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Export Controls: BIS Posts Comments on Rules For ‘Specially Designed,' Transition

08/16/12

Source: BNA
Related Topics: International Trade

158 DER C-1
Export Controls
BIS Posts Comments on Rules
For ‘Specially Designed,' Transition
BNA Snapshot
BIS Receives Comments
Key Development: Commerce Department's Bureau of Industry and Security posts comment letters responding to proposed rules on definition of “specially designed” and on the transition-related regulations in connection with export control reform initiative.
What's Next: Comment period for “feasibility” rule closes Sept. 17.

By Len Bracken
The Commerce Department's Bureau of Industry and Security posted comment letters the week of Aug. 6, responding to the proposed rules on the definition of “specially designed” and on the transition-related regulations that will be required as part of the export control reform initiative.

The transition rule received 26 public comment letters, which were posted Aug. 7 on the bureau's website. The rule was originally proposed June 21 and the comment period closed Aug. 6 (124 DER A-25, 6/28/12). The new definition of “specially designed” received 31 comment letters, which were posted Aug. 6.

A major aspect of the reform effort is the transfer of control to the Export Administration Regulations (EAR) of items the president determines no longer warrant control under International Traffic in Arms Regulations (ITAR), once congressional notification requirements and corresponding amendments to the ITAR and the EAR are completed.

The bureau's proposed transition rule addresses issues pertaining to transition of control over the items that make this migration and it complements the Export Control Transition Plan, a proposed policy statement and request for comments issued by the State Department's Directorate of Defense Trade Controls.

This rule proposes to amend the EAR by establishing a general order regarding continued use of State authorizations for a specified period, by broadening license exceptions in the EAR to make them consistent with ITAR exemptions, and by extending the validity period of Commerce licenses.

The new, multipart definition of “specially designed” was originally proposed June 19 and the comment period closed Aug. 3 (117 DER A-26, 6/19/12).

The proposed definition of specially designed is based on nine objectives and has a two-part definition that uses a “catch and release” approach. Paragraph (a) of the definition contains the broad bases for an item to be defined as specially designed, and paragraph (b) contains various exceptions to an item being considered specially designed. Paragraph (a) catches the item and paragraph (b) potentially releases the item (118 DER A-30, 6/20/12).

The State Department concurrently published a proposed rule to create, to the extent possible, a common definition of “specially designed” in the ITAR.

Wolf Describes Letters as ‘Thoughtful,' ‘Meaty.'

In his Aug. 8 weekly conference call on the reform initiative, Assistant Secretary of Commerce for Export Administration Kevin Wolf said the comment letters contained “very thoughtful, meaty questions.”

Wolf said that the bureau's effort to get feedback from practitioners on what would and would not work in the proposed rules was successful. His team is now going over the comments.

“Just because you disagree doesn't mean we failed,” he said. “It means that we solicited your input, and we consider it an iterative process and hope you all do as well.”

The number and quality of the public comment letters in response to the transition rule reflect a high level of engagement in the reform initiative by individuals, companies, universities, and associations, he said.

Companies that contributed comments include Alliant Techsystems Inc., Applied Materials, Boeing, GE Aviation, Huntington Ingalls Industries, Northrop Grumman Corp., and Rolls-Royce.

‘Feasibility' Rule Open for Comment Until Sept. 17

Wolf noted that the bureau still has one proposed rule open for comment until Sept. 17, which is called the “feasibility of enumerating specially designed components” rule. This rule reflects the effort by the bureau to eventually move away from the term “specially designed,” Wolf said.

He added that this longer term effort would involve editing particular export control classification numbers (ECCNs) in the Commerce Control List (CCL) that use the phrase, evaluating what items warrant controls, and forwarding recommendations for changes to the multinational export control regimes, such as the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies.

Congressional Notification to Begin in Late August
At the bureau's annual update conference, officials outlined July 17 the moves they intend to make in coming months related to the finalization of the first rules concerning the category-by-category migration of less militarily sensitive items from the U.S. Munitions List (USML) to the CCL.

The congressional notification process, pursuant to Section 38(f) of the Arms Export Control Act, will likely begin in late August or early September with USML Category VIII Aircraft and Related Items, they said.

Once congressional approval of the changes to Category VIII is obtained, the rule for that category will be attached to the proposed transition rule and the proposed definition of specially designed, and all three regulations will be finalized together (137 DER A-33, 7/18/12).

NAM, Others Raise Congressional Notification Issue
The National Association of Manufacturers (NAM), which is the nation's largest industrial trade association, actively supports the reform effort. It cited in its comment letter on the transition rule a recent study by the Milken Institute that estimates U.S. high-tech exports could increase by $60 billion, resulting in 350,000 new jobs, if the export control system is comprehensively modernized.
NAM added, however, that clarifications concerning the reform effort are required, particularly with the congressional notification requirement for USML items approved for transfer to a new 600 series of ECCNs, often called the Commerce Munitions List (CML). The CML will capture the items that migrate from the USML to the CCL.
“The export control reform initiative is grounded on the principle that those transferred items are not critically important to U.S. national security. Therefore, the NAM does not support establishing a Congressional notification requirement for items on the [Commerce Munitions List].”

National Association of Manufacturers letter
“Unlike the Arms Export Control Act (AECA), the Export Administration Act (EAA)—as currently authorized by the International Emergency Economic Powers Act (IEEPA)—does not require a Congressional notification requirement for changes to the Export Administration Regulations (EAR),” NAM said in a letter from Lauren Airey, director of trade facilitation policy.

She noted that the administration's export control reform initiative has focused primarily on the effort to evaluate the USML and transfer certain items to the CCL after notifying Congress, pursuant to the AECA's 38(f) provision.

“The export control reform initiative is grounded on the principle that those transferred items are not critically important to U.S. national security,” the letter said. “Therefore, the NAM does not support establishing a Congressional notification requirement for items on the CML.”

The group said that the technical specifications for transferred items have been vetted for transfer from the USML, and Congress was appropriately notified before the transfer.

“We recommend removing the CML Congressional notification language from the proposed rule,” the letter said. “Alternatively, we recommend amending the provision to activate the notification requirement based on the dollar threshold of the license application, rather than the contract value.”

The group said that this way, parts and components subject to the EAR would not be inadvertently captured, and follow-on shipments of CML parts and components not identified in the initial transaction should not be subject to follow-on notifications in the future.

The National Defense Industrial Association, the Satellite Industry Association, the Aerospace Industries Association, and several companies including Boeing had identical or similar positions on this issue.

Longer Implementation Window Sought
General Electric Aviation (GEA) said in its letter responding to the proposed transition rule that the effective date for the final version of the rule should be at least 180 days after publication, in addition to making numerous specific recommendations. The time would be used to make the multiple implementation changes regarding classifications, tool updates, training, and licensing.

“Having a delayed effective date for this rule is fully consistent with the approach that has been taken by the Bureau of the Census in rules that have a wide impact across the exporting community on hardware shipments, such as this proposed rule would have,” GEA said in a letter signed by Kathleen Palma.

Huntington Ingalls Industries also sought a 180-day implementing window prior to the effective date and cautioned, moreover, that the proposed changes have generated enough questions about interpretation and application to everyday business for the bureau to publish a second draft of the transition plan for further review rather than immediately issue a final rule.

On behalf of the firm, Sandra Cross noted that the “easing of foreign supply channels in support of manufacturing U.S. military products” was not listed by the bureau as one of the enhancements to national security envisioned in the movement of items from the USML to the CCL.

“As a manufacturer of U.S. Navy and Coast Guard vessels, we ask that BIS consider export activity in a foreign supply chain arrangement to be as equally important to our nation's security,” Cross said. “We offer that national security interests would be further served with a streamlined foreign supply chain accessible to the aerospace and defense industry.”

General Electric, Others Raise De Minimis Rule
GEA also raised concerns regarding the proposal for having no de minimis level for “600 series” items destined for a country subject to a U.S. arms embargo, as this would make foreign manufacturers inclined to avoid using these U.S. parts and components.

The EAR has a de minimis exception (Section 734.4), often relied on by foreign manufacturers, whereby if the U.S.-controlled content is 25 percent or less of the value of the finished product—or 10 percent or less for arms embargoed countries—the product is not subject to the EAR. No such exception exists for the International Traffic in Arms Regulations (ITAR).

GEA favors the current 10 percent de minimis level used with countries subject to unilateral embargoes, that is CCL Country Group E.

GEA said that foreign exporters conduct de minimis calculations at the development stage when they are not fully aware where their customers will be located and would therefore consider avoiding 600 series items.

The de minimis rule was raised by numerous other commenters, such as the Aerospace Industries Association and Rolls-Royce North America, that had a similar or identical position. Northrop Grumman said that it favors the current structure with a zero percent de minimis for countries listed under ITAR Section 126.1, which includes countries subject to comprehensive arms embargoes and those found to be supporters of international terrorism, and the 10 percent de minimis for CCL Country Group E.

The U.K.-based Export Group for Aerospace & Defence (EGAD) warned that there is a need for clear statement from the bureau on how incorporation will work for 600 series items so that foreign contractors can make informed de minimis assessments.

“Any uncertainty on this could result in the U.S. government being on the receiving end of a veritable tsunami of queries from organizations, especially at the lower tiers, from around the world, who lack the in-house expertise to be able to make such complicated calculations for themselves, and, otherwise would face the herculean task of having to categorize for themselves every single U.S.-sourced line item in their stocks, as well as all spares that they own,” EGAD said.

Universities Question Revisions to TSU Exception
The Association of American Universities (AAU) and the Council on Governmental Relations (COGR) said in their joint letter that they strongly support the reform initiative. They said that if it is implemented appropriately, it will enhance national security and facilitate compliance while reducing related costs and regulatory burdens for exporters, including their member institutions. They did, however, raise concerns about revisions to license exception TSU (Technology and Software—Unrestricted), dealing with encryption source code that would be considered “publicly available” and corresponding object code.

AAU is an association of 59 U.S. and two Canadian research universities and COGR is an association of more than 185 U.S. research universities and their affiliated academic medical centers and research institutes that concerns itself with the impact of federal regulations, policies, and practices on the performance of research conducted at its member institutions.

A common problem for these institutions arises when technology or source code subject to the EAR is released to a foreign national in the United States, it is “deemed” to be an export to the home country of the foreign national under the EAR.

“We were pleased to see that BIS has responded to our comments by incorporating the bona fide employee exemption for universities in License Exception TSU (EAR 740.13),” the groups wrote, adding that it appears the bureau has generally incorporated this exemption in the EAR through the proposed 740.13(f), consistent with the overall harmonization objective.

“However,” they said, “the proposed 740.13(f) license exception is subject to a large number of restrictions, including those set forth in part 740.2 of the EAR, part 744 regarding end use/end user restrictions, and a prohibition on release of technology or source code subject to missile technology (MT) or encryption (EI) controls.”

The groups said these restrictions appear to apply generally to all EAR controlled technologies and software, not just those included in the 600 series transferred items, and added that the ITAR bona fide employee exemption from licensing does not exclude particular types of technology or software.

“While we have not been able to assess specific potential impacts on universities, it appears these restrictions may limit the usefulness of the exemption to universities, especially as applied to the 600 series transferred items,” the groups said.

The groups acknowledged that the EAR will control many more items, especially as the reform initiative proceeds and more items are transferred and that some restrictions may be statutorily mandated.


“Nevertheless,” they said, “we urge BIS to reconsider whether all these restrictions are in fact warranted.”

‘Permanent Abode' Term Cited
AAU and COGR also noted that in transitioning the bona fide full-time employee exemption to the EAR, the qualifying terms of 740.13(f)(3)(i) include the ITAR requirement that the employee's “permanent abode throughout the period of employment” be in the United States.

The groups said that many U.S. institutions of higher learning do not use the current ITAR exemption because the use of the term “permanent abode” appears to contradict the terms of the employee's nonimmigrant visa.

“We understand that in discussions with the Association of University Export Control Officers (AUECO) Chuck Shotwell, then-director of defense trade controls policy, provided the following guidance: ‘I've conferred with our legal counsel who agrees that ‘permanent abode' in this context really was intended to mean ‘residence' in the U.S. for the period of employment. ‘Permanent' was meant to distinguish it from ‘temporary' residence, e.g., short term, in the U.S.,” the groups said.

“Any uncertainty… could result in the U.S. government being on the receiving end of a veritable tsunami of queries from organizations, especially at the lower tiers, from around the world, who lack the in-house expertise to be able to make such complicated calculations for themselves …  .”

Export Group for Aerospace & Defence
The groups said that the bureau should consider modifying the proposed language or that the matter should be clarified by note in the proposed changes to the EAR. Kelly Hochstetler, writing on behalf of AUECO, said that the bureau should adopt language that is consistent with visa eligibility requirements to avoid confusion.

When he formally launched the export control reform initiative in an April 20, 2010, speech, then-Secretary of Defense Robert Gates cited his experience as the president of Texas A&M University and the challenge of attracting and keeping scientists and engineers from all over the world in U.S. universities and companies because of controls on “deemed” exports.

Research institutions often rely on the fundamental research exclusion (FRE) that applies to basic or applied research in science and engineering conducted at accredited institutions pursuant to 15 CFR Section 734.8 under the EAR and 22 CFR Section 120.11(8) under the ITAR.

Root Submits Detailed Comment on Definition
William Root—an export control consultant, author, and frequent commenter on rules proposed by the bureau—submitted what is by far the longest public comment letter on the proposed new definition of the term “specially designed.”

In his 152-page comment letter, Root said that the June 19 proposed definition of “specially designed” would defeat the objective of the reform initiative to reduce incentives for foreign manufacturers to “design out,” that is not use, U.S.-origin content.

“It would vastly increase the scope of controls on specially designed components currently on the CCL,” Root said. “This would constitute an incentive for foreign manufacturers to design out EAR as well as ITAR components.”

He contends that this could be avoided by not using “specially designed” in the 600 series, yet acknowledges that the bureau disagrees with him on the grounds that all references to “specially designed” cannot immediately be removed from the CCL because:

• replacing the term with specific items that warrant control would take many years; and

• the new 600 series must use a catch-all “specially designed” term to avoid decontrolling items now ITAR-controlled.

Root, whose background in the field goes back to 1964, disagreed and said that before adopting any increase in national security controls beyond Wassenaar agreements, such as numerous existing CCL component controls, a proposal to that effect would have to be submitted to the multinational Wassenaar Arrangement to comply with EAA Section 5(c)(6).

ISTAC Working on Proposals
The Information Systems Technical Advisory Committee (ISTAC) said in its comment letter that the “specially designed” definition is “complicated and imprecise” and, like Root, noted that it has not been adopted by participating member states of the Wassenaar Arrangement.

While ISTAC members support the adoption of a common definition of “specially designed” for use in the sections of the EAR that may be affected by the migration of items from the USML to the CCL, the members of the committee did not support the adoption of a common definition for the balance of the CCL.

The chair of the group, Jonathan Wise, said in the letter that members would prefer to eliminate or replace the term where it currently appears on the CCL and members are working on proposals to this end for Categories 3B and Category 5, Part 2.

“The approach suggested by the ISTAC goes beyond the immediate issue of parts and components, and eliminates or replaces ‘specially designed' throughout the relevant sections of the Commerce Control List,” the letter said.

Citation of Lachman Questioned
Most of the 31 letters raised problems with the definition that has been a problematic part of the reform effort because of differences in interpretation in uses of the term “specially designed” in the EAR and ITAR.

The American Bar Association, however, noted in its letter that the preamble to the BIS proposed definition refers to the Lachman decision, a case involving the top executive of a New England high-technology company, Walter Lachman, who was sentenced in November 2005 in federal court for violating United States export law in connection with the export to India of equipment that is used to manufacture a material that improves the accuracy of strategic ballistic missiles with nuclear capabilities.

“We see no particular value in this reference and it provides some potential for confusion,” the ABA said in a letter signed by Michael Burke, chair of the Section of International Law. “The decision in Lachman does not address the clearer and more objective standard in the proposed rule to define ‘specially designed.' ”

The group said that the Lachman interpretation of the undefined term “specially designed” does not limit the authority of the departments of Commerce and State now to define the term because their organic statutes authorize this.

“Moreover,” the association said, “we believe Lachman relies too heavily on subjective intent to serve the goals of Export Control Reform. We note that the Lachman decision of the First Circuit is in conflict with the Seventh Circuit's decision in Pulungan.”

The ABA said that if the preamble in the pending proposed rule refers to case law, perhaps it should also refer to the Seventh Circuit's decision in its Pulungan decision, because it raises limits under the Constitution on rules not sufficiently clear that a person knows how to avoid conduct that is in violation of the agency's rules.

The other option, ABA said, would be for BIS to make no references to case law. The reference to the Lachman decision either adds nothing or at worst creates unintended confusion, the association said.

For More Information
The comment letters on the transition rule can be found here: http://efoia.bis.doc.gov/pubcomm/records-of-comments/record_of_comments_ear_transition_rule.pdf. The comment letters on the definition of “specially designed” are at http://efoia.bis.doc.gov/pubcomm/ear_specially_designed_definition/ear_specially_designed_definition.pdf.

 
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