Major Export Controls Revisions and the AUKUS Trilateral Security Partnership

The U.S. Department of Commerce and U.S. Department of State have been continuously easing restrictions on export-controlled trade between the United States, United Kingdom and Australia to foster technological innovation among these nations and support the objectives of AUKUS, the Trilateral Security Partnership Between Australia, the U.K. and the U.S.

Most recently, on Aug. 20, 2024, the State Department published an Interim Final Rule amending the International Traffic in Arms Regulations (ITAR) to further facilitate defense trade between and among the three countries. The State Department is currently seeking public comments on the Interim Final Rule to ensure it supports the goals of the AUKUS partnership while maintaining individual licensing requirements for the most sensitive items subject to the ITAR. The Interim Final Rule will take effect on Sept. 1, 2024, and comments on the rule are due by Nov. 18, 2024. Comments submitted after the rule takes effect will be considered by the State Department when deciding whether to finalize the Interim Final Rule.

Background

AUKUS was established in September 2021 to promote the security and defense interests of the three countries, enhance information sharing and improve their joint capabilities in cybertechnology, artificial intelligence (AI), quantum technology and other areas.

The Interim Final Rule is designed to harness and maximize the innovative power residing in the partners' defense industrial bases by facilitating license-free, defense-related trade. The Interim Final Rule is aimed to enhance the collective efforts brought forward by AUKUS to address security challenges and promote global stability. Notably, the vast majority of commercial defense trade between Australia, the U.K. and the U.S. is eligible for transfer under the license exemption introduced by the Interim Final Rule.

Changes Under the Rule

State Department Amendments

The  Interim Final Rule follows the State Department's previous issuance of a Proposed Rule on May 1, 2024, which was contingent upon the U.K. and Australia aligning their export control regimes with that of the U.S. and implementing a comparable export controls exemption for the U.S. On Aug. 15, 2024, the State Department announced that the U.K. and Australia had met these standards and subsequently issued the Interim Final Rule to loosen restrictions on trade among the three countries involving ITAR-controlled goods.

Specifically, the Interim Final Rule amends the ITAR to add a new exemption in Part 126, allowing exports, reexports, retransfers or temporary imports of defense articles, as well as the provision of defense services or engagement in brokering activities among previously approved parties (Authorized Users) in Australia, the U.K. and the U.S. (the AUKUS Exemption). Additionally, the Interim Final Rule provides for expedited processing of license applications for the export of defense articles and services that do not qualify for an exemption to Australia, Canada or the U.K. The Interim Final Rule also expands the scope of the existing ITAR exemption for intracompany, intra-organization and intragovernmental transfers to permit the transfer of classified defense articles to certain dual nationals who are authorized users or regular employees of an authorized user within Australia and the U.K.

The Interim Final Rule also includes several limitations. Most prominently, it introduces a new Excluded Technology List (ETL) that identifies certain defense articles and services ineligible for transfer under the new AUKUS Exemption, based on statutory obligations and policy decisions, including national security considerations. Additionally, the manufacturing of significant military equipment (SME) abroad is not permitted under the AUKUS Exemption, as such activity is subject to congressional certification requirements. The Interim Final Rule does not alter or replace other ITAR exemptions and requirements such as recordkeeping and reporting. In cases where the AUKUS Exemption does not apply, the State Department must adjudicate licenses within 45 calendar days (or 30 days in some circumstances), providing for greater timing certainty for potential transactions.

To qualify as an authorized user for purposes of the AUKUS Exemption, the Interim Final Rule requires that U.K. and Australian transferors or recipients complete an enrollment process initiated through their respective governments. The State Department has indicated that details on the enrollment process will be provided separately but managed by agencies of the U.K. and Australian governments.

Commerce Department Amendments

The Interim Final Rule follows similar updates to the Export Administration Regulations (EAR) published by the Commerce Department's Bureau of Industry and Security (BIS) earlier this year in a separate rulemaking. The rulemaking from BIS removed certain restrictions and license requirements for most items on the Commerce Control List (CCL) to allow Commerce Department-controlled military items, as well as items related to missile technology and hot section engines, to be exported or reexported to Australia and the U.K. without a license.

These changes include the removal of list-based license requirements for exports, reexports and transfers (in-country) to Australia and the U.K. for items controlled for reasons of national security column 1 (NS1), missile technology column 1 (MT1) and regional stability column 1 (RS1) reasons. Additionally, BIS removed military end-use and end-user-based license requirements for exports, reexports and transfers (in-country) of certain cameras, systems or related components subject to the EAR. Moreover, the change allows for the export, reexport and transfer of "significant items" (i.e., hot section technology for the development, production or overhaul of commercial aircraft engines, components and systems) to or within Australia and the U.K. without a license. Finally, the revisions to the EAR include additional minor policy changes to achieve broader alignment of controls on exports to Australia, Canada and the U.K.

Conclusion

Overall, the export reforms implemented by the State and Commerce Departments will significantly reduce the licensing requirements for defense-related trade with Australia and the U.K., as well as facilitate defense and dual-use related trade and cooperation between the three countries. According to a report published on Aug. 22, 2024, by the University of Sydney's United States Studies Centre, the reforms in the three countries could exempt three-quarters of their defense trade from licensing requirements.

These changes have various implications for U.S. and foreign companies alike:

• For U.S. companies with subsidiaries, business partners, customers or other counterparties in Australia or the U.K., as well as Australia and U.K.-based companies currently engaged in or considering business in the U.S., a license will be required in fewer instances (both for goods controlled under the EAR and ITAR). This will enable greater sharing of hardware, software and technical data between U.S. companies and counterparties located in Australia or the U.K. A case-by-case assessment must be performed to ensure all of the regulatory requirements have been met to qualify for license-free exports.
• Additionally, the export reforms will ease the regulatory and compliance burden on U.S. companies doing business with counterparties in Australia and the U.K., as well as companies based in these countries that utilize U.S. technology, which would otherwise be controlled.
• Moreover, the export reforms would not only allow for the physical export of controlled items to Australia and the U.K. but also affect the ability to transfer services or information to Australian or U.K. nationals located within the U.S., since the new exemptions would also cover deemed exports (i.e., the release or transfer of technical data to a foreign person in the U.S.). These changes could significantly assist with streamlining business activity and furnishing technical data and services to Australian or U.K. national employees of companies within the U.S.
• Finally, the changes will have an impact on foreign investment transactions subject to the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). Removing the national security, missile technology and regional security controls for certain technologies controlled under the EAR for exports to Australia or the U.K. would affect the treatment of the technologies as "critical technologies," thereby removing a mandatory filing requirements with CFIUS for transactions involving Australian or U.K. parties in certain instances. This results in a more favorable treatment of Australian and U.K. investments, some of which already benefit under the CFIUS-excepted investor provisions if certain criteria are met. However, ITAR-controlled technologies would not benefit from the exemption, as CFIUS regulations do not permit the use of ITAR exemptions to remove mandatory filing requirements.

For more information on the implications of the Interim Final Rule or assistance with complying with U.S. export controls, please contact the authors or another member of Holland & Knight's International Trade Group.

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