United States: 2016 Exports Year-End Review

Last Updated: November 21 2016
Article by Olga Torres

Co authored by Derrick Kyle

2016 has been another year full of developments in the export world. We saw the advancement of the Export Control Reform ("ECR") initiative, other revisions to the International Traffic in Arms Regulations ("ITAR") and the Export Administration Regulations ("EAR"), and changes in the export control enforcement outlook.

Below is a brief summary of many of the developments that have occurred in exports over the past year.

Export Control Reform

For the fourth consecutive year, the ECR initiative has continued the transition of items from the State Department's Directorate of Defense Trade Control's ("DDTC") United States Munitions List ("USML") to the Commercial Control List ("CCL") of the Department of Commerce's Bureau of Industry and Security ("BIS"). The BIS and DDTC have also undertaken the task of harmonizing important terms and concepts in the EAR and ITAR.

ITAR Category Revisions

On July 28, DDTC and BIS concurrently published final rules, amending the ITAR's USML and the EAR's CCL.1 These final rules revised two Categories of the USML: Category XIV, pertaining to toxicological agents, and Category XVIII, pertaining to directed energy weapons. On October 12, the agencies published another final rule, this time revising Category XII of the USML, pertaining to fire control, laser, imaging, and guidance equipment.2 All of these revisions attempt to more precisely describe articles warranting control on the USML and to establish a "bright line" between the USML and the CCL regarding control of these items. The revisions to all three Categories will become effective on December 31, 2016.

Category XIV of the USML regulates chemical and biological agents and associated equipment. The recent revisions remove certain toxicological agents and associated equipment from control under the USML to the CCL's control. Among the items removed from the USML to the CCL are riot control agents (e.g., tear gas), test facilities, and equipment for the destruction of chemical and biological agents. These items new to the CCL were given new ECCNs in Category 1 (1x607).

The ITAR will continue to control "Tier 1" pathogens and toxins, as established by the Department of Health and Human Services and the United States Department of Agriculture select agents and toxins regulations (42 C.F.R. pt. 73 and 9 C.F.R. pt. 121), meeting specific capabilities. Tier 1 pathogens and toxins that do not meet the enumerated capabilities will be listed in the CCL. Other enumerated items that will be listed in the USML include chemical agents adapted for use in warfare; antibodies, recombinant protective antigens, polynucleotides, and biopolymers funded exclusively by a Department of Defense ("DoD") contract; and some vaccines exclusively funded by a DoD contract.

Category XVIII, which covers directed energy weapons, was revised to more specifically describe the controlled items as those articles that "other than as a result of incidental, accidental, or collateral effect, achieve [certain] effects described in [paragraph (a)] by way of non-acoustic techniques." The revisions transfer to the CCL certain tooling, production equipment, test and evaluation equipment, test models and other articles related to directed energy weapons. The new EAR-controlled items will be listed under new ECCNs 6x619.

The revisions to Category XII of the USML introduced a concept that has not been used in other revisions to the USML: identifying certain items as defense articles if they were "specially designed for a military end user." The final rule removes some fire control, laser, imaging, and guidance equipment and related software and technology from the USML to CCL ECCN 7A611 and newly-created ECCNs 7B611, 7D611, and 7E611. The rule also amends Categories VIII, XIII, and XV to reflect that certain items previously controlled under those Categories are now controlled under the revised Category XII or the CCL.

ITAR and EAR Definition Harmonization

On June 3, BIS and DDTC issued a final rule and an interim final rule, respectively, for the purpose of harmonizing the definitions of many of the terms found in the ITAR and EAR.3 The purpose of the rules is to increase clarity and consistency between key terms used in the regulations. Some of the terms that were revised or introduced in these rules include "export," "reexport," "release" and "retransfer." Important conceptual changes include the ITAR formally adopting the "deemed export" concept previously only found in the EAR -although in practice the ITAR had long regulated technology transfers to foreign nationals. Notably, for purposes of deemed exports under the ITAR, DDTC will continue to review all citizenships of foreign employees whereas BIS will only look at the last country of residence or citizenship. 

The following changes to the regulations are also noteworthy: 1) In the context of cloud computing, the BIS rule provides a carve-out from the "export" definition for certain unclassified technology or software that is secured using end-to-end encryption and certain cryptographic modules compliant with FIPS 140-2.4 In order for the carve-out to apply, the encrypted technology cannot be intentionally stored in a country listed in Country Group D:5 or the Russian Federation. (The DDTC rule contains no such carve-out for encrypted data, although one could be included in a future rule.) 2) For in-country transfers, both the EAR and the ITAR have been modified to clarify that an in-country transfer, sometimes requiring additional authorization, occurs if there is a change in end user or end use in the same foreign country. 3) Under the EAR and ITAR, for technology to be released to a foreign person, it must actually be "revealed." 4) Both sets of regulations have clarified exemptions related to when foreign employees of U.S. companies or U.S. persons are permitted to receive technical data without a license when travelling abroad on a temporary assignment. To achieve this, BIS revised License Exception TMP, and DDTC revised its technical data exemption.5/p>

Harmonization of the Destination Control Statement

As part of the initiative to harmonize as much as possible between the ITAR and the EAR, on August 17 both BIS and DDTC published final rules that harmonized the Destination Control Statement ("DCS") required by each agency.6 Inclusion of a DCS in shipping documentation is mandatory in certain situations under both sets of regulations. Previously, exporters and freight forwarders raised concerns regarding which DCS to use on shipping documentation and claimed the rules were inconsistent and unclear. The new rules, which become effective November 15, 2016, address this problem by creating a single DCS with common language7 that can be used whether shipping items controlled by the ITAR or the EAR.

After harmonization, exporters are only required to include the DCS on the commercial invoice. With respect to the shipment of EAR-controlled items, the ECCNs of 9x515 or "600 series" items must also be included on the commercial invoice; a DCS is not required for EAR99 items or items shipped under License Exceptions BAG or GFT; and there is no longer a requirement for a special DCS for items shipped to India having ECCNs controlled for CC column 1 and 3 reasons or RS column 2 reasons. For shipments of ITAR-controlled items, exporters must include the end-user, country of destination, and license or other approval number or exemption citation on the commercial invoice. With respect to mixed shipments, having both EAR and ITAR-controlled items, the State Department rule clarified that items subject to the EAR are not defense articles, even when exported under a license from the State Department, but when exported under such State Department license, the exporter must include the appropriate export classification for each item on the commercial invoice.

Other Developments

EAR Encryption Changes

On September 20, BIS published a rule updating Category 5-Part 2 of the CCL.8 The amendments include revisions to ECCN 5A002, which was divided into three subsections: 5A002 (Cryptographic information security), 5A003 (Non-cryptographic information security), and 5A004 (Defeating, weakening, or bypassing information security). According to BIS, the revisions are meant to streamline the classification process as the new ECCNs will have more specific, informative headings. Further, ECCNs 5A992/5D992 a&b and 5E992.a were deleted and the items previously controlled under the deleted ECCNs may now be controlled under EAR99 or elsewhere (e.g., 5A991).

The revisions also made changes to License Exception ENC. These changes include no longer requiring an Encryption Registration, updating performance parameters under §740.17(b)(2), and moving the mass market provisions to the ENC section (§740.17).

Enforcement

Recent trends show that enforcement actions have stayed relatively level in recent years, but developments in 2016 indicate that they may rise again and be even harsher when they do.

Enforcement Trends

According to the BIS' Annual Report to Congress for Fiscal Year 2015 (the most recent year that complete data is available), criminal convictions of businesses and individuals for export violations were down to 31 in 2015 from 39 in 2014 and a four-year high of 52 in 2013. However, both total criminal fines ($156,416,030) and forfeited assets ($84,496,015) were up from 2014, which saw $137,808,756 in total criminal fines and more than $1,318,832 in forfeitures.

Regarding civil enforcement in 2015, there were 51 administrative export and antiboycott actions against businesses and individuals resulting in $15,111,200 in civil penalties, whereas in 2014, 48 actions resulted in $60,567,150 in civil penalties. These numbers signal the agencies' increased focus on intentional violations. Although there were less criminal cases in 2015, the total in penalties issued for these cases increased. In the ITAR enforcement arena, there have been three Consent Agreements entered into between violating companies and the Department of State in 2016, up from zero in 2015 and two in 2014.  Due to the recent publication of the Department of Justice's Guidance (see below), the criminal enforcement of both EAR and ITAR violations are likely to increase.

DOJ Guidance

On October 2, the National Security Division ("NSD") of the Department of Justice ("DOJ") published its Guidance Regarding Voluntary Self-Disclosures, stating it has made it a top priority to pursue "willful export control and sanctions violations by corporate entities and their employees."9 DOJ's VSD guidance also implements the 2015 "Yates memo," which emphasizes enforcement against individual corporate defendants.10

Penalty Inflation

Although it is uncertain, though likely, that the number of enforcement actions will trend upward, what is certain is that the amount of potential recovery in civil enforcement actions against individuals and organizations for violations of export controls has increased. The export agencies have recently adjusted export penalties to reflect inflation guidelines pursuant to the Federal Civil Penalties Inflation Adjustment Act ("the FCPIA Act").11 As a result, the penalty for an EAR violation has risen from $250,000 per violation (or twice the value of the transaction) to $284,582 (or twice the value of the underlying transaction).12 The FCPIA Act also mandated an increase for violations of the Arms Export Control Act, which includes ITAR violations.  The civil penalty for an ITAR violation has more than doubled from $500,000 per violation to $1,094,010 per violation.13 The increases became effective August 1, 2016.

Outlook

The ECR initiative that started in 2009 is coming to a slow end. With the revisions to Categories XII, XIV, and XVIII, 18 of 21 USML Categories have been revised since 2013. That only leaves Categories I, II, and III without revision. There are currently no published proposed rules with respect to these Categories, most likely because they control firearms, close assault weapons, and combat shotguns; guns and armament; and ammunition and ordnance, respectively.

When it comes to dealing with the 2016 revisions to the ITAR and EAR, the removal of items from the more heavily controlled USML to the arguably less restrictive CCL will come as a blessing to some exporters, but the effort and costs of reclassifying multiple items has been burdensome for small businesses. Further, the harmonization of terms, concepts, and definitions may lessen the burden on exporters somewhat, but the definitions are still often different from one another and sometimes true inconsistencies remain.

When it comes to enforcement, the DOJ's Guidance makes it clear that criminal enforcement for export control violations is a priority. By implementing the Yates memo, the Guidance clarifies that criminally culpable corporate individuals will be targeted for prosecution for violations.

As the year comes to an end, it would be wise to revisit these latest revisions to ensure you are up-to-date with the ever-changing regulations.

If you have any questions regarding any of the changes discussed in this article, please do not hesitate to contact us.

Footnotes

1 Amendment to the ITAR: Revision of USML Categories XIV and XVIII, 81 Fed. Reg. 49,531 (July 28, 2016) (to be codified at 22 C.F.R. pt. 121); CCL: Addition of Items Determined to No Longer Warrant Control under USML Categories XIV or XVIII, 81 Fed. Reg. 49,517 (July 28, 2016) (to be codified at 15 C.F.R. pts 740 & 774).

2 Amendment to the ITAR: Revision of USML Category XII, 81 Fed. Reg. 70,340 (Oct. 12, 2016) (to be codified at 22 C.F.R. pt. 121); Revisions to the EAR: Control of Fire Control, Laser, Imaging, and Guidance Equipment That No Longer Warrant Control under the USML, 81 Fed. Reg. 70,320 (Oct. 12, 2016) (to be codified at 15 C.F.R. pts. 734, 740, 742, 744, 772 & 774).

3 Revisions to Definitions in the EAR, 81 Fed. Reg. 35,586 (June 3, 2016) (to be codified at 15 C.F.R. pts. 734, 740, 750 & 772); ITAR: Revisions to Definition of Export and Related Definitions, 81 Fed. Reg. 35,611 (June 3, 2016), amended by 81 Fed. Reg. 62,004 (Sept. 8,2016) (to be codified at 22 CFR pts. 120, 123, 124, 125, 126 & 130).

4 Federal Information Processing Standards 140-2 or its successors, supplemented by software implementation, cryptographic key management and other procedures and controls that are in accordance with guidance provided in current U.S. National Institute for Standards and Technology publications, or other equally or more effective cryptographic means.

5 15 C.F.R. pt. 740.9(a)(1); 22 C.F.R. pt. 125.4(b)(9).

6 Revision to the EAR: Harmonization of the Destination Control Statements, 81 Fed. Reg. 54,721 (Aug. 17, 2016) (to be codified at 15 C.F.R. pt. 758); Amendment to the ITAR: Procedures for Obtaining State Department Authorization to Export Items Subject to the EAR; Revision to the Destination Control Statement; and Other Changes, 81 Fed. Reg. 54,732 (Aug. 17, 2016) (to be codified at 22 C.F.R. pts. 120, 123, 124, 125 & 126).

7 "These items are controlled by the U.S. government and authorized for export only to the country of ultimate destination for use by the ultimate consignee or end-user(s) herein identified. They may not be resold, transferred, or otherwise disposed of, to any other country or to any person other than the authorized ultimate consignee or end-user(s), either in their original form or after being incorporated into other items, without first obtaining approval from the U.S. government or as otherwise authorized by U.S. law and regulations."

8 Wassenaar Arrangement 2015 Plenary Agreements Implementation, Removal of Foreign National Review Requirements, and Information Security Updates, 81 Fed. Reg. 64,656 (Sept. 20, 2016) (to be codified at 15 C.F.R. pts. 730, 734, 738, 740, 742, 743, 758, 770, 772 & 774).

9 Department of Justice--National Security Division, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations (Oct. 2, 2016), available at https://www.justice.gov/nsd/file/902491/download.

10 Department of Justice, Memorandum from Deputy Attorney General Sally Quillian Yates on Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015), available at https://www.justice.gov/dag/file/769036/download.

11 Federal Civil Penalties Inflation Adjustment Act § 4, 28 U.S.C. § 2461 (2015).

12 Civil Monetary Penalty Adjustments for Inflation, 81 Fed. Reg. 36,454 (June 7, 2016) (to be codified at 15 C.F.R. pt. 6).

13 Civil Monetary Penalties Inflationary Adjustment, 81 Fed. Reg. 36,791 (June 8, 2016) (to be codified at 22 C.F.R. pts. 35, 103, 127 & 138).

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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