Proposed Changes To ITAR And EAR Further Limit Support To Certain Military, Intelligence, And Security End Users And Restrict U.S. Person Support

On July 25, 2024, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued two proposed rules: one that focuses on enhancing and expanding controls on military and intelligence end users and end uses, and the other that focuses on human rights and expansion of crime control requirements (the FSEU Rule). On the same day, the U.S. Department of State, Directorate of Defense Trade Controls (DDTC) issued a new proposed rule (the Defense Services Rule) that would revise the definition of "defense services" and the associated scope of related controls in the International Traffic in Arms Regulations (ITAR).

The key changes include:

• Expanding the military end user (MEU) and military end use rule, including expanding the definition of MEU, the scope of items, and countries affected
• Amending the military intelligence end user and end use rule to apply to all intelligence end users, including civil users, and expanding the scope of items and countries affected
• Adding two new end use controls under the Export Administration Regulations (EAR) to capture entities supporting the development, production, installation, maintenance, repair, overhaul, or refurbishing of military items (e.g., defense contractors) and entities deemed to be foreign-security end users (e.g., police and security agencies)
• Prohibiting U.S. persons from supporting activities associated with the amended and new end users controls even when the item(s) involved are not subject to the EAR
• Adding Commerce Control List (CCL)-based controls on facial recognition systems and related software and technologies, which would mean requiring licenses to export to certain countries, including China
• Revising the list of regulated activities under the ITAR's definition of defense services
• Introducing new United States Munitions List (USML) entries to restrict U.S. person support to critical military and intelligence assistance

Interested parties have until September 27, 2024 to submit comments to both departments.

Proposed EAR Changes

BIS released two proposed rules outlining potential changes to existing restrictions under the EAR which, if adopted, would amend and expand the existing end use/end user controls and related U.S.-person support restrictions and create CCL-based controls for facial recognition systems. The proposed rules indicate that BIS is strongly considering imposing more stringent licensing requirements than before.

MEU

The MEU/MIU Rule contains proposed amendments that would dramatically expand certain military end users and use restrictions. Specifically, BIS intends to revise Section 744.21 of the EAR to cover any exports, reexports, and in-country transfers of all items subject to the EAR when there is "knowledge" that the items are intended for MEUs or a military end use of a D:5 country or Macau.¹ Currently, Section 744.21 is limited to only six countries and restricts only those items listed in Supplement No 2. to Part 744. However, under the proposed rule, all items subject to the EAR would require a license if destined to a MEU or for a military end use of a D:5 country or Macau.

The MEU/MIU Rule would also amend the definition of MEU to include any person or entity performing the functions of a MEU, such as mercenaries, paramilitary, or irregular forces. It would also remove national police, government intelligence or reconnaissance organizations, and any person or entity whose actions or functions are intended to support military end uses from the scope of the MEU definition. However, those categories are still covered under the new types of end users described elsewhere in the MEU/MIU Rule and FSEU Rule.

The expansion of the proposed rule is intended to capture private companies, non-state actors, or parastatal entities that engage in combat or other activities similar to those of traditional armed forces, other than the kinds of activities described below in connection with military-support end users, which generally involves the design, development, production, installation, maintenance, repair, overhaul, or refurbishing of military items. In connection with these revisions, BIS is proposing moving all entities currently listed on the MEU List to the Entity List.

Applications to export, reexport, or transfer (in-country) items for a MEU in connection with Burma, China, Cuba, Iran, Macau, North Korea, Syria, and Venezuela, will be reviewed with a presumption of denial, and applications for Russia and Belarus will be reviewed with a policy of denial consistent with Section 746.8(b)(1) of the EAR. All other requests will be reviewed on a case-by-case basis.

Military-Support End User

In modifying the MEU rule described above, BIS also proposes to create a new military-support end user control under a new section of the EAR, Section 744.22. BIS defines the term "military-support end user" as any person or entity whose actions or functions support military end uses and entities on the Entity List with a footnote 6 designation. Under the MEU/MIU Rule, a license would be required for the export, reexport, or transfer (in-country) of items subject to the EAR that are specified on the CCL with "knowledge" that the item is intended, entirely or in part, for a military-support end user(s) in a D:5 country or Macau, or wherever located when identified on the Entity List with a footnote 6 designation. This end user control is intended to capture entities involved in the design, development, production, installation, maintenance, repair, overhaul, or refurbishing of military items.

The same licensing review policy for MEU licenses under Section 744.21 would apply for military-support end user requests.

Military-Intelligence End User

The MEU/MIU Rule would revise Section 744.22 of the EAR, which currently addresses military intelligence end users and end uses, by moving the restrictions to a new section of the EAR, Section 744.24, and dropping the "military" qualifier, resulting in the term "intelligence end user." BIS intends to define "intelligence end users" as any government intelligence or reconnaissance organization and other entities performing functions on behalf of such entities. This would cover entities planning and directing, processing and exploiting, analyzing and producing, disseminating and integrating, surveilling, and evaluating and providing feedback for traditional espionage and economic espionage activities. The scope of this end user control would also be revised to apply to all items subject to the EAR and to countries listed in Country Groups D and E that are not also listed in Country Groups A:5 and A:6.²

The same licensing review policy for MEUs and military-support end users would apply to intelligence end users.

Foreign-Security End User

The FSEU Rule proposes to add another new category for end user control to cover foreign-security end users under a new section of the EAR, Section 744.25. This new control would require a license to export, reexport, or transfer (in-country) items subject to the EAR that are specified on the CCL to foreign-security end users of a country listed in Country Group D:5 or E. BIS intends to define foreign-security end users as governmental and other entities with the authority to arrest, detain, monitor, search, or use force in the furtherance of their official duties. This includes persons or entities at any level of governmental police and security services (e.g., municipal, provincial, regional) and would include persons or entities performing the functions of a foreign-security end user because non-government entities may be hired to assist or carry out such activities. The proposed foreign-security end user term would also cover others performing functions of such a foreign-security end user and may include laboratories, jails, prisons, detention facilities, and labor camps and/or reeducation centers. However, if any foreign-security end user is integrated into or organized under the military,
the MEU control in Section 744.21 applies.

This definition does not apply to purely civilian emergency medical, firefighting, and search-and-rescue end users. However, a license would be required if an end user integrates police, emergency medical, and search and rescue services under a single public safety department.

Given the wide implication of this rule, BIS intends to apply a case-by-case review standard for license applications under Section 744.25 to ensure the export, reexport, or transfer (in-country) of items necessary to protect lives is not disrupted.

General Restrictions on Certain U.S. Person Activities

BIS also proposes more general restrictions to U.S. person activities when related to such end users described above. These restrictions include specific exclusions to the definition of "support" such as: (1) activities that relate to items not subject to the EAR as specified in Section 734.3(b); (2) activities that are subject to the jurisdiction of other agencies (e.g., U.S. Department of State, Directorate of Defense Trade Controls); (3) activities that do not extend beyond administrative services; (4) commercial activities relating to the movement of goods by common careers for certain items; and (5) activities conducted for, on behalf of, or in connection with the U.S. government.

Under the proposed rules, a license would be required if a U.S. person engaged in certain kinds of activities, including but not limited to: facilitating a shipment, performing any contract, service, or employment with the knowledge it may assist or benefit certain end uses or end users, and transferring any item not subject to the EAR with the knowledge it will be used by certain end users or end uses.

BIS does not propose adding controls on U.S. person activities that relate to military-support end users, but notes that the restrictions on U.S. person support to military end users will extend to entities on the Entity List with a footnote 6 designation. The proposed rules would restrict U.S. persons from engaging in certain kinds of activities for a "military-production activity." The term "military-production activity" means incorporation into or any other activity that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, development, or production of 600 series items, including foreign-origin items not subject to the EAR, and any other items described on the CCL or designated EAR99, including foreign-origin items not subject to the EAR when there is knowledge it is destined to a MEU.

CCL-Based Controls for Facial Recognition Systems

In addition to the end use controls, BIS also proposes a CCL-based control on facial recognition systems due to rapidly evolving facial recognition technologies coupled with artificial intelligence capabilities that can bolster the abilities of foreign-security end users (e.g., law enforcement agencies and other government affiliated agencies). The proposed rule would amend ECCN 3A981 to include facial recognition systems and would add a note to ECCN 3A981 to indicate that it does not control detection or authentication items versus identification items or items that facilitate individual access to personal devices or facilities. Furthermore, the software for facial recognition would be controlled under ECCN 3D980 and 3E980 would control facial recognition technology. These ECCNs would be subject to crime controls (CC) column 1.

Proposed ITAR Amendments

The Defense Services Rule contains several key changes, including amending the definition of defense services under Section 120.32 and adding new entries to the ITAR's USML. The potential changes are intended to provide clarity about U.S. person activities already subject to the ITAR's control and highlight certain U.S. person activities that should warrant control under the ITAR.

Definition of Defense Services

Under the proposed rule, DDTC intends to update the list of regulated activities described in the defense services definition to include "assistance, including training or consulting, to foreign persons in the development (including, e.g., design), production (including, e.g., engineering and manufacture), assembly, testing, repair, maintenance, modification, disabling, degradation, destruction, operation, processing, use, or demilitarization of a defense article." Moving "design, engineering and manufacture" into parentheticals would align the definition with changes made to the definitions of "development" and "production" in March 2022. Two new activities, "disabling" and "degradation" would be added to make it clear that the act of harming a military capability by degrading or disabling a defense article would be controlled. DDTC also intends to include a specific reference to consulting activity, not as an additional level of control, but to clarify that "training" includes more than direct instructional activities. DDTC intends to remove the rest of the current language under the defense services definition and replace the language to reference the newly proposed USML categories.

New USML Categories for Military and Intelligence Assistance

DDTC is proposing adding a new subparagraph to the definition, directing the reader to two new proposed USML entries under Category IX that would control defense services related to intelligence and military assistance, but not directly related to a defense article. DDTC determined the proposed additions to the USML would clarify that restricting U.S. persons from furnishing assistance in intelligence activities without DDTC approval is warranted and necessary to address risks to the national security and foreign policy of the United States.

The proposed USML category, IX(s)(2), describes furnishing intelligence assistance. Meanwhile, USML Category, IX(s)(3), describes military and paramilitary assistance. This is intended to provide clear notice to U.S. persons and regulated communities that the ITAR regulates services related to military or intelligence activities regardless of a nexus to a defense article.

Each of these proposed new categories would carve out certain activities in order to only control and regulate a higher level of support for activities that provide a critical military or intelligence advantage. For example, the assistance activities described in the proposed paragraph (s)(2) must be "for compensation," thus limiting the control to services that are provided in a professional or commercial capacity. However, DDTC makes it clear that compensation is not limited only to financial compensation but does require a measurable response from the recipient in exchange for services (including goods and services, political favors, legislative or legal relief, etc.). Non-critical intelligence assistance provided on a volunteer basis would not be controlled by the ITAR, nor does DDTC intend to control the activities of hobbyists or casually interested persons who provide commentary or forward open-source and publicly available information.

Notably, the proposed USML categories would follow the ITAR's "catch and release" method of control, which initially describes and covers a broad range of activities in order to "catch" them within the ITAR's control, and then specifies certain limited carve-outs to then "release" certain activities. Only assistance that is both "caught" and not "released" would be controlled under the proposed paragraphs IX(s)(2) or (s)(3). Under the proposed paragraphs for USML Category IX(s)(2)(1) through (iv), there would be six carveouts related to intelligence activities and three carveouts for military assistance activities. Notably, the first three intelligence-related carveouts are identical to the three military assistance activities:

Conclusion

The proposed rules, if implemented, may have a significant impact on U.S. and foreign operations, especially for those who conduct business with and in D:5 countries or Macau. It will be important for individuals and companies to review the proposed EAR and USML changes to understand what activities may be prohibited if such rules are implemented.

DDTC and BIS have requested public comments on the proposed rules and will accept comments until September 27, 2024.

Footnotes

1. D:5 Countries (U.S. Arms Embargoed Countries) currently are: Afghanistan, Belarus, Burma, Cambodia, Central African Republic, People's Republic of China (China), Democratic Republic of Congo, Cuba, Eritrea, Haiti, Iran, Iraq, North Korea, Lebanon, Libya, Nicaragua, Russia, Somalia, South Sudan, Sudan, Syria, Venezuela, and Zimbabwe.

2. Those countries include: Afghanistan, Bahrain, Belarus, Burma, Cambodia, Central African Republic, People's Republic of China (China), Democratic Republic of Congo, Cuba, Egypt, Eritrea, Haiti, Iran, Iraq, Jordan, North Korea, Kuwait, Lebanon, Libya, Oman, Pakistan, Qatar, Russia, Saudi Arabia, Somalia, South Sudan, Sudan, Syria, United Arab Emirates, Venezuela, and Zimbabwe.

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