V&E Export Controls and Economic Sanctions E-Communication, November 21, 2011

On November 7, 2011, the Departments of State and Commerce each issued proposed rules that, together, would transfer jurisdiction of many lower-level aircraft parts and components from control under the more restrictive U.S. Munitions List (USML) to the less restrictive Commerce Control List (CCL). The proposed changes represent the latest step in the U.S. government's ambitious Export Control Reform Initiative. A major goal of the initiative is to modify the USML to be a more "positive," objectively defined control list that does not consider the original design intent of the part and is limited to items that present the greatest national security and foreign policy risks. These changes have been highly anticipated by the aircraft industry, which has long struggled with export jurisdiction issues, particularly with respect to more generic legacy parts and components. While the proposed rules generally would reduce and clarify aircraft controls, a wide variety of parts and components would continue to be controlled under the USML and in some cases controls will still be based on design intent criteria. In addition, many items transferred to the CCL from the USML will continue to be subject to licensing requirements administered by the Department of Commerce, and some controls will also be based on the design intent of the item. Comments on the proposed rule must be submitted by December 22, 2011.

Proposed State Rule Seeks to Clarify Jurisdiction and Reduce Controls over Less Sensitive Aircraft Items

Currently, the USML describes defense articles in a vague, broad way that focuses on whether an item was "specifically designed" for a military or intelligence purpose. This means that in determining jurisdiction, exporters must know the original "design intent" of the item. This has been a particular challenge for the aircraft industry, in which many parts and components are used interchangeably in military and commercial aircraft, and many parts and components were developed many years or even decades ago, making it difficult to determine the original design intent of the item. Manufacturers and distributors other than the Original Equipment Manufacturer (OEM), in particular, often face significant challenges in determining design intent.

As a result, there has been considerable confusion and inconsistency within the aircraft industry in interpreting the controls applicable to aircraft equipment. Due to the sensitivity of aircraft and related items, the potential consequences for incorrect jurisdictional determinations can be high. For instance, in 2006, the Boeing Company was subjected to a civil penalty of $15 million under a Consent Agreement with the Department of State's Directorate of Defense Trade Controls (DDTC) to settle alleged unauthorized exports of commercial aircraft containing the QRS-11 quartz rate sensors, which DDTC determined to be a USML-controlled part.

As part of the Obama administration's Export Control Reform Initiative, various U.S. government agencies responsible for administering export controls are attempting to eliminate uncertainty and focus export controls on the most sensitive items. Under its proposed revision to the International Traffic in Arms Regulations (ITAR), DDTC would amend USML Category VIII to largely eliminate the "design intent" component of the jurisdictional analysis by creating a "positive" list of controlled items in which only aircraft with significant military applications remain controlled, and only certain parts and components are controlled. As a general matter, Category VIII would no longer control generic lower-level parts and components "specially designed" for any military aircraft.

Category VIII would still control lower-level parts and components that are "specially designed" for certain aircraft with low observable capabilities, for U.S. government technology demonstrator aircraft, and for some aircraft systems on the "positive" list. Inertial navigation systems and gas turbine engines would be moved out of Category VIII and placed in another USML Category or on the CCL, through future proposed rules. All classified aircraft equipment would continue to be controlled on the USML.

Continued Licensing Requirements under Commerce Control

Aircraft equipment and related materials, software, and technology that are removed from the USML under DDTC's proposed rule would be placed into a new "600 series" of export control classifications on the CCL pursuant to a proposed rule issued by the Department of Commerce's Bureau of Industry and Security (BIS), and such equipment will be subject to BIS licensing requirements under the Export Administration Regulations (EAR). Of particular note, the 600 series will continue to include a "catch-all" category of all parts, components, and other equipment that are "specially designed" for an item on the CCL or on the USML, but are not described specifically on either list. With few exceptions, such parts, components and other equipment will require a license from BIS for export or re-export to all countries except Canada.

Aircraft items classified in the 600 series will be eligible for very few license exceptions. Notably, the recently-implemented License Exception STA is available for export to most NATO countries, but only for ultimate end-use by U.S. and foreign government entities or by persons in the U.S., and use of STA for a 600 series aircraft end-item requires prior BIS approval. Interestingly, BIS proposes to maintain a policy of denial on applications to export equipment, software and technology "specially designed" or "required for" F-14 aircraft to any destination.

Likely Impact

Overall, the proposed rules appear to go a long way in streamlining and clarifying controls over lower-level aircraft parts. A host of manufacturers, distributors, and exporters of various generic low-level aircraft parts that would be removed from USML controls are likely to reap the greatest benefits from the proposed rules, although they will have to consider any licensing requirements imposed by BIS under the EAR. Those in the aircraft industry involved with the following parts are likely to face the greatest challenges in determining whether or not their parts are subject to the ITAR or the EAR and complying with the new rules:

  • Parts and components identified in Proposed Category VIII(h)(1) that are "specially designed" for certain identified aircraft with low observable capabilities. The meaning of "specially designed" has been the subject of much discussion and analysis within DDTC and BIS, as well as industry, and has not been finalized. However, regardless of the final regulatory definition, applying this standard likely will continue to require knowledge of the original design intent of the part.
  • Parts and components identified in proposed Category VIII(h)(2)-(h)(18) that are "specially designed" for some of the aircraft systems identified on the new positive USML list. Challenges in interpreting and applying this ambiguous standard will remain.

Finally, the structure of the proposed rules illustrates that the Departments of State and Commerce have tabled an earlier-proposed plan of "tiering" the USML and the CCL into various levels of control, finding it too difficult to implement, and will instead focus for now on creating more "positive" lists. In sum, all manufacturers and exporters of aircraft equipment are advised to review the proposed rules to assess the potential impact, if any, on the export control jurisdiction of their products and any licensing requirements. The agencies are accepting comments on the proposed rules until December 22, 2011.

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