United States: US-UK Defense Trade Treaty Implemented In ITAR, Will Soon Lift Certain Licensing Requirements For US Exporters

Introduction

On March 21, 2012, the US State Department, Directorate of Defense Trade Controls (DDTC), issued a final rule amending the International Traffic in Arms Regulations (ITAR) to implement the Defense Trade Cooperation Treaty (Treaty) between the United States and the United Kingdom.  The Senate gave its advice and consent to the Treaty on September 2010.  Congress soon thereafter amended the Arms Export Control Act (AECA) (22 U.S.C. 2751 et seq.) to reflect its provisions via the Defense Trade Cooperation Treaties Implementation Act of 2010 (P.L.111-266, Oct. 8, 2010).  DDTC published a proposed rule on November 22, 2011 (see our November 2011 advisory).  With this final rule, DDTC has made minor clarifying and conforming revisions in response to public comments. 

The new exemption for US-UK defense trade eliminates certain export licensing requirements for exports within "Approved Communities" of companies and government agencies in the United States and the UK for projects where the US and UK Governments are the end users.  However, not all defense articles are eligible for the exemption, and eligible exporters must comply with a range of conditions to avail themselves of the license exemption.

The new rule will become effective once the Treaty enters into force, which is expected to occur sometime in late March or April 2012. The new rule does not implement the US-Australia defense trade treaty, which was approved by the Senate along with the US-UK Treaty and incorporated into the AECA, but continues to be the subject of  finalizing arrangements.  The new rule also updates the ITAR's Canadian exemption and changes Israel's status under the ITAR to one that is equivalent to NATO, NATO members and major non-NATO allies such as Australia and Japan.

Conditions and Requirements for the US-UK Treaty Exemption in the ITAR

The State Department's final rule, implemented at section 126.17 of the ITAR, provides for the following:

Community Members/Authorized Parties

The only authorized exporters, transferors and recipients who can export or receive eligible defense articles under the new exemption are members of the US and UK Communities. Community members are determined differently for the UK and for the US, as below:

  • Members of the UK Community consist exclusively of UK governmental and non-governmental entities and affiliates determined according to the Treaty's Implementing Arrangement.  UK Community members must be identified as such on DDTC's website at the time of the transaction
  • Members of the US Community consist of the following, including their personnel when acting in their official capacities and possessing appropriate clearances and need-to-know:
    • US Government departments and agencies
    • US persons and entities registered with DDTC and eligible to obtain export licenses, so long as none of a company's officers or directors are ineligible to participate in export transactions.

Exporter Eligibility

The final rule includes a new definition of "export" specifically for this treaty exemption.  Under it, an "export" refers to a movement of a defense article or service from the US Community to the UK Community. To be eligible to export, or to participate as an intermediate consignee in an export transaction, the following conditions must be met:

  • US exporters must be registered with DDTC and be eligible to export.  Eligibility requires that the exporter and all senior officers, directors and other parties to the export be authorized to obtain an export license from any US Government agency, including DDTC and the Bureau of Industry and Security of the US Department of Commerce.
  • US exporters must have been licensed by DDTC to export (under the general definition of the term at 22 C.F.R. 120.17) the identical type of defense article to any foreign person.
  • Intermediate consignees must be eligible under the AECA and other provisions of US law to handle or receive a defense article or service without restriction. 
    • For unclassified exports, US intermediate consignees must be: DDTC-registered exporters; licensed customs brokers subject to certain conditions; or freight forwarders designated on the US Department of Defense Civil Reserve Air Fleet list.  UK intermediate consignees must be members of the UK Community or freight forwarders on DDTC's Authorized UK Intermediate Consignees list.
    • All classified exports, which must be first authorized by the Department of Defense, must comply with the National Industrial Security Program Operating Manual.

Authorized End Uses

License-free exports pursuant to the Treaty may only be made for one of the following four end uses:

  • US and UK combined military or counterterrorism operations
  • US and UK cooperative security and defense research, development, production and support programs
  • Projects for UK Government end use, as mutually agreed between the US and UK
  • Projects for US Government end use

Projects, programs and operations that are eligible for the exemption and that can be publicly identified will be posted on DDTC's website; those that cannot be publicly identified will be confirmed in written correspondence by DDTC.  US Government end use programs will be explicitly identified as eligible under the Treaty in contracts and solicitations.

Ineligible Defense Articles and Services

Not all defense articles are eligible for license-free treatment.  A new Supplement No. 1 to Part 126 contains a list of defense articles ineligible for export under the exemption, including items that are: 

  • Classified defense articles and services, unless exported pursuant to US Department of Defense request, contract or directive
  • Listed on the Missile Technology Control Regime Annex
  • Specific to the method or existence of compliance with anti-tamper measures made at US Government direction
  • Specific to reduced observables or counter low observables
  • Specific to sensor fusion except that required for display or identification
  • Specific to submarine combat control systems
  • Amphibious vehicles
  • Specific to gas turbine engine hot section components and digital engine controls
  • Nuclear power generating equipment or propulsion specifically designed for military use
  • Various types of software source code

Generally, any defense article that is excluded from the exemption but embedded in a larger system that is eligible for the exemption continues to require DDTC authorization.

Transfers, Retransfers and Reexports

The exemption authorizes transfers within and between the US and UK Communities, subject to specified conditions.  Under the new rule, a "transfer" refers to the movement of a previously exported defense article or service by one UK Community member to another, or from a member of the US Community to a member of the UK Community. 

The requirements for transfers, retransfers and reexports generally match those required for exports. Certain transfers and reexports made by US or UK Community members in support of specified UK Armed Forces or Ministry of Defense activities and operations may also be undertaken without specific and separate DDTC authorization.

Transition to Treatment under the Treaty Exemption

The new rule allows previously exported defense articles that meet the applicable requirements of 126.17 to transition to the exemption.  To do so, the US exporter or UK recipient must submit a written request to DDTC.

Non-Applicability to the Foreign Military Sales Program

The new rule specifically states that it does not apply to exports made pursuant to the Foreign Military Sales (FMS) program.  Once in the possession of the UK, however, FMS defense articles may be treated as if exported under the Treaty, and must be marked and handled in accordance with its terms and that of its Implementing Arrangement, as well as the new rule.

Marking and Recordkeeping Requirements

The new rule specifies marking and identification requirements for defense articles and services exported pursuant to the exemption. 

As with other ITAR exports, all records relating to exports under the exemption must be maintained for at least five years.  The rule specifies codes for Electronic Export Information (EEI) filings.

Other Provisions

As discussed in our November 2011 advisory on the proposed rule, the final rule also contains certain Congressional notification provisions and changes to update the ITAR's Canada exemption (by referencing the new Supplement No. 1 list).  The final rule also contains amendments to implement Israel's status as a major non-NATO ally by authorizing reexports and retransfers of US-origin components incorporated into foreign defense articles without prior DDTC authorization, authorizing brokering without a license for activities within NATO and major non-NATO ally countries and reducing Congressional notification requirements for arms sales.  

The final rule also revises Part 126.1(e) regarding prohibited transactions with embargoed countries by requiring "any person" who knows or has reason to know of an unauthorized export transaction involving defense articles to or from embargoed countries to "immediately inform" DDTC.  The rule also makes conforming changes to Part 127.

While the exemption's requirements are strict, eligible participants and transactions will enjoy a reduced regulatory burden.  Exporters of defense articles and services to the UK should review the details of the exemption to consider how the new Treaty amendments might benefit their operations. UK companies that can qualify as members of the Australian/UK Community should evaluate how they might benefit under the new exemption as well. 

* * * * * * * * * *

We will continue to keep you informed of developments relating to the Treaty's implementation and entry into force, as well as developments with respect to Australia. 

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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Authors
Edward J. Krauland
Jack R. Hayes
Meredith A. Rathbone
Maury Shenk
 
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