Defense Trade Advisory Group (DTAG) Licensing Process Plenary Session May 3, 2011

Licensing Process Working Group Members 2 Dave BowmanMeritor Dennis BurnettEADS, North American Defense Rebecca ConoverIntel Corporation Kim DePewGeneral Electric Company Andrea DynesGeneral Dynamics Corporation Chuck GravesDay & Zimmerman, Inc. Greg HillDRS Technologies Dave IsenbergNorwegian Initiative on Small Arms Larry KeaneNational Shooting Sports Foundation Dave KellyBluefin Robotics Krista LarsenFLIR Systems, Inc. Spence LeslieTyco International Brenda NicacioNivisys Industries Dale RillHoneywell International Janet RishelBell Helicopter Jay RodriguezMAC Aerospace Sam SevierMK Technology Joy SpeicherSpace Systems/Loral Inc.

3 Determine how the USG should implement the [licensing] policy guidance for tiers 2 and 3 in the International Traffic in Arms Regulations to include recommended regulatory language for the “authorizing mechanisms” and “license exceptions”. Proposed solutions must address how the exporter will: Ensure the configuration and capabilities of the defense articles/services proposed for export are consistent with technology and other not necessarily public security policies (LO/CLO, Anti- Tamper, NDP, etc). Provide verification of the legitimacy of the export at the port of debarkation. Ensure that, when required, end-use or other assurances are obtained prior to export. Provide information to the USG to meet its requirements for tracking and follow up on those exports that must be reported to various international fora (UN Arms Registry, etc), as well as statutory reporting (655 report). DTAG Working Group Assigned Task

4 Continued Tier 2 Worldwide license requirement for all exports and re-exports, to include a variety of authorizing mechanisms, with license exceptions for U.S. Munitions List (USML) defense articles to certain government end- users/end-uses in countries that are close allies and regime adherents, NATO-plus. Tier 3 Worldwide license requirement for all exports and re-exports, to include a variety of authorizing mechanisms, with license exceptions for USML defense articles to certain government and other end-users/end-uses. [Excluding §126.1 countries]

5 Evaluate licensing mechanism(s)Create a new license “exception”Establish frameworkIdentify criteria to considerDraft ITAR languageDevelop process maps to validate approach …Note: Items that move from USML to CCL could be as tightly controlled under the EAR or equally tiered with the same licensing policy. Task Approach

6 Obtain Export Authorization Comply w/ pre- shipment authorization requirements & provisos; execute TAA,MLA,WDA Comply w/ pre- shipment authorization requirements & provisos; execute TAA,MLA,WDA Lodge License with Customs (as applicable) Prepare draft of commercial Invoice (include license #) Prepare draft of commercial Invoice (include license #) File AES, CBP decrements license (include license #) Shipping packs product along with paperwork Freight Forwarder picks up package Shipping completes Air Way Bill or Shippers Letter of Instruction Decrement license value /quantity Retain export records Formal Authorization Required Shipment executed Post shipment reporting activities Congressional Reporting as required to issue authorization Apply for Export Authorization Exemption applicable? Pre Export ActivitiesExport ActivitiesPost Export Activities Preserve Authorization obtainment Records Preserve Authorization obtainment Records Comply w/exemption requirements Tangible or Intangible Export? Tangible Intangible Start End Current Process Decrement license value /quantity

7 License Exemption Framework Qualifiers to determine eligibility Technical data, defense service (including agreements), and manufacturing applicability Additional recordkeeping requirements/needed system modifications End-user and other assurances Reexports/retransfers Impact on registration requirements Relationship to other exemptions

8 Eligibility Qualifications NEW ITAR License exemption is created for eligible defense article systems, components, parts, assemblies, software, technical data, and defense services controlled under Tier 2 and Tier 3 as follows: Tier 2 items are eligible for export to NATO, NATO agencies, and NATO- plus foreign government end users only. Please note: Many foreign government purchase orders are placed through third parties. Therefore, it would be helpful if DTC would consider modifying the proposed rule to allow use of third party purchase orders whereby the goods are destined for foreign governments provided the following requirements are met: 1) the exporter obtains a letter or other certification from the foreign government certifying the “trusted agent” is authorized to order parts/components on their behalf; and 2) a copy of that letter/certification is maintained on file with each “trusted agent” Purchase Order stating the end-user is the foreign government who has issued the “trusted agent” letter/certification.

9 Eligibility Qualifications Continued Tier 3 items are eligible for export to all countries, except those countries prohibited under ITAR or other export restriction (e.g. denied parties).... normal due diligence for the proposed transaction must be completed

10 Eligibility Qualifications Continued Assumptions: 1. Based on the published definition of Tier 1, items are not eligible. 2. Based on the published definition of Tier 2 and the published proposed Category VII, the articles (end-items and components), we assume that most articles that it will include are items that are within the above cited release policies for NATO-plus countries.

11 Eligibility Qualifications Continued Assumptions Continued: 3. Based on the published of Tier 3 and the published proposed Category VII, we assume that Tier 3 will be void of any items that meet the above policies for world-wide release, minus country destinations. 4. Hardware, technical data, software, defense services, etc. will be tiered according to the USML category review. For example, technical data used in design may be put in a more restrictive tier than the item itself or the technical data used in the operation of the item.

12 Items Not Eligible The DDTC would continue to require licenses for certain items. For Example: (1) All Missile Technology Control Regime (MTCR) Annex items. (2) Any transaction involving the export of items for which congressional notification is required in accordance with § and § of this subchapter. (3) Any item moved to a higher tier of control at the discretion of the USG.

13 Proposed Language § (Name of the new exemption) (a) A license from the Directorate of Defense Trade Controls is not required for the export of Tier 2 or Tier 3 items as follows except as noted in § (b): (1) Tier 2 items may be exported to NATO, NATO agencies, NATO-plus foreign government end users. (2) Tier 2 items may be exported to “trusted agents” provided both of the following are met: (i) the exporter obtains a letter or other certification from the foreign government certifying the “trusted agent” is authorized to order parts/components on their behalf; and (ii) a copy of that letter/certification is maintained on file with each “trusted agent” Purchase Order stating the end-user is the foreign government who has issued the “trusted agent” letter/certification.

14 Proposed Language Continued (3) Tier 3 items are eligible for export to all countries, except those countries prohibited under ITAR or other export restriction (e.g. denied parties). (b) The following items identified in 22 CFR §121.1 will continue to require a license from DTC: (1) All Missile Technology Control Regime (MTCR) Annex items. (2) Any transaction involving the export of items for which congressional notification is required in accordance with § and § of this subchapter. (c) All required end use assurances must be obtained prior to the export of an item when using this exemption.

15 Our team reviewed recordkeeping from two aspects: 1.What exporter must maintain in their files 2.What exporter must submit to the USG for reporting purposes Exporter’s internal files… ITAR §122.5 …must maintain records concerning the manufacture, acquisition and disposition (to include copies of all documentation on exports using exemptions and applications and licenses and their related documentation), of defense articles; of technical data; the provision of defense services… Additional details regarding recordkeeping for technical data exports are included in ITAR § and §125.6 No change is recommended on the actual requirements for the exporter to maintain local records. Exporter’s submitted information… When using the license exemption, the exporter will be required to provide information, as applicable, to the USG to enable required reporting to international fora, congress, etc. Recordkeeping

16 Quantity Dollar value Date of export Recipient country Party of ultimate destination Country of ultimate destination Exemption “number” Fees and commissions paid SME or not SME items being manufactured Name and country of manufacture for all SME items Detailed ITAR list number – new designators for items on positive list DTC Reporting Requirements

17 Recordkeeping Continued Challenge: How will exporters provide this information to DDTC? Several Viable Solutions Reviewed and Discussed: The DTAG recommends further review of current IT systems used to support export license applications (i.e., D-TRADE) and census reporting (i.e., AES) to determine the feasibility of streamlining requirements into a “Single information-technology system.” Consistent with one of the four reform initiatives set forth by the current Administration; create a “single IT system” to reduce redundancies and incompatibilities of the current system comprised of multiple database products. The exporter would be required to submit the information needed for reporting with each export made under the exemption (for technical data and software for initial export only) Note: Reports could be developed to validate exporter due diligence, calculate quantities of exports, etc.

18 Exporter determines if license/exemption applies Upon submission of data, immediately receive automatic “exemption transaction number” Proceed with export under exemption – insert transaction number into AES and/or record on export documents Record exemption through new version of D-Trade Start End License Exemption Complete standard D- Trade Licensing Process Apply for license in D- Trade Dept of State collects data as required Proposed Exemption Recordkeeping – D-Trade Examples of Required Data: End User Name End User Country Item Description USML Quantity Value Date of Export Method of Export Examples of Required Data: End User Name End User Country Item Description USML Quantity Value Date of Export Method of Export Example Or AES or other IT system

19 Multiple ways of meeting these requirements today. Fulfill the requirement via… - DSP-83 - End-Use / End-User Certificates - Destination Control Statement - A letter from ally government to USG - NATO agreements/diplomatic notes, etc. - Another agreement between company and foreign government Exporter may not use exemption until obtained (must also be maintained) The burden of proof continues to be on the exporter … end-user/assurances requirements still apply, no change to what we do today End-User and Other Assurances

20 Registration Requirements Registration is an independent issue (i.e. out of scope) relative to the licensing process and proposed exemption. There would be a reduction to industry registration requirements as a direct result of a positive control list and the implementation of the proposed “defense services” definition since many items/activities would be removed from the current USML.

21 Re-exports/Retransfers Concept: Defense articles eligible for export under the new ITAR license exemption are similarly eligible for re-export or retransfer under the ITAR license exemption, subject to certain limitations and requirements. Scope of the re-export authorization is consistent with initial export authorization under the license exemption Limitations: Only for Tier 2 and Tier 3 defense articles Only for authorized end-users and countries listed in exemption E.g., Tier 2 defense article exported under license exemption to a governmental end user in a NATO-plus country can only be re- exported under the license exemption to another governmental end user in another NATO-plus country.

22 Re-exports/Retransfers Continued Requirements: Written notification requirement to DDTC 30 days following the re- export or retransfer (similar to approach under current (e) {re- exports of U.S.-origin defense articles incorporated into a foreign defense article to NATO-plus} Proposed ITAR language: Modify current {Country of ultimate destination and approval of re-exports or retransfers}

23 § Country of ultimate destination and approval of reexports or retransfers. Re-exports/Retransfers Continued (a) The country designated as the country of ultimate destination on an application for an export license, or on a Shipper's Export Declaration where an exemption is claimed under this subchapter, must be the country of ultimate end-use. The written approval of the Directorate of Defense Trade Controls must be obtained before reselling, transferring, transshipping, or disposing of a defense article to any end user, end use or destination other than as stated on the export license, or on the Shipper's Export Declaration in cases where an exemption is claimed under this subchapter, except as provided in [subparagraphs (e) or (f) of this section]. Exporters must ascertain the specific end-user and end-use prior to submitting an application to the Directorate of Defense Trade Controls or claiming an exemption under this subchapter. (b) The exporter shall incorporate the following statement as an integral part of the bill of lading, and the invoice whenever defense articles on the U.S. Munitions List are to be exported: These commodities are authorized by the U.S. Government for export only to [country of ultimate destination] for use by [end-user]. They may not be transferred, transshipped on a non-continuous voyage, or otherwise be disposed of in any other country, either in their original form or after being incorporate into other end-items, without the prior written approval of the U.S. Department of State [or satisfying the notification requirements specified in subparagraphs (e) or (f) of this section].

24 Re-exports/Retransfers Continued (c) A U.S. person or a foreign person requesting approval for the reexport or retransfer, or change in end-use, of a defense article shall submit a written request which shall be subject to all the documentation required for a permanent export license (see §123.1) and shall contain the following: (1) The license number under which the defense article was previously authorized for export from the United States; (2) A precise description, quantity and value of the defense article; (3) A description of the new end-use; and (4) Identification of the new end-user. (d) The written approval of the Directorate of Defense Trade Controls must be obtained before reselling, transferring, transshipping on a non-continuous voyage, or disposing of a defense article in any country other than the country of ultimate destination, or anyone other than the authorized end-user, as stated on the Shipper's Export Declaration in cases where an exemption is claimed under this subchapter, except as provided in [subparagraphs (e) or (f) of this section]. (e) Reexports or retransfers of U.S.-origin components incorporated into a foreign defense article to NATO, NATO agencies, a government of a NATO country, or the governments of Australia, Japan, New Zealand, or South Korea….. § Country of ultimate destination and approval of reexports or retransfers. (cont)

25 Re-exports/Retransfers Continued (f) Reexports or retransfers of a U.S.-origin defense article lawfully exported from the United States under a license exemption provided in § may be reexported under the provisions of this subparagraph without the prior written approval of the Directorate of Defense Trade Controls, pursuant to the following requirements: (1) Reexports and retransfers of U.S.-origin defense articles lawfully exported under license exemption §126.16(x) [(“Tier 2”)]. U.S.-origin defense articles lawfully exported under license exemption §126.16(x) to an authorized end-user and end-use identified in §126.16(x) located in any NATO-plus country [or any other country that is identified in Country Group xx under the provisions of §xxx.xx] may be reexported or retransferred to another authorized end-user and end-use (identified in [§126.16(x) located in any NATO-plus country [or any other country that is identified in Country Group xx under the provisions of §xxx.xx] without the prior written approval of the Directorate of Defense Trade Controls, provided that: (i) [reserve for DDTC to specify any limitations on any specific defense articles not eligible for license-free reexports/retransfers within Tier 2 - NATO-plus countries]; (ii) The person reexporting the defense article must provide written notification to the Directorate of Defense Trade Controls of the reexport or retransfer not later than 30 days following the reexport. The notification must state the articles being reexported, the recipient [government] end-user, end-use and country of destination; and (iii) In certain cases, the Managing Director, Directorate of Defense Trade Controls or the Director, Office of Defense Trade Controls Licensing, may place reexport or retransfer restrictions on the use of this exemption. § Country of ultimate destination and approval of reexports or retransfers. (cont)

26 Re-exports/Retransfers Continued (2) Reexports and retransfers of U.S.-origin defense articles lawfully exported under license exemption §126.16(x) [(“Tier 3”)]. U.S.-origin defense articles lawfully exported under license exemption §126.16(x) to an authorized governmental or other end-user and end-use identified in §126.16(x) and located in [any country not identified in §126.1] [or any other country that is identified in Country Group xx under the provisions of §xxx.xx] may be reexported or retransferred to another authorized end-user and end- use (identified in §126.16(x) located in any country located in [any country not identified in §126.1] [or any other country that is identified in Country Group xx under the provisions of §xxx.xx] without the prior written approval of the Directorate of Defense Trade Controls, provided that: (i) [reserve for DDTC to specify any limitations on any specific defense articles not eligible for license-free reexports/retransfers within Tier 3 countries]; (ii) The person reexporting the defense article must provide written notification to the Directorate of Defense Trade Controls of the reexport or retransfer not later than 30 days following the reexport. The notification must state the articles being reexported, the recipient end-user, end-use and country of destination; and (iii) In certain cases, the Managing Director, Directorate of Defense Trade Controls or the Director, Office of Defense Trade Controls Licensing, may place reexport or retransfer restrictions on the use of this exemption. § Country of ultimate destination and approval of reexports or retransfers. (cont)

27 Relationship to Other Exemptions Existing exemptions would remain, but likely be used less often due to tiered licensing and removal of items from the USML. The DTAG reviewed current ITAR export license exemptions and believes that the creation of a new license exemption: would not preclude the use of any exemption currently established in the ITAR; and, could replace other certain license exemptions. Some exemptions could be modified to reference the proposed § exemption, such as DTAG has proposed in §123.9(f). It appears as though the use of very few exemptions would be adversely impacted under the tiered categories. Once the tiering activities are done, all current exemptions need to be reviewed for any possible impact.

28 Remaining Concerns for Further Consideration Could not abate all risks for use of exemption Need “positive list” description for all categories Not privy to USG critical items and all foreign policy Possible risk for exporting large quantities of end items in tier 3

29 Takeaways From the Exercise Items that won’t change with addition of exemption Number of ITAR exports will not change Due diligence by exporter still required End use assurances still required Use of other exemptions still allowed USG will have same visibility on items exported Positive impact from adding exemption DDTC can focus on critical exports…licensing, post-shipment validations Reduces effort by all parties to process non-contentious licenses

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