International Trade Law News

In a speech today during the the Bureau of Industry and Security’s Update Conference on Export Controls, Commerce Secretary Locke announced that he has proposed that the Commerce Department, working with other government agencies, immediately explore pursuing two reforms that will "provide substantial relief" to U.S. exporters while strengthening U.S. national security and foreign policy interests:

• Eliminating dual-use export license requirements for allies and partner nations;
• Implementing a fast-track procedure for the review of dual-use export licenses for other key allies.

While the first of these proposed changes will require amendments to the Export Administration Regulations, the second proposed change may be able to be implemented fairly quickly. Stay tuned.

The full text of Secretary Locke's speech can be found here.

Click here to view the live Twitter feed from some of today's Update sessions.

Labels: BIS Update Conference

Just posted some news from the export enforcement panel at BIS Update on our Twitter feed at twitter.com/tradelawnews.

Labels: BIS Update Conference

Secretary of Commerce Gary Locke met yesterday with Secretary of Defense Robert Gates at the Pentagon to discuss export controls and business visa reform. (Photo courtesy of Department of Commerce).

Locke and Gates met for approximately one hour and agreed to continue to work together with their counterparts at other cabinet agencies toward these reforms.

They plan to meet again in the next few weeks with fellow administration officials to address their progress.

On July 22nd Secretary Gary Locke said that "undertaking a review of export controls" is one of his top five priorities and that he has already instructed the Bureau of Industry and Security to initiate a review of the entire U.S. export control system. The White House subsequently announced that the Obama Administration would conduct a review of the U.S. export control system.

Secretary Locke will be the keynote speaker at next week's Update Conference on Export Controls and Policy presented by the Commerce Department's Bureau of Industry and Security.

We hope to see many of our readers at Update.

Labels: BIS, BIS Update Conference, Export Controls

The Bureau of Industry and Security (BIS) has posted on its website the agenda and other details for the 22nd annual Update Conference on Export Controls and Policy that will be held in Washington, DC from September 30 through October 2, 2009.

In addition, BIS began sending registration information to persons that submitted their "interest form" and were randomly selected to attend. Since there was more interest than space available, those names that were not drawn will be placed on a waiting list and notified on how to register as space becomes available.

If you missed out on submitting the Update Interest Form and would like to be included on the waiting list, you can complete the wait list form.

Labels: BIS Update Conference

As a follow-up to our previous post, the Bureau of Industry and Security today announced that the 22nd annual Update Conference on Export Controls and Policy will be held September 30 through October 2, 2009 in Washington, DC.

Because the expected number of attendees will likely exceed the number of persons interested in attending, BIS will hold a registration lottery as they did in the past few years. Interested persons must first complete and submit the online “Interest Form” below between June 25 and July 17. If there are more potential participants than there is space available, BIS will grant registration through a random selection from the entire list of respondents, regardless of when received during the period. Those selected will be notified and given registration instructions in late July. They must register and submit payment by the designated date or their place will be forfeited and given to someone on the waiting list.

More information on the venue and program will be available in the coming weeks.

Labels: BIS Update Conference

While the specific dates and location have not been finalized, this year's Bureau of Industry and Security's annual update Update Conference on Export Controls and Policy should be held during the week of September 28, 2009 (end of September and beginning of October). Details on registration will follow once BIS has finalized the dates.

Labels: BIS Update Conference, Export Controls

As in the past, Update 2008 concluded with an export enforcement plenary session, which started with a keynote speech by Daryl Jackson, Assistant Secretary for Export Enforcement. The full text of Assistant Secretary Jackson's speech can be found here. Some of the highlights of the speech included:

• Emphasized the need for the Office of Export Enforcement (OEE) to hire more Special Agents and in more locations to conduct investigations, detect diversions and conduct outreach. Noted that OEE cannot remain in the same nine field locations – some of which cover as many as ten states – while new technology corridors are sprouting up elsewhere throughout the nation.
  
• Stated that Congress must equip OEE's Special Agents with the modern investigative tools and permanent law enforcement authorities that they need to counter national security threats.
• Reemphasized need for permanent Export Administration Act.
• Stated that the Office of Antiboycott Compliance (OAC) will expand its efforts by engaging in collaboration with the International Trade Administration, the Departments of State and Treasury, and the U.S. Trade Representative, in order to engage governments that initiate unsanctioned boycotts. By “going to the source”, OAC will "improve its ability to finally end these impediments to international trade, and further the economies of the U.S. and our allies."
• Sees greater penalties and consequences for noncompliance as a result of the Justice Department's Export Enforcement Initiative and greater administrative penalties as a result of the IEEPA Enhancement Act.

On a related note, the Export Practitioner recently published an article by Assistant Secretary Jackson entitled "Congress Should Modernize BIS Enforcement Authorities".

Following the keynote address, there was an export enforcement panel, moderated by Kevin Delli-Colli, Deputy Assistant Secretary for Export Enforcement and consisting of Glenn Krizay, Director of the Office of Export Analysis, Thomas Madigan, Director of the the Office of Export Enforcement and Ned Weant, Director of the Office of Antiboycott Compliance.

These panelists provided the following export enforcement statistics (these statistics cover the first three quarters of FY 2008):

Criminal Cases: 16 arrests; 46 indictments/informations; 32 convictions; $1,267,500 in fines.

Administrative Cases: 33 cases closed with final orders; Penalties imposed in 27 of the 33 cases; Civil fines totaling $2,342,132.

Voluntary Self-Disclosures (VSDs): 145 received (projected to be 193 for FY 2008); 42 of the 145 VSDs were investigated and closed (20 without action, 21 warning letters, 1 charging letter); 103 of the 145 VSDs remain under investigation.

End-Use Checks (EUCs): 352 EUCs; 35% were pre-license checks and 65% were post-shipment verifications; approximately 16% of all EUCs were unfavorable; Reviewed almost 7,000 parties; completed checks in 48 countries.

Labels: BIS Update Conference

Assistant Secretary of Commerce for Export Administration Christopher R. Wall announced at Update 2008 today that the long awaited de minimis rule, the first of five soon to be published regulations, will be published in tomorrow's Federal Register.

The de minimis rule, which will be published as an interim final rule and therefore effective upon publication, represents the first changes to de minimis calculations since 1996. The de minimis rule is important to non-U.S. companies, as it determines whether a foreign-made item that incorporates controlled U.S.-origin items will be subject to U.S. export controls.

Specifically, the de minimis rule, amends the Export Administration Regulations (EAR) in the following ways:

1. Changes the de minimis calculation for foreign produced hardware that is bundled with U.S.-origin software.
2. Clarifies the definition of "incorporate" as it is applied to the de minimis rules and to the medical statement of understanding.
   
3. Removes the requirement to submit a one time report to BIS for foreign-made software that incorporates U.S.-origin software.
   
4. Revises the “Steps for Using the EAR” and General Prohibition Two with regard to the de minimis rules in order to reduce redundancies in the EAR and harmonize the provisions with other revisions made by the rule.
   

In addition, BIS will publish in the coming days the following additional regulations:

1. Intra-Company Transfer license exception (ICT)
   
2. Revision of license exception ENC;
3. Implementation of the December 2007 Wassenaar Arrangement Plenary Agreement;
4. Final rule to implement the Protocol Additional to the Agreement Between the United States of America and the International Atomic Energy Agency (IAEA) for the Application of Safeguards in the United States of America (known as the "Additional Protocol'').

Labels: BIS, BIS Update Conference, Export Controls

Bureau of Industry and Security staff announced today at the Update 2008 mini sessions that several long-awaited regulations will soon be published in the Federal Register, including revised encryption controls and updated de minimis content rules.

For the first time, many of the Update sessions will recorded on video and available for viewing on the BIS website. BIS staff estimates that the videos from Update 2008 will be available in three or four weeks.

Labels: BIS Update Conference

International Trade Law News and the law firm of Strasburger & Price, LLP look forward to seeing our readers at next week's BIS Update 2008 conference in Washington, DC. While we will not be blogging from Update this year, please contact us if you would like to meet during your visit to Washington, DC.

Note: The final Update agenda was posted today at: www.bis.doc.gov/seminarsandtraining/update2008/agenda.htm.

Labels: BIS Update Conference

The Bureau of Industry and Security today announced that the annual Update Conference on Export Controls and Policy will be held September 29 - October 1, 2008 at the Grand Hyatt Washington in Washington, DC.

The program will begin on Monday, September 29 and will feature several "mini training sessions" for those new to Update. An exhibit hall with industry and government exhibitors will be available on the first day only (this is similar to last year, although the exhibit hall will be open all day, rather than just in the afternoon and evening).

The main conference will begin on Tuesday, September 30 and end on Wednesday, October 1.

The complete agenda and other information on Update 2008 can be found here: www.bis.doc.gov/seminarsandtraining/update2008/index.htm.

Instructions on how to register will be e-mailed on July 25, 2008 to those that pre-registered. Since there was more interest than space available, those whose names are not drawn will be placed on a waiting list and notified of how to register as space becomes available. If you did not pre-register and would like to be placed on the Update waiting list, send an e-mail ASAP to Updateconference@bis.doc.gov.

Labels: BIS Update Conference

U.S. Customs and Border Protection has announced that its annual Trade Symposium will be held October 29 – 31, 2008 at the JW Marriott hotel in Washington, D.C. More details to follow.

Meanwhile, the Bureau of Industry and Security (BIS) has not yet finalized the dates of its annual Update conference, which is normally held in the fall in Washington, DC. In the meantime, potential Update attendees have until July 6, 2008 to submit their on-line "Update Interest Form" (aka the "Update Lottery") that will be used by BIS to make registration assignments through a random selection from the entire list of applicants.

Labels: BIS Update Conference, Customs

Summaries of the plenary and breakout sessions from the Bureau of Industry and Security's Update 2007 conference have now been posted on International Trade Law News.

Labels: BIS Update Conference

Elizabeth Scott, Director of the Chemical and Biological Controls Division at BIS, opened the breakout session by providing an overview of the critical components of items on the Commerce Control List (CCL) as follows:

• Toxic Chemicals: useful for production of chemicals agents or used independently;


• Biological agents: pose a danger to human, animal or plant;


• Production equipment: necessary for making controlled items;


• Technology: do not want unfriendly actors to have access to sensitive and new technologies.
  

The CCL is now under review and BIS will take a close look at the public comments submitted by industry in order to revise various Export Control Classification Numbers (ECCNs) on the CCL. In addition, BIS is working at the multilateral level with the Australia Group, a group of countries that work together to develop policies and guidelines regarding the export of chemicals and biological weapons.

Suggested revisions to Australia Group controls are made by member countries to the Australia Group secretariat for distribution to members. Annual plenary sessions are held to review the proposals. A consensus among all Australia Group members is needed for a revision to be adopted. Once a change to the Australia Group list is adopted, BIS notifies U.S. industries by publishing a notice in the Federal Register.

The input of U.S. industry is also sought on potential changes to the Australia Group list. For example, BIS is seeking the input of industry with respect to changes to ECCNs 2B352 (cross tangential flow filters) and 2B350 (chemical processing equipment).

The next speaker in the breakout session was Steve Clagett, Director of the Nuclear and Missile Technology Division of BIS's Office of National Security and Technology and Technology Transfer Controls. Mr. Claggett noted that his office is tasked with reviewing the CCL and the CCL guidelines, which direct how the controls work. The objective of Mr. Clagett's office is to keep the CCL modern, add new items that address specific proliferation concerns, and delete entries that are no longer germane.

With respect to the Missile Technology Control Regime, he noted that Category I items, which include first generation nuclear weapons, are the most sensitive. Category II includes dual-use items, capable of being used in missile delivery systems. The jurisdiction for these items is shared between the EAR and ITAR. He also discussed the Nuclear Suppliers Group lists, including the Trigger List (Part I), which governs the exprot of items that are especially designed for nuclear use, and the Dual-Use Annex (Part II), which governs the export of nuclear related dual use items and technologies. Notably, the Dual-Use annex is fairly static and minor changes were made to machine tool controls in order to harmonize with Wassenaar. The Trigger List is also fairly static, however, the Nuclear Suppliers Group is reviewing a number of items, such as controls on stable isotope separation and valves for gas centrifuges.

Mr. Clagett was followed by James Thompson, Director of the Sensors and Aviation Division of BIS's Office of National Security and Technology and Technology Transfer Controls. Mr. Thompson noted that U.S. controls for National Security are based on the list developed by the Wassenaar Arrangement. The Wassenaar Arrangement has 40 member countries and was established in 1996 to promote transparency and responsibility in transfers of conventional arms and dual-use goods and technologies. U.S. National Security (NS) controls are based on the Wassenaar List of Dual Use Goods and Technologies. Thus, changes to U.S. NS controls require a change to the Wassenaar list.

Proposed changes to the Wassenaar list are presented by member countries for review and consideration. In order to adopt a member country’s proposal, unanimous agreement is required. This review cycle occurs annually and requires several months for changes to become integrated into the EAR.

John Albert, from the State Department's Office of Conventional Arms Threat Reduction and Head of the U.S. Delegation to the Wassenaar Arrangement Experts Group, discussed the Wassenaar Arrangement process for modifying the Wassenaar List of Dual Use Goods and Technologies. He summarized the process as follows:

• Proposals submitted by deadline early in the year


• Initial review in the spring


• Intersessional meetings are held
  
• Final reviews occur in the fall

• Final proposals reviewed at the Wassennaar Plenary session in December

• Each country subsequently implements the changes to their own laws and regulations
  

In order to be listed on the Wassenaar list, a item has to be a key component for the development use or enhancement of military capability. In order to be placed on the Munitions list, the item must be designed for military use.

Mr. Albert noted that the Wassenaar List is an evolving process and seeks to balance security concerns with the free flow of international trade. It is also a process that seeks to develop a shared outlook.

Labels: BIS Update Conference

The Technology, Software and Encryption breakout session was chaired by Bernard Kritzer, Director of BIS’s Office of National Security Controls and Technology Transfer. He noted that while his office has been around for 15 years, technology has changed dramatically during that time. Mr. Kritzer indicated that his office reviews and process 8,200 license applications per year, 5,000 of which are for three basic technologies: deemed exports (1,100), encryption (1,300) and sensors (3,000).

He also noted that there have been numerous geopolitical changes affecting technology over the past few years, including much greater foreign availability, less reliance on the military to generate new technology, more global sourcing and production, and migration of capital, management and technology across international borders.

Mr. Kritzer also discussed the evolution of the products controlled by the final “China Rule”. He also discussed the evolution and analysis of the deemed export rule proposing the use of country of birth. In both cases, BIS took note of the public comments that led to significant changes in the final rule that was issued. With respect to deemed exports, Mr. Kritzer noted that the Deemed Export Advisory Committee final report should be issued later this year with recommendations on how to change and improve the deemed export process.

Mr. Kritzer also noted that BIS is also looking at conducting a review of the Commerce Control List, which is long overdue. For example, he noted that there have been 10 product cycles in semiconductor manufacturing technology since the last CCL review was conducted in 1991.

With respect to encryption, Mr. Kritzer noted that there has been double-digit growth in encryption reviews and mass market determinations. BIS is considering an inter-company licensing program for companies with stellar track export compliance track records. This proposal is a work in progress and BIS hopes to circulate a draft to other agencies in the near future.

Next, Anthony Koo, a licensing officer in Mr. Kritzer’s office that is is responsible for reviewing numerous commodity classifications and export license applications each year, spoke on licensing issues and changes to the CCL.

Regarding the CCL review, he noted that the CCL is made up of several multilateral and unilateral control regimes. Thus, BIS is trying to update the CCL to make it reflect the real world. BIS is also trying to make the CCL more consistent with multilateral regimes, such as updating temperature ranges.

Mr. Koo noted that the final rule modifying the EAR to reflect the December 2006 Wassenaar plenary changes will be published in the FR on Monday November 5, 2007. The final rule can be found here. There will be a 30 day savings provision to reflect pending shipments. The rule implementing the 2006 Wassenaar makes a number of changes to the EAR. For example, the final rule revises the EAR by amending certain entries that are controlled for national security reasons in CCL categories 1, 2, 3, 5 Part I (telecommunications), 6, 7, 8 and 9. The final rule also adds a number of new ECCNs to the CCL, amends and adds some EAR definitions and adds a new Statement of Understanding on source code.

Mr. Koo was followed by Ms. Randy Pratt, Director of the Information Technology Controls Division. Ms. Pratt noted that the there has been an increase in encryption licensing, and BIS saw a 20% increase in encryption licensing activity from FY 2006 to FY 2007, noting that most licenses are issued for exports to government end-users in emerging markets. The average encryption export license is issued in 42 days. There has been a 10% increase in encryption reviews and classification requests. This has resulted in the average processing time for encryption classifications to increase to 46 days from 31 days. The average processing times for mass market encryption reviews has increased to 35 days from 29 days.

Ms. Pratt discussed three major issues regarding encryption.

1. Noted that licenses for the export of components containing encryption are reviewed on the basis of the product’s design. She also noted that BIS does not classify components incorporating mass market software as mass market.
   
2. Reiterated that it is not necessary for classifications to be submitted for new versions of previously classified software, if the name of the software changes or if a software producer is acquired. Companies should therefore limit the submission of classification reviews.
3. Advised that exporters can self-classify their products if they contain weak encryption (ECCN 5E002). Exporters are encouraged to self-classify, if possible. Noted that BIS has the authority to classify weak encryption items without NSA review.

With respect to licensing issues, Ms. Pratt stated that Encryption Licensing Arrangements are available to export unlimited quantities of goods to specified end-users and destinations. She also indicated that the definition of "government end-user" is important for encryption licensing purposes. As far as encryption technology, which is not available for license exception ENC, she noted that export licenses are required to export such technology to certain destinations. Ms. Pratt also noted that U.S. jurisdiction over encryption is limited to the foreign direct product of U.S. technology. She also noted that it is a common misconception that de minimis rules do not apply to encryption products and parties should review foreign made products to determine if they are subject to EAR.

With respect to the next steps in encryption, Ms. Pratt noted that BIS is aware that the encryption regulations need to be updated and streamlined and BIS is working on an EAR amendment package to amend encryption controls, including reporting and notification requirements.

Following the presentation, the panel took questions from the audience, which included the following:

1. Mr. Kritzer noted that the U.S. does not coordinate implementation of Wassenaar changes with other countries. Each country implements the changes made at the December plenary sessions on their own schedule. Thus, U.S. changes are implemented on a different schedule than the E.U. and Japan.

2. Stated that if a data server is located in China containing data used to produce EAR 99, no license is required. However, if that server contains controlled technology a license is required to export the controlled technology to China.

3. Medical devices containing encryption algorithms are exempt from licensing pursuant to the Wassenaar medical exception set forth in the EAR.

4. Ms. Pratt noted that Microsoft has obtained from BIS a Letter Authorization that permits Vista to be exported worldwide in a manner similar to mass market software (authorized for export, reexport, resale and transfer worldwide, except to Country Group E:1 countries and to parties denied export privileges).

5. BIS is considering changes to license exception ENC.

Labels: BIS Update Conference

By Amy Stanley*

At the International Practices in Export Controls breakout session, three foreign government representatives discussed their countries’ export systems and policies. The three representatives discussed similarities and differences between the export systems of the United Kingdom, Japan and Canada.

First, Spencer Chivers, of the U.K. Government's Department of Trade & Industry's Export Control Organisation, discussed the U.K’s. export licensing system and export regulations. Mr. Chivers noted that U.K.’s control lists were defined by many of the same agreements that the U.S. is party to including the Wassenaar Arrangement, the Missile Technology Control Regime and the Nuclear Suppliers Group. The U.K. export system is also guided by international bodies such as U.N. Security Council measures and the U.N. Register of Conventional Arms. He noted a difference between the U.K. and the U.S. is that the U.K. follows the EU Code of Conduct on Arms Exports. All licensing decisions in the U.K. must be taken against this Code, however the Code only covers military and dual-use goods.

The primary law in the U.K. that governs exports is the Export Control Act of 2002. This law gives certain powers to the Department of Business Enterprise & Regulatory Reform (BERR). This Act has been expanded by several Orders including the Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control) of 2003 (“the Main Order”). The Main Order controls the export of strategic goods, the transfer of technology and technical assistance. The Main Order establishes license registration and record keeping requirements and provides appeal rights for denied licenses, among other things. Mr. Chivers also discussed EC Regulation 1334/2000 which establishes an EU regime for the control of dual-use exports and technology.

The U.K.'s BERR controls exports for both military and dual-use goods. That agency is in charge of receiving and processing all license applications. Mr. Chivers explained that there are several license types within the U.K. system including a Standard Individual Export License (SIEL), Open Individual Export License (OIEL) and Open General Export License (OGEL). The method to apply for a license is similar to the U.S. system of SNAP-R and is referred to by as SPIRE. Effective September 3, 2007, all U.K. export licenses must be submitted electronically. Mr. Chivers noted that SPIRE is configured to use algorithms to filter license applications and flag applications depending on what is being exported, the destination, value and other factors.

Mr. Spire concluded his remarks noting that like the U.S., the U.K. has an interagency process in making export determinations. These agencies include the Ministry of Defense, Foreign and Commonwealth Office and the Department of International Development, among others.

Second to address the audience was Satoshi Miura, from the Embassy of Japan in Washington, DC. Mr. Miura discussed the legal framework from which Japan’s export laws and regulations are drafted. He noted that Japan’s Ministry of Economy, Trade and Industry (METI) was the primary agency to govern Japan’s exports on dual-use items and arms. Mr. Miura stated, however, that Japan does not allow export of arms, with few exceptions.

Mr. Miura discussed Japan's Center for Information on Security Trade Control (CISTEC), which is a coordinating group among industry, government and academia on security export controls in Japan. Among other things, CISTEC provides advice related to security export controls and can determine if items are regulated by export laws. CISTEC can also assist with export planning, negotiation, contract and license applications, if required.

The final speaker was Lynne C. Sabatino, Deputy Director of the Export Controls Division of Canada's Ministry of Foreign Affairs and International Trade. Ms. Sabatino noted that Canada and the U.S. have similar legal and regulatory frameworks, licensing procedures, enforcement and prosecution capabilities..

Export controls in Canada are administered by Foreign Affairs and International Trade Canada (FAITC) under the Export and Import Permits Act. Notable provisions within this Act include: 1) Area Control List, which is a list of countries (currently Burma and Belarus) that Canada deems it necessary to control the export of any goods and any export to these two countries requires a license; and 2) Export Control List, which are goods controlled for enumerated purposes (e.g. of U.S. origin, on Canada’s export control list, etc.).

Ms. Sabatino pointed out that a general export permit is needed for all U.S. goods being reexported from Canada, except when being exported to Cuba, North Korea, Syria, Iran and Sudan, although such a permit would not likely be granted.

Ms. Sabatino closed her remarks by discussing a major difference in Canada’s Controlled Goods Program, a security related initiative. The Controlled Goods Program regulates the examination, possession and transfer of controlled goods in Canada and any company that is in possession of these goods must be registered. In addition, a U.S. company would not be able to transfer any goods to a Canadian company, unless that Canadian company was registered.

In answering questions, Mr. Chivers stated that within the EU, a license is required from where the exporter is based, not where the goods may be physically located. For example if goods are to be exported from France, but a forwarder is located in the U.K., a U.K. license would be needed in order to export.

Ms. Sabatino answered a question related to Cuba stating that if a good is not on Canada’s controlled list, and is not made in the U.S., only then would it be possible to export to Cuba.

Mr. Miura stated in the question and answer session that there are no current plans to translate the Japanese export regulations to English, but that the Japanese version is available online.

*Ms. Stanley is a recent law school graduate with an interest in export controls and international trade issues. Ms. Stanley can be reached at amyjstanley@gmail.com.

Labels: BIS Update Conference

The extremely well-attended breakout session on the EAR/ITAR Commodity Jurisdiction (CJ) process showed that there is a great deal of interest by industry in this important topic.

The program began with an introduction on the Defense Department's (DoD) role in the CJ process. Mercedes Beffa, an export control analyst with the Defense Technology Security Administration (DTSA) noted that DTSA reviews BIS commodity classifications and CJs when requested by BIS or the State Department's Directorate of Defense Trade Controls (DDTC). She noted that in making a CJ:

• precedent is important;
• performance equivalents are very important; and
• capability of a product is extremely important.

Ms. Beffa provided some important CJ-related tips, including that it is important to remember that while DoD and BIS provide input on the process, DDTC is ultimately responsible for designating defense articles. She also noted that the criteria that is evaluated for determining whether something is covered by the USML is whether the product is for a "military application", not just "for the military".

Next, Gene Christiansen, a senior engineer with BIS’s Office of National Security and Technology Transfer Controls first discussed the important distinction between commodity jurisdictions and commodity classifications. He noted that commodity or licensing jurisdiction is the first step in determining whether the item is subject to the jurisdiction of the State Department (ITAR) or the Department of Commerce (EAR). Whereas, the commodity classification process is specific to dual-use items that are subject to the EAR and involves matching the technical characteristics of the item with the control parameter of an Export Control Classification Number (ECCN) on the Commerce Control List (CCL).

Establishing jurisdiction is, of course, critical since the Departments of State and Commerce have different licensing requirements. Once jurisdiction has been established the exporter is responsible for obtaining an export license, if required, from the appropriate agency.

Thus, submitting a CJ request to DDTC under the guidelines set forth in the ITAR (22 CFR 120.4) is the first step if an exporter is uncertain whether the product is subject to the EAR or ITAR.

After discussing the jurisdiction legal requirements set forth in section 120.3 of the ITAR, Mr. Christiansen noted the following thing to remember regarding the CJ process:

• There is no requirement to submit CJ, unless directed to seek an official jurisdiction ruling
• Once a CJ request has been submitted, the item is under DDTC’s jurisdiction until ruled otherwise
• The ITAR has no de minimis provisions and DDTC follows the “see through” rule [Editor’s note: Under the see-through rule, wherever an ITAR item is incorporated into a civilian item, the civilian item becomes subject to the DDTC’s export licensing jurisdiction].

If an exporter is unsure as to what agency has jurisdiction (BIS or DDTC) then a CJ request is suggested. All exporters should include the following information in CJ requests:

1. Original intent of the design
2. Who funded the development of the product
3. Unique characteristics of the design
4. Current market for the item
5. Performance equivalents
6. If originally under Department of State jurisdiction, how has item been modified and for what specific end-use
7. Relevant jurisdiction history, if applicable
8. Civil Certification Status of item and identification on whether there are civil applications of the item.

Mr. Christiansen noted that items from a military production line continue to be subject to the ITAR until they have been determined not to satisfy military requirements, have been renamed or officially reviewed for jurisdiction.

It was also noted that certifications made under section 17(c) of the Export Administration Act (EAA) are not always recognized by DDTC. However, DDTC and BIS are working with the FAA on the 17(c) issue [Editors Note: Section 17(c) of the EAA provides that the Commerce Department is to have jurisdiction over standard parts and components certified by the FAA for use in civil aircraft. However, there has been an ongoing turf battle on which agency has jurisdiction over certain aircraft parts].

To help expedite a CJ request, it is important that all supporting documentation is consistent with the request itself. It is equally important that all information is given in the initial request as well for the exporter to stay involved in the process.

Mr. Christiansen also reminded conference participants that if an item that a company manufactures is deemed to be subject to the ITAR, it is important to inform suppliers because they may need to register with the DDTC. Customers also deserve to know since it will impact the jurisdiction of the end-item.

Next, Ann Ganzer, Director of DDTC’s Office of Defense Trade Controls Policy (the office that oversees the CJ process), reviewed the procedural process for reviewing CJ requests. She noted that the interagency process is sophisticated and eventually makes a recommendation on the product. DDTC reviews the recommendation to ensure that it is consistent with prior CJs and that is consistent with ITAR 120.3. DDTC also determines if there is any other information needed for the agency to make an educated decision. While the CJ is vetted through other agencies, DDTC works toward interagency consensus. If, however, there is interagency disagreement, the CJ application can be escalated to the Director of Defense Trade Controls Policy, to the Assistant Secretary and to the Under Secretary. There is a right of escalation to the President of the United States, although this has never occurred.

Ms. Ganzer noted there has been a significant increase in number of CJs submitted during the past few years and provided the following CJ statistics for calendar year 2006:

CJ applications received = 368

CJ applications closed = 412

Of the CJ determinations issued, 24% were USML, 66% were CCL, 6% were split CCL/USML jurisdiction and 3% were returned without action.

The median processing time for DDTC to issue a CJ determination is currently 63 days, while the average time to issue a CJ determination is 120 days. Both of which are an improvement from previous processing times. DTSA’s current review time is 28.6 days. Companies should currently allow at least 90 days for DDTC to issue a CJ determination.

Ms. Ganzer stressed that ECCNs are determined by the CCL list. She also stated that is it not important to include the ECCN in a CJ request. Finally, she noted that CJs have no expiration dates and that it is important for exporters to keep records related to CJs as DDTC only keeps records for 15 years.

The panelists then answered questions that had been previously submitted prior to Update and questions from the audience. Some of the answers provided are as follows:

*For commodities that are manufactured from a mix of technical data controlled by the ITAR and EAR and the end use is commercial, it still may be necessary to obtain a CJ to determine the jurisdiction of the product with certainty.

*It is a good idea to get a CJ on products produced from DARPA funded products.

*DDTC tries not to issue CJs where the applicant is not the manufacturer. DDTC prefers that the manufacturer submit the CJ or at least be involved in the process.

*Government agencies can and do submit CJs.

*DDTC is in the process of implementing an electronic CJ submission process. However, there is no definitive date yet on when the system will be implemented.

*CJs are confidential and will not be made public.

[Editor's note: Special thanks to Amy Stanley for her assistance in drafting this post. Ms. Stanley is a recent law school graduate with an interest in export controls and international trade issues. Ms. Stanley can be reached at amyjstanley@gmail.com.]

Labels: BIS Update Conference

Jerome Greenwell, the Trade Ombudsman of The Census Bureau's Foreign Trade Division, kicked-off the breakout session on the Automated Export System (AES) Compliance Review Program by noting that the program provides a unique opportunity for review of the automated data systems used by exporters in the U.S. Although the compliance review program has been availablesince 1979, Census has not previously used the program to review AES filers.

The purposed of the AES Compliance Review Program is to identify best business practices, seek out glitches that cause reporting problems and educate Census's Foreign Trade Division staff. In return, the program has been educational for foreign trade staff in coming to terms with the various companies’ concerns.

Mr. Greenwell identified the following 3 goals set forth in the AES Compliance Review Program:

• Identify and develop best practices
• Offer assistance and guidance to exporters with AES filings
• Help exporters avoid costly encounters with government enforcement agencies.

To determine which companies to visit, Census first divided companies into compliant and non-compliant companies. Non-compliant companies are deemed to be those with numerous unresolved fatal errors, or companies that submit late filings on a regular basis. Non-compliant Option 4 (post-departure) filers are also targeted.

The compliance review began in March 2007 with pre-testing. The non-compliant visits began in June 2007. To date, Census has visited 46 companies throughout the country. These visits seem to be working, as Census has seen a decrease in the number of late AES filings since this program began, dropping from 2.9% in January 2007 to 1.6% in August 2007.

The Compliance Review Process begins first with a notification letter sent to the company. Next, the Census Compliance Team visits the company to meet with the company’s managers, compliance officers, forwarders and other staff with AES responsibilities.

Through this process, Census was able to produce a list of “Best Practices” for filing AES records which includes the following points:

• Obtain good software
• Generate an export checklist of each operation that has to be fulfilled prior to exportation
• Verify commodity classification
• Use/Update references
• Attend seminars/workshops
• Develop a mentoring program for new employees
• Provide cross-training
• Develop a training manual
• When in doubt, ask somebody

Next, Gerald J. Horner from BIS's Office of Technology Evaluation focused on the use of AES to improve compliance and reduce reporting burdens. He noted that BIS primarily uses AES for statistical compliance purposes. BIS can review the data for compliance purposes by looking at the elements. His office relies on AES to assist in obtaining vital data to determine current trends, such as the impact that VEU program is having on exports. AES data also helps licensing officers make decisions.

BIS uses the “BIS Effectiveness Metric of Compliance” to determine how exporters are complying with the laws. This review includes the following key components:

• Shipping tolerances: in order to ensure that licensees are staying within limits of value, country destination, etc.
• License exception uses: to ensure that these are exceptions are properly utilized.
• ECCN Validation: to ensure that exporters are using the ECCN in proper format.
• Outreach Identification: isolates trouble spots as further outreach targets.

Mr. Horner also identified the following AES Data Elements as areas of primary concern to BIS:

• License type: i.e., NLR, exception, or license number
• License Number
• ECCN
• Country
• Quantity and Value
• Exporter
• Consignee

The AES data may also be assessed to determine whether the data fields are properly filed, by comparing AES to license applications. License exceptions are also reviewed. This protocol often results in contact with exporters, and improving AES functionality.

As a result of the license exception review, BIS found over 50,000 missing ECCNs. This reflected a need to bolster awareness on license exceptions. BIS is also looking to improve AES functionality, so that the system will force compliance of exporters. For example, BIS recommends mandatory ECCNS for most license exceptions and a limit on the use of EAR99 for license exceptions. These can be programmed into the system. BIS will provide a 90 day notice prior to any changes as well as countrywide training and seminars.

In response to an audience question, BIS noted that companies cannot break down shipments to avoid executing an SED/AES by lowering the value below the $2500 per HTS threshold. The only exception is where domestic shipments are separated from foreign shipments, because these are naturally in separate warehouses prior to exportation.

Also in response to an audience question, the agency indicated that low value shipments must still be reported under exports made under the VEU program.

Labels: BIS Update Conference

In his opening remarks during the Export Enforcement Plenary Session at the 2007 BIS Update, Darryl Jackson, Assistant Secretary for Export Enforcement introduced the three office directors of BIS's enforcement team, including Kevin Delli-Colli, the new Director of the Office of Export Enforcement, Glenn Krizay, the new Director of the Office of Export Analysis and Ned Weant, the Director of the Office of Antiboycott Compliance.

In keeping with the theme of Update 2007, Assistant Secretary Jackson took a look at the past, present and future of export enforcement. He noted that more than 75% of all of BIS's past enforcement cases fell within BIS’s three priority areas of weapons of mass destruction (WMD), terrorism and unauthorized diversion/transshipment. He also noted that BIS does not take lightly false statements made by exporters on SEDs and AES records and that pre-license checks are an important part of the BIS enforcement strategy.

With respect to the present, Assistant Secretary Jackson noted that the Justice Department’s recent export enforcement initiative is an important part of the increased emphasis on export enforcement and that the Justice Department intends to train more law enforcement personnel to understand and focus on export control-related issues.

In addition, Assistant Secretary Jackson discussed the recent increase in maximum penalties for export violations made by the IEEPA Enhancement Act that would raise penalties to $250,000 or twice the value of the export. He also announced that BIS will generally not pursue enhanced penalties in the five circumstances set forth in BIS's announcement issued on November 1, which includes prior disclosures submitted by October 16, 2007, settlement offers made by October 16, 2007, violations where proposed charging letters were issued and cases where statute of limitations waivers have been made. (See related post published on November 1, 2007). He also noted that BIS will continue to apply revised PATRIOT act provisions in accordance with previous guidelines.

He noted that when it comes to issuing penalties for export violations, more serious penalties call for increased penalties. He also noted that voluntary disclosures will be considered to a "great weight" mitigating factor, leading to at least a 50% reduction in the penalty amount. With respect to the future of export enforcement, Assistant Secretary Jackson said it is still BIS’s priority to pass the renewal of the Export Enhancement Act. He also noted that is necessary to have cooperation among nations and he recognized that nearly 75 countries were represented at Update 2007.

Next, Kevin Delli-Colli, the newly appointed director of BIS's Office of Export Enforcement discussed his experience in export control issues during his long career in law enforcement. He then summarized the FY 2007 enforcement statistics, which included:

• 25 criminal arrests for export control violations
• 16 cases led to convictions
• 65 administrative cases were settled, resulting in approximately $5.8 million in civil penalties

With respect to BIS’s three priority areas of WMD, terrorism and unauthorized diversions/transshipment, Mr. Delli Colli noted that transshipments create a special dynamic in conducting investigations. The most prevalent countries involving prohibited transshipments of controlled U.S. goods are Singapore, UAE and Hong Kong, which also happen to be the three largest transshipment points of legitimate commerce too. This allows bad actors to operate as a needle in a haystack. He noted, however, that transhipments, can occur from any country, and this past year there were enforcement cases involving transshipments from UK, Netherlands and Spain. China, Iran, Pakistan and India are the most common transshipment destinations. BIS is working many countries in an effort to control and reduce anauthorized transshipments. Mr. Delli-Colli also warned that U.S. domestic transactions are also a source of concern for diversion., as individual may attempt to smuggle items out of U.S. and into another country.

In his various travels, Mr. Delli-Colli recognized the prominent role the Internet plays in export transactions. Criminals are just as capable to use the Internet and other emerging technologies. Exporters are at risk when they receive a request for quotation over the Internet. Danger exists when exporters do not speak to their customers to verify their identity and Mr. Delli-Colli stressed the importance of knowing your customer. The onus is on exporters to use the technology to research and verify the names and addresses of their Internet customers. A delivery to a post office box , of course, should raise suspicion.

Other frequent enforcement actions involve exporters submitting false information on SEDs and AES records. Frequently, this involves the misrepresentation of the value of shipped items on the SED or AES record at the customer's request in order to reduced customs duties.

He also noted that most investigations are conducted with the assistance of other agencies. BIS applauds the DOJ’s efforts, particularly their recent export enforcement initiative. The agency continues to encourage the filing of voluntary self-disclosures for violations. Not only are voluntary disclosures potentially advantageous to the exporter, but they provide the agency reliable intelligence with respect to bad actors.

The next member of the export enforcement plenary panel was Glenn Krizay, the newly appointed director of the Office of Export Analysis. Mr. Krizay discussed the objective of his office, which is to support BIS's enforcement efforts and is handled by tracking illegal transfers through end-use checks and providing in-depth research and analysis to support compliance and enforcement investigators.

End-use checks occur in the form of a pre-license checks or as post-shipment verifications. Pre-license checks are performed on unknown entities and exporters of sensitive products. Post-shipment verifications are a way to perform a check to develop a level of confidence in the end-user and licensee. In FY 2007, he noted that BIS conducted 854 end-use checks, 36% of which were pre-license checks and 64% were post-shipment verifications. Of the end-use checks performed, 11% were unfavorable.

The last speaker was Ned Weant, Director of BIS's Office of Antiboycott Compliance. He noted that as a result of his office's efforts over the past years antiboycott laws are now widely known among U.S. exporters. When reviewing the statistics from 20 years ago, he noted that in 1988, OAC settled 54 antiboycott cases and imposed $3.4 million in penalties. By contrast, in FY 2007 BIS settled only 10 cases and imposed $20,000 in penalties and issued 2 warning letters. In FY 2007, BIS also received 109 boycott reports and more than 1,100 calls to the antiboycott advice line.

Mr. Weant noted that outreach and awareness is also decreasing boycott activity. For, example, he noted that BIS is making outreach visits to business located in and governments of boycotting countries. He also stated that BIS has visited all of the Gulf Cooperation Council countries.

In other news, Mr. Weant reported on the following trends in boycott activity:

• The United Arab Emirates continues to be the biggest problem in terms of the number of boycott requests issued. BIS received 74 reports relating to boycott requests received from the UAE in 2006, and BIS received 53 in the first six months of 2007.
• Saudi Arabia appears to be backing away from boycott practices, as the number of reports fell from 10 in 2006 down to 2 this year.
• Syria has also decreased its unsanctioned boycott activities from 48 in 2006, to 28 this year.
• Many exporters are receiving boycott requests from Iraq.
• In Libya, there were 18 prohibited requests in 2006 and 9 in 2007 to date.

Labels: BIS Update Conference

In a breakout session on Reexport Regulations, Sharron Cook from BIS's Regulatory Policy Division provided the audience a crash course on reexport regulations. During the breakout session, Ms. Cook identified the scope o reexports subject to the EAR and discussed license requirements and exporter responsibilities. She closed with an overview of reexport license exceptions and compliance recommendations.

Ms. Cook provided the audience with several definitions of terms as an introduction to the break-out session:

A deemed reexport is any release of technology or source code subject to the EAR that occurs within another country to person who is not a citizen of that country (i.e. a foreign national). Such a transaction is a deemed reexport to the home country of the foreign national. A reexport may be distinguished from an export in that

A reexport, -- i.e., a shipment or transmission of an EAR-controlled item from one foreign country to another -- may occur via email, facsimile, reading from a book, or by uploading or downloading data. The item being exported may be a commodity, software or technology.

There are three ways to release technology under reexport regulations: visual, orally or by providing technical assistance (such as applying knowledge abroad).

U.S. items wherever located are subject to the EAR, unless they are subject to another U.S. government agency or are publicly available. For example, materials freely given away on the Internet, or certain available patents, would not be subject to the EAR, because such items cannot be controlled. As discussed below, the reexport provisions apply to all U.S. persons, items with U.S. origin and in some cases, foreign produced items. The application of the EAR to reexports of foreign produced items are limited, however, to items with sufficient U.S. content.

According to the EAR, the reexports licensing requirements apply under three possible conditions: (1) the U.S. technology is controlled for national security reasons, (2) a foreign product is controlled for national security reasons, and (3) a foreign product is destined for Cuba, or to a country appearing on country group D:1. BIS jurisdiction extends to any U.S. person, which includes a person in the U.S., as well as U.S. citizens, permanent resident aliens, or protected individuals wherever located. It also includes U.S. based firms and their foreign branches. The “de minimis” rule indicates, however, that a foreign made product is subject to the license requirement only if it contains at least 10% of U.S. content value, for goods shipped to Cuba, North Korea, Sudan, Syria and Iran, or 25% for all other destinations.

Ms. Cook also emphasized a few areas for exporters to bear in mind. First, several items classified as EAR99 are controlled for national security reasons if destined for certain countries. Second, even freight forwarders may be liable for unlawful exports, if sufficient evidence suggests that they aided in the export transaction.

Exporters are required to calculate the value of the U.S. sourced component and the finished foreign made article, in order to invoke the de minimis rule. The value should be based on the arms length value for the goods. The fair market value should be used both for the U.S. component, and for the finished foreign made article or technology. Importers are not permitted to calculate the value of goods based on discounted rates.

Certain foreign manufactured items do not require a license for export, where the U.S. component is manufactured into a foreign made item, and that product gets incorporated into another article. According to the “second incorporation rule,” the initial U.S. component loses its initial value. Thus, under such circumstances, a de minimis calculation is not required.

Ms. Cook warned that certain items are not eligible for the de minimis exception. This includes U.S. origin components of high performance computers, encryption and QRS 11 if included in a commercial standby instrument system or a commercial aircraft with such a system.

On the practical side, the Ms. Cook provided the following tips in submitting applications to the agency:

- Provide descriptions of the de minimis calculations
- Provide export price of U.S. content
- For software, estimate of future sales
- Provide fair market value of the foreign technology
- Avoid details involving product specifications, and how the software programs will be used.
- Do not provide detail regarding end-use.

The agency advices exporters that this is not a license process, but rather a content jurisdiction issue.

In the event that the U.S. content is above the de minimis limit, the next step is to classify the foreign product, that is the finished article that includes the U.S. component. From that point, the exporter can determine the license requirements, and exceptions.

Licensing Requirements, Responsibilities & Exceptions

In certain instances where a U.S. agent acts on behalf of a foreign principal and licensee, both the agent and the foreign principal are responsible for the use of the license. The following recommendations were made with response to a compliance strategy for licensees:

• Communicate license conditions
• Obtain written acknowledgement of receipts of the conditions.

Compliance Tips

The reexport breakout session provided several helpful hints for compliance. These include:
- Know-your customer
- Get required end-use and end-user assurances
- Inform your customer about license conditions
- Understand your EAR responsibilities
- Educate your customers, subsidiaries, distributors.

Labels: BIS Update Conference

Daniel Hill, Director of the Office of Strategic Industries and Economic Security (SIES) chaired the breakout session and introduced the program with a slide showing his office at the intersection of national security and industry partnership. Mr. Hill noted that BIS does more than export licensing and that his office is at the center of that "other" activity. He indicated that SIES has two divisions, the Defense Programs Division and the Strategic Analysis Division, which administer a number of programs, including offsets in defense trade and the NATO Security Investment Program.

Next, Karen Nies-Vogel, Director of the Strategic Analysis Division, discussed BIS and SIES’s role in the Committee on Foreign Investment in the United States (CFIUS). She noted that CFIUS is the inter-agency group that reviews the proposed acquisition of U.S. companies by foreign companies and CFIUS was thrust into the spotlight as a result of the Dubai Ports World transaction.

She noted there has been a dramatic recent increase in the number of CFIUS filings. For example, in 2006 CFIUS reviewed 113 cases, a 50% increase from 2005. In calendar year 2007, CFIUS has already reviewed 126 cases. The most common cases involve acquisitions by companies lcoated in the U.K., Japan, France, Canada and Germany. The most common industries now being reviewed by CFIUS include computer hardware and software, energy and communications.

The CFIUS process entails a 30-day review, followed by a 45-day investigation, if necessary. BIS reviews the transaction to determine export compliance and licensing record of the buyer and target company.

Ms. Nies-Vogel noted that the new CFIUS law, the Foreign Investment and National Security Act of 2007 (FINSA), was implemented by Executive Order on October 24, 2007. She noted that the regulations implementing FINSA should be issued in May 2008. Guidance on transactions will also be issued in May 2008. She noted that one of the major changes of FINSA is the change in the standard for conducting an investigation.

Next up was Michael Vaccaro, Director of SAIS’s Defense Programs Division. Mr. Vaccaro oversees the Defense Priorities and Allocations System Update (DPAS), a little known, but important program. DPAS is intended to assure the timely availability of industrial resources to meet current national defense and emergency preparedness requirements.

Mr. Vaccaro noted that BIS delegates the authority to place priority ratings on contracts/orders (called "rated orders") necessary to promote the national defense. The DPAS regulations are set forth in 15 CFR Part 700 and applied to contacts issued by the DoD, DoE, DHS and GSA.

BIS may authorize other persons (government agencies, foreign governments or companies) to place rate orders on a case-by-case basis. In order to be considered a "rated order", the contract or purchase order must contain the following elements:

1. a priority rating symbol (DX or DO + Program ID).

2. Required delivery date or dates

3. Authorized written or digital signature

4. The Certification statement set forth in 15 CFR Part 700.

Any company in the U.S. must accept and fill a rated order for items that the company normally supplies. A company may not discriminate against rated orders in any manner, such as by charging higher prices or by imposing different terms and conditions than for comparable rated orders. He noted that a company must reschedule unrated orders if they conflict with performance against a rated order and must reschedule "DO" rated orders if they conflict with performance against a higher rated "DX" rated order. Companies who receive rated orders must in turn place rated orders with their suppliers for the rated with their suppliers for the items they need to fill to fill the rated orders. Mr. Vaccaro also indicated that the DPAS regulations contain a defense of claims provision that can protect the supplier from claims made by other customers.

Mr. Vaccaro provided information on the new Mine Resistant Ambush Protected (MRAP) vehicles program, which is rated "DX", the highest DPAS rating.

He mentioned that a new "DX" approved program list was issued in August 2007 and that U.S. companies should review this list to verify whether the programs they are currently working on are still rated DX.

The panelists took a number of questions from the audience. Here are some of answers:

• There is no published or public list of CFIUS filings or cases. The best source of such information is the press. It was also noted that there are significant penalties for release of CFIUS-related information.

• As far as the size of transactions to be reviewed by CFIUS, specific information on that issue will be included in the new CFIUS regulations in 2008.

• Mr. Vaccaro noted that DPAS rated orders do not trump licensing requirements. Rated orders still require export licenses, if necessary. In addition, DPAS does not trump the Berry amendment for specialty metals.
  

• DPAS ratings only apply to U.S. companies and does not flow down to foreign manufacturers. However, there are bilateral arrangements with Canada and other countries to get a priority rating for certain items.

• In response to a question regarding the Market Impact Committee, Mr. Vaccaro noted that there are certain products that have been designated by Congress to be sold.

• In response to a question regarding license applications for rated orders, it was noted that certain rated orders can be given expedited treatment.

• Finally, Mr. Vaccaro mentioned that companies subject to rated orders can request special priority assistance with respect to delivery dates and scheduling.

Labels: BIS Update Conference

Deemed exports are obviously a hot topic in industry right now, as evidenced by the fact that the foreign nationals and deemed exports breakout session was standing room only.

Alex Lopes, Director of BIS's Deemed Exports and Electronics Division, introduced the program by joking that items classified under ECCN 0A983 (i.e., instruments of torture) do not relate to deemed exports.

With respect to deemed export licensing, Mr. Lopes noted that for the first time the number of deemed export license applications received exceeded 1,000 (1,064 to be exact). The number of deemed export licensing exception determinations, however, has dropped. He noted that 80% of license applications were approved and the average license processing time is 40 days. The most common deemed export licenses issued are for semiconductors and electronics in Category 3. The most common foreign nationals for which deemed export license applications are received are from China, followed by India.

Mr. Lopes noted that BIS conducts around 120 outreach events to government, industry and universities each year. For the first time, BIS recently held a webinar to raise deemed export awareness.

Mr. Lopes mentioned that Bernard Kritzer, BIS's Director of the Office of National Security and Tecnology Transfer Controls, is the designated federal officer to the Deemed Export Advisory Committee (DEAC), that was announced by BIS in May 2006. DEAC has held six meetings and will issue a report to the Secretary of Commerce in late 2007. The report will be released to the public on BIS’s website.

Next, Ilona Shtrom, a senior export policy analyst at BIS, discussed third country national issues as they relate to deemed exports. For example, Ms. Shtrom discussed the case of an Indian foreign national who recently obtained UK citizenship. In such a case, for purposes of licensing, it is the foreign national’s most recent obtained permanent residency or citizenship status that is considered.

Ms. Shtrom went through a series of case studies illustrating these issues. For example, what happens when a deemed export license for a Chinese national is submitted, but in the interim the subject obtains Canadian citizenship and thus no license is required? What is the responsibility of an exporter when the exporter knows that the national may have questionable ties? The key, advised the agency, is to have practices in place ahead of time to deal with these issues. When dealing with third country nationals, companies must consider all the facts, ask questions, be aware and be vigilant.

Following Ms. Shtrom, Joseph Conaty, an export policy analyst in the deemed export office, explained the distinction between deemed exports (release of controlled technology to third country national in the U.S.) and deemed re-exports (release of controlled technology to third country national outside of the US).

Next, Special Agent Joel Moss, from the FBI's San Francisco field office, talked about the FBI’s role in combating economic espionage. He noted that the U.S. intelligence community has identified 106 countries that are seeking to obtain technology in the U.S. The top 5 countries conducting economic espionage in the U.S. are China, Russia, Taiwan, South Korea and India.

What is being targeted? Information systems is the leading target, accounting for 25%. Lasers and optics, sensors and electronics are also targeted technologies.

Not surprisingly, unsolicited emails are a leading method used to target technology. Rather than deleting such emails, however, it may be useful to provide the email to the FBI. Front companies are also a common technique. In a survey, many companies did not perceive an economic espionage threat, but such threats are real. Trusted insiders are a common source of economic espionage.

The prime targets are source code, integrated circuit designs, business plans and customer lists. Companies, of course, need to pay attention to economic espionage warning signs and report any suspected acitivities.

Labels: BIS Update Conference

Labels: BIS Update Conference

In the morning breakout session on antiboycott compliance, Fred Davidson, Assistant Director for Policy of the Office of Antiboycott Compliance, started the program by noting that BIS's role in antiboycott compliance is based on the antiboycott regulations set forth in Part 760 of the EAR. He also gave a few examples of how the antiboycott regulations can impact transactions in the Middle East. For example, he noted that the receipt of boycott questionnaires or language from Iraqi or Libyan companies or nationals can implicate the antiboycott regulations and lead to a violation.

Mr. Davidson stated that U.S. companies need to have their compliance staff and counsel actively engaged in analyzing any boycott-related language or requests received. He also reiterated that the antiboycott regulations focus on unsanctioned boycotts. However, he noted that while the only unsanctioned boycott is the Arab Boycott of Israel, there are other boycotts, involving India, Pakistan,Bangladesh, China, Taiwan and Serbia that may require the submission of boycott reports.

Mr. Davidson also provided examples of the three levels of the Arab boycott of Israel. The first level, or primary boycott, is when a Kuwaiti asks a U.S. company not to ship Israeli goods to Kuwait. The second level, or secondary boycott, is when the Government of Syria or a Syrian company requires a U.S. company to refuse to do business with Israel in order to do business with Syria. The third, or tertiary boycott, is when a Lebanese company asks a U.S. company to refuse to do business with anyone on a blacklist compiled by Lebanon or by the Arab League Boycott office (in fact, he mentioned that the Arab League will be meeting next week).

Mr. Davidson stated that there are four basic steps to analyze a boycott problem: (1) Jurisdiction – Is there a U.S. person?; (2) Prohibitions – Is the conduct prohibited by the EAR? (3) Exceptions – Does the activity fall within one of the exceptions (i.e., war risk clause)?; and (4) Reporting – Is the boycott request reportable to BIS?

Next, he discussed the three main prohibitions included in the antiboycott regulations, including (1) refusing to do business; (2) taking discriminatory actions based on religion or national origin; and (3); furnishing information about business relations with a boycotted country or a blacklisted person.

The next speaker was Ned Weant, Director of BIS’s Office of Antiboycott Compliance. Mr. Weant started his presentation by noting that providing prohibited information (on race, religion, etc.) is the most common violation, such as providing a negative certificate of origin to a customer in the Middle East.

In a welcome move, Ned Weant immediately fielded and answered a number of specific questions from the audience.

For example, in response to a question regarding reporting boycott requests, Ned noted that there is no chance that antiboycott reports will be able to be submitted via SNAP-R.

In response to another question regarding the scope of country requirements, Mr. Weant said that exporters should interpret the regulations broadly and should report any boycott against a country that is friendly to the U.S. (i.e., India, Pakistan, etc.). Whether an enforcement action would be taken for failing to report receipt of a boycott request not involving Israel is a policy decision that BIS would have to make.

Mr. Weant noted that the increased $250,000 maximum penalties set forth in the IEEPA Enhancement Act will apply to antiboycott violations. (Note: See today's post on this issue, indicating that BIS will apply the new penalties to violations occurring after October 16, 2007.)

Mr. Weant also indicated that that BIS recently published boycott penalty guidelines and for the first time information and clarification on voluntary self-disclosures.

Next, David Joy, an attorney in the Treasury Department's Office of the General Counsel, complimented the audience by noting that, based on the questions asked so far, they were the most well-informed audience that he had ever spoken to on antiboycott issues. Mr. Joy noted that the Treasury Department has a separate set of antiboycott laws and that the basis for the Treasury Department's antiboycott penalties (the Ribicoff Amendment to 1976 Tax Reform Act - Section 999 of the Internal Revenue Code) was issued before the antiboycott regulations contained in the EAR.

Mr. Joy mentioned that Treasury’s boycott statute is enforced by the Internal Revenue Service and the Office of General Counsel answers general legal and policy issues associated with boycott issues. He also stated that the Treasury Department’s statute applies to a company's worldwide operations and that a person who "participates in or cooperates with an international boycott" may lose certain tax credits, including the Foreign Tax Credit and Foreign Subsidiary Deferral Benefits (CFC Deferral). Mr. Joy noted that the Treasury law and guidelines contain exceptions that permit companies to agree to "primary" boycotts (direct restrictions on imports from or exports to a boycott country) or U.S. sanctioned boycotts.

Mr. Joy noted that boycott reporting for Treasury Department purposes is reported by companies on IRS Form 5713, which is filed annually when normal corporate or partnership tax returns are due.

Labels: BIS Update Conference