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Kevin Lombardo to Present Export Control Reform Updates and FCPA & OFAC Lessons at the AZTC Export Controls, Compliance and Enforcement Programs

This September, our colleague Kevin Lombardo will present a series of discussions on Export Control Reform. On September 15 in Tucson, and September 17 in Phoenix, Kevin will present details and updates on export control reform as part of the Arizona Technology Council (AZTC) Export Controls, Compliance and Enforcement program. He will focus on what businesses should be doing, lessons to be learned from real world case studies and enforcement actions, their practical application, and the consequences of compliance or non-compliance. He will also co-present need-to-know information on the Foreign Corrupt Practices Act and the US Department of the Treasury’s Office of Foreign Assets Control with Margrette Francisco, Export Counsel and Executive Officer of the Marvin Group. Register for the Tucson event or the Phoenix event by September 11. Download full agendas for the Tucson event and Phoenix event.

Additionally, in conjunction with the AZTC events, Kevin will co-present a free, educational discussion on export control compliance for academics, students, and researchers with John Priecko, President and Managing Partner of Trade Compliance Solutions, on September 16. This two-hour, interactive discussion will focus on the costs and consequences of non-compliance with export control reforms using real world case studies and settlements. Register for this program by emailing david.fitzgerald@phoenix.edu with your full name, title, organization, phone number, mailing address, and email address by September 14.

Kevin Lombardo to Present Export Control Reform Updates and FCPA & OFAC Lessons at the AZTC Export Controls, Compliance and Enforcement Programs

Commerce Department Imposes New Restrictions on Exports to Venezuela

Today, the Bureau of Industry and Security (BIS) imposed military end use and end user licensing requirements on exports to Venezuela.  This new restriction parallels the existing restrictions in place regarding China (for military end uses) and Russia (for both military end uses and end users).  It prohibits unlicensed exports to Venezuela of certain items subject to the EAR that the exporter knows are destined for military end users or end uses, as those terms are defined in the rule.

For exporters, this change reinforces the importance of knowing the EAR’s end use and end user restrictions and conducting effective due diligence on customers and other parties to export transactions.

Unlike similar changes of this type, BIS gave exporters a bit of a break by not making the restriction retroactive to contracts signed prior to November 7, 2014.

For more information, the full Federal Register notice is available here.

Commerce Department Imposes New Restrictions on Exports to Venezuela

Export Control Reform Meets the Final Frontier

Effective November 10, 2014, commercial communications satellites will move from the United States Munitions List (“USML”) and the jurisdiction of the Directorate of Defense Trade Controls (“DDTC”) to the Commerce Control List (“CCL”) and the jurisdiction of the Bureau of Industry and Security (“BIS”).  While changes affecting commercial communications satellites are likely to garner the greatest amount of attention, the new rules are part of the Administration’s larger Export Control Reform (“ECR”) initiative, and effect numerous changes to USML Category XV, which covers spacecraft items.  The first of these changes – moving radiation hardened microelectronic circuits previously controlled under the ITAR to the CCL – will take effect even earlier than the satellites rule.  That change is effective June 27.  Notably, in addition to rad-hardened microelectronic circuits, the International Space Station (“ISS”) and all specially designed parts will be moved from the USML to the CCL.

In light of the numerous jurisdictional and licensing changes effected by the new rules, from the outset, manufacturers and exporters of items formerly controlled in USML Category XV will need to assess carefully where their products will now fall. Items moving to the CCL will generally remain subject to licensing requirements to most destinations.  Exporters must become familiar with these new controls.  Many spacecraft items formerly controlled under the ITAR will move to a new “500-series” within CCL Category 9, specifically ECCN 9×515.  As such, they will be subject to a combination of National Security (NS), Regional Stability (RS), and, in certain cases, Missile Technology (MT) controls.  Knowing whether a spacecraft item moving to the CCL requires a license will necessitate a clear understanding of precisely where that item falls within ECCN 9×515 and will depend on its intended destination.

Notwithstanding the shift of commercial communication satellites from the ITAR (where China is a prohibited destination) to the EAR (where it is not), any pent-up Chinese demand for U.S. spacecraft items will remain so for the time being.  Consistent with Congress’s mandate when it authorized the jurisdictional shift, BIS will apply a policy of denial to license requests to China for most spacecraft items moving to the CCL.

Export Control Reform Meets the Final Frontier

Final DFARS Rule Mandates New Security and Reporting Obligations to Protect Unclassified Controlled Technical Information

Earlier today, the DOD issued its final DFARS Rule imposing heightened security safeguards and mandatory reporting requirements on DOD contractors handling unclassified controlled technical information. 78 Fed. Reg. 69273 (Nov. 18, 2013).  The rule specifically imposes two significant compliance obligations for contractors and subcontractors handling unclassified controlled technical information: (1) safeguarding information systems containing any unclassified controlled technical information; and (2) reporting and investigation of cyber incidents.  These requirements are imposed through a new DFARS clause, DFARS 252.204-7012, Safeguarding of Unclassified Controlled Technical Information, which is mandatory for all DOD prime contracts and subcontracts.

Given the breadth of this rule, contractors at all levels in the DOD supply chain must be prepared to comply with this rule.  Specifically, DOD contractors should:

  • Determine where unclassified controlled technical information resides on (or transits through) contractor and subcontractor information systems.
  • Assess compliance of relevant information systems using the National Institute of Standards and Technology (“NIST”) security controls incorporated into the rule.  If non-compliant with the rule’s standards, contractors should be prepared to explain why particular standards do not apply or why other protections provide adequate security.  Contractors must also assess risks and vulnerabilities and, if warranted, ensure additional protections are in place to address those risks.
  • Immediately assess possible system compromise events to determine whether a cyber incident has occurred and whether it is reportable.  Contractors should ensure policies are in place to address the timely and adequate reporting of cyber incidents to DOD and to preserve evidence of cyber incidents.  Contractor investigations of possibly reportable incidents should be detailed and thorough, and, as with all other internal investigations, contractors should consider the use of outside counsel (with outside technical experts as necessary), to ensure that the investigation is independent, transparent, and protected by the attorney client privilege.
  • Assess supply chain compliance with the rule’s requirements.  Contractors should update terms and conditions to include the DFARS clause and to address the consequences of a supplier noncompliance.  Failure to properly flow down the DFARS clause and ensure supply chain compliance could result in purchasing system disapproval and payment withholding under the DOD business system rule.
Final DFARS Rule Mandates New Security and Reporting Obligations to Protect Unclassified Controlled Technical Information

Export Control Reform: It’s On

Shutdown or no shutdown, the first round of export control reforms took effect yesterday, October 15. The objective of the Export Control Reform initiative is to apply more stringent controls to items that are significant from a national security perspective while lowering the barriers to exporting items that do not pose such concerns.

This first round of changes rewrites USML Category VIII (aircraft), establishes a new USML Category XIX (gas turbine engines) and creates new “Commerce Munitions List” categories (designated as the “600 series”) under the EAR for military items subject to less stringent controls. The reforms also create a new, unified definition of “specially designed,” which is a linchpin in how commodity jurisdiction and classification determinations will be made in the future.

The changes will affect how items are designated as defense articles subject to the ITAR or as items subject to the EAR.  In short, the long-standing sweeping USML categories and “specifically designed for a military application” analysis are out, replaced by what has been called a “positive list” that endeavors to identify with greater specificity which items are subject to which controls.

The changes will result in previously ITAR-controlled items becoming subject to the EAR, and may present opportunities for companies that make or sell items that may be moving from one list to the other.  At the same time, the new rules are complex and will doubtless present compliance challenges.  Enforcement agencies have already signaled that they will be vigilant in policing whether manufacturers or exporters are misclassifying items or misusing applicable license exceptions and exemptions.

The rules that took effect on October 15 were published April 16, 2013.  The Department of State rule can be found here and the Department of Commerce rule can be found here. Further significant changes are afoot as well.  The State Department’s Interim Final Rule on brokering takes effect October 25. In addition, the next round of reformed categories will take effect on January 6, 2014 and can be found here (State) and here (Commerce).

Export Control Reform: It’s On