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The Legal Side: Recent Developments in Export Control Reform: Proposed Reorganization of the U.S. Munitions List and the Commerce Control List - Part I
by Guest Author Sarah A. McKeown

It is my distinct pleasure to introduce to you a special guest contributor this month. The following article was authored by Ms. Sarah A. McKeown, whose practice focuses largely on international trade and export compliance. Ms. McKeown brings her specific knowledge and experience in the area to this piece, which examines recent proposals by the Department of Commerce to redefine and reorganize the export control regime.

In August 2009, President Obama directed an interagency review of the export control system and by April 2010, initial results made clear that major changes to the current structure would be necessary. While the administrative review process is a lengthy one, several revisions have already been proposed and promise to have a significant impact on licensees engaged in the export of defense articles. This month’s column is the first in a two-part series in which I will review the proposed changes that, if made final, will most directly affect licensees. The first part of the series will explain the U.S. Department of Commerce’s proposed reorganization of the U.S. Munitions List (USML) and the Commerce Control List (CCL). The second part of the series will review a new license exception that will apply to the CCL as amended by the proposed changes set out in this month’s article.

The Current System & Goals of the Reform

At present, the U.S. Department of State Directorate of Defense Trade Controls (DDTC) administers the International Traffic in Arms Regulations (ITAR) and thus regulates all “defense articles” on the USML. Section 120.1 of the ITAR defines “defense articles” as articles or services that are specifically designed for military application and have neither a predominant civil application nor a functional equivalent in civil applications, or which are specifically designed for military application and have “significant military applicability such that control [by the ITAR] is necessary.” Items that are not controlled by the ITAR through the USML and are not controlled by another federal agency are generally regulated by the Export Administration Regulations (EAR) administered by the Department of Commerce.

Concern over the ambiguity of the USML and CCL, however, has led to efforts to streamline and clarify the classification and licensing process. Thus, the goal of these reforms is to clearly articulate which articles fall under each control list, to eliminate some of the licensing and registration requirements, and to move some of the “less militarily significant” items to the CCL. The revision is intended to make the USML a clearer, “positive” list based on objective criteria. In other words, instead of listing parts and components generically that are “specifically designed,” the revised USML would consist of a specific, objective list of what exactly is controlled by the ITAR.

On July 15, 2011, the U.S. Department of Commerce Bureau of Industry and Security (BIS) published a Notice of Proposed Rulemaking (NOPR) in the Federal Register announcing its proposed revisions to the export control regime (76 FR 41958). Largely, the proposal sets forth a plan to 1) reclassify a considerable number of articles currently designated as defense articles on the USML as less militarily significant articles that need only be included on the CCL and 2) to redefine certain terms to further clarify the scope and intent of the regulations.

Proposed Addition of the “600 Series” to the Commerce Control List & Other Changes

One of the most significant suggested changes is the proposed movement of certain “less militarily significant” items from the USML to the CCL. As readers familiar with the CCL will know, items on the CCL are organized into numbered series of Export Control Classification Numbers (ECCNs), each subject to varying restrictions and requirements. To accommodate these newly moved items, a new series - the “600 Series” - would be established on the CCL. This 600 Series would be made up of end items and parts, components, accessories and attachments previously listed on the USML as well as the 13 existing Wassenaar Arrangement Munitions List (WAML) entries already covered by the CCL. This new series would likely be referred to as the “Commerce Munitions List.” It is this part of the CCL that would be most relevant for those in the firearms trade.

Each 600 Series entry would include all WAML and USML end items that are either 1) no longer identified on the revised USML, or 2) not already strictly controlled elsewhere on the CCL. Although no final decisions have been made, we believe it is likely that no fully-automatic firearms, which are currently ITAR controlled, would move to the CCL. However, it is possible that certain semiautomatic or smaller caliber firearms may be moved. Certainly, other types of end items in the ITAR have already been suggested for movement (e.g., tanks manufactured in or prior to 1955, unarmored military recovery vehicles, etc.). In some cases, parts, components, attachments and accessories that were previously on the USML (e.g., Category I(h) firearms parts and accessories) may be moved to the CCL, even if the corresponding end item (here, Category I(a) firearms) remains on the USML.

Under this proposal, all 600 Series end items that were transferred from the USML to the CCL would by default require a Commerce license for exports to all foreign destinations (except, in most cases, Canada). Some exceptions, with limited availability, would be applicable: Temporary Export (TMP), Replacement Parts (RPL), Limited Value Shipment (LVS), Government End Users (GOV), and Strategic Trade Authorization (STA) (the new exception published in a June 2011 Federal Register notice, and the subject of next month’s article). Parts, components and related technology for the 600 Series, however, would likely be allowed very broad license exceptions. It is intended that these exceptions would allow for easier and less burdensome licensing procedures, particularly with friendly countries.

Other proposed changes include the addition of a new category on the CCL for newly developed items that are not yet categorized or that are still emerging. These uncategorized articles would be identified by ECCN 0Y521 and the government would have one year to review and categorize the article. This new category is analogous to Category XXI Miscellaneous Articles on the USML. Items with ECCN 0Y521 would be subject to a worldwide license requirement (except for Canada), with licenses granted on a case-by-case basis.

Lastly, another relevant, but small, change to the de minimis rule for the 600 Series is proposed. This rule defines the extent to which foreign-made items incorporating U.S. origin content are subject to the EAR. The current de minimis rule sets the value limit for U.S. origin percentage in foreign-made items at 25% (10% for state sponsors of terrorism): if an article contains more than 25% U.S. origin parts or content, by value, it would be subject to the EAR. The new 600 Series rule would restrict the percentage to only 10% for this category.

Expected Impact on Licensees

The most striking aspect of the proposed changes to the regulations is how incredibly complex the regulations would be if adopted. Even for industry members familiar with the EAR, the CCL, and the BIS licensing process, the changes are not simple. For those members of the firearms and defense industry encountering the EAR for the first time, the overhaul would be overwhelming. The ITAR and EAR are structured very differently and significant resources, of both time and money, would need to be invested in re-training officers and employees. Moreover, licensing officers at Commerce would need to receive new training on an entirely new and unfamiliar category of items.

One of the biggest concerns related to these proposed reforms is the possibility of increased review times for licenses. BIS acknowledges this possibility, citing DDTC’s average as 17 days and BIS’s average as 31 days (although it can take up to 39 days). This difference is significant on its own, but also does not address how BIS would approach licenses that must be expedited for U.S. Government or ally government purposes. Under the current control regime, DDTC provides immediate attention to license applications identified as, for example, Operation Enduring Freedom or Operation New Dawn. Furthermore, the knowledge and availability of the DDTC licensing division allows for effective communication and ensures that the most important shipments are given priority. It is unclear if any type of consideration for shipments vital to U.S. Government operations would be provided for under the EAR.

Additionally, although the intent to create a “positive,” more objective list appears to be a welcome revision that would eliminate the broad or vague descriptions found in the ITAR, the unique characteristics of the firearms trade, in contrast to other industries subject to the EAR, may be problematic here, as rapid development and ever-changing technology make a “positive” list difficult to maintain. With the constant research and development that is a hallmark of the trade, it is unclear if the CCL would be constantly updated, or if articles would be reclassified, forcing companies to regularly reevaluate their relevant ECCNs.

The creation of the new ECCN 0Y521 is, presumably, BIS’s answer to this problem, but it seems an inefficient process to address rapidly changing technologies. The benefit of larger “groups” or “categories” of control, as under the current ITAR, is that new technology can generally easily fit into an existing group and can be immediately and predictably exported from the country after relatively prompt review by DDTC. Creating new categories requiring significant review periods by BIS would most certainly increase the wait time for licenses dramatically.

It does appear that the intent of the regulations is to allow for more unlicensed shipments and, for some members in the small arms trade, this reform may prove to be a boon. Companies that export only EAR controlled parts or components would no longer need to register with DDTC and many of their products could be available to ship without even a BIS license. For many firearms companies, however, these proposed changes would not lessen, and could perhaps increase, the administrative burden or licensing wait time, as it could add a second licensing agency review to a shipment that before only required one.

Furthermore, the logistics of shipments themselves would be affected. Orders and shipments generally include many different types of items, all of which can often be included on one State Department license. Under the new rule, it is likely that many shipments would require two licenses from two agencies. This extra burden is time-consuming and costly. Further, when international shipping is concerned, costs could increase even more if shipments had to be split up because of a delayed license. The economic toll of so-called “mixed shipments” could be quite large.

The proposed reorganization of the USML and CCL would be a complicated and substantial change, if accepted. There are positives: small arms parts and accessories would often likely fall under a license exception making them eligible for shipment without a license. Secondly, removing the less significant items from the ITAR would allow the DDTC Licensing Division to concentrate its efforts, and shorten wait time, on approving militarily significant licenses.

Even so, significant concerns abound. Understanding the proposed changes requires, at the very least, basic working knowledge of the CCL - a list in which many in the small arms industry have little to no experience. Further, the licensing process itself may take longer or require multiple applications, in direct conflict with the intent of the reforms. Lastly, although small companies may benefit from some of the proposed changes, larger companies and those involved in complex transactions would be hit with more paperwork and logistical and reporting requirements for items that move to the CCL.

It is unclear as yet, what the outcome of this export control reform proposal will be and how specifically it will affect the small arms community. However, we urge you to familiarize yourselves with these changes both adopted and proposed so that you are ready to comply with the changes if, and when, they are implemented.

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