Major Changes to U.S. Export Laws Go into Effect October 15, 2013: Is Your Company Ready?

New rules implementing export control reforms become effective October 15, 2013. The keystone of these reform efforts is to transfer jurisdiction of less sensitive military items currently controlled under the International Traffic in Arms Regulations (ITAR) to the more flexible Export Administration Regulations (EAR) administered by the Department of Commerce. The rules going into effect on October 15 transfer certain military aircraft, engines, and parts and components off the United States Munitions List (USML), as well as make a number of regulatory changes to the ITAR and EAR to facilitate the transition of items from the USML to the EAR Commerce Control List (CCL).

Now Is the Time for Companies to Establish a Transition Team and Plan

Export control reform is not export simplification, therefore, the transition period is likely to be difficult for affected companies. The reforms represent a substantial revision of the export control regime, thus companies would be wise to devote resources now to be ready for changes. During the transition, expect an uptick in inadvertent violations, mistakes and delays, and potential tension between major contractors and suppliers as they transition at different paces. Now is the time to establish a transition team and develop an implementation plan.

This alert provides a management level overview, highlighting the major issues that will face industry in implementing export control reforms.

What Are the Major Reforms?

Migration of Less Sensitive Items from the USML to the CCL

The most important changes are the transitioning of less sensitive items from the USML to the CCL on a rolling, category-by-category basis.

• USML Will Largely Become a "Positive List." The USML will largely become a positive inclusive list of sensitive military items that continue to require strict control. For example, fighter and bomber aircraft, and specialized military components such as air-to-air refueling, tail hooks, bomb racks, and related services and technical data will continue to be controlled under USML Cat. VIII. Certain military gas turbine engines are broken out into a new USML Cat. XIX.
• New 600 Series Controls on CCL. Military items, and most "specially designed" parts and components for such items controlled on the USML, will now be controlled under new export control classification numbers (ECCNs) in the CCL. For example, military cargo and trainer aircraft, as well as many specially designed parts and components for these aircraft and USML aircraft, will now be classified under one of the subcategories of ECCN 6A610. Certain military gas turbine engines and specially designed parts will fall under ECCN 6A619. These will generally require a license to any country other than Canada, unless a license exception applies.
• ".y" Sub-Systems Subject to Lesser Controls. Certain enumerated parts and components not associated with military functions will be classified under a ".y" subsection to the relevant ECCN, and will generally be exportable to most countries without a license (excluding China and certain other countries for which specific controls apply). For example, tires, filters, galleys, lavatories and magnetic compasses specifically designed for military aircraft will all be classified under ECCN 6A6910.y, and can be exported to most countries without a license.
• Decontrol of Fasteners. Most fasteners (e.g., nuts and bolts) will be decontrolled even if specially designed for a particular military application.
• Space Systems. Space systems for commercial satellite operations will move to new 500 series ECCNs and be subject to similar restrictions as 600 series ECCNs. The Bureau of Industry and Security (BIS) has proposed a broad definition of "space qualified" that goes beyond items specially designed for space applications to include items tested for use in space.

Broader License Exceptions Under the CCL

Manufacturers, whose items are migrating from the USML to the CCL, may be able to take advantage of license exceptions, particularly when exporting to certain countries. In particular, under the Strategic Trade Authorization (STA) already available in the EAR, subject to certain limitations and requirements, U.S. companies can export items otherwise requiring a license to most European countries, Argentina, Australia, Japan, New Zealand and South Korea — with more limited application to Albania, Hong Kong, India, Israel, Malta, Singapore, South Africa and Taiwan.

Common Definitions

The reforms implement new common definitions that will make determining jurisdiction of an item easier. The new substantively identical definitions of "specially designed" found in the ITAR and EAR are the most important new definitions. The definitions give a multistep test for determining whether a part or component is specially designed for a particular item controlled on the USML or CCL. It is expected that a major part of many companies' transition will be reclassifying items using these definitions. There is currently still a difference with regard to "foreign nationals," with BIS looking at the most recent country of citizenship/permanent residence, whereas the U.S. Department of State's Office of Defense Trade Controls (DDTC) looks at a number of factors, including place of birth.

Reform Timeline

DDTC and BIS have issued proposed (and more recently) final rules to implement reforms, with some key dates as follows:

• September 9, 2013. Currently, the agencies are soliciting comments on the transition of certain military electronics off the USML (comments are due by September 9).
• October 15, 2013. Final rules issued April 16, 2013, regarding changes in USML Cat. VIII (aircraft) and new USML Cat. XIX (gas turbine engines) and the corresponding CCL changes will become effective. In addition, major transition rules and new definitions take effect.
• Fall 2013. Expect proposed rules for USML Cat. XII (Fire control and night visions equipment) and USML Cat. XIV (toxins, biologics), and the corresponding CCL changes. Also expect final rules for other categories already published as proposed rules to be issued. This will likely include USML Cat. XV (spacecraft).
• January 6, 2014. The next round of final rules issued July 8, 2013, will become effective with certain less sensitive items in the following USML categories being transferred to the CCL: USML Cat. VI (warships), Cat. VII (military vehicles), Cat. XIII (materials/miscellaneous) and Cat. XX (submersibles).

Assuming all the remaining final rules are published this year, the regulatory transition from the USML to the 600 series will largely be fully effective sometime next summer. However, BIS has indicated that there will be further "housekeeping" changes to effect reforms, including new rules on recordkeeping, documentation, routed export transactions, and revision of license exceptions, such as the temporary sojourn exception for aircraft and vessels.

Transition and Grandfathering

The agencies have gone to some length to try and ease the transition covering a number of anticipated issues:

• Delayed Effective Dates. Final rules will not be effective for 180 days after issuance, giving industry time to reclassify items, recode systems and make conforming changes to compliance manuals.
• Prior Commodity Jurisdiction Determinations (CJs). Industry can largely continue to rely on old CJs that identify an item as subject to the EAR, (i.e., items determined to be dual-use will not suddenly be captured by the new 600 series ECCNs). Industry can self-classify items that are removed from the USML, even if a prior CJ indicates it is USML.
• Grandfathering of DDTC Approvals. Even after the October 15, 2013, effective date for aerospace items (or the effective date for other categories), licensees can still continue to use existing DDTC approvals, and even amend such DDTC approvals, subject in some cases to a two-year limit. For example, a DDTC manufacturing license agreement to manufacture military items in a foreign country will remain effective for two years, and may be extended even if the items manufactured move from the USML to the CCL.
• Procedure to Avoid "Dual Licensing" Requirement. If a new project will involve both USML and CCL items requiring a license, applicants can apply to DDTC to license both. On the other hand, once a BIS license is issued covering an item, the DDTC license must be terminated.
• DDTC Applications in Process. DDTC will continue process license applications filed before changes to an item become effective. For example, DDTC would process an application to export USML aircraft tires filed before October 15, even though after this date these items would become CCL items.
• Pre-positioning of BIS License Applications. Applicants can file with BIS in advance of effective dates. BIS will review and hold without action until the effective date in order to enable applicants to quickly be licensed under the new rules.

What Should a Company Be Doing to Prepare?

• Brief Management. If your company will be affected, brief upper management so that they have some understanding of the scope and impact of changes and the value of devoting resources up-front to avoid negative impacts, such as inadvertent violations, detention of improperly documented exports, or misunderstandings with key customers.
• Get Your Key People Up to Speed in Advance. Many experienced export control professionals have learned from past experience to ignore proposed changes until they come into effect. However, this strategy will not work this time and your key people need to have an understanding of what the changes are so they can implement the transition.
• Transition Team. Assemble a transition team that includes affected departments, including IT, if you have automated systems; also include logistics because the Automated Export System (AES) and other coding will change.
• Plan of Action and Milestones. Assess the impact of reforms and develop an action plan. This may include the following steps:
   
  • Identify what automated systems will require changes (as software changes may have long lead items).
  • Make changes to your export compliance manual. In particular, you will need to develop specific guidelines/check sheets for classifying/reclassifying items.
  • Develop and roll-out training to staff on changes.
  • Identify product areas that will likely change classification, and reclassify these items using an agreed upon and documentable procedure. This may include seeking commodity jurisdiction determinations and/or classification determinations ahead of the transition date.
  • For transition items, determine what license exceptions may be available for key contracts, programs and customers.
  • Determine a transition plan for existing licenses. For example, will you continue to operate under existing DDTC licenses where available, or apply for new BIS licenses to replace them? Will you pre-stage BIS licenses to replace existing DDTC licenses?
• Coordinate with Key Suppliers/Customers. It will be important to coordinate transitions with your business partners to avoid confusion. Expect that major defense contractors will be implementing detailed transition plans and will be looking to ensure that their suppliers are following suit.

Because these reforms will take effect on a rolling basis, the plan and team will need to be fully prepared to handle routine changes as new rules are issued (and then become effective).

Conclusion

It is not hyperbole to state that the changes that will begin to take effect on October 15, 2013, are the most significant changes to export regulations since the 1990s. Compliance professionals steeped in the ITAR will have to come to grips with the more complex — but also more flexible — EAR rules. Companies that invest the resources to prepare for the transition will be able to take advantage of the reforms and avoid the many potential problems that such massive changes could bring.   

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.