Last reviewed 12 November 2014
Iqubal Pannu, Senior Solutions Consultant at AEB (International), considers the impact on EU businesses of the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR).
The US Government has been placing increasing pressure on businesses located outside the USA to comply with US export and re-export laws. Controlled articles extend to physical goods as well as technical data, software and any associated services. The US Government does not distinguish between tangible and intangible transfers, with both falling under the same level of control. Many government agencies are involved in US export controls but the three primary authorities are the Department of Commerce, the Department of State and the Department of Treasury.
Department of Commerce (DoC)
The DoC is authorised by the Export Administration Act to regulate the export and re-export of USA originating commercial goods and technology (mostly dual-use goods: items that have both commercial and military applications). DoC enforces these controls through a set of regulations called the Export Administration Regulations (EAR). The EAR contain the Commerce Control List (CCL), which lists all controlled articles by Export Controls Classification Number (ECCN). The ECCN indicates the level of control for an item and, combined with the Commerce Country Chart (CCC), provides a look-up table to determine whether an article being exported to a certain country would require a licence. Licences are issued by the Bureau of Industry and Security within the DoC.
Department of State (DoS)
The Arms Export Control Act (AECA) is the law enforced for the export of munitions from the USA. The International Traffic in Arms Regulations (ITAR) are the means for the DoS to implement the laws of the AECA. They set out the licence/authorisation requirements for defence articles, defence services and related technical data. Licences are issued by the Directorate of Defense Trade Controls and must bear the Department of State seal and validity date. Contained within the ITAR is the US Munitions List (USML), which categorises defence articles and services. The way in which a transfer is made is not relevant under the ITAR, meaning that a company has to control not only physical movements but also data warehousing and transfers, conversations, training and services.
Department of Treasury
In addition to the EAR and ITAR controls are those imposed by the Office of Foreign Assets Control (OFAC). OFAC sits within the Treasury and enforces economic and trade sanction programs against groups of individuals, companies and countries. OFAC administers the Specially Designated Nationals List and will block assets and impose trade restrictions.
The EAR and ITAR impact in Europe
The USA controls how its goods are traded throughout the world. US law follows the goods so to speak, and therefore a company does not need to be located in the USA to be subject to US export controls. The US Government claims worldwide application of US export control laws (extraterritoriality) and seeks to penalise those who breach them, regardless of location. Under either the ITAR or EAR, non-US companies must obtain prior approval from the US Government for any re-exports of sensitive materials or technology. Additionally, products made outside the US can also be subject to US trade controls if the end-item is sensitive in nature and based on, or derived from, sensitive US-origin technology.
Under the EAR, a re-export is classed as a controlled article that is being shipped or transferred from one country (outside the USA) to another country. The EAR applies a de minimis rule in order to identify whether an article is controlled, which also applies to non-US companies that are manufacturing goods using US-originating materials. This generally means that goods with a share of critical US components of 25% or more, based on value (de minimis threshold), are subject to the EAR. There are exceptions as follows.
Thede minimis threshold drops to 10% for destinations on the list of state sponsors of terrorism (E:1 country group).
The threshold is even less than 10% for certain shipments to Iran.
Special rules also apply to certain encryption technologies and high-powered computers.
The de minimis rule applies only to exports and re-exports of dual-use goods. There is no de minimis rule for munitions, aerospace technology or space technology, which is controlled under the ITAR. As soon as even a single ITAR component is installed, the ITAR apply. Under the ITAR, a retransfer refers to an article being transferred or sold to another recipient not named on the original licence. Authorisation must be sought from the Directorate of Defense Trade Controls prior to a retransfer, even if outside the USA. Control of an ITAR article goes beyond the initial export control process and extends to all activities throughout its life.
Even if a non-US company does not engage in any defence exports, but supplies exclusively to the domestic market and has products that incorporate any ITAR-controlled components, or uses ITAR-controlled technical data in their manufacture, it needs to have a comprehensive understanding of the ITAR. Not only must this company put measures in place to properly control ITAR-controlled products and technical data, but it must also ensure that appropriate State Department authorisation to work with these articles is in place.
A company that handles US controlled articles has a duty of care to ensure it implements a system to manage these within the terms of the applicable licence or agreement. Further to this, for ITAR compliance, a company must be able to demonstrate that it identifies and controls ITAR articles while within its responsibility, and must pass key information down the supply chain to ensure the goods are identified as being controlled under the ITAR.
Changes under the US Export Control Reform (ECR)
Under the current system, an exporter may be required to apply for export licences from multiple agencies depending on the materials being exported and, consequently, jurisdiction is sometimes unclear and processes cumbersome. The US ECR defined by the Obama Administration has been well under way since 2013 and seeks to implement a single licensing agency with a single control list and single IT system for all licence applications. Under the ECR, the existing USML is being reviewed to determine what should be controlled on the USML, and what can be moved to the control of the EAR. The first pair of rules implementing ECR was implemented in October 2013, and the second set of rules including USML Categories VI (Vessels of War and Special Naval Equipment), VII (Tanks and Military Vehicles), XIII (Auxiliary Military Equipment), and XX (Submersibles) took effect in January 2014.
Articles moving from the ITAR to the EAR are referred to as the “600 series”, as the third character of each ECCN for these articles begins with a 6 (eg 9A610). There are some ECCNs already on the CCL, which will additionally move into the 600 series. In addition, exporters will be able to export less sensitive military items without a licence to 36 of the USA’s closest allies, if they meet the requirements of Licence Exception Strategic Trade Authorization, which has been specifically revised to cover controlled articles in the 600 series.
The changes being introduced under the ECR could open up new opportunities for businesses to save costs and speed up processes. Companies should therefore review their current export controls procedures in light of the new licence exceptions and possible reduced or eliminated registration fees. Additionally, as the de minimis principle would apply to the 600 series, there may be benefits from a reduced licensing burden, thus making it easier to source articles from the USA.