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Navigating the U.S. Export Control Reform (ECR)

Iqubal Pannu, Senior Solutions Consultant at AEB (International) Ltd discusses the

changes to the U.S. ECR, which will involve various changes for UK companies

Iqubal Pannu, SeniorSolutions Consultant, AEB

Freight Forwarding

The ECR aims to simplify U.S. export controls while enhancing U.S. security by consolidating the two primary control lists – the

United States Munitions List (USML) and the Commerce Control List (CCL) – into a single control list administered by a single agency. As a result, many items previously classified as munitions items under U.S. export controls laws and regulations are being transferred from the USML, administered by the Department of State, to the CCL, administered by the Department of Commerce.

The reform involves significant changes for UK companies operating in various industry sectors, including aerospace, automotive, defence, information technology, telecommunications and software. Many companies who previously focused on dealing with the International Traffic in Arms Regulations (ITAR) controlling the export and import of defence-related

articles and services on the USML, now have to familiarise themselves with the Export Administration Regulations (EAR), as future licenses may be required from the Department of Commerce. As the EAR is structured very differently than the ITAR, the ECR requires non-U.S. companies to understand aspects of the EAR that they did not have to consider before.

Basic principles of the EAR

Determining which U.S. federal agency has jurisdiction over products, technical data and services is a key step in the process of identifying U.S. export license requirements. EAR and USML jurisdiction can apply merely on the basis that goods, software, or technology are of U.S. - origin or contain U.S. content – there is no need for the product to be located in the United States, and no need for U.S. parties to be involved in the export or re-export transaction.

“The reform involves significant

changes for UK companies

operating in various industry

sectors...”

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The U.S. Department of State has export control jurisdiction over the export of defence items under the ITAR, while the U.S. Department of Commerce has export control jurisdiction over the export of dual-use items and items that have strictly civilian or commercial uses under the EAR. Notably, a non-U.S. company receiving and re-exporting U.S. controlled items is responsible for ensuring the correct jurisdiction and classification of the items, even if this information has been provided to them by their supplier.

Export Control Classification Numbers (ECCNs) are fundamental components for determining whether a license is required from the Department of Commerce for (re-)export to a particular destination. The ECCN is a five character alphanumeric code which identifies the technology parameters and the capabilities of a dual-use item for export control purposes. All ECCNs are listed in the CCL, which is divided into ten broad categories that are further subdivided into five product groups.

The “see through” principle under the ITAR means that a single ITAR component remains subject to ITAR controls regardless of its incorporation into the finished product. In contrast, when EAR-controlled hardware, software, or technology is incorporated into a foreign made (foreign to the U.S) assembly, the “de minimis” calculation process determines whether the finished product is subject to EAR.

Main elements of the U.S. ECR

Among the most significant changes introduced with the ECR is the addition of the “600 series” to the CCL. The “600 series” is comprised of less sensitive military items that were formerly captured under the USML and hence subject to the ITAR. Moving these items to the CCL allows for more flexible controls under the

EAR so they can be exported to NATO countries and other U.S. allies more easily. They do, however, retain their nature as military items, and licenses from Commerce are required to export and re-export them unless an EAR License Exception is available.

Of additional importance is the revised license exception Strategic Trade Authorization (STA) of the EAR, which is designed to ease trade between the U.S. and its allies and close partners. Some transactions that, prior to the ECR, would have been conducted under a license may now be possible under this exception, reducing the administrative burden on exporters. The STA allows export, re-export, and transfer of certain dual-use and “600 series” items to STA-eligible countries without a transaction-specific license, provided certain conditions are met.

Screening all parties involved in a transaction is a fundamental part of a company’s U.S. trade controls compliance programme. The U.S. Government has consolidated 9 different screening lists from the Departments of State, Commerce and Treasury that can be used as a single resource for screening. If a party to a transaction is matched against the Consolidated Screening List, additional investigation is required to understand whether the process can continue, if an authorisation is required from the U.S. Government, or if other restrictions apply.

Lastly, a new license exemption by the Department of State eliminates the need to obtain prior approval for transfers of unclassified defence articles to dual national or third country national employees of foreign business or government entities, or international organisations that are approved end-users or consignees for such defence articles. This exemption is subject to fulfilling certain screening and recordkeeping requirements.

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Important points to note:

“Specially Designed”

Among the key changes introduced with the U.S. ECR is a definition for the term “specially designed”, which addresses previous ambiguity between the respective interpretations of the Departments of Commerce and State regarding “design intent.” The creation of a single common definition under EAR and ITAR makes it easier to identify whether products are subject to export controls as “specially designed” items.

ITAR License Exemptions and EAR License Exceptions

One of the guiding principles established by the U.S. export control agencies is that, as a result of the ECR, the rules governing the “600 series” items that have moved across from USML to CCL should not be more restrictive than they were prior to the reform. This means that if it was possible to use an exemption under the ITAR, then it should also be possible to use a license exception under the EAR.

Transition Procedures

As commodities are moved from the USML to the CCL, there is the challenge of deciding which authorisation to apply, and from which jurisdiction. The decision on which authorisation to use when re-exporting items that have moved from the USML to the CCL depends on a number of factors, including the expiry date of existing authorisations and the effective date of the final ruling from the Directorate of Defense Trade Controls (DDTC).

Paragraph (x)

Aerospace and defence exporters voiced concerns that the transfer of some military-related items from the USML to CCL would result in them having to apply more frequently for both EAR and ITAR licenses for a single military programme. In response, the State Department now has authority to issue licenses for certain items that are subject to EAR. Under the ECR, the revised USML categories will now include a “paragraph (x)” which allows for ITAR licensing for commodities, software, and technical data subject to the EAR when they are used in or with defence articles controlled in the relevant USML category.

Technology Transfer Under ECR

Just like hardware, technology and technical data have also been re-classified and moved from the USML to the CCL. Both the hardware and associated technology or technical data are classified individually to determine the correct jurisdiction for control. Despite efforts to better align the rules under EAR and ITAR, one area that has not yet been harmonised concerns “deemed re-exports”, i.e. the transfer of controlled technology or technical data to a dual or third country national (from a U.S. perspective), even if that transfer occurs strictly within the territory of a given country. A “deemed re-export” may apply if a UK company receives controlled U.S.-origin technology and then shares that technology within its own UK offices with an individual who is of Chinese nationality or dual nationality. The ITAR and EAR continue to take disparate approaches to determining the applicability of the “deemed re-export” rules to non-U.S. persons. The ITAR considers all countries of citizenship, permanent residence, and birth, while the EAR generally focuses on the most recent country of citizenship or permanent residence.

Compliance Through Automation

Covering all the aspects required to demonstrate control - including real time visibility, validation and control, data capture and archiving, and being able to demonstrate compliance during an audit - is very difficult to achieve with manual processes. Software helps to meet the relevant requirements effectively and affordably, checking all export processes for possible embargoes and licensing requirements under EU law and U.S. EAR & ITAR. An export control compliance solution should be integrated directly into the business workflow so that whenever a new transaction is created or modified, it is automatically screened in the background.

Today’s powerful export control solutions refer to and search through the latest national, EU and U.S. regulations to determine whether a license is required or whether the goods can be shipped without restrictions. They help with the proper and effective management of licenses and detailed record-keeping required for audit purposes. Export control automation should be embedded in organisations’ overall global trade and logistics processes, and solutions should offer open interfaces to make it possible to integrate the software into any system as foundation for end-to end processes and overall transparency.