BIS Update 2008, Day 2 - DDTC to Rewrite 125.4(b)(9)

Terry L. Davis, DDTC's Deputy Director for Licensing, spoke at the second day of the BIS Update 2008 Conference in the breakout session dedicated to the Department of State Licensing Update. Mr. Davis spoke of several DDTC initiatives for the upcoming year, including DDTC plans to amend the ITAR license exemption at 22 CFR 125.4(b)(9) to allow hand-carry exports of technical data for personal use - presumably while an individual is on travel. Specifically, Mr. Davis directed his comments to technical data loaded on laptop computers, but mused that the amendment would be crafted to cover technical data on other types of electronic devices, and would likely cover technical data in hard copy format.

Only a very rigid and conservative reading of the exemption at 22 CFR 125.4(b)(9) would lead one to conclude that the type of export at issue - where an individual hand-carries technical data out of the US for his or her sole use while out of the country - is not already covered by the 22 CRF 125.4(b)(9) exemption. Unfortunately, this is the reading of which DDTC is an apparent proponent. Fortunately, DDTC today expressed an intention to execute a liberalizing amendment.

Until DDTC actually executes the amendment, industry will have to send laptops, other commercial electronic equipment, or documents containing controlled technical data to its US person employees once the employees have already traveled abroad in order to make use of the exemption at 22 CFR 125.4(b)(9) - according to the interpretation Mr. Davis represented. If a traveler must hand-carry the technical data out of the US and no other license exemption applies, General Instruction 4 of the DDTC Guidelines for Completion of a Form DSP-73 suggests DDTC may permit a DSP-73 license to support the activity.

New De Minimis Rule Unveiled at Opening Day of BIS Update 2008

At the first day of the BIS Update 2008 Conference in Washington, DC, BIS Senior Export Policy Analyst, Sharron Cook, announced that BIS would release a New De Minimis Rule on Wednesday. Ms. Cook walked attendees through a slide-show application of the new rule, which, since my scanner's on the fritz, I'll summarize for your edification in advance of its official release.

Begin by throwing the old de minimis rule out. BIS does not attempt to retrofit the New De Minimis Rule onto the old language.

BIS NEW DE MINIMIS RULE
If...

• The foreign-made commodity incorporates controlled US-origin commodities or is bundled with controlled US-origin software, or
• Foreign-made software is commingled with controlled US-origin software, or
• Foreign-made technology is commingled with controlled US-origin technology,

Then...
It is subject to the EAR only if the US-origin controlled content exceeds:

• 10% for Cuba, Iran, North Korea, Sudan, or Syria.
• 25% for all other destinations.

DEFINITIONS
Incorporated:
US items are incorporated when all of the following conditions are met:
When the US items are:

1. essential to the functioning of the foreign equipment,
2. customarily included in the sale of the foreign-made items, and
3. reexported with the foreign-produced item.

Bundled:
Software is considered bundled if the software:

1. is listed on the CCL as solely controlled for anti-terrorism (AT) reasons (e.g., ECCN 5D992) or is EAR99, and
2. is configured for a specific commodity, but is not necessarily physically integrated into the commodity (e.g., printer driver software is generally not incorporated into the printer, but is customarily delivered with the printer so that the software may be loaded onto the computer to which the printer will be connected).

Controlled Content:
Controlled Content means US-origin items that, if exported directly from the US, would require a license to the ultimate destination of the foreign product.

Here, keep in mind that EAR99 items are considered Controlled Content for certain sanctioned destinations.

CALCULATING THE DE MINIMIS PERCENTAGE
Determine the value (cost) of the Controlled Content.
In determining the value of the Controlled Content, exclude:

1. US-origin items eligible for license exception GBS or NLR to the ultimate destination,
2. Foreign-manufactured items, and
3. Second incorporation of US-origin items (e.g., If a US-origin item was originally exported to Germany, where it was integrated into a subassembly which was exported from Germany to France for integration into a system, and France seeks to further export the fully-integrated system to Azerbaijan, do not count the US-origin items originally exported to Germany in calculating application of the de minimis rule to the France-to-Azerbaijan transaction. The integration in France is a second incoproation of the US-origin items.).

The de minimis percentage is expressed as a ratio of the cost of US-origin items to the foreign product normal selling price.

The de minimis percentage must be calculated on three bases:

1. cost of US-origin commodities to normal selling price of commodities plus bundled software,
2. cost of US-origin software to normal selling price of the software, and
3. cost of US-origin technology to normal selling price of the technology.

Certain US-origin items will not be eligible for de minimis treatment, including:

• US-origin components of certain high performance computers,
• Encryption technology under ECCN 5E002 and certain software under 5D002,
• QRS 11, and
• Technology under ECCN 9E003.a.1 through 9E003.a.11 and 9E003.h.

Finally, the New De Minimis Rule requires a one-time report be filed electronically with BIS, detailing:

1. The percentage of US-origin content by value,
2. A full description of your calculations (values, assumptions, and methodologies), and
3. A description and fair market value of the foreign technology.

BIS Warns Iran Is Building Nuclear Weapons

The Department of Commerce's Bureau of Industry and Security (BIS) has posted guidance to assist US exporters in identifying foreign-origin activity which may be in support of Iran's plans to complete construction on nuclear weapons and ballistic weapons capable of delivering a nuclear attack. This follows on the heals of BIS and other agency action last week against seventy-five entities engaged, in BIS' words, "in a global procurement network which sought to illegally acquire U.S.-origin dual-use and military components for the Iranian Government."

BIS advises to be on the lookout for suspicious orders of some rather mundane technology, including:

• carbon fiber (ECCNs 1A002, 1C010, 1C210, and 1C990);
• filament winding machines (ECCNs 1B001, 1B101, 1B201), and;
• epoxy resin (ECCN EAR99).

Epoxy resin is combined with agents to bind carbon fibers used in uranium centrifuge and missile structures.

Characteristics of suspicious orders include orders originating from transshipment countries (particularly countries known to serve as easy front shops for Iranian entities), orders of unusual quantity or price, requests for vendor to deliver directly to a freight forwarder or to a third country, and waiver of normal installation, training, or maintenance agreements.

Suspicious activities can be confidentially reported to BIS here.

Big Business Subsidizes DDTC

DDTC announced today that the ITAR has been amended to institute a three-tiered registration fee schedule for required registrants. With exceptions for certain tax-exempt registrants and for all first-time registrants, registration fee will be determined based on the number of applications reviewed, adjudicated, or issued during the twelve-month period ending ninety days prior to expiration of the current registration ("Qualifying Applications"). If you have zero Qualifying Applications, the annual registration fee is $2,250 - up $500 from the previous fee schedule of $1,750 per annum. This is Tier 1. The Tier 2 registration fee is $2,750, and is reserved for registrants with ten or less Qualifying Applications. Tier 3 is reserved for registrants with more than ten qualifying applications. The registration fee for Tier 3 registrants is $2,750 plus $250 per Qualifying Application. This means that for every forty Qualifying Applications filed, a registrant will need to fork over $10,000 to DDTC, with one possible exception: Tier 3 registrants have their fee capped at 3% of the total value of Qualifying Applications, unless 3% of the total value of Qualifying Applications is less than $2,750, in which case the registration fee would revert to $2,750.

DDTC excluded the following from Qualifying Applications (and the $250 per instance fee):

• Activities under 22 CFR parts 123 through 126 not requiring a DDTC response, including
• annual submission of sales reports,
• prior notifications,
• provision of documents required by proviso, and
• submission of purchase orders to support offshore procurement
• Activities outside of 22 CFR parts 123 through 126, including
• commodity jurisdictions, and
• disclosures
• License Applications that are
  
• "Returned Without Action", or
• "Denied".

Why the radical change in fee structure? The President mandated that DDTC be responsible for self-financing up to 75% of DDTC's costs. DDTC estimated its annual costs at $23 million. Last year, DDTC collected about $7 million from registration fees. The three-tiered fee structure was designed by DDTC to permit DDTC to fulfill the Presidential mandate, while not placing an undue burden on small businesses and research institutions.

The new fee structure certainly meets DDTC's goal, but places an undue burden on large defense contractors. It has been estimated that a very large defense contractor's annual registration fee may end up funding five percent or more of DDTC's $23 million annual budget projection. This is particularly irksome because we know that many entities required to register are not registered with DDTC. Monies from collected fees could be dramatically increased if registration requirements were more strictly enforced, which could be fairly easily accomplished via simple amendment to the DFARS. Increased registration, coupled with a flat increased registration fee of between three and six thousand dollars per registrant per annum would fulfill DDTC's self-financing obligation. Rather, due to the fee structure adopted by DDTC, many export professionals in industry will soon be faced with new budgetary problems of their own.

The Plane Meaning of the VIII(h) Note

There has been quite a lot of industry buzz about the implications of Federal Register Document E8-18844, which amended the ITAR to reiterate DDTC's longstanding practice with regard to the implementation of the criteria at Section 17(c) of Export Administration Act of 1979 (EAA). Some folks seem to believe that this amendment creates a new process by which USML Category VIII(h) aircraft components can be self-classified as falling under the jurisdiction of BIS and the Export Administration Regulations (EAR) as CCL commodities. I even found one bulletin claiming that "one may now determine that a standard part or component installed on a civil aircraft or civil aircraft engine covered by a Federal Aviation Administration (“FAA”) certification is, with few exceptions, not ITAR-controlled... even if... it was originally specifically designed or modified for a military aircraft or military aircraft engine."

I don't get that at all from the amendment.

DDTC states quite clearly in the Federal Register Document that the amendment "is intended to clarify the control of aircraft parts and components, and does not remove any items from the USML." (emphasis added). In the Note itself, DDTC rules that the "International Traffic in Arms Regulations administered by the Department of State control any component, part, accessory, attachment, and associated equipment designed, developed, configured, adapted or modified for military aircraft, and control any component, part, accessory, attachment, and associated equipment designed, developed, configured, adapted or modified for military aircraft engines." DDTC explained its intent in Federal Register Document 08-1122 - Notice of Proposed Rulemaking: too many people were submitting CJ requests to DDTC for aircraft parts that were clearly not ITAR-controlled. Moreover, the Federal Register Document summary states upfront that the purpose in issuing the amendment is "restating the Department's longstanding policy and practice of implementing the criteria of this provision."

I fail to see how the restatement of a longstanding policy can lead many to believe that there is much new actual substance here - let alone a new process for wholesale declassification of USML components. A close reading of the intent and amendment reveals there is not. DDTC has not, in reiterating its longstanding policy, given industry a new path for simple declassification. What is new is the designation of additional items as Significant Military Equipment (SME), which is not a boon for US industry or exporters.

If your component was a USML component prior to August 14, 2008, barring a Hermes-paced CJ determination, it's a USML component today - although it may now be SME, too. The amendment did not remove any items from the USML.

The Matrix

I recall the day I was busily scouring the web looking for Export Control Classifications Numbers (ECCNs) when I had the good fortune to stumble across Scott Gearity's Export Control Blog. Mr. Gearity had assembled a list of links to companies' export compliance matrices and personnel. On April 18, 2007, I was disheartened to find that one of my favorite blogs was going inactive. Almost eighteen months later, I still check the site regularly - just in case things have started back up.

In continuance of the great service Mr. Gearity launched for the export community, I've dedicated the lower right-hand corner of this site to links to companies' export compliance matrices, information and personnel: Mr. G's Compliance Corner. I'll do my best to keep these links updated. If you have resources to share and add to the list, let me know.

Once Licensed, Twice Why?

The Directorate of Defense Trade Controls (DDTC) posted its Updated Guidelines for Licensing of Foreign Persons and handy FAQ to redefine those processes US companies must implement to permit foreign person employees to engage ITAR-controlled technical data and defense services. The basic employer/employee authorization is embodied in a DSP-05 which will be valid for the lesser of four years or the expiration of the employee's authorized stay in the US. Notable additional aspects include:
1) The employing US company has an obligation to inform other US parties of the foreign person employee's status before the foreign person employee interacts with other US parties on ITAR-controlled technologies;
2) Other US parties must obtain separate DSP-05 authorizations prior to disclosing technical data to the foreign national employee;
3) The foreign person employee must be named on all Technical Assistance Agreements (TAAs) to which the foreign person employee provides support;
4) The foreign person employee must be named as a foreign consignee on all foreign marketing DSP-05s the foreign person employee supports, and the marketing license application should reference the case number of the employment DSP-05 license;
5) For transfer of classified technical data and defense services to foreign person employees, type up a DSP-85. A DSP-83 will be required to support the DSP-85, and DDTC may require a foreign government to execute the DSP-83;
6) DSP-83s will also be required for the transfer of manufacturing know-how pertaining to Significant Military Equipment (SME) to foreign person employees.

DDTC will no longer require a separate TAA to support the employment of foreign person.

Projections show that if DDTC moves forward with its plan to assess a per-instance fee for submissions, the current simplification of the foreign person employee authorization process could single-handedly fully-fund DDTC within twelve weeks of full scale implementation.