May 01, 2013
Export Controls Alert
The U.S. government’s implementation of Export Control Reform is now officially underway, and one of the most significant changes to the U.S. export controls regime is the addition of the “600 Series” to the Commerce Control List (CCL). The creation of this new series is the administration’s attempt to lift some of the restrictions on exporting U.S. products by moving them from the laws that govern military products and services under the International Trafficking in Arms Regulations (ITAR) to the laws that govern “dual-use” items under the Export Administration Regulations (EAR).
This alert is the second in a series of alerts that Nixon Peabody will be publishing that takes a more detailed look at some of the changes to the U.S. export control regime and how they will affect exporters.
The 600 Series is comprised of items that were formerly listed on the U.S. Munitions List (USML) and were subject to the jurisdiction of the U.S. Department of State, Directorate of Defense Trade Controls (DDTC). The purpose of this migration of USML items to the CCL, which is subject to the jurisdiction of the Bureau of Industry and Security of the U.S. Department of Commerce, is to differentiate between those military items that, according to BIS, are “critical to maintaining a military or intelligence advantage to the U.S.” and those that require more flexible controls so they can be easily exported to NATO countries and other U.S. allies. Prior to this migration, most military items were subject to ITAR, which is generally a more restrictive regime than EAR.
The new BIS rule, which was published on April 16, 2013, sets forth the first group of items being migrated to the CCL. The Rule moves items from USML Category VIII (Aircraft and Related Articles), Category XVII (Classified Articles, Technical Data, and Defense Services Not Otherwise Enumerated), and Category XXI (Articles, Technical Data, and Defense Services Not Otherwise Enumerated) to CCL Category 9. All of the items moved thus far relate to military aircraft other than those enumerated in USML Category VIII(a) and military gas turbine engines other than those controlled under USML Category XIX(a).
In order to house those items being moved from the USML, BIS added ten new 600 Series export control classification numbers (ECCN) to the CCL. All of these ECCNs are in CCL Category 9 (Propulsion Systems Space Vehicles and Related Equipment). ECCN 9A610 – 9E610 cover military aircraft and related commodities and ECCN 9A619 – 9E619 cover military gas turbine engines and related commodities. As in the rest of the CCL, A through E in the ECCN numbers correspond to (A) items, (B) test inspection and production equipment, (C) materials, (D) software, and (E) technology. For example, ECCN 9A610.g is “Aircrew life support equipment, aircrew safety equipment and other devices for emergency escape from aircraft controlled by either USML paragraph VIII(a) or ECCN 9A610.a” Consequently, ECCN 9B610.g controls “test . . . ‘equipment’ ‘specially designed’ for the ‘production,’ ‘development,’ repair, overhaul, or refurbishment of aircrew life support equipment and the other items enumerated in ECCN 9A610.” ECCNs 9C610, 9D610, and 9E610 operate in the same manner with respect to materials, software, and technology respectively. BIS will be adding additional 600 Series categories in due course.
As a general matter, the 600 Series ECCNs are subject to the following reasons for control: National Security Column 1 (NS1), Regional Stability Column 1 (RS1), Anti-Terrorism Column 1 (AT1), and United Nations embargo (UN). Items in 9A619 (military gas turbine engines) are controlled for Missile Technology as well. Notably, all items controlled for NS1 reasons and most items controlled for RS1 reasons require that an exporter obtain a license before exporting a 600 Series item to every country in the world except for Canada.
Thus, at first glance it appears that the 600 Series of the CCL is not all that different from the ITAR because exporters of USML items must obtain a license before exporting any item on the USML (unless an exception or exemption applies, such as the Canadian exemption). Some practitioners have pointed out that much of what the U.S. government has accomplished with the 600 Series is to create a class of items within the CCL controlled in a manner very similar to ITAR items. In addition to nearly every export requiring a license, there are other features of the 600 Series that are nearly identical to the USML. For instance, information on all exports of 600 Series items must be filed in AES regardless of value or destination. 600 Series items are also subject to U.S. arms embargos, which means that they cannot be exported to countries subject to a U.S. arms embargo. This essentially imports a key piece of the ITAR into the EAR.
Furthermore, there is no de minimis threshold for foreign-made items that incorporate U.S.-origin 600 Series items destined for a country subject to a U.S. arms embargo. If a foreign item contains 600 Series items, it cannot be re-exported to a country subject to a U.S. arms embargo. For example, if a foreign gas turbine engine contains even one component that is classified in ECCN 9A619, it cannot be re-exported to China because China is subject to a U.S. arms embargo.
Exporters should note some key differences between the treatment of ITAR items and 600 Series items. The standard EAR de minimis rules apply for foreign items containing 600 Series components being re-exported to countries not subject to a U.S. arms embargo. For those countries, generally speaking, foreign items that contain 25% or less of U.S. origin 600 Series can be re-exported to third countries without a U.S. re-export license.
For some time exporters have had to include a Destination Control Statement (DCS) on documents related to export of any item subject to the EAR (except items classified as EAR99). The ITAR require a similar statement. The new BIS rules modify this rule for 600 Series items—adding the requirement that exporters include the ECCN of any 600 Series items as part of the DCS.
Another key difference between the obligations imposed on items listed in 600 Series and items on the USML are license exceptions. Because items subject to the 600 Series are less militarily significant, BIS has indicated that license exceptions for the export of 600 Series items should be more available than comparable ITAR exemptions. The most important example of this development is that 600 Series items will qualify for an exception known as Strategic Trade Authorization (STA) if they are intended for a government end-user in one of 36 countries in the Country Group A-5 (which contains countries such as the UK, South Korea, Germany, and Australia). As with any license exception, caveats exist with respect to use of the STA. Consequently, exporters should carefully review the requirements of any license exception that they wish to claim, including the STA. In addition, it is worth noting that certain items are not eligible for export under the STA. Despite these limitations, however, the STA exception is a meaningful development as it provides exporters an exception that was not available to them when their items were controlled under the ITAR.
No export license is required for the export of 600 Series items to Canada. While there is a Canadian exemption under the ITAR, it cannot be used for every export and only applies for certain end-users that have been pre-approved by the U.S. government. Exporters of 600 Series items can freely export them to any Canadian end-user (provided that they are not included on a denied person list and the item is not destined for a prohibited end-use).
One final distinction may be obvious but is certainly worth noting. Exporters who exclusively export 600 Series items will not have to register with the DDTC as 600 Series items are no longer subject to DDTC’s jurisdiction.
As described above, the introduction of the 600 Series is changing the rules applicable to companies that have items that were listed on the USML. It is clear that the intent of these changes is to reduce the restrictions that attach to U.S. products to increase the competitive capabilities of U.S. companies. It is also fair to say that one of the goals of these changes is to reduce the administrative burden on companies. The immediate reality, however, is that manufacturers and exporters face a steep learning curve in mastering these new rules and distinguishing which set of obligations are relevant. In addition, the government must also monitor the implementation of these rules to avoid the very real risk of reform doing nothing more than adding an additional layer of procedural complexity.This alert is the second in a series of alerts examining how U.S. Export Control Reform may affect exporters. See related link below to read the previous alert in this series.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.