Using ITAR Commodity Jurisdiction Procedures to Maximize Civilian Exports
January 1, 2010
By: John A. Leonard
Companies that desire to preserve civilian markets for articles and services which can be used by the military must plan. The good news is that the planning does not have to slow a company down and can significantly reduce costs and increase profits.
In the United States, Defense Articles and Defense Services are regulated by the International Traffic in Arms Regulations (“ITAR”). Articles and Services that are regulated by ITAR are placed on the U.S. Munitions List and subject to rigorous export control laws under the jurisdiction of the U.S. Department of State.
Companies that provide Articles and Services that can be used for civilian and military purposes (so called, “dual-use”) items, can maximize domestic and international sales and minimize expenses by ensuring that ITAR does not apply to the civilian uses of the particular Articles or Services. The two most significant challenges for companies are:
- Increased Costs from Regulation. Unlike exports regulated by the Department of Commerce, exports regulated by the Department of State require licenses for technical demonstrations, and exports - including purely civilian uses of dual use items. Companies must therefore employ ITAR based export management systems that go far beyond what is normally required for civilian exports.
- Loss of Domestic Sales. Companies with ITAR regulated Services and Articles may lose U.S. domestic sales. Increasingly, suppliers of parts, software and other items that are incorporated into civilian exports are asked to certify that everything supplied is “ITAR free.” For example, after the U.S. government determined that a computer chip used for navigational purposes incorporated into the Boeing 737 was originally developed for military purposes, sales of the plane to China required authorization by President Bush. In a related investigation, it was learned that Boeing 787 engineers sold parts and practices originally developed for the B-2 stealth bomber. The contamination by the single microchip and B-2 technology has cost Boeing millions of dollars in sales, led to costly internal investigations, and, most importantly for suppliers, resulted in Boeing requiring that every supplier certify that parts and services are ITAR free.
Companies that desire to avoid ITAR for its civilian applications of dual-use items are best advised to enter into industry briefings and obtain a formal Commodity Jurisdiction by the Department of State and Department of Defense. Services and Articles will be considered on the U.S. Munitions list and subject to ITAR regulation if all of the following are present:
- The Article or Service is specifically designed, developed, configured, adapted or modified for a military application;
- The Article or Service does not have predominant civil applications; and
- The Article or Service does not have performance equivalent (defined by form, fit and function) to those of an Article or Service used for civilian applications.
Informal industry briefings with appropriate Department of State, Department of Defense or other governmental officials are valuable in establishing the criteria by which services and articles will be deemed civilian or military prior to the actual design, development or adaptation. Once the service or article is complete, the industry briefings can serve as the basis of a formal commodity jurisdiction by the Department of State.
With a formal Commodity Jurisdiction, a company can export Services and Articles under less onerous Department of Commerce regulations, assure investors, governmental officials and parts purchasers that items and services are ITAR free.
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.
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John A. Leonard.