Export Control Reform Implementation: Status and Non-U.S. Party Considerations 1

Topics Why ECR was necessary Status Update on ECR Initiatives Actions in 2014 Considerations for Non-U.S. Parties 2

Two Different Systems 3 State (Arms Export Control Act (AECA)/ International Traffic in Arms Regulations (ITAR)) Commerce (Export Administration Act (EAA) Export Administration Regulations (EAR)) Registration of Manufacturers/Exporters YesNo Country GroupsNoYes Control ListsMostly SubjectiveMostly Objective De minimisNoYes ExemptionsNarrowBroad Retransfer assurancesOftenSeldom License FeeYesNo Purchase Order Requirement YesNo

Two Different Systems 4 State (Arms Export Control Act (AECA)/International Traffic in Arms Regulations (ITAR)) Commerce (Export Administration Act (EAA)/Export Administration Regulations (EAR)) Defense Articles or Hardware“Dual-Use” or Commercial Items Technical Data and Defense ServicesTechnology License ExemptionLicense Exception Empowered OfficialNone Required Foreign PersonNot a defined term Disclosure to Foreign PersonDeemed Export Commodity JurisdictionCCATS All exports need a license unless an exemption is available ECCN, Country Chart and Country Groups define licensing requirements.

Control Lists “Tracker” 5 USMLDescriptionCCLStatus IFirearms0A601Under USG Review IIArtillery0A602Under USG Review IIIAmmunition0A603Under USG Review IVLaunch Vehicles/Missiles9A604Effective July 1, 2014 (Published January 2, 2014) VExplosives/Propellants1C608Effective July 1, 2014 (Published January 2, 2014) VIVessels of War8A609Effective January 6, 2014 (Published July 8, 2013) VIITanks/Military Vehicles0A606Effective January 6, 2014 (Published July 8, 2013) VIIIAircraft9A610Effective October 15, 2013 (Published April 16, 2013) IXTraining Equipment0A614Effective July 1, 2014 (Published January 2, 2014) XPersonal Protective Equipment1A613Effective July 1, 2014 (Published January 2, 2014)

Control Lists “Tracker” 6 USMLDescriptionCCLStatus XIElectronics3A611Under USG Review – expect publication late Spring XIIFire Control/NVTBDUnder USG Review XIIIMiscellaneous0A617Effective January 6, 2014 (Published July 8, 2013) XIVToxicological Agents1C607Under USG Review XVSpacecraft/Satellites3A611/9A515/ 9A604 Under USG Review – expect publication late Spring XVINuclear Weapons0B618/0A607Effective July 1, 2014 (Published January 2, 2014) XVIIIDirected Energy WeaponsN/AUnder USG Review XIXGas Turbine Engines9A619Effective October 15, 2013 (Published April 16, 2013) XXSubmersible Vessels8A620Effective January 6, 2014 (Published July 8, 2013)

ECR Actions for 2014 Completed to date… In Phase II of ECR implementation More than half-way through control list revisions Finalized definition of “specially designed” Provided transition guidance to industry In 2014… Finish the remaining control list revisions Harmonize definitions – technical data/technology, defense services, public domain/publicly available Continue developing inter-agency relationships Fine-tuning processes 7

ECR for Non-U.S. Parties Non-U.S. parties need to follow the same steps as U.S. parties: Commodity Classifications Authorization Review Additional considerations: Understanding USML paragraph (x) Destination Control Statement Requirements Re-export and Retransfers De Minimis and Foreign Direct Product Impact on Dual and Third Country Nationals 8

Commodity Classification The revised control lists are intended for self- classification by all parties, U.S. and non-U.S. alike Follow “Order of Review” Understanding “Specially Designed” Need to conduct review of current inventory Prioritize commodities for review If doubt, contact U.S. supplier/manufacturer Critical for determining authorization requirements U.S. exporter required to provide classification information for shipments post-transition Changes to ITAR §123.9(b) and EAR §758.6(b) 9

Authorization Review Questions to ask after commodity classification: Are you receiving items under ITAR authorization which have transitioned? Are you a party to an ITAR agreement which may need to be amended to reflect a change in jurisdiction? May want to reach out to agreement holder… Does your commodity have program status? The re-export/retransfer authority remains valid Annotate the authorization records to document the transition to the EAR Crucial for compliance activities Become familiar with future licensing options Licenses versus Exemptions/Exceptions 10

Understanding USML (x) Paragraph USML (x) paragraph is not a jurisdictional entry; it is a licensing entry: Meant to alleviate “dual licensing” Items shipped under USML paragraph (x) are “subject to the EAR” Change in thought process: DSP license ≠ ITAR control ITAR §123.9(b)(2) requires U.S. party to provide the appropriate ECCN entry or EAR99 designation If not received = ask the U.S. party 11

ITAR Destination Control Statement Requirements ITAR §123.9(b)(1) revised to require “flow down” of destination control statement by both U.S. and non-U.S. parties Inform customers and end-users of their responsibilities as recipients of U.S. origin, export controlled items Needs to be included by non-U.S. party for any re- export or retransfer activity Including approved transactions Need to update shipping and purchase documentation 12

ITAR §123.9(b)(1) (b)(1) “These commodities are authorized by the U.S. Government for export only to [country of ultimate destination] for use by [end-user] under [license or other approval number or exemption citation]. They may not be resold, diverted, transferred, or otherwise be disposed of, to any other country or to any person other than the authorized end-user or consignee(s), either in their original form or after being incorporated into other end-items, without first obtaining approval from the U.S. Department of State or use of the applicable exemption.” 13

EAR §758.6(b) (b) Additional requirement for “600 series” items. In addition to the DCS as required in paragraph (a) of this section, the ECCN for each “600 Series” item being exported must be printed on the invoice and on the bill of lading, air waybill, or other export control document that accompanies the shipment from its point of origin in the United States to the ultimate consignee or end-user abroad. 14

Re-export/Retransfer Authorizations Currently approved ITAR re-export/retransfer authorizations remain valid: ITAR §123.9, program status, MLAs and WDAs If activity exceeds the above scope, a new re-export/ retransfer authorization must be obtained by appropriate agency (State or Commerce) Need to determine jurisdiction first The original authorization is not always indicative of post-ECR jurisdiction If ITAR request authorization from State Can include paragraph (x) items If EAR need to determine licensing requirement Calculate De Minimis License or license exception 15

Calculating De Minimis Non-U.S.-made items incorporating below de minimis levels of controlled U.S. content generally are not subject to the EAR See EAR §734.4 and Supplement 2 to Part 734 Conversely if non-U.S.-made items incorporating more than de minimis levels of controlled U.S. content is subject to the EAR General thresholds: 10% content for proscribed or embargoed countries 25% content for all other countries Thresholds different for 600-series items: 0% de minimis for 600 series items destined for Country Group D:5 (maintains ITAR §126.1 proscriptions) 25% de minimis for 600 series items destined for all other countries 16

Be careful in how you apply the de minimis rule! ONLY Compare…  Hardware to hardware  Software to software  Technology to technology Commingled with Incorporated into U.S. item SW Code U.S. item Foreign item SW Code

Foreign Direct Product Rule Certain foreign-made items that are the direct product of certain U.S.-origin technology or software are subject to the EAR when re-exported to certain destinations – EAR §736.2(b)(3) Foreign-made 600 series items that are the direct product of U.S.-origin 600 series technology or software require authorizations under the EAR when re-exported to countries in Country Groups D:1, D:3, D:4, D:5, or E:1 18

Foreign Direct Product Rule and the “600 series” 19 The “600 series” Direct Product Rule Is the foreign-produced item a direct product of: (i)U.S.-origin “600 series” technology or software; or (ii)A plant or major component of a plant that is a direct product of U.S.-origin “600 series” technology or software? Yes Is the foreign-produced direct product a “600 series” item? Yes Is the foreign-produced direct product being reexported or exported from abroad to countries listed in Country Groups D:1, D:3, D:4, D:5 or E:1? Yes If “yes” to all three questions, then the foreign-produced direct product is subject to the EAR.

Dual and Third Country Nationals No equivalent to ITAR §§ and in the EAR If an item has transitioned to the EAR or the ITAR agreement is no longer required: Need to determine whether a transfer or access May require a “deemed re-export” authorization from Commerce (see EAR §734.2(b)(5)) Per the EAR, Dual and Third Country Nationals determined by country of last allegiance Country of birth and substantive contacts not applicable No need for execution of Non-Disclosure Agreement (NDA) Commerce guidance published October 10 20