations

• Export Administration Regulations

• U.S. Sanctions Laws


International Traffic In ArmsRegulations (ITAR)

• Enabling statute: Arms Export Control Act

• Regulations - International Traffic In Arms Regulations (“ITAR”) (22 C.F.R. Chapter 1, Subchapter M, parts 120-130)

• Department of State – Directorate of Defense Trade Controls

• List of Controlled Products - U.S. Munitions List

• Controls Military Items – Broad scope encompassing many items originally developed for military use


Defense Articles - U.S. Munitions List (USML)• Category 1: Firearms, weapons

• Category 2: Guns and armaments

• Category 3: Ammunition, ordinance

• Category 4: Launch vehicles, missiles, rockets

• Category 5: Explosives, incendiary agents

• Category 6: Naval vessels

• Category 7: Military vehicles

• Category 8: Aircraft and equipment

• Category 9: Military training services, equipment

• Category 10: Protective personnel equipment and shelters

• Category 11: Military electronics

• Category 12: Optical and guidance control equipment

• Category 13: Auxiliary equipment (cameras, encryption, camouflage)

• Category 14: Toxicological, chemical, biological agents, protective equipment

• Category 15: Space systems and equipment

• Category 16: Nuclear weapons, technology

• Category 17: Classified technical data and services

• Category 18: Directed energy weapons

• Category 19: Reserved

• Category 20: Oceanographic equipment

• Category 21: Other items designed or adapted for military use


ITAR Also Controls Technical Data and Software

Technical Data:Information which is required for the design,

development, production, manufacture, assembly, operation, repair, testing,

maintenance or modification of defense

articles, and other items. ( see 22 CFR §120.10)


Technical Data and Software (Cont’d)

Blueprints

Training Manuals Data

Models


Methods For Exporting Technical Data and Software

•Send or take it abroad (e.g., send disk in the mail)

•Go abroad and talk about it

•Electronic transmissions, e-mail, phone call, fax to foreign party

•Foreign national comes to U.S. and has access to it


Defense Services• Furnishing of assistance to

foreign persons related to Defense Articles; examples:

– Consulting– Engineering– Technical Services– Military training– Other services– Furnishing technical data

• Requires Technical Assistance Agreement (TAA)


Examples of USML Items• Electronic equipment which is

designed, modified or configured for military application

• Drone aircraft• Navigation systems for military

vessels• Command, control and

communications systems including radios (transceivers) and identification equipment

• Military training services and equipment

• Underwater sound equipment• Flight control products, software

and technologies

• Certain satellites and ground control equipment, including parts, technologies and software

• Classified products, technical data and software

• Anti-gravity and pressure suits, atmosphere diving suits

• Body armor (certain Types only)• Naval vessels and related

equipment, parts, technologies and software

• Protective personnel equipment and shelters

• Auxiliary military equipment

This listing represents items on the USML as of June 12, 2013. Certain of these items may be amended and/or transferred to the Commerce Control List under the Export Control Reform Initiative.

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Items on USML ― Computers and Software Current USML:

• Computers or software designed or modified for military use, or for use with any USML item (XI(a)(6))

• Experimental or developmental electronic equipment designed or modified for military use (Category XI(a)(7))

After Export Control Reform:• Certain of these items will be

transferred to Commerce Control List


Intelligence and SecurityExample: Electronic Equipment – Category XI(b):

> Electronic systems or equipment specifically designed, modified, or configured for intelligence, security, or military purposes for use in search, reconnaissance, collection, monitoring, direction-finding, display, analysis and production of information from the electromagnetic spectrum and electronic systems or equipment designed or modified to counteract electronic surveillance or monitoring.

> A system meeting this definition is controlled under this subchapter even in instances where any individual pieces of equipment constituting the system may be subject to the controls of another U.S. Government agency.


Items on USML ― Parts and Components

Current USML:• Many parts, components, accessories specifically designed for a USML

item are also on USMLAfter Export Control Reform:• Certain parts and components will be transferred to CCL or decontrolled• Certain “specially designed” parts and components remain on USML


Services on the USML• Intelligence and security

services often covered under ITAR

• Military advice to foreign persons is covered under ITAR (§120.9)

• Military training for foreign persons (§120.9)

• Training in use of USML items (subject to certain exemptions)


Government Sponsored Research Funding

• SBIR, DOD university research funding and other defense research funding

• Resulting products, technical data, software and services are often on U.S. Munitions List


USML Category XVII: Classified Information

> Classified Information is on the USML

> Category XVII: “Classified Technical Data and Services”

> Major issue for government contracts firms

> Another “Catch-All” category


Commodity Jurisdiction Requests

• Procedure for DDTC to determine if item is on U.S. Munitions List

• Binding, written response

• Can also be used to request removal of item from USML

• Form DS - 4076


Requirements If Item Is On USML• Physical articles:

– Cannot export unless obtain export license (e.g. DSP-5)

• Technical Data and Software:

– Cannot send or take out of U.S. without export license

– Cannot transfer to foreign party in U.S. without export license


Requirements If Item Is On USML (cont.)

• Services:– Cannot perform defense

services for foreign persons overseas or in the United States without license (TAA)

• Imports:– Items on USML and U.S.

Munitions Import List subject to import restrictions


Other Requirements - Registration• Parties that manufacture or export items on the USML

or perform defense services are required to register with DDTC

• This is even if the company does not export any products

DDTC Registrations

0

2000

4000

6000

8000

10000

12000

Exporters Manufacturers Total


Recordkeeping Requirements• Mandatory requirement

to maintain records of ITAR - related activities for 5 year period

• Covers paper, electronic and other media

• Retention period can be extended in certain instances


Brokering Registration and Licensing• Parties that facilitate export or import of ITAR items

are subject to ITAR Brokering Regulations (22 CFR Part 129).

• 22 CFR §129.2(a): Broker means any person who acts as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee, commission, or other consideration.

• Registration, licensing, reporting and other requirements


Denied Party Screening• Prohibited Party Lists:

• Specially Designated Nationals List (OFAC)• Denied Persons List (BIS)• Unverified List (BIS)• Entity List (BIS)• DDTC Debarred Party List (DDTC)• Nonproliferation Sanctions List (DDTC)


Export Administration Regulations

• Enabling Statute: Export Administration Act (expired), International Emergency Economic Powers Act

• Regulations: Export Administration Regulations (EAR)

• Department of Commerce – Bureau of Industry and Security

• List of Controlled Products – Commerce Control List• Controls “Dual-Use” Items


Commerce Control List – Examples of Products Covered

- encryption - computers, networking- aerospace devices - lasers - high performance- chemicals materials- power generation - telecom equipment- police equipment - high strength fibers- electronics - nuclear industry products- sensors - high performance pumps,- electronics generators, processing- machine tools equipment

- fingerprint/biometrics

- others


Commerce Control List

Computers Telecom

Lasers Machine Tools


Requirements for all exports (even if product is not on CCL):

• Know Your Customer Requirements – 15 CFR Part 732, Supplement No. 3

• Denied persons list – 15 CFR Part 764

• Recordkeeping requirements – 15 CFR Part 762

• Shipment documentation – 15 CFR Part 758

• Prohibited End-Use Controls – 15 CFR Part 744


U.S. Sanctions Programs

• Office of Foreign Assets Control (Department of the Treasury)

• Prohibition against dealing with targeted list of countries

• Prohibition against dealing with targeted list of entities and parties


Sanctions Programs - SummaryOFAC Country Programs

• Balkans• Belarus• Burma• Cote D’Ivoire (Ivory Coast)• Cuba• Dem. Republic of the Congo• Iran• Iraq• Lebanon• Liberia (Taylor Regime)• Libya• Magnitsky Sanctions• North Korea• Somalia• Sudan• Syria• Yemen• Zimbabwe

OFAC Non-Country-Specific Programs

•Counter-terrorism Sanctions Program

•Non-Proliferation Sanctions Program

•Narcotics Trafficking Sanctions Program

•Diamond Trading Sanctions Program

•Persons Undermining the Sovereignty of Lebanon or Its Democratic Processes and Institutions

•Transitional Criminal Organizations


U.S. Sanctions Programs – SDN’s

• Prohibition against dealing with Specially Designated Nationals anywhere in the world

– 3,000 Parties

– 15 CFR Chapter 5, App. A-C


Consolidated Screening List


Penalties for Violations• Criminal Sanctions – up to 20 years imprisonment• Fines: Up to $1,000,000 per violation• Press release• Debarment• For criminal cases Justice Department can

prosecute:– Company– Officers and Directors– Employees in their individual capacities


Major Export Compliance Cases• BAE Systems plc - $400,000,000 criminal

penalties; $79,000,000 civil penalties• ITT Corporation - $128,000,000 combined civil and

criminal penalties for ITAR violations related to night-vision products and technology

• Analytical Methods, Inc. - $500,000• Interturbine Aviation Logistics GmbH - $1,000,000• Qioptiq S.a.r.l. - $25,000,000• The Boeing Company - $3,000,000• Orbit/FR Incorporated - $300,000


SENTENCING OF COMPANY FOR EFFORTS TO TRADE WITH IRAN

Raleigh, North Carolina - United States Attorney George E.B. Holding announced today that on Monday July 28, 2008, Allied TelesisLabs, Inc. (ATL), was sentenced in United States District Court in Elizabeth City to a $500,000 criminal fine and was placed on probationfor two years for violating United States law regarding conducting business with Iran.

ATL was successfully engaged in the design of telecommunication equipment and systems including high capacity Multiservice AccessPlatforms (iMAPs) and related items capable of routing a large volume of messages/information/data. ATL’s guilty plea acknowledgedthat the corporation conspired with another to trade with the Islamic Republic of Iran in violation of the law. Specifically, ATL and itsrelated corporate entities conspired to land and execute a $95,000,000 contract with the Iranian Information Technology Company(IRITCO) to rebuild and upgrade the telecommunications systems of approximately 20 Iranian cities, including Tehran. The iMAPSdeveloped here in the Triangle were to be a central component of this system. Preparation for the execution of the contract went as far asthe manufacture of approximately $2 million worth of iMAPS at ATKK facilities in Singapore. The contract negotiations eventuallycollapsed, the telecommunications system was not installed and the iMAPs were sold elsewhere at a loss.

Mr. Holding noted the importance of the case: “Every American is aware of the sensitive nature of the United States’ relationshipwith Iran. That relationship is a central focus of our foreign policy and the work of our Government. The International EmergencyEconomic Powers Act allows the President to regulate the conduct of business internationally under certain circumstances, a stepwhich was taken with regard to Iran. When the President imposes these types of authorized restrictions, it is incumbent on allcitizens, including our corporate citizens, to adhere to those regulations and to follow the strict letter of the law. Only then can webe confident that our country speaks with one voice in our relationships with our international friends and foes. The plea of guiltyand the sentence in this case should act as a reminder to our business community of the seriousness with which the Department ofJustice takes this issue.”

The case was investigated by the United States Department of Commerce. Assistant United States Attorney John Bowlerrepresented the United States in federal court.

For Immediate Release: July 31, 2008Contact - BIS Public Affairs 202-482-2721

U.S. Department of JusticeUnited States Attorney's OfficeDistrict of Columbia(202) 514-2007


Compliance Strategy• Classification – review all of your company’s products

to see if they are listed on:– U.S. Munitions List– Commerce Control List– End Use Based Controls (15 CFR Part 744)

• Application – Apply as required for:– DDTC export licenses (DSP-5, etc.)– BIS export licenses– TAA’s, MLA’s– Warehouse Distribution Agreements– Re-export authority

• Compliance Program – internal company compliance procedures


Export Compliance Program• Designated company official in charge of compliance• Classification of company’s products, software, technical data and

services• Written policies and procedures for dealing with ITAR and EAR

issues• Procedure for foreign nationals• Training• Recordkeeping• Prohibited list checking and OFAC sanctions review• Procedure for dealing with suspected violations• Auditing• Updating program


Export Control Reform Initiative

20456961.1


Initial Export Reform Goals1. Rationalize and coordinate the Commerce Control List and

U.S. Munitions List

2. Three-tiered licensing system

3. United enforcement effort

4. Unified licensing IT system


Unified Export Enforcement Effort• Export Enforcement Coordination Center – Government-wide

Enforcement Initiative For Export Control Violations

• Established under Executive Order 13558 – November 9, 2010

• Departments of State, Treasury, Justice, Commerce Energy, Homeland Security and U.S. intelligence agencies


Unified Licensing IT System• Will use DoD’s USXPorts System for all internal export licensing

processing

• Departments of Commerce, State and Defense will use same system

• Effective fall/winter 2012


Rationalize USML and CCL• Review and revise U.S. Munitions List

• Emphasize product specifications rather than design intent

• Transfer certain items to Commerce Department and CCL Series 600

• Emphasis for CCL Series 600 on parts and components


Commerce Control List Series 600• Items will still require export licenses for all destinations except

Canada

• May be eligible for Strategic Trade Authorization exception (to government end-users only)

• Will be subject to de minimis rules for incorporating U.S. parts and components into foreign made items

• Reduced controls on services

• “Specially designed” – effort to remove routine components (bolts, washers, screws, etc.) from controls


Status of AmendmentsApril 16, 2013 Implementing Regulations• Authorize framework for reform and Series 600• Definition of “Specially Designed”• Transition Rules• Become effective October 15, 2013

April 16, 2013 Finalize Categories VIII and XIX• Finalize USML Category VIII (Aircraft)• Add Category XIX (Gas Turbine Engines)• Effective October 15, 2013

Expected Later 2013• Final versions of remainder of USML Categories• Individual Categories published on periodic basis over rest of year• Each Category becomes effective 180 days after publication date• Reform becomes effective on rolling basis until mid-2014


Congressional Review• “Informal Notification” to Congress for each USML Category – 30

day “informal consultations”

• 38(f) Notification to Congress for each USML Category – Congress has 30 days to object.

• After Congressional review of revised USML Categories, Categories are issued in final form

• Transfer of commercial satellites to CCL has been authorized under separate legislation


Specially Designed(ITAR § 120.41)

Two Pronged Determination – “Catch and Release”

A. Catch – Except for items in B below, a commodity or software is “specially designed” if:

(1) As a result of development, it has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics or functions described in the relevant USML paragraph; or

(2) It is a part, component, accessory, attachment or software for use in or with a defense article.


Specially Designed (cont.)B. Release – A part, component, accessory, attachment, or software is

not controlled by a USML “catch-all” or technical data control paragraph if it:(1) Is subject to the EAR pursuant to a commodity jurisdiction

determination;(2) Is, regardless of form or fit, a fastener (e.g., screws, bolts, nuts, nut

plates, studs, inserts, clips, rivets, pins), washer, spacer, insulator, grommet, bushing, spring, wire, or solder;

(3) Has the same function, performance capabilities, and the same or ‘‘equivalent’’ form and fit as a commodity or software used in a commodity that: (i) is or was in production (i.e., not in development); and (ii) is not enumerated on the USML;

(4) Was or is being developed with knowledge that it would be for use in both defense articles on the USML and also commodities not on the USML; or

(5) Was or is being developed as a general purpose commodity or software, i.e., with no knowledge for use in a particular commodity or type of commodity.


Specially Designed• The above text regarding “Specially Designed” has been

edited for this PowerPoint presentation.

• To apply this definition for actual classification determinations refer to the exact text of the definition as follows:

– ITAR: 22 C.F.R. § 120.41– EAR: 15 C.F.R. § 772.1


• Licenses (DSP-5’s) issued by DDTC prior to the effective date where all of the items on license have transferred to the CCL will remain valid until expired, returned by the license holder, or for period of two years from the effective date of the final rule – whichever occurs first.

• Licenses (DSP-5’s) where some items covered on license have been transferred to BIS and some remain under jurisdiction of DDTC will remain valid until their expiration.

• TAA’s and other agreements containing transitioning and non-transitioning items issued prior to the effective date will remain valid until they have expired (unless they require an amendment), or for a two year period from the effective date, whichever occurs first.

Transition Rules


• Agreements containing solely transitioning items issued prior to the effective date will remain valid for two years from the effective date, unless revoked, suspended or terminated. After this two year period all activities must be conducted under BIS authorization.

• Previously issued CJ Determinations for items determined to be subject to the EAR shall remain valid. Previously issued CJ Determinations for items that have been transitioned to the CCL will be superseded by the newly revised lists.

• Any limitation, proviso or other requirement will remain in effect.

Transition Rules (Con’t.)


Steps for Companies to Prepare for Export ReformCompanies should prepare a management plan to manage export reform changes over the next twelve months:

• Review classifications of company’s products/services to see if jurisdiction and classifications have changed; review new USML Categories and companion CCL Series 600 entries.

• For parts, components, accessories, apply the “Specially Designed” test for relevant items

• If required, apply for commodity jurisdiction or commodity classification requests from DDTC and BIS

• If classifications have changed, determine impact on your compliance requirements:» Use of Strategic Trade Authorization or other BIS exceptions?» Use of de minimis rule?» Decontrol of regulation of services and use of TAA’s?» Impact on DDTC registration status?

• Plan licenses, TAA’s during transition period in accordance with DDTC Transition Plan and BIS General Order No. 5

• Amend company’s export compliance procedures to reflect changes in the law and changes in company’s export requirements

• Conduct training of relevant company employees on changes in company’s export obligations

• Coordinate with subcontractors, suppliers and other program partners


Export Control Newsletter:

Contact Tom McVey: [email protected]

Thomas B. McVey1666 K Street, NW

Suite 1200Washington, DC 20006

[email protected]

www.williamsmullen.com

21762626

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