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Changes Afoot for Rules of Overseas Sales

January 2011
By Rita Boland, SIGNAL Magazine
E-mail About the Author

 

Engineers work on a Cisco IRIS payload. Many in the commercial satellite industry and other fields are calling for reform to current export regulations. Concerns that the United States is losing business to foreign companies and disadvantaging allies have prompted the U.S. government to make changes to current rules in an effort to improve trade.

Overhaul of regulations could result in a single-tiered list of goods, a single licensing agency and an increase in business for U.S. companies.

Export controls of military-related materials long have been a bone of contention between government and industry, but 2010 ushered in an array of changes, with adjustments to current laws and talk of broader reform. Leaders of private-sector organizations have pushed hard for legal decision makers to simplify the sale of products to foreign entities so domestic companies can keep pace with overseas competitors. And though these industry personnel might sometimes label the governing agencies as obstacles, administrators of the law also want restructuring efforts to move forward.

Reasons for the ill feelings toward export laws abound. One is the sheer complexity of the regulations process. The U.S. Department of State and the U.S. Department of Commerce are the two major agencies responsible for the controls. The former handles the International Traffic in Arms Regulations (ITAR), which authorizes the U.S. Munitions List (USML); the latter administers the Commerce Control List (CCL) under the Export Administration Regulations. The Directorate of Defense Trade Controls (DDTC) is the office within the State Department that handles exports; the Bureau of Industry and Security is the equivalent at the Commerce Department. Robert S. Kovac, managing director of the DDTC at the State Department, explains that his office wholeheartedly supports ITAR changes. “We’ve always been committed to making ITAR better,” he says.

The USML deals primarily with items directly related to military operations; the CCL, on the other hand, lists dual-use items and serves as a catch-all for items not regulated on any other list. While in theory the two lists should contain completely different items, the practice is not always so clear-cut. Kovac uses an example of integrated circuits to illustrate this point. His department controls integrated circuits created for defense purposes. However, in cases of other integrated circuits, the Commerce Department might be responsible for the decision on exporting.

Manufacturers must determine which organization monitors their products’ sales and go through the correct specific licensing procedure. While items on the USML are more tightly controlled than CCL items, the Commerce Department’s list can be more confusing as exporters try to figure out, based on the rules, if they need a license and what restrictions exist for their products and customers.

Adding to the confusion are the myriad other agencies also responsible for administering certain export restrictions including the Office of Foreign Asset Controls, or OFAC, at the U.S. Department of Treasury, the U.S. Department of Energy and the U.S. Food and Drug Administration. Though these organizations control fewer assets than the State or Commerce departments, they still come into the mix for companies looking to work with foreign clients. These organizations also have their own individual processes for requesting licenses, and the involvement of multiple agencies often results in overlap of authorities and duplication of efforts.

Military items also warrant input, though no direct licensing, from the U.S. Defense Department. A spokesperson for the department says it has no actual vote, and any suggestions it makes can be overridden, but leaders in the military weigh in on relevant sale decisions. However, the department acknowledges that changes should be made. Defense Secretary Robert Gates has spoken publicly about the need for reform and his support for legislative action.

Perhaps even more confusing are the rules about who in a foreign client company can access equipment or data. In cases where a company in one country might employ citizens of another, or people with dual citizenship, more regulations exist. There also are examinations into and restrictions on what a client can do with items from U.S. industry after a sale.

Another problem industry and government have with export controls is that the laws were written during the Cold War era when military and commercial technologies rarely overlapped and the United States could clearly identify friends and foes. In the current market, many technologies serve military and commercial purposes, and in some cases U.S. companies are restricted from selling items that are readily available on the open market overseas to customers outside the United States. Lt. Gen. Steven Boutelle, USA (Ret.), the chief executive officer of Cisco IRIS and vice president of the company’s Global Government Solutions Group, says these limits hinder defense interoperability by making the transfer of systems to allies and coalition partners onerous.

During current battles or crisis response scenarios, the U.S. military relies on a coalition of the willing. Because of ITAR restrictions on the sharing of certain technologies with various other nations, industry has trouble providing interoperable equipment to foreign forces. These countries are forced to purchase systems from other manufacturers. This equipment may not be compatible with that used by U.S. personnel and definitely directs funds away from U.S. businesses. U.S. companies can go through licensing processes to obtain permission to sell their goods to coalition members, but this takes time and money. “When partners want to talk or interoperate with you, they want to buy something quickly,” Gen. Boutelle says.

 

Under current export regulations, the sale of the brake pads for the M1A1 Abrams tanks is as tightly controlled as selling the entire vehicle. The government is making strides to improve export lists to remove restrictions on the export of items that pose no threat to U.S. security.

He believes several measures could help ease licensing difficulties, and the government, in part through a push by President Barack Obama, took steps in that direction last year. The president announced plans to grant authority to a single licensing agency that would control a single, tiered positive list of export items. The idea behind the list is to create smaller backyards with higher fences. Less critical technologies will be easier to export while the most sensitive data and equipment, such as weapons of mass destruction, will be highly protected.

Items that will go into the highest tier provide critical military or intelligence advantages to the United States, are available almost exclusively in the United States or are weapons of mass destruction. Middle-tier items provide the same advantages to the United States but are available almost exclusively from multilateral partners and allies. The third tier includes items that provide significant military or intelligence advantages but are available broadly.

Equipment that falls into this final tier is of the most concern to Gen. Boutelle. He argues that the current strong restrictions on those types of items are harming U.S. interests. Commercial satellite items fall under ITAR so any sales, even those to NATO allies, must go through the licensing procedures. The result is that companies in countries with looser restrictions are building the satellites and selling them to customers the U.S. private sector would like to engage. Gen. Boutelle explains that 20 to 30 years ago, domestic companies were almost the exclusive builders of commercial satellites. “We drove the industry offshore,” he states. “We need to bring that back.”

In addition to addressing items on the lists, the president is making changes in other areas of export controls. Last November, President Obama issued an executive order to establish an interagency FederalExportEnforcementCoordinationCenter to coordinate and strengthen enforcement efforts among the departments of State, Commerce, Treasury, Energy, Defense, Justice and Homeland Security, and the Office of the Director of National Intelligence. Administrative responsibility for the center falls under the Department of Homeland Security. In addition, the executive order outlined methods to address the multiple information technology systems, and in some cases paper systems, that agencies use today. Going forward, all the organizations involved will employ a single system that will make licensing applications easier for exporters and help the government obtain all the information it needs to make correct decisions.

Implementation of the reform will take place in three phases. According to a White House fact sheet on the topic, “Phase one makes significant and immediate improvements to the existing system and establishes the framework necessary to create the new system, including making preparations for any legislative proposals. This phase includes implementing specific reform actions already in process and initiating review of new ones.” The first stage of the effort involves refining the USML and CCL as well as establishing new independent control criteria to screen items in the new tiered-list structure. Additionally, it addresses improving licensing and enforcement and migrating to a single U.S. information technology point of entry for exporters.

Phase two was scheduled to be complete by the end of 2010, resulting in “a fundamentally new U.S. export control system based on the current structure ... This phase completes deployment of specific phase one reforms and initiates new actions contingent upon completion of phase one items. Congressional notification will be required to remove munitions list controls or transfer items from the munitions list to the dual-use list, and additional funding will be required both for enhanced enforcement and the IT [information technology] infrastructure.”

In this phase, the control lists are restructured into identical tiered layouts, unilateral controls are removed as appropriate and proposals are submitted multilaterally to add or remove controls. In terms of licensing, the phase completes the transition to mirrored control lists and to “fully implement licensing harmonization to allow export authorizations within each control tier to achieve a significant license requirement reduction which is compatible with national security equities.”

The final phase requires legislation and will complete the shift to the new U.S. export control system. By the end, the White House plans a single control list with systematic processes in place to keep it current; a single licensing agency; consolidation of certain enforcement activities into a primary enforcement coordination agency; and a single, enterprisewide information technology system that incorporates both licensing and enforcement.

As officials wait for the congressional legislation necessary for full reform, the offices responsible for export control within the State and Commerce departments, along with other partners, already are changing what they can. Last August, three amendments to the ITAR became effective.

One addressed “electronic submission of a request for a commodity jurisdiction determination using ‘Commodity Jurisdiction Determination Form.’” The second removed “the requirements for prior approval or prior notifications for certain proposals to foreign persons relating to significant military equipment.” The third amendment clarifies an ITAR exemption for technical data. The amendment states: “The clarification is that the exemption covers technical data, regardless of media or format, sent or taken by a U.S. person who is an employee of a U.S. corporation or a U.S. government agency to a U.S. person employed by that U.S. corporation or to a U.S. government agency outside the United States.”

The State Department also proposed another change to ITAR in August to update the policies regarding end users who employ dual- and third-country nationals. If adopted, the amendment would eliminate the DDTC’s need to grant prior approval for the transfer of defense materials—including data—to dual-national or third-country national employees of foreign businesses with certain limitations. Action was scheduled to take place by the end of 2010, but had not been completed at the time of publication.

Another item of change on the wish lists of government and industry is regular review of the items on the USML and CCL to determine outdated listings. Steps in this direction already have occurred. Technical experts from across the government completed a review of one category of the USML and the corresponding entries on the CCL, restructuring USML Category VII (Tanks and Military Vehicles) into a positive, tiered list. Assistant Secretary of Commerce for Export Administration Kevin Wolf explains that experts chose this category as a test case to determine how the review process would play out. As a result, preliminary analysis estimates that approximately 74 percent of the 12,000 items licensed last year in the USML category either will transfer to the CCL or be decontrolled. None of the remaining items landed in the highest tier of control.

Though much of the impetus to revamp the export control policies is to enhance U.S. exports of high technology, control of equipment on items such as tanks highlights some of the burdens exporters face. Brake pads for the M1A1 Abrams tank, for example, are almost identical to those for municipal fire trucks, yet the former require an export license while the latter can be sent license-free to almost any country. The current system devotes the same resources to protect the release of the brake pads as to protect the entire tank. Similar issues exist with aircraft components. As the government continues a review process, Wolf expects the CCL to grow by receiving items no longer deemed relevant under the stricter ITAR rules.

Along the path to reform and after its completion, representatives of government plan to do what they can to assist U.S. business while protecting security interests. Wolf explains that part of what makes the Commerce Department’s role so important is that the dual-use control items on the CCL may be destined one day for a completely benign role, but the next day intended for someone who wants them to cause harm. To do their job well, Commerce Department personnel use tools such as regulations, education, screening and review of end users to make licensing decisions. Wolf says his agency has a good working relationship with industry, but does receive regular pushback from companies.

At the State Department, Kovac explains that the DDTC’s work protects the United States even when the companies asking for licenses have the best intentions. He says that on occasion a domestic company may be looking to sell to a foreign company that claims to plan to supply the equipment to its ministry of defense. The customer will present all the necessary, official-looking documentation, but when State Department officials review the claim, they find out that the foreign government has no knowledge of the sale. According to Kovac, his agency processes about 200 of those types of cases each year. And while a couple hundred out of more than 80,000 might not seem like much, these denials help protect soldiers on the ground. The State Department has special procedures in place to help U.S. friends and allies who want goods and information to obtain it quickly.

Kovac says his office is sensitive to justified criticisms, such as if it takes too long to grant a license. However, “I make no apologies for not approving sales.” He adds that certain complaints are not justified. “I’m sure it hurts any industry not to be able to get a sale when we do a check, but if [the items are] ultimately going to end up in the hands of al-Qaida, I don’t think that’s warranted.”

WEB RESOURCES
ITAR: www.pmddtc.state.gov/regulations_laws/itar_official.html
Export Administration Regulations: www.gpo.gov/bis
Office of Foreign Assets Control: www.ustreas.gov/offices/enforcement/ofac