Industry experts advise taking control of process rather than letting it drive you.
While the U.S. government’s ongoing initiative to reform its Cold War-era export control regulations promises significant simplification and streamlining of procedures in the future, many exporters are struggling in the present with how to properly straddle their compliance programs between the old and new ways.
These exporters are worried that during this regulatory transition they are prone to mistakes which could come back to haunt them in the form of hefty penalties and other disciplinary actions from federal regulators once the new export control regulations and procedures are finalized and implemented. That’s why export practitioners are urging companies to remain engaged in the reform and stay on top of the changes.
“If you’re the export compliance officer for your organization then you have a responsibility of keeping informed of changes to the export regulations that have an impact on your organization’s compliance program,” said Paul DiVecchio, president of Boston-based export consultancy DiVecchio & Associates. “Failure to do so places your organization, as well as you personally, at risk of non-compliance with the regulations, plus missed opportunities that are a result of the progressive changes.”
“Undoubtedly, it’s confusing because it’s so new, particularly for people who have been working in the same mode on export compliance for years,” said Dennis Farrell, director of global trade compliance at Analog Devices. “This is one of the biggest changes in 20 to 25 years.”
President Obama, via then Defense Secretary Robert Gates, announced the sweeping export reform initiative in April 2010, with great promise, specific goals and a determination to make the process as expeditious as possible. The long-term vision for the initiative is to create a single control list administered by one agency using a standard information technology platform, and consolidate enforcement activities under a single agency within the Department of Homeland Security.
The first goal post of the reform is to improve the export licensing processes and eliminate persistent agency jurisdictional disputes. The administration realizes that overly burdensome export controls, which have been put in place over the years to prevent certain products and technologies from ending up in the hands of rogue nations and terrorists who may attempt to use them to harm the United States and its interests, may hinder the country’s manufacturing base from efficiently engaging in international trade.
However, the bureaucratic and legislative wheels in Washington have turned slower on the reform than many in the industry would like, resulting in confusion and frustration among exporters who simply want to understand the rules and comply with them.
For the past several years, the primary agencies responsible for managing and enforcing the nation’s export controls—State’s Directorate of Defense Trade Controls (DDTC), Commerce’s Bureau of Industry and Security (BIS); Defense’s Defense Technology Security Administration (DTSA), and Treasury’s Office of Foreign Assets Control—have laboriously gone back and forth to develop criteria for a tiered control list, with the “crown jewels” or weapons of mass destruction in the top tier, and working downward based on maturity of the product technology. A tiered control list is supposed to help government licensing officers prioritize applications. Currently, licensed exports are mainly split between two lists, the Commerce Control List (CCL) and U.S. Munitions List (USML).
Many components that were once regulated for exclusive military use by the State Department under the USML, as required by the country’s International Traffic in Arms Regulations, have started to move over to the CCL as guided by the Commerce Department’s Export Administration Regulations.
“The judicious pruning of the USML accomplishes two things: First, a movement of low-risk items from the USML to the CCL, and second, but more importantly, a 50 percent reduction (about 80,000 to 40,000) in DDTC license applications processed from 2013,” said David Ross, president of consultancy Ross Global Trade Solutions in Cumberland, R.I.
“Shifting jurisdiction of defense articles and services from the ITAR to the EAR will permit many smaller exporters and their forwarders to enter the defense product and service market without the need to register with State/DDTC, pay registration fees, hire ITAR experts, and retain lawyers and consultants to assist,” explained James Bartlett, an attorney with a specialty in arms and defense technology trade compliance and publisher of the widely circulated online newsletter, The Daily Bugle
“I do see the pruning of the USML and CCL as an overall positive step in eliminating low-risk items from both lists, thus loosening export controls and licensing requirements for these items,” Ross added. “This is a big step forward to support President Obama's export initiative to double U.S. exports in the next five years.”
Ross noted one of his aerospace clients used to have to apply for an export license under the USML for common nuts, bolts, washers and fittings. “Now they can ship without a license,” he said.
However, that doesn’t mean items now on the CCL and under Commerce’s jurisdiction are any less regulated than they were under the USML, industry experts say. As explained by Kevin Wolf, Commerce’s assistant secretary of export administration, the export reform initiative is not about “decontrol,” but how to more efficiently control certain exports for national security purposes.
Companies that must now request export licenses for their products from BIS instead of DDTC due to their ability to be used for either commercial or military applications, also known as “dual-use,” will experience a longer wait period for approval – often two to four months – compared to the two-week wait when the process was purely under State’s jurisdiction. This is mostly due to the required inter-agency signoff on dual-use export license applications. Both DDTC and DTSA licensing officers have up to 30 days each to approve an application or even stop it altogether from proceeding, if either agency believes an item should be regulated for national security purposes.
During the past three years, the agencies have reviewed and made their recommendations on moving items from various USML commodity and technology categories to the CCL, with an initial implementation occurring on Oct. 15, 2013, including those covering aircraft and related parts, gas turbine engines, surface vessels and special naval equipment, ground vehicles, and submersible vehicles. DDTC and BIS plan to release their final rules on satellites and radiation-hardened vehicles in April, followed by similar regulatory action for military electronics in June, Wolf said.
“The bottom line here is that exporters must re-classify their aircraft and gas turbine engine parts, for example, to be reflective of the new regulations,” Ross said. “Otherwise, there is a high risk that license applications to the State Department will be denied and returned without action if State deems the parts have moved to the Commerce Control List under the export control reform.”
BIS observers worry about the adequacy of training for the agency’s licensing officers and their ability to efficiently process the influx of commodity classification and license requests from exporters with former ITAR-licensed shipments.
“BIS is overwhelmed,” DiVecchio warned. “This is going to get worse under the ECR (export control reform) with the anticipation of at least a 30 percent transfer of ITAR items to the Commerce Control List.
“The result will be inordinate delay in decisions and inadequate time dedicated to the reviews resulting in incorrect determinations,” he said. “In addition, the inter-agency review process places more power with the Defense Department to have control over decisions without the pressure of accountability to the industry for timely and accurate responses. BIS is the official focal point to industry for Commerce jurisdiction on commodities and technology.”
“The work must continue until two leaner and smarter lists evolve, and that will make a difference in increasing U.S. exports. Beyond completion of the shuffle, export control will consist of maintaining the lists by making informed decisions as to what to add, delete or transfer,” Ross said.
Another tricky area of the export reform for companies has been a proper understanding of BIS’s new “specially designed” definition. The term traditionally helped exporters either regulated by ITAR or EAR dateline whether their items were subject to export licenses. The new definition, which was published in the Federal Register on April 16, 2013, attempts to narrow the focus on items that may be subject to the Commerce Control List.
“Exporters want to operate in line with the regulations in front of them,” Wolf said. “You can’t be a reliable and predictable exporter if it’s left open to the interpretation of whoever you’re talking to.”
“Both State/DDTC and Commerce/BIS have fully consulted with industry by asking for and carefully considering comments on the proposed regulations, and have provided extensive training opportunities through their Websites and public appearances – far more than export regulators provided in the past,” said Bartlett, who is also an industry member of the Commerce Department’s Regulations and Policy Technical Advisory Council (RPTAC).
However, many export practitioners have called the new specially designed definition overly complex. “There is more logic assigned to applying the definition, but there is still too much confusion regarding interpretation of certain terms within it,” DiVecchio said.
Wolf doesn’t downplay the difficulty, especially for small and midsized companies with limited internal compliance resources, to understand the new specially design definition. “It’s a paradigm shift,” he said. “It may take three to four times to go through it” before an understanding of it is reached.
BIS has tried to ease the burdens of the export reform changes by hosting or participating in numerous webinars, in addition to holding conference calls every Wednesday during which Wolf answers pre-submitted questions from the audience. The agency conservatively estimates that during the past year these venues have provided export reform information to more than 17,000 individuals. BIS is building a list of frequently asked questions and answers based off these events, which it plans to make available on its Website soon.
“I’d like to see more FAQs on the BIS Website. What are the mechanics? What should people be aware of? I’d like to see more of that,” Farrell said.
The agency has also developed an online tool that helps exporters answer their specially designed questions, and a “yes/no” review tool that assists companies in determining whether their commodities are subject to ITAR or EAR.
In addition to BIS’s outreach, DiVecchio said exporters must take the initiative to properly drive their own compliance programs during the reform, including:
*Finding out which agency licensing division and officer are handling your request.
*Developing relationships with licensing officers and policy staff at the agencies.
*Sending comprehensive information when submitting commodity jurisdiction or license requests.
*Communicating by email and telephone with agency personnel.
*Not being “pushy” with agency personnel, but letting them know the impacts to your business and at the same time showing sensitivity to the situation that they’re facing.
“There’s a lot going on with the ECR and I wonder how the licensing officers are keeping up with all the changes, and what’s changed that may impact their decisions,” said Farrell, who also serves on the RPTAC. “They certainly have their noses buried in license applications all day.”
BIS is currently operating with a $101 million budget for fiscal year 2014, which is about $11 million less than what the White House requested for the agency from Congress in its initial budget proposal, but it “allows us to keep functioning normally,” Wolf said.
Generally, most export practitioners believe that the country’s export control reform initiative will ultimately result in a less complex regime that will benefit U.S. industry with expanding its presence in the international market and meet the government’s political objectives for national security.
“Most people are in favor of progress – it's the changes they don't like,” Bartlett said. “Implementation of new rules takes time and costs money. But in a few years we will have a simpler system that should greatly benefit U.S. industry.
“And although it may mean I’ll have fewer clients once the new ECR rules are in effect, I predict there will be fewer export violations, and more error-free exports of U.S. technology,” he said.
U.S. export compliance and reform resources
- U.S. Commerce Department Website:
- www.bis.doc.gov – Bureau of Industry and Security, go to “Regulations” tab and drop down to “Federal Register notices.”
- www.export.gov/ecr – Site for keeping track of the changes to the regulations related to the export control reform initiative.
- U.S. State Department Website:
- www.pmddtc.state.gov -- Directorate of Defense Trade Controls, go to “Federal Register notices” tab on the left side of the home page.
- The Daily Bugle – Published by James Bartlett, an attorney, author and frequent lecturer on international trade, with a specialty in arms and defense technology trade compliance. The free daily online subscription service provides notice of export and import regulations, plus news and events. Email JEBartlett@JEBartlett.com to subscribe.
- Export Law Blog – Maintained and published by attorney Cliff Burns and includes editorials and insights related to export control issues. It can be accessed at www.exportlawblog.com.
- International Trade Law News – Maintained and published by attorney Douglas N. Jacobson and provides news, analysis and information on export controls, sanctions, customs law, Foreign Corrupt Practices Act, antidumping and other international trade issues. It can be accessed at www.tradelawnews.com.
These are just a few online private-sector information resources, often available for free. Numerous law firms also publish announcements and interpretations of recently published BIS and DDTC proposed and final rulemakings, which they make available to their clients and news outlets.
In addition, trade associations, such as the International Compliance Professionals Association, American Bar Association’s International Law Export Controls and Economic Sanctions Committee, Coalition for Excellence in Export Compliance, Semiconductor Industry Association, and Aerospace Industries Association, to name a few, provide insights into U.S. export control reforms and compliance through email blasts, newsletters, seminars and webinars.