United States: The Logistics Of Export Control Reform For The Aerospace Industry

On October 15, 2013, the first pair of final rules implementing the President's Export Control Reform (ECR) initiative became effective. These rules, which govern military aircraft and aircraft parts, redefine the line between military and commercial controls for these products, and significantly change the aerospace export compliance landscape.

The new rules modify the International Traffic in Arms Regulations (ITAR), particularly United States Munitions List (USML) Category VIII (Aircraft and Related Articles) and the newly established Category XIX (Gas Turbine Engines and Associated Equipment). In addition, the final rules transfer specified less sensitive aircraft and aircraft components to the newly created "600-series" of the Commerce Control List (CCL), found in the Export Administration Regulations (EAR), specifically Category 9 (Aerospace and Propulsion).

The federal government also is enhancing its tools for reviewing export transactions and strengthening the reporting requirements for data that must be reported at the time of export through the Department of Commerce, Census Bureau's (Census) Automated Export System (AES). While the majority of changes to AES are administrative, one upcoming change will hold particular significance for exporters of ITAR-controlled and 600-series aircraft and aircraft components. As part of a U.S. Customs and Border Protection (CBP) plan to create a single automated export processing platform, the legacy AES mainframe will be re-engineered and migrated to CBP's Automated Commercial Environment (ACE), with a rollout scheduled for April 2014. The centralization of AES on the ACE system will have a significant impact on both the government's oversight capabilities and exporters' compliance responsibilities. CBP will for the first time be able to apply its shipment targeting strategies to exports of defense articles.

With annual exports exceeding $20 billion and products that by their nature travel all over the world, the aerospace industry represents a large portion of defense exports from the United States. Moreover, even though ECR will affect the entire defense industry, the aerospace industry can expect to bear the initial burden of CBP's enhanced targeting capabilities. As the most mature industry in terms of ECR implementation, the aerospace industry is expected to be further along in its development of ECR compliance programs and will have submitted the largest amount of post-ECR export data by the April 2014 migration date.

As a result, the aerospace industry should be aware of the "logistics" of exports, particularly in a post-ECR world, and be prepared for increased government oversight of their exports. This article provides a brief overview of ECR, specifically changes to the export control classifications, and the role of ACE and AES in federal oversight of exports. Second, this article will summarize the recent and upcoming changes to AES prior to the transition to the re-engineered ACE system platform. Finally, this article will discuss the significance of the centralization of electronic oversight of exports in ACE for the aerospace industry and make suggestions for ensuring compliance as the changes are finalized.  

Export Control Reform

Commodity classifications for aircraft and components underwent significant changes with the implementation of the first set of ECR rules in October 2013, with both the USML and CCL transitioning to positive control lists in furtherance of the President's goal of a single export control list. The most significant change to aircraft and aircraft component classifications is the creation of the new 600-series of the CCL, which represents items that have transitioned from the USML and ITAR controls to CCL and EAR controls. This transition includes aircraft components "specially designed" for military aircraft and not elsewhere listed on the USML, which can now be found in Export Control Classification Numbers ("ECCN") 9A610.x and 9A610.y (a positive list of items of lesser military significance). 

In addition to the overhaul of aircraft and aircraft component classifications, the final rule also set forth the new definition of "specially designed," which will be used to determine whether items not specifically enumerated on the USML and CCL are subject to ITAR or EAR jurisdiction. In order to comply with the upcoming changes to AES, as well as to prepare for increased oversight as a result of AES migration to CBP's ACE platform, aerospace companies must know the export control classification for their products, which will be largely dependent on the platform for which a manufacturer's products were initially designed. The following order of review should be used when making aircraft and aircraft component classification determinations following ECR:

  • Is the item listed on the USML? Aircraft and aircraft components specifically enumerated in USML Categories VIII and XIX remain subject to ITAR controls.
  • Is the item "specially designed" for specified aircraft on the USML? Aircraft parts and components "specially designed" for any of the following aircraft: B-1B, B-2, F-15SE, F/A-18 E/F/G, F-22, F-35 and future variants thereof, remain subject to ITAR controls.
  • Is the item listed in the CCL 600-series? Aircraft and aircraft parts and components specified in the CCL 600-series are subject to EAR controls.
  • Is the item "specially designed" for military aircraft and not listed on the USML? Aircraft parts and components "specially designed" for military aircraft and not listed elsewhere on the USML are found in ECCNs 9A610.x and 9A610.y of the CCL. These items are subject to EAR controls.
  • Is the item listed elsewhere on the CCL? Items listed elsewhere on the CCL will be subject to various levels of EAR control. If the item is not captured on the CCL, it will be designated EAR99 for shipment to most destinations without a license.

The new classifications for aircraft and aircraft components brought about by ECR would be of little use for the monitoring of defense exports without a means for collecting information on export transactions involving these items.

AES is the computer system used by Census to collect Electronic Export Information (EEI) for shipments made by United States exporters. As a joint venture between CBP, Census, Department of Commerce, Bureau of Industry and Security (BIS), and Department of State, Directorate of Defense Trade Controls (DDTC), AES serves as a central point through which the export shipment data required by these agencies is filed electronically.

EEI filing using AES is required by law for the majority of exports, including exports of ITAR-controlled items, certain 600-series items, and products subject to BIS and DDTC licenses. Failure to file or the submission of false/misleading information in AES can result in the seizure of merchandise, civil fines and criminal penalties.

While Census collects AES data in order to compile and publish trade statistics, BIS and DDTC use AES to monitor exports of controlled items and licensed transactions. In turn, CBP is responsible for enforcing export control laws at the U.S. border and can examine, detain, or seize goods as well as refer suspect shipments to BIS and DDTC.

ACE serves as CBP's commercial trade processing system, with features designed to automate border processing and enhance border security. Originally developed to process data regarding imported merchandise, ACE allows for electronic filing by importers of the majority of customs entry data, including electronic cargo manifests, shipping data, and entry documentation. ACE allows CBP to identify shipments that pose compliance and security risks out of the thousands of daily import transactions.

Recent changes to the Automated Export System

In November 2012, CBP began to move the legacy AES mainframe to a re-engineered ACE system platform with an end goal of creating a single, automated export processing platform for all export manifest, commodity, licensing, export control, and export targeting transactions.  AES also has undergone a number of related reporting changes that will carry over to the ACE-based platform in April 2014.

EEI reporting requirements

The general requirements for EEI reporting in AES are set forth in 15 C.F.R. § 30.6 and remain in place following ECR. In addition to other data elements required by AES, exporters will be required to report the "Ultimate Consignee Type" and the remaining "License Value" for shipments requiring an export license. These new reporting requirements will go into effect on April 5, 2014, and are discussed in more detail below. 

USML exports

The reporting in AES of EEI for all ITAR-controlled aircraft exports remains mandatory. While shipments of ITAR-controlled defense articles will be subject to the new AES data element reporting requirements, the rules regarding AES reporting for shipments of ITAR-controlled aircraft and aircraft components remain largely intact, including in instances involving exports under legacy DDTC licenses.

One new reporting element for DDTC licenses involves the delegation of authority from the Department of Commerce to DDTC to authorize the export of EAR-controlled aircraft and aircraft components, including 600-series items when such items are included on an approved ITAR license. For example, a license for a Category VIII(h)(5) tail hook may include an authorization for a 9A610.g aircrew life support equipment, which would be reported as Category VIII(x). In such a case, even though an exporter will be required to make a DDTC license filing in AES, the exporter also must report the Export Control Classification Number (ECCN) for the aircrew life support equipment.

600-series exports

As of October 15, 2013, exporters must report shipments of aircraft and aircraft components enumerated in paragraphs ".a" through ".x" of the 600-series regardless of value or destination, including exports to Canada and those made under License Exception Strategic Trade Authorization (STA). The 600-series covers aircraft and aircraft components that have transitioned from ITAR control, including ".x" and ".y" subcategories. The new mandatory reporting requirement for 600-series items excludes .y ECCNs, as BIS has deemed these items to be of lesser military significance. Items under the .y paragraphs of the 600-series ECCNs may be exempt from reporting in AES if their value is $2,500 or less or they are destined for Canada.

Impact of migration to ACE

A report of the Department of Homeland Security, Office of Inspector General (OIG), published September 9, 2013, identified a number of shortcomings in the monitoring of defense exports due to CBP's lack of a centralized system for tracking foreign military sales, including:

  • Inaccurate and unverified shipper information submitted to AES;
  • Export documents filed at multiple ports for single transactions;
  • A lack of targeting and inspection prior to shipment departure; and
  • Non-centralized tracking of BIS and DDTC licenses, which could result in shipments in excess of authorized values.

In essence, the OIG report found that the mere presence of an AES data filing for a scheduled defense shipment often satisfied CBP's oversight responsibility, and that few shipments were targeted for review based on inconsistencies in AES filings. The OIG report recommended that CBP create a centralized system for the tracking of foreign military exports.

Almost on cue, CBP announced that the scheduled migration of the AES mainframe to ACE would take place on April 5, 2014. While anti-climactic in terms of actual data reporting, the real changes will occur behind the scenes as the AES data is broken down and analyzed in ACE. Although subtle, this change will address the OIG's concerns by increasing CBP oversight and targeting of aircraft-related exports, particularly with regard to the new data elements that will soon be required to be reported in AES.

Increased CBP oversight and targeting

The AES migration, new "Ultimate Consignee" and "License Value" data points, and the ability to review all export shipping documents electronically will improve CBP's ability to review and target high-risk shipments. ACE currently allows CBP to target selected data elements on entry documents filed using ACE. With the migration of AES to ACE, CBP will have the capability to target data elements contained in both EEI and the export documents (such as manifests) submitted electronically through AES and analyzed on the ACE platform.

The most significant new data element in AES is the new "Ultimate Consignee" data element. This element requires the exporter to report the "business function of the ultimate consignee that most often applies." Exporters will be able to choose from four categories of ultimate consignee:

  1. Direct Consumer;
  2. Government Entity;
  3. Reseller; and
  4. Other/Unknown.

When combined with the pre-existing "Country of Ultimate Destination" data element in AES, the new ultimate consignee reporting requirement will further enhance CBP's ability to identify high-risk shipments in ACE using a variety of red flags, including:

  • Customer addresses similar to those on BIS' list of denied persons;
  • Products that do not fit the identified customer's line of business;
  • Ordered items that are incompatible with the technical level in the country of final destination;
  • Freight forwarders listed as the items' final destination; and
  • Abnormal shipping routes.

Following the AES migration, CBP will be able to target ultimate consignees identified as a "Direct Consumer" or "Government Entity" where the ultimate consignee, the country of ultimate destination, or a combination of the two presents a high risk of diversion of the exported product to an unlicensed or prohibited destination or end-user. Exports of ITAR-controlled or 600-series aircraft and aircraft components where the ultimate consignee is identified as a "Reseller" or "Other/Unknown" will likely be subject to a high level of CBP scrutiny. Such designations are unlikely for ITAR-controlled products due to DDTC licensing and re-export/re-transfer restrictions, which require written DDTC approval prior to transferring licensed defense articles to any end-user or destination other than those listed on the license. Exporters may encounter "Other/Unknown" or "Reseller" designations for exports of 600-series aircraft components that do not require BIS authorization for export to most destinations (i.e., ECCN 9A610.y).   

Collection of Electronic Licensing Value Data

The first step in the integration of BIS and DDTC license processing into the ACE platform will occur on April 5, 2014, when the new "License Value" data element is implemented in AES. This will provide CBP ports of export with a searchable reference for the value remaining on BIS and DDTC licenses subject to pending exports. Combined with the pre-existing "Value" data element for exported products entered in AES, CBP will have the ability to quickly identify license value discrepancies between shipments, as well as prevent unauthorized overshipments.

While a date has not yet been announced for implementation, CBP indicates that manual and paper-based license processing will be replaced by electronic license processing in the ACE platform. CBP currently reviews DDTC licenses and associated license values in paper format.

The current license review process is complicated by the ITAR requirement that exporters lodge DDTC licenses at "a U.S. Port before any export"; the EAR, by contrast, requires no such lodging. Exporters often lodge DDTC licenses at the port closest to their facility, which in many cases is not the port of export for the exporter's shipments. Consequently, CBP's review of DDTC licenses is fractured, with license reviews often requiring the involvement of two or more CBP ports. The adoption of electronic licensing and movement of the AES mainframe to ACE, will remedy these inefficiencies; ACE will serve as a more modern and flexible environment for export licensing transactions.

Narrowing of voluntary disclosure period

While many of the changes described in this article may seem innocuous, AES and ACE are key enforcement tools utilized by CBP, Census, BIS, and DDTC to ensure compliance with U.S. export regulations. As previously discussed, the April 2014 (and future) changes to AES and ACE represent an upgrade in these agencies' ability to scrutinize export transactions. Because USML Category VIII is the first category affected by ECR, this heightened scrutiny will have an effect on the export compliance programs of aircraft and aircraft component manufacturers, particularly in the area of voluntary disclosures.

All agencies tasked with export control enforcement encourage voluntary disclosures when exporters become aware of potential export violations. Census, BIS, and DDTC consider the submission of voluntary disclosures as a mitigating factor in the imposition of administrative penalties for export-related violations. Penalty mitigation is not available for voluntary disclosures submitted after Census, BIS, DDTC, or any other government agency (i.e., CBP) obtains knowledge of the same or substantially similar information to be disclosed and commences an investigation or inquiry involving the potential violations. Based on this limitation, CBP's increased oversight capabilities in AES and ACE may tighten the window for voluntary disclosures to Census, BIS, and DDTC. Valuable export documents and data that were once difficult to track, link together, and selectively target in AES will now be available in CBP's centralized ACE platform, making it easier for CBP to identify potential export violations. Therefore, exporters in the aerospace industry should develop procedures for auditing their AES filings so that any errors can be identified and corrected in a timely fashion.    

Conclusion

The aerospace industry will experience a number of benefits as a result of ECR. The transition of formerly ITAR-controlled aircraft and aircraft components to EAR control should decrease licensing and regulatory burdens, while facilitating expansion of exports.

ECR and the changes to AES and ACE, however, will not be without compliance burdens as CBP acquires access to more and better data. With the integration of AES into ACE, CBP will have centralized access and processing power not previously available in AES to analyze AES data elements and electronic export documents. As a result, exporters can expect heightened CBP (and by extension Census, BIS, and DDTC) scrutiny, as well as a likely increase in compliance actions related to their exports of ITAR and EAR-controlled products. 

In light of these changes, as well as the high potential penalties for violations of U.S. export control laws, exporters should invest in and develop compliance programs and procedures designed to identify and correct potential export control violations. Such programs include: self-conducted audits of data submitted to AES, scheduled license and exemption use reviews, automated license tracking systems, and voluntary disclosure procedures (should violations be discovered).

Reprinted with permission from the American Bar Association - April 2014

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions