Presentation on theme: "Where Dual-Use and Military Items Coincide – Proper Classification C5 – 4th Forum on Export Controls 8 February 2010 - Brussels Anita C. Esslinger, Partner."— Presentation transcript:
Where Dual-Use and Military Items Coincide – Proper Classification C5 – 4th Forum on Export Controls 8 February 2010 - Brussels Anita C. Esslinger, Partner - Bryan Cave 88 Wood Street, London EC2V 7AJ +44(0)20 3207 1224 email@example.com
2 Special Thanks To Kevin J. Wolf – Bryan Cave, Washington DC firstname.lastname@example.org, 001-202-508-6113 email@example.com Clif Burns – Bryan Cave, Washington DC firstname.lastname@example.org, 001 202-508-6067 email@example.com Susan M. Kovarovics – Bryan Cave, Washington DC firstname.lastname@example.org, 001-202-508-6132 email@example.com Katherine L. Heubert – Bryan Cave, Washington DC firstname.lastname@example.org, 001 202-508-6194 email@example.com Thomas Rothaermel – Bryan Cave, Hamburg Thomas.Rothaermel@bryancave.com, 0049 4030 3316 133 Thomas.Rothaermel@bryancave.com Joseph Smallhoover – Bryan Cave, Paris Joseph.Smallhoover@bryancave.com, 0032 1 4417 7710 Joseph.Smallhoover@bryancave.com
3 US Military Controls – Relevance to European Companies Extra-territorial effect –Control not just exports from the US, but also reexports and transfers to unauthorised persons by any person of US military items –“See through rule” controls reexports and transfers of US controlled military items incorporated into foreign produced products –Control derivative items – data or hardware that is derived from the U.S. origin ITAR-controlled goods and which may be produced or manufactured from ITAR-controlled technical data or defense services
4 US Military Controls – Relevance to European Companies Examples –QRS11 - quartz rate sensors used in commercial aircraft –Qioptiq S.a.r.l. Consent Agreement and Order December 2008 -- $25 million civil penalty (including $10 million for remedial compliance measures) –Interturbine Aviation Logistics GmbH Consent Agreement November 2009. January 2010 -- $1 million civil penalty – causing an unauthorised export and unauthorised transfer
5 Penalties: Qioptiq In December 2008, Qioptiq S.a.r.l. agreed to pay $25 million in fines for ITAR-violations for, among other violations, export of ITAR controlled technology to a variety of countries, including: export to China of ITAR technical data, “original and derivative” export to Iran of hardware, manufacturing equipment, technical data and know-how involving derivative designs “based in part on U.S. origin ITAR technical data exported to Singapore” export to Cyprus of “night vision equipment involving derivative designs based in part on U.S. origin ITAR technical data” and “components that were derived from ITAR technical data”
6 ITAR-Free Products? U.S. and foreign companies in the aircraft parts and other industries have become more aggressive in the use of “ITAR-Free” certifications.
7 What Does ITAR-Free Mean? None of the parts, components, or other end-items supplied to buyer are “defense articles.” –Buyers are concerned about see through rule tainting its end-item, thus requiring US Government approval to transfer foreign-made end-item.
8 What Does ITAR-Free Mean? None of the technical data or services from which the buyer’s items are produced or manufactured were ITAR-controlled. –Clause 124.8(5) relating to Manufacturing License Agreements and Technical Assistance Agreements involving ITAR-controlled technical data require State Department approval before any such items are transferred to a third country or a national of a third country
9 Jurisdictional Determinations Precise jurisdictional determinations are the most fundamental and most important part of any export control compliance program. If item is subject to the jurisdiction to the ITAR, then there are almost always significant licensing requirements If not, then it depends.
10 US Controls - Questions to Answer 1.What is at issue, i.e., hardware, software, or information (“item”), or a service? 2.What is the jurisdictional status of the item or service, i.e., defense item or service controlled by the International Traffic in Arms Regulations (“ITAR”), or is it controlled by the Export Administration Regulations (“EAR”) or by another agency?
11 US Controls - Questions to Answer 3.What is the classification status of the item or service, i.e., if EAR-controlled, what is its Export Control Classification Number (“ECCN”), or, if ITAR- controlled, what is its U.S. Munitions List (“USML”) subcategory number?
12 US Military Controls International Traffic in Arms Regulations (ITAR) promulgated pursuant to the Arms Export Control Act (AECA) govern –Exports, reexports and transfers, plus temporary imports of Defense Articles Defense Articles = Controlled Hardware, Technical Data, Software Listed on the US Munitions List – Exports of Defense Services
13 US Military Controls US State Department’s Directorate of Defense Controls (DDTC) is charged with interpretation and enforcement of the ITAR Together with other relevant US Government agencies (principally the US Department of Defense), it is has the final say as to which items and services are subject to ITAR jurisdiction
14 Export Administration Regulations Export Administration Regulations (EAR) govern the export of items “subject to the EAR” which are listed on the EAR’s Commerce Control List (CCL) The EAR are administered by the US Department of Commerce’s Bureau of Industry and Security (BIS)
15 Export Administration Regulations Items subject to the EAR are generally most items other than defense articles, technology and software –Although other agencies may exercise licensing jurisdiction over other kinds of items, such as nuclear materials, controlled substances –US sanctions regulations, such as those relating to Cuba and Iran, administered by the Office of Foreign Assets Controls (OFAC) may overlap and override EAR controls
16 Export Administration Regulations Items “subject to the EAR” are often called Dual- Use items Misleading term – does not mean items used for both commercial and military applications
17 ITAR Trumps EAR If an item is subject to the jurisdiction of the ITAR, it is not controlled by the EAR –Even if the CCL specifically describes item –Even if BIS has classified item in a specific written ruling
18 US Military Controls Under the AECA, the President is authorized to “designate those items which shall be considered as defense articles and defense services... and to promulgate regulations for the import and export of such articles and services.” The items so designated constitute the United States Munitions List (USML) –Not just “munitions” –Is this list all inclusive?
19 What is ITAR Controlled? Final jurisdictional determinations must be based on the specific words in the relevant USML subcategories because: –Not all subcategories are worded in the same way
20 Defense Article §120.6 Any item or technical data designated in the USML Includes: technical data recorded or stored in any physical form, models, mockups, or other items that reveal technical data directly relating to items designated in the USML Excludes: basic marketing information on function or purpose or general system descriptions
21 What is ITAR Controlled? Some ITAR categories also control associated equipment –Term is not defined except as a subset of accessories and attachments
22 What is ITAR Controlled? All USML subcategories control technical data, software and defense services “directly related” to the defense articles listed in the subcategory.
23 Technical Data § 120.10 Information that is required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles
24 Technical Data (and Software) § 120.10 Includes: information in the form of blueprints, drawings, photographs, plans, instructions or documentation; classified information relating to defense articles and defense services; and software directly related to defense articles Excludes: information concerning general scientific, mathematical or engineering principles commonly taught in schools, colleges and universities; information in the public domain; and basic marketing information on function or purpose or general system descriptions of defense articles
25 Defense Service § 120.9 The furnishing of assistance (including training) to foreign persons, whether in the US or abroad in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operations, demilitarization, destruction, processing or use of defense articles The furnishing to foreign persons of any ITAR- controlled technical data whether in the US or abroad
26 Defense Service § 120.9 Military training of foreign units and forces, regular and irregular, including formal or informal instruction of foreign persons in the U.S. or abroad or by correspondence courses, technical, educational, or information publications and media of all kinds, training aid, orientation, training exercise, and military advice
27 Defense Service Provision of defense services is controlled by the ITAR even if no ITAR-controlled technical data is provided and even if information relied upon in performing the defense services is in the public domain or otherwise exempt from licensing under the ITAR
28 Derivative Items Controlled technical data and hardware includes the data or hardware transferred under a license or agreement and often data or hardware that is derived from the U.S. origin ITAR-controlled goods Examples: –a drawing developed abroad using information from an ITAR controlled U.S. drawing transferred pursuant to a TAA or MLA –hardware developed abroad using U.S. technical data that was transferred under a license containing a proviso capturing items derived from that data
29 Controlled Under Agreements § 124.8(5) language must be included in all MLAs and TAAs –“…and any defense article which may be produced or manufactured from such technical data or defense service may not be transferred to a person in a third country or a national of a third country except as specifically authorized…”
30 Controlled Under Export Licenses DDTC can “proviso in” limitations and restrictions when approving an export license application Provisos capturing derivative items can be added to licenses –Always ask to see provisos and limitations on export licenses under which you receive data or hardware
31 Controlled under USML Categories USML Categories that do not explicitly include derivative item language should not be assumed to exclude derivative items DDTC takes a broad view of its authority to regulate derivative items as ITAR-controlled, even if a defense against their interpretation exists –This broad view is reflected in the recent Qioptiq Consent Agreement
32 “See Through” Rule ITAR-controlled defense articles DO NOT lose their identity as ITAR-controlled articles even if they are incorporated into higher level assemblies or end products made outside the United States Unlike the EAR, the ITAR do not have a “de minimis” threshold which permits lower amounts of U.S. controlled content incorporated into foreign- made items to be released from U.S. export controls
33 “See Through” Rule The ITAR “sees through” the end-item to find the ITAR-controlled component Reexport/reetransfer authorization requirements continue to apply to the ITAR component—even after incorporation The term “See Through Rule” is not in the ITAR, and the ITAR does not contain a citation to explain the principle
34 US Munitions List (USML) §120.3 Includes any article or service designated as (or determined in the future to be) specifically designed, developed, configured, adapted, or modified for a military application, and: –has neither predominant civil applications nor performance equivalents (defined by form, fit and function) to those of an article or service used for civil applications; or –has significant military or intelligence applicability such that control is necessary
35 What is ITAR Controlled? Broadly speaking: was the item – regardless of how it is used now: –originally specifically designed, developed, configured, adapted, or modified in any way –for a military application, military end-item or a commercial satellite, spacecraft, or launch end-item or application? At the heart is the intent of the designer or modifier of the part or component at the time it was designed or modified
36 Practical Tip DDTC has virtually unfettered discretion, as a practical matter, on jurisdictional determinations and in interpreting the ITAR Accordingly, there is not much scope for self- determination and it is often advisable to seek a “Commodity Jurisdiction” or “CJ” from DDTC
37 DDTC Policy Use caution if item was specifically designed or modified for a military application but now has – a predominant civil application – performance equivalents to items with civil applications and/or – no significant military or intelligence applicability
38 DDTC Policy ITAR section 120.3 cites these three criteria as policy considerations regarding when an article may be designated or determined in the future to be a defense article BUT according to the ITAR, DDTC, not the exporter, may consider such factors when adding items to the USML, responding to requests to resolve doubts about the jurisdictional status of an item or removing an article from the ITAR’s jurisdiction
39 DDTC Policy Under the ITAR, policy factors are not applied in a self-determination by the exporter of whether an item is subject to the ITAR
40 DDTC Policy If item was specifically designed or modified for a military application and now has one of the three characteristics in the policy section, the procedure described in the ITAR is to submit a CJ request asking DDTC to determine that the item is not ITAR controlled
41 “See Through Rule” QRS11: March 2006 Boeing Consent Agreement with DDTC: –Executive Order 11958 and the Arms Export Control Act (“AECA”) “authorize [DDTC] to designate what is a defense article or a defense service and [the ITAR] require written authorization before such articles are exported regardless of whether the underlying defense article is used in a commercial system or product. [The ITAR], through the Commodity Jurisdiction (§ 120.4) process, is the only official mechanism by which questions regarding jurisdiction and categorization may be addressed.”
42 Meaning of Consent Agreement Paragraph 5 of the Consent Agreement does not mean exporters cannot make self-determinations about whether something is or is not ITAR controlled. Rather, it means that if something is (i) on the US Munitions List or (ii) declared by DDTC to be ITAR controlled, then only DDTC can declare it to be EAR controlled through the Commodity Jurisdiction (“CJ”) process.
43 Specific USML Categories Subcategory VIII(h) controls –Components, parts, accessories, attachments, and associated equipment... specifically designed or modified for the articles listed in the preceding Category VIII subsections, which include aircraft specifically designed, modified, or equipped for military purposes
44 Specific USML Categories Subcategory VIII(h) applies if designer or modifier intended that part or component be – designed (i.e., planned) or – modified (i.e., changed or altered in any way) specifically (i.e., particularly) for a controlled military aircraft (even if part or component is no more sophisticated than a similar item for use with a commercial end-item)
45 Specific USML Categories Subcategory VIII(h) does not apply if designer or modifier intended that part or component was not only for defense article, but also for non-defense article – Even if first actual use was for a defense article
46 New “Note” to Cat. VIII A new Note makes now easier to make a self- determination that a standard part or component installed on a civil aircraft or civil aircraft engine covered by a FAA type certificate is, with few exceptions, not ITAR-controlled. Formal CJ determinations are not required to make these decisions under the new Note except when there is doubt about the Note’s applicability or if installations involve items identified in the ITAR as “significant military equipment” that were not installed prior to August 14, 2008.
47 Implication of Cat. VIII Control Prior to its addition of the new Note, subcategory VIII(h) had only one published criterion for determining whether a part or component was ITAR- controlled – whether it was specifically designed or modified for a military aircraft, a military aircraft engine, or a related military end-item. If so, the part or component required a license from the State Department to export or re-export regardless of its age, sophistication, size, spookiness, cost, similarity to other civil parts, or incorporation into a civil end-item.
48 5 Parts of New Note According to the new Note, an aircraft or aircraft engine part or component is not ITAR controlled if it is: 1.“standard equipment;” 2.“covered by a civil aircraft type certificate (including amended type certificates and supplemental type certificates) issued by the [FAA] for a civil, non-military aircraft;” 3.“an integral part of [i.e., installed in] such civil aircraft;”
49 5 Parts of New Note cont. 4.not new “significant military equipment” to be installed on civil aircraft or civil aircraft engines on or after August 14, 2008; and 5.not controlled by another category on the USML.
50 Other USML Categories & USML Catch-All Category Before supplying an item for use on a civil aircraft, all USML categories -- and the “Note” to Category VIII -- must be reviewed Be mindful of USML Catch-All Miscellaneous Articles Category XXI – Any article not specifically enumerated in the other categories which has substantial military applicability and which has been specifically designed, developed, configured, adapted or modified for military purposes.
51 Why File CJ Request? ITAR gives two reasons for when the CJ process is used or may be used –One: When one wants to have a defense article removed from the jurisdiction of the ITAR –Two: When doubt exists about whether an item is subject to the ITAR
52 Why File CJ Request? What gives rise to doubt about a product’s jurisdictional status? – The words in the ITAR – The U.S. Government – U.S. Government contracts – Competition and customers
53 Why File CJ Request? Customer or vendor relations Gut reaction To get a sense for how DDTC interprets a particular issue
54 New Draft CJ Request Form http://www.pmddtc.state.gov/docs/DS4076.pdf http://www.pmddtc.state.gov/commodity_jurisdiction/ documents/cj_guidelines.pdfhttp://www.pmddtc.state.gov/commodity_jurisdiction/ documents/cj_guidelines.pdf Form, fit, function
55 Factors to Include in CJ Request Some common sense factors cannot be relied upon when making a self-determination of a product’s jurisdictional status But, they can be asserted in a CJ request
56 Factors to Include in CJ Request –Intended Use – Level of Technical Sophistication – Age – Foreign Availability – Foreign Export Controls – Common Availability in the U.S. Market – Incorporation into a civilian end-item – No obvious military capabilities – Source of funding Factors to consider and, if favorable, argue in a CJ request, include :
57 DDTC Policy In CJ request, make arguments about – predominance, – performance equivalents, or – lack of significant military applications that support request to DDTC to remove item from ITAR control
58 Complications in Preparing CJ Requests (or Internal Determinations) Parts/components may have been designed years or decades ago Companies are bought and sold Engineers retire, resign, forget, or pass away (more …)
59 Complications cont. Records and business plans are often unclear about design intent – For military and later civilian applications discovered? – For commercial, but only military market took off? – Always for both markets? – Predominant military market?
60 Military Controls in Europe Unlike Dual-Use controls, which are principally EU controls (with some exceptions), military controls are the province of each member state. Even intra-EU transfers of military goods require national licensing, unlike intra-EU transfers of most dual-use items In contrast to the US, in many instances, the same regulator has the final say over whether an item is military or dual-use – more scope for consistent treatment
61 UK In general, items on the UK Military list are those designed or modified for military use –Original design purpose is key Once military, always military with few exceptions, even if now predominantly civilian use –NATO towing-hitch fitted to a civilian vehicle remains military –WD 40 lubricant, originally designed for military, now dual-use
62 UK Can self-assess, but responsible if you are wrong Rating enquiries to the Export Control Organisation of the Department for Business Innovation & Skills (BIS, formerly BERR, formerly DTI) – electronically through SPIRE Details of information needed for a rating request (and what should be considered for self-assessment) on the website
63 UK In principle, apparently no “see through” rule for military components incorporated into civilian end- items However, General Note 2 to Annex I of the EU Dual- Use Regulation provides that when non-controlled goods contain controlled components which are the principal element of the goods and can feasibly be removed or used for other purposes, the object of control for such items contained in the Annex should not be defeated by export of non-controlled goods containing such components
64 UK Whether components are a “principal element” involves a weighing of factors of quantity, value and technological know-how involved and other special circumstances which might establish the controlled component as the principal element While this note refers to controlled dual-use items, might arguably be applied by the regulator in certain circumstances to situations involving military components in civilian items
65 France Items originally designed or modified for military use will generally fall within the scope of weaponry or assimilated equipment subject to military export controls –If now have predominant civilian applications, not clear if it can move to dual-use Detailed description in decrees and the Arrêté of June 17, 2009 Self determination permissible – liability if wrong Can address a request to the Ministry of Defence
66 France Based on informal advice, appear to follow the rule that exportation of goods not subject to control but containing components that are subject to control cannot render the control procedures inoperative where the component is the principal element of the goods and can be practically separated from it Quality, quantity, know-how of the technology and other criteria are considered in determining if the component is the principal element
67 Germany Items designed or modified for military use will be military items BAFA is the same agency for military and dual-use, and it may be possible for originally military items that now have predominantly civilian to be considered as dual-use Generally exporters may check with BAFA on classification
68 Germany In principle, does not appear to be a “see through” rule, but would expect Germany to follow the “principal element” analysis as well
69 Conclusion Clearly, proper determination of whether an item is controlled under applicable military export controls – and whether US military controls apply – is important Far more stringent licensing requirements and prohibitions such as arms embargoes apply to military items And enforcement is a greater priority in connection with military items