United States: US-UK Defense Trade Cooperation Treaty: An Overview

Last Updated: September 19 2007
Article by George N. Grammas

Industry anxiously awaits the new exemption in the International Traffic in Arms Regulations (ITAR) for the United Kingdom. The exemption is based on the US-UK treaty that created a framework for facilitating trade in defense articles and services between the two countries and that promotes the interoperability of their armed forces and security agencies. The US administration is optimistic that the treaty will receive Senate ratification in late 2007, and a change in the regulations will follow in 2008.

In contrast to the "UK exemption" (modeled after the Canadian exemption) that failed to receive Congressional approval in 2005, this treaty outlines a new form of license-free cooperation that recognizes the close relationship of the US and UK governments and the interrelationship of their defense industries. The two countries have the closest relationship in terms of military interoperability in theaters of war and the highest level of information sharing between their nuclear and intelligence communities. UK defense contractors such as BAE, Rolls-Royce and Smiths are also US defense contractors, just as Raytheon, Northup Grumman and Boeing are UK defense contractors. Allowing a trusted community of defense contractors in both countries to share military technology without a license in support of US and UK programs seems a natural outgrowth of this relationship.

The treaty is a short document, leaving many details to be provided in the implementing regulation, which will likely not appear until 2008. Nonetheless, comments from US government officials over the past months offer some insights. In the United States, the treaty will most likely be implemented as an exemption to the license requirement in the ITAR. In essence, the exemption will probably allow exports without a license if three conditions are satisfied:

  1. the ultimate end user is the US or UK government and the ultimate end use is a US or UK program;
  2. the recipient party is a "trusted" private or governmental entities; and
  3. the defense articles or services exported are eligible for the exemption. The key elements of the treaty and its expected implementation in the United States are set forth below.

End Uses and End Users

The treaty covers only exports for which the end user is the UK or US government. The end use must be a US or UK governmental program or a US-UK collaborative or cooperative military or counterterrorism program or activity. However, the program or activity need not be confined to the geographical boundaries of the two countries. In these situations, exports from the United States to the United Kingdom, temporary imports into the United States and other transfers or retransfers within the trusted community may be exempt from the ITAR license requirement.

Exports from the United States, even if to a trusted community member, that are destined for other end uses or end users (non-US or UK governments) will be subject to existing ITAR requirements.

Trusted/Approved Community

The treaty provides for the transfer and retransfer of defense articles and services to the US and UK governments and approved US- and UK-based contractors within this "trusted community" and further provides for retransfers of the articles and services among and within this "trusted community." The ITAR license exemption is likely to allow, for example, exports to approved UK contractors of an eligible defense article or service, retransfer to another approved UK or US contractor for further manufacturing and testing and delivery to the US or UK governments for a cooperative US-UK program. The export of defense articles and services from the United Kingdom to the United States is already permitted under open licensing arrangement.

The trusted community in the United Kingdom is likely to be composed of the UK government and companies in the UK who have authority to possess classified government material. Technical data export to the United Kingdom pursuant to the treaty will be classified by the UK government as RESTRICTED, the lowest form of classification in the United Kingdom, and subject to the corresponding security controls for such information under the UK Official Secrets Act (e.g., labeling all such data). A security clearance is not expected to be a prerequisite for a US company to use the ITAR exemption. Registration with the Directorate of Defense Trade Controls (DDTC) may be all that will be required, but this is one of the details for the implementing regulations.

Dual nationals in the United Kingdom who are employed in the trusted community and have a clearance and a "need to know" will be allowed access to the exported defense articles and services without DDTC approval of the third country nationality.

Eligible Defense Articles and Services

The ITAR exemption will allow exports of most defense articles and services, with only a few exceptions, which are likely to be specifically listed in the ITAR. The exceptions might include low-observable technology and countermeasures, anti-tamper technology and communication security technology.

Re-Exports and Retransfers

The ITAR exemption is expected to allow retransfers of US-origin defense articles and services among the trusted community in the United States and the United Kingdom. However, retransfers to entities outside the trusted community and re-exports outside the United States and the United Kingdom will be subject to normal export licensing requirements under the ITAR. In addition, the UK government’s approval will be required for such retransfers or re-exports of US-origin items located in the United Kingdom.

Are you screening transactions for trade compliance?

US companies should be screening all non-US parties involved in cross-border business transactions and in foreign investment in the United States. Proper due diligence screening of transactions will provide assurance that the participation of the non-US parties does not raise concerns of:

  • corrupt activities under the Foreign Corrupt Practices Act
  • money laundering or other support of terrorist activities
  • export controls
  • foreign government ownership, which may be an issue in the context of certain transactions in defense, communications, transportation, energy and high tech industries

Each of these areas may be addressed in a preliminary questionnaire to be completed by all non-US parties to the transaction. The answers can then be screened using one of the many commercially available screening services.

In addition to screening the parties to the transaction, the transaction documents should include representations and warranties from the non-US parties as to the accuracy and completeness of their questionnaire responses and their compliance with pertinent US laws and regulations. Every transaction is different and transactional documents need to be carefully tailored to the transaction and the questionnaire responses.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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