Export Controls Reform - Category VIII Transfer

On November 7, 2011, the US Department of Commerce, Bureau of Industry and Security ("BIS") and the US Department of State, Directorate of Defense Trade Controls ("DDTC") published parallel proposed rules aimed at transferring current United States Munitions List ("USML") Category VIII articles to a new Commerce Control List ("CCL") classification. The proposed rules, at 76 Fed. Reg. 68675 and 76 Fed. Reg. 68694, are part of the Administration's ongoing Export Control Reform Initiative, and are the second of a planned series aimed at transferring articles from the USML to the CCL.  The first proposed transfer of USML items to the CCL covered Category VII (military vehicles and related articles), and was published in a July 15, 2011 proposed rule (see our August 5, 2011 update). Both BIS and DDTC are accepting comments on the November 7^th proposed rules until December 22, 2011.

The proposed rules are highly detailed. Below is a high-level summary of the proposed changes:

BIS Proposed Rule: The proposed BIS rule describes the transfer of items determined to no longer warrant control under Category VIII of the USML—such as aircraft and related items— to the CCL. The proposed rule would also partially modify certain aspects of the BIS proposed rule of July 15, 2011.

Determination of articles to be transferred: Category VIII articles that will remain on the USML are those which (1) are inherently military and otherwise warrant control on the USML, and/or (2) are of a type common to civil aircraft applications and possess attributes that provide a critical military or intelligence advantage and are available almost exclusively to the United States.  Category VIII articles that would be transferred to the CCL are those that do not satisfy the above criteria for the USML, but are nonetheless determined to be "specially designed" for military applications as a result of differences in form and fit. 

Addition of new ECCNs: The BIS proposed rule of July 15, 2011 established a framework for the assignment of an Export Control Classification Number ("ECCN") to transferred articles.  The current proposed rule also follows that framework. Specifically, the current proposed rule would create five new "600 series" ECCNs in the CCL Category 9, accounting for product groups A through E. The rule also would transfer items currently classified in the CCL under 9A018, 9D018, and 9E018 to the 600 series, thereby consolidating the Wassenaar Arrangement Munitions List ("WAML") and former USML items into one series of ECCNs:

• ECCN 9A610 would encompass certain military aircraft and related commodities. 
• ECCN 9B610 would encompass test, inspection, and production "equipment" for the "development" or "production" of ECCN 9A610 commodities.
• ECCN 9C610 would consist of materials specially designed for aircraft and related commodities controlled by ECCN 9A610 that are not specified elsewhere on the CCL or the USML.
• ECCN 9D610 would encompass software specially designed for commodities in 9A610, 9B610 and 9C610.
• ECCN 9E610 would consist of technology that is required for the above mentioned ECCNs (A through D).

Each product group would also have a special paragraph designated ".y.99" to cover items that were previously determined to be subject to the Export Administration Regulations ("EAR"), were not listed on the CCL (i.e., would previously have been classified as EAR99), and would otherwise fall within the scope of the 600 series. These items would be subject to antiterrorism controls, and therefore would be subject to slightly more stringent controls under the new proposed rule.

The most current proposed rule also would revise § 742.6 of the EAR, covering "Regional Stability" controls, to apply the RS Column 1 licensing policy to commodities classified under the new ECCNs (except paragraphs .y), and amend RS Column 1 licensing policy to impose a general policy of denial for (1) "600 series" items if the destination is subject to a United States arms embargo and (2) items specially designed or required for the F-14 aircraft. 

Addressing license exceptions availability: The new rule likewise addresses license exception availability for items controlled by the five new ECCNs that would be created.

• The new rule proposes that License Exception STA under § 740.20(c)(1) of the EAR generally would be available for eligible end items (as described in § 740.20(g) of the July 15, 2011 proposed rule) and all other 600 series items if, at the time of export, reexport or in-country transfer, the item is destined for (1) ultimate end use by the armed forces, police, paramilitary, law enforcement, customs, correctional, fire, and search and rescue agencies of a government in one of the § 740.20(c)(1) countries (the "STA-36") or the U.S. government, or (2) the "production" or "development" of an item for ultimate end use by a foreign government agency in the STA-36 countries, the U.S. government, or any person in the U.S.
• The rule also proposes a new Supplement No. 4 to part 740. The new supplement would list 15 types of parts and components that would be classified under the new ECCN 9A610.x ("specially designed" parts, components, accessories and attachments). Supplement No. 4 would limit the use of License Exceptions STA and GOV for the export or reexport of technology under 9D610 and 9E610 (other than "build-to-print" technology) for the production and development of 9A610.x-listed items to certain U.S. end users.

Delayed tiering towards a positive list: The proposed rule also announces that the Administration will delay the "tiering" component of its plan to make the USML and CLL "positive, tiered, and aligned" (see December 2010 75 FR 76935). The Administration determined that fundamentally altering the structure of the USML by tiering and aligning it would cause significant problems with the compliance systems of exporters. However, the Administration has stated that it will continue efforts to transform the USML into a more positive list.

The new ECCNs created by this proposed rule would be subject to the de minimis provisions outlined in the July 15, 2011 proposed rule (contrary to the USML, which does not permit de minimis treatment). Items in the new ECCNs would become eligible for de minimis treatment if they meet the threshold of no more than 10 percent controlled U.S.-origin content.  In addition, many exports and reexports of the Category VIII articles that would be placed on the CCL by this proposed rule would become eligible for license exceptions that apply to shipments to U.S. agencies valued at less than $1,500, parts and components being exported for use as replacement parts, temporary exports, and License Exception STA, thereby reducing the number of licenses that exporters would require. 

DDTC Proposed Rule

The proposed DDTC rule revises USML Category VIII as outlined above.  Below is a high-level summary:

• Narrow list: The proposed revision narrows the types of aircraft and related items controlled on the USML to only those that warrant the stringent requirements of the AECA (i.e., the aircrafts B-1B, B-2, F15SE, F/A18E/F/G, F-22, F-35, F-117, or United States Government technology demonstrators).
• Positive list: While the proposed USML category does not retain controls over all generic parts, components, accessories, and attachments that are specifically designed or modified for defense articles, it does retain controls over such items that are specifically designed for the aircrafts listed above.  This aspect of the proposed rule has the potential to complicate a company's export compliance efforts, as a manufacturer of specially-designed parts or components would need to track the type of aircraft into which the part or component is to be incorporated in order to determine the jurisdiction of that item.
• "Specially designed": In its proposed rule, DDTC stated that the definition of "specially designed" as provided in the December 2010 proposal (75 FR 76935) – and not as set out in the July 15, 2011 proposed rule – should be used for the evaluation of the currently proposed rule.  Under that definition, "'specially designed' means that the end-item, equipment, accessory, attachment, system, component, or part has properties that (i) distinguish it for certain predetermined purposes, (ii) are directly related to the functioning of a defense article, and (iii) are used exclusively or predominantly in or with a defense article identified on the USML." The Departments of State and Commerce plan to publish for public comment another proposed rule with further revisions to the definition of "specially designed" that would be common to both the USML and the CCL.

Overall, the proposed rules continue the major effort undertaken by the Administration to modernize its export controls framework, though they do acknowledge some redirection of the reform efforts undertaken thus far, such as a deferral of the focus on establishing "tiered" controls, and renewed efforts to define the term "specially designed."  As indicated above, while many of the proposed changes are likely to be welcomed by exporters, some have the potential to complicate the export compliance efforts undertaken by companies.

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.