Abbey E. Baker contributed to this article.
When it comes to export rules and regulations, what do companies want most? A system that is clear, predictable and easy to use. For years there have been complaints that the current export regime is too rigorous, burdensome, confusing, outdated and slow. The archaic system has hurt the competitiveness of U.S. businesses.
The Obama Administration got the message and in August 2009 announced a comprehensive review of the export control system. In April 2010, the Secretary of Defense announced a four-pronged approach to the administration’s reforms. (See the White House Fact Sheet on the President’s Export Control Reform Initiative) The initiative includes a plan to overhaul the current export system and improve and streamline the multi-agency arrangement in place today.
Although it is not yet clear whether the proposed changes will actually improve the system by cutting out redundancies and inefficiencies, companies are asking “What can we expect?” and “How do we plan for this?” The honest answer is that it is too early to tell.
Here is a summary of the changes and what to expect. Bottom line—it is going to be a long, drawn out process.
The current system of export controls divides the regulation and licensing of U.S. exports between multiple agencies. The Department of State’s Directorate of Defense Trade Controls (DDTC) uses the International Traffic in Arms Regulations (ITAR) to govern the export of defense articles and services, which are defined as “specifically designed, developed, configured, adapted, or modified for a military application.”
Controlled items appear on the U.S. Munitions List (USML), which is considered a “negative list.” The USML does not list items by specific criteria or technical descriptions, but instead uses general descriptions and design-intent based criteria intended to act as catchalls to prevent sensitive unlisted items, such as new technologies, from going uncontrolled. Generally, all items on the USML require a license for export.
The Department of Commerce’s Bureau of Industry and Security (BIS) controls dual-use goods—goods that have both civil and military applications—under the Export Administration Regulations (EAR). The EAR lists controlled goods on the Commerce Control List (CCL), a “positive” list of specific goods, technology and software that may require licensing depending on the item and destination.
Other agencies involved in export controls and enforcement include the Nuclear Regulatory Commission (NRC), the Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of Justice (DOJ), the Department of Homeland Security (DHS) and the Federal Bureau of Investigation (FBI), among others.
The current export control system also includes Congressional notification requirements that provide a check on foreign sales of military equipment and prevent hasty changes to the USML. Congress must be notified of government-to-government foreign arms sales as well as large commercial sales of certain military equipment. Congress then has the option to pass legislation barring or modifying the sale.
Similarly, the president must notify the House Foreign Affairs Committee and the Senate Foreign Relations Committee 30 days before removing an article from the USML. Some claim that these review functions inhibit U.S. ability to make timely adaptations to the USML and fulfill the role of supplier and ally. Others see the notification process as a necessary national security measure in an overly lax export regime. What does this mean for U.S. businesses? It means this could be a slow process with a lot of pushback from the Hill.
Defense Secretary Robert M. Gates laid out the key elements of the administration’s plan that consists of a four-pronged approach to export reform. The administration plans to implement these in three phases. The plan would create:
Phase I harmonizes the CCL and USML, synchronizes the enforcement process through a new “Enforcement Fusion Center” and standardizes licensing policies.
Phase II will create a harmonized licensing system and structure the USML and CCL identically. Certain items will move from the USML to the CCL with Congressional notification, and unilateral and multilateral controls will be reconsidered for certain items.
Phase III will establish a single licensing agency, expected to take over the licensing tasks of BIS, DDTC and OFAC (not the NRC or Department of Energy), control list and IT system. A single licensing agency should end the existing lack of centralized government knowledge pertaining to license applications across the export control system. This communication gap sometimes leads to conflicting application approvals and denials. A singular IT system should also help address this problem. It is likely that the USXPORTS database, which the Department of Defense currently uses, will be expanded to DDTC, BIS and OFAC, as well as to other agencies, to be used as the platform for a proposed single export license application.
As we will discuss in a moment, BIS and DDTC are already working to restructure both the CCL and USML to harmonize definitions, restrict items that require greater control and liberalize control of items that the agencies decide have been unnecessarily restrained.
Along with the President’s initiatives, in 2011 two new bills intended to reform the export control system were introduced that would either reauthorize or rewrite the expired Export Administration Act. Proposed amendments include granting Presidential authority to create a new dual-use export control licensing system. Both bills were referred to committee in 2011 and would affect the President’s current initiative, so it is important to continue to monitor these other proposals.
Doreen M. Edelman is a shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz P.C. in Washington, D.C., where she helps clients create business solutions for international trade compliance. She has more than 20 years of experience developing compliance programs and counseling clients on export licensing, export controls, FCPA and Office of Foreign Assets Control (OFAC) sanction laws. Ms. Edelman also helps companies prepare global business plans and work through foreign government market regulations.
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