On November 22, 2011, the US Department of State, Directorate of Defense Trade Controls (DDTC) published a proposed rule to implement Defense Trade Cooperation Treaties between the United States and Australia, and between the United States and the United Kingdom. This proposed rule was issued pursuant to Title I of the Security Cooperation Act of 2010 (Pub. L. 111-266), and incorporated the two treaties into US law. In addition, DDTC's rule amends the section of the International Traffic in Arms Regulations (ITAR) relating to the products excluded from the Canadian exemption, and adds Israel to the list of countries that have shorter Congressional certification time periods and a higher dollar value Congressional reporting threshold.

The primary purpose of the proposed rule is to add sections 126.16 and 126.17 to the ITAR to create licensing exemptions pursuant to the US-Australia and US-UK treaties, respectively.  The two sections are substantively the same. DDTC is also proposing the addition of a supplement to Part 126 that lists the defense articles and services that are excluded from the two new exemptions. The exemptions include fairly detailed requirements, but allow license-free exports to Australia and the UK when those requirements are met. The main requirements for use of the proposed license exemptions include the following:

Authorized Exporters

Authorized exporters under the treaties include (1) departments and agencies of the US Government, including their employees (with security clearance and a need-to-know, if appropriate), and (2) US persons registered with DDTC, including employees acting in their official capacity (with security clearance and a need-to-know, if appropriate). However, a non-governmental exporter is ineligible to use these exemptions if any of the exporter's senior officers or officials, directors, any party to the export, or any source or manufacturer is ineligible to receive export authorization from any agency of the US Government.

Eligible Recipients

The treaties and proposed rule describe the eligible recipients in terms of the "Australian Community" and the "United Kingdom Community."  These two communities include Australian and UK entities and facilities, respectively, which are identified as such through the DDTC website at the time of a transaction.  As we previously reported, the Australian and UK Communities will consist of certain specified government authorities, as well as private entities that have applied for inclusion. Requests for inclusion by private entities will be evaluated based on several factors (including, but not limited to, designation as UK "List X" site, foreign ownership, control or influence, US export licensing history, etc.), and are subject to prior US and Australian or UK government approval.

Authorized End-Uses

Under the proposed rule, exempted transactions must involve only the following end-uses:

  1. United States and Australian or UK combined military or counter-terrorism operations;
  2. United States and Australian or UK cooperative security and defense research, development, production, and support programs;
  3. Mutually determined specific security and defense projects where the Government of Australia or the UK is the end-user; or
  4. US Government end-use.

DDTC also proposes procedures for identifying these authorized end-uses, which include the following:

  1. Operations, programs, and projects that can be publicly identified will be posted on DDTC's website;
  2. Operations, programs, and projects that cannot be publicly identified will be confirmed in written correspondence from DDTC;
  3. US Government end-use will be identified specifically in a US Government contract or solicitation as being eligible under the Treaty.

Items Eligible for Export

DDTC proposes to add a supplement to Part 126 of the ITAR that lists all defense articles and services that are excluded from the scope of the new exemptions. While this supplement is long and detailed, some of the items excluded from the scope of the treaty exemption include the following:

  • Classified defense articles (except to the extent otherwise authorized by a written US DOD request)
  • Articles listed in the annexes to the Missile Technology Control Regime
  • Defense articles specific to the existence of antitamper measures made at US Government direction
  • Defense articles specific to developmental systems that have not obtained written Milestone B approval from the Department of Defense milestone approval authority (except to the extent otherwise authorized by a written US DOD request)
  • Defense articles specific to reduced observables or counter low observables in any part of the spectrum
  • Defense articles specific to sensor fusion beyond that required for display or identification correlation
  • Defense articles specific to the automatic target acquisition or recognition and cueing of multiple autonomous unmanned systems.

If a defense article or service is included in the supplement, or the transaction is otherwise ineligible for these exemptions, then export authorization is required pursuant to the ITAR and normal DDTC practice.

However, an authorized exporter may market a defense article to the Government of Australia or the UK if that exporter has received a DDTC license to export the identical article to any foreign person.

Transfers, Retransfers, Reexports

The exemptions in Section 126.16 and 126.17 also permit the transfer of a defense article or defense service from a member of the Australian or UK Community to another member of that Community or the United States Community (i.e., authorized US exporters) for an authorized end-use without a license. All other transfers, retransfers, and re-exports (as well as changes in end-use to an unauthorized end-use) are generally prohibited without prior DDTC authorization.  However, a license is not required for the following transfers, re-transfers, or reexports of defense articles or defense services:

  1. The transfer by a member of the United States Community or the Australian or UK Community to, respectively, Australian Department of Defense (ADOD) or UK Ministry of Defense (UKMOD) elements deployed outside the Territory of Australia or the UK and engaged in an authorized end-use, using applicable ADOD or UKMOD transmission channels or the provisions of this section;
  2. The transfer by a member of the United States Community or the Australian or UK Community to, respectively, a member of the Australian or the UK Community that is operating in direct support of ADOD or UKMOD elements deployed outside the Territory of Australia or the UK and engaged in an authorized end-use, using applicable ADOD or UKMOD transmission channels or the provisions of this section; or
  3. Delivery to the ADOD or the UKMOD for an authorized end-use, if the item is deployed when conducting official business within or outside the Territory of Australia or the UK, respectively, and the item remains under the effective control of the ADOD or the UKMOD while deployed and access may not be provided to unauthorized third parties.

In this section, ADOD or UKMOD transmission channels includes electronic transmission of a defense article and transmission of a defense article by an ADOD or UKMOD contracted carrier or freight forwarder that merely transports or arranges transport for the defense article in this instance.

Congressional Notification

Exports under the Australia or UK exemption may not take place until 30 days after the exporter submits a Form DS–4048 notifying DDTC, if the export involves one or more of the following, each of which requires Congressional notification by DDTC:

  1. Major defense equipment in the amount of $25 million or more, or defense articles and defense services in the amount of $100 million or more;
  2. Firearms controlled under Category I of the US Munitions List in an amount of $1 million or more;
  3. Manufacturing abroad of any item of significant military equipment; or
  4. An amended contract or other instrument involving (i)-(iii).

The exporter must also submit the following information:

  1. The information identified in sections 130.10 and 130.11 of the ITAR (political contributions, fees, and commissions);
  2. A statement regarding whether any offset agreement is proposed in connection with the export, and a description of the offset agreement;
  3. A copy of the signed contract or other instrument; and
  4. If the notification is for the export of firearms, a statement of what will happen to the weapons in their inventory.

Additional Provisions

The proposed exemptions also include rules for transitioning an existing license to use of the exemptions. The proposed rule also specifies detailed marking and classification requirements for items transferred under the exemptions, as well as recordkeeping requirements.

*          *          *

DDTC's proposed rule includes many other revisions to the ITAR, both to clarify sections and to add references to the Australia and UK treaties and proposed Sections 126.16 and 126.17.  However, the other major proposed amendments are the following regarding Canada and Israel:

Canada

The Canadian exemption in Section 126.5 of the ITAR will be amended to refer to the new supplement to Part 126. This supplement will also list the items that are excluded from the scope of the Canadian exemption. Accordingly, Section 126.5(b)(1)-(21), which currently identifies the exclusions under the Canadian exemption, will be removed.

Israel

The Security Cooperation Act also altered the status of Israel under the ITAR such that it now has a status similar to NATO, NATO members, Australia, Japan, New Zealand, and Korea.

In order to implement this statutory change, DDTC proposes to make the following amendments to the ITAR:

  1. Increase the Congressional certification threshold for transfers to Israel for transactions of major defense equipment sold under a contract in the amount of $25 million or more (from $14 million), or for defense articles and defense services sold under a contract in the amount of $100 million or more (from $50 million), provided the transfer does not include any other countries. 
  2. Shorten the Congressional certification time period for Israel from 30 to 15 days.
  3. Add Israel to the list of countries for which a brokering license is not required under Part 129 of the ITAR, for activities arranged wholly within and destined exclusively for such countries.

*          *          *

DDTC's proposed licensing exemptions for Australia and the UK have been long anticipated by affected exporters. The President submitted the defense trade cooperation treaties to Congress four years ago, and they were ratified over a year ago. While the requirements for the proposed exemptions are narrow, this development still represents a significant easing of military export controls to these two allies. For eligible participants, the export of defense articles and services will be facilitated by the license exemptions. While it is not yet clear what percentage of the overall defense trade between the United States and Australia/UK will be covered by the exemptions, they are likely to benefit many government contractors and other parties as well. Companies that export defense articles and services to Australia or the UK should review the details of sections 126.16 and 126.17, and consider how to best take advantage of this proposed opportunity. Similarly, Australian and UK companies that might qualify as members of the Australian/UK Community should consider applying for inclusion when possible. Finally, DDTC is accepting public comments on the proposed rule until December 22, 2011.

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.