State Dept. Issues Final Rule on Defense Exports To Dual/Third-Country National Employees of Approved Foreign End-Users


Source: WorldTrade\INTERACTIVE
Related Topics: International Trade

The State Department published in the Federal Register May 13 a final rule intended to alleviate some of the licensing burdens on exports of defense articles to approved foreign end-users that employ dual nationals or third-country nationals. However, this rule continues to include widely criticized restrictions on employees who maintain "substantive contacts" with prohibited countries. As a result, use of the newly created exemption is expected to pose significant compliance challenges to many companies.

The final rule amends the International Traffic in Arms Regulations (ITAR) to update policies regarding exports of defense articles and technical data designated on the U.S. Munitions List to eliminate the separate licensing requirement for dual nationals and third-country nationals employed by approved foreign end-users. The State Department explains that the previous policy imposed a large administrative burden on foreign end-users and placed "U.S. companies at a disadvantage with foreign competitors." State also acknowledged that the overwhelming majority of commenting parties expressed discontent with the previous policy as a result of conflicts with foreign human rights laws as well as the burden of compliance.

The final rule adds a new Section 126.18 to the ITAR, exempting intra-company, intra-organization and intra-governmental transfers of USML-controlled items by approved foreign end-users or consignees to their employees who are dual or third-country nationals. Such transfers must take place completely within the physical territory of the country where the approved foreign end-user is located, where the governmental entity or international organization conducts official business, or where the consignee operates, and be within the scope of the export license, authorization or license exemption.

In order to use this new exemption, the foreign end-user must have effective procedures to prevent unauthorized diversion of ITAR-controlled items to destinations or entities, or for purposes, other than those permitted by the underlying license or authorization. Such procedures may include the issuance of security clearances approved by the host national to the third-country or dual national employees or the implementation of employee screening and non-disclosure agreement (NDA) processes. Companies must also establish a technology security/clearance plan that documents their screening and record retention processes.

With respect to employee screening in particular, employees are to be screened for any "substantive contacts" they may have with restricted or prohibited countries. Examples of "substantive contacts" include-

regular travel to such countries, recent/continuing contact with agents, brokers or nationals of such countries, demonstrated allegiance to such countries, maintenance of business relationships with persons from such countries, maintenance of residence in such countries, receiving salary or other continuing monetary compensation from such countries, or acts otherwise indicating a risk of diversion.

Unless the State Department determines otherwise, an employee that has "substantive contacts" with agents and/or nationals of restricted or prohibited countries would be presumed to raise a risk of diversion. It should be noted that the concept of "substantive contacts" is expected to pose serious conflicts with foreign laws.

In response to comments it received, the State Department is also extending the new license exemption to certain contract employees by adding a new definition for "regular employee" in Section 120.39. A "regular employee" includes not only individuals permanently and directly employed by the company but also contract employees who are engaged in a long-term contractual relationship with the company. In order to qualify, contractors must work full-time and exclusively at the company's facilities under the company's direction and control and have executed NDAs. The staffing agency seconding such workers should have no role in the work of the employees and should not have access to any controlled technology.

The final rule also clarifies that the new license exemption does not extend to academic institutions at the present time and applies only to unclassified defense articles and technical data.

For more information about the final rule, or advice on any export control matter, please contact Melissa Miller Proctor at (480) 305-2110, Donna L. Bade at (312) 641-0000 or Anu Gavini at (248) 474-7200. 

You can also stay up-to-date on the latest developments on this issue by subscribing to ST&R's WorldTrade\INTERACTIVE daily e-newsletter.

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Published by Sandler, Travis & Rosenberg, P.A.

NOTE: Information contained herein is of necessity a summary of complicated and fact-specific issues. It is not intended to convey legal advice, and receipt of it does not constitute or create an attorney-client relationship. Before you act on any information provided in this document, you should seek professional advice regarding its applicability to your specific circumstances.

© 2011, all rights reserved. [5/16/2011] 


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