U.S. Export Controls - A Practical Approach
by John A. Leonard

A. Three questions - one recommendation.

U.S. export controls can be addressed by three questions and one recommendation:

1. Will there be an export?
2. Who has jurisdiction?
3. If an export license or Technical Assistance Agreement is required, are there opportunities to eliminate or reduce the scope of such licenses or agreements?

The recommendation: establish an export management system tailored to your needs with the help of an expert in order to identify issues and opportunities raised by the three questions earlier rather than later.

Each are discussed in more detail, below.

B. Will there be an export?

Exports are not always obvious. Consider the following:

1. A shipment out of the United States (e.g. regulated technical data stored on a laptop that leaves the United States without a license).
2. An electronic transmission out of the United States (e.g. Website content or an attachment to an email of regulated data).
3. Release of technology to a foreign national in the United States. This is a special concern for University Tech Transfer. Does not apply to U.S. citizens, individuals granted permanent resident status, or protected individuals.)
4. Other “deemed” exports within the United States.

• Visual inspection (such as reading technical specifications, plan, blueprints, etc.)
  
• When technology is exchanged orally (may require a license or Technical Assistance Agreement)
  
• When technology is made available by practice or application under the guidance of persons with knowledge of the technology
  
• Site visits by foreign nationals to U.S. installations
  

C. Who has jurisdiction?

Jurisdiction defaults to the Department of Commerce, Bureau of Industry and Security (“BIS”) unless another agency has exclusive jurisdiction. As a general rule, the vast majority of exports are under Department of Commerce jurisdiction and regulated pursuant to the Export Administration Regulations or “EAR”. The vast majority of Department of Commerce exports do not require a license. However, even without an export license requirement, exporters are required to adequately perform screening so items are not exported to denied persons, entities or countries. The EARs require a Department of Commerce license for certain “dual-use” items which are listed on the Commodity Control List (“CCL”). These commodities usually have a significant civilian use, but because of their nature, can also be used for military purposes. Other goods and services are, because of their nature, designed for a military application. In those cases, exclusive jurisdiction falls under the Department of State and are regulated by the International Traffic in Arms Regulations (“ITAR”). Many mistakes are made simply because companies and governmental officials automatically assume that the Department of Commerce or the Department of State have jurisdiction without confirming the basis for that assumption. For example, military helmets are exported under the jurisdiction of the Department of Commerce, not the Department of State. In most cases, companies are able to determine jurisdiction simply based upon the nature and use of the particular good or service. However, both the Department of Commerce and the Department of State have formal written mechanisms to confirm who has jurisdiction if there is any uncertainty.

As noted above jurisdiction for the vast majority of exports is within the Department of Commerce. One notable exception are goods and services regulated under the Department of State pursuant to ITAR. The Arms Export Control Act gives exclusive jurisdiction for exports to the Department of State for “defense articles and services”. An article or service may be designated or determined in the future to be a defense article or defense service:

(1) If it is specifically designed, developed, configured, adapted or modified for a military application, and (a) does not have predominant civil applications and (b) does not have performance equivalent (defined by form, fit and function) to those of an article or service used for civil applications, or (2) is specifically designed, developed, configured, adapted, or modified for military application, and has significant military or intelligence applicability such that control under ITAR is necessary.

The intended use of the article or service after export, (i.e. for a military or civilian purpose) is not relevant in determining whether an article or service is subject to the controls of ITAR.

In addition to the Department of Commerce and Department of State, the following agencies have exclusive jurisdictions over the export of certain goods:

1. For export of certain drugs, chemicals and precursors: Drug Enforcement Administration, International Chemical Control Unit.
2. For export of controlled substances: Drug Enforcement Administration, International Drug Unit.
3. For drugs and biologics: Food and Drug Administration, Import / Export.
4. For investigational drugs permitted: Food and Drug Administration, International Affairs.
5. For fish and wildlife controls; for export of endangered species: U.S. Department of the Interior, Chief Office of Management Authority.
6. For foreign assets and transactions controls for transactions between U.S. persons and embargoed countries: U.S. Department of Treasury, Office of Foreign Assets Control, Licensing.
7. For medical devices: Food and Drug Administration, Office of Compliance.
8. For export of natural gas and electric power, U.S. Department of Energy, Office of Fuels Programs.
9. For export of nuclear materials: Nuclear Regulatory Commission, Office of International Programs.
10. For export of nuclear technology; technical data for nuclear weapons / special nuclear materials: Department of Energy, Office of Export Control, Policy and Cooperation.

D. If an export license or technical assistance agreement is required, are there opportunities to eliminate or reduce the scope of such licenses or agreements?

A partial list of opportunities include the following:

1. Increasing exports by avoiding erroneous ITAR classification. An ITAR designation can significantly diminish your exports. Everyone wants to protect our nation and our armed services. However, quick decisions based on faulty assumptions made by both the government and companies can result in an improper jurisdiction decision which ultimately hurts the U.S. economy and does not benefit our armed services.

2. Avoiding lawsuits by supplying non-controlled items. Inadvertently incorporating an ITAR item into a larger item “contaminates” the larger item. For example, by incorporating even a single ITAR regulated microprocessor into a very large item such as a civilian jet airliner will result in the entire jet airliner becoming ITAR regulated.

3. Plan development to have both civilian and military models. If possible, plan development so that the civilian product is developed first, and only then modified for military purposes. Have discussions early to confirm that there is an ability to have a non-military version of an item that will also be sold to the military.

4. Discuss issues early with the Department of State and Department of Commerce. Military funding and military first use of a product can be very problematic. Have discussions early to confirm that there is an ability to have a non-military version of an item that will also be sold to the military.

5. Negotiate broad Technical Assistance Agreements. If ITAR applies and if information will be exchanged that requires a technical assistance agreement, negotiate a broader rather than a narrow TAA. Also get clarification on when limited discussions may be had under a DSP-5 license. If ITAR does not apply and / or the goods and services are likely to be placed on the Department of Commerce Commerce Control List, work with the Department of Commerce regarding threshold technical specifications that must be satisfied before a license requirement is established.

6. Homeland Security is an ITAR Flag - be prepared. Be aware that anything related to “Homeland Security” can be very problematic and its jurisdiction and commodity classification should be established sooner rather than later. These are items that could potentially be developed so that a company could have three versions of a single product. One that could be exported under Department of Commerce jurisdiction without a license, a more advanced version that would be exported under the jurisdiction under the Department of Commerce as a “dual-use” item and require a license, and a military version that would require a Department of State license pursuant to ITAR. Early planning is needed to preserve all three commercial opportunities.

7. ITAR classification may hurt investments. Investors performing due diligence on a company may reduce the value of a company or decide not to invest if a company's goods and services are ITAR controlled. A good option is to plan development so that the company will have non-ITAR controlled versions of its goods and services.

E. Recommendation: establish an export management system with the help of an expert in order to identify issues raised by the three questions earlier rather than later.

Violation of U.S. export laws can result in civil and criminal penalties. Companies, universities, and other persons involved with exporting risk fines, jail time and missed commercial opportunities unless they develop a system to ensure compliance. A typical export management system will include the following:

1. A statement by upper management that it views export compliance as important to the entity including management's commitment to training.
2. Procedures to determine whether an export will occur which are tailored to the particular entity.
3. Procedures to identify opportunities relating to jurisdiction and licensing.
4. Various Administrative features to ensure record keeping, audits, updates and a procedure for reporting violations.
5. Screening mechanisms employed before an export occurs. All exports, especially under the jurisdiction under the Department of Commerce (even those that do not otherwise require a license require screening).

a) Screening identifies the following general issues:


1. What is the item (export control classification, number of item)?
2. Where is it going (country of ultimate destination)?
3. Who will receive it (ultimate end-user)?
4. What else will they do with it (ultimate end-use)?
5. What else does the end-user do (and user's conduct)?


b) Below is a list of specific Department of Commerce screens:


• specially-designated nationals list (SDN)
  
• specially-designated terrorist (SDT)
  
• specially-designated narcotics traffickers (SDNT)
  
• foreign terrorist organizations (FTO)
  
• specially designated kingpins (SDNTK)
  
• product classifications / licensing determination screen
  
• diversion risk screen
  
• sensitive nuclear screen
  
• missile technology screen - license required if you know the item:
  (1) will be used in the design, development, production or use of rocket systems capable of a range of at least 300 kilometers in certain countries)
  (2) will be used anywhere in the world for nuclear weapons delivery
  
• chemical / biological weapons screen - license required if you know the item
  will be used in the design, development, production, stockpiling or use of chemical or biological weapons
• anti-boycott screen
  
• entity list screen

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2007, Fairfield and Woods, P.C.,
ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:
John A. Leonard