Slow Road to Export Reform

(Lexology – John R. Liebman and Andrea Prohaska, McKenna Long & Aldridge)

It has been widely recognized for decades that U.S. export controls are in disrepair. Congress’ failure to reauthorize the law underpinning the Export Administration Regulations (“EAR”) has resulted in frail, disjointed authority to regulate dual-use items. Poor coordination between the U.S. State and Commerce Departments has created confusion over which agency has jurisdiction over what products; and overly stringent regulation of commercial items has stunted business and has arguably distracted from effective regulation of key military technologies. Yet, despite several past attempts at reform, including legislative initiatives beginning in the early ‘80s and President Clinton’s efforts to overhaul the system in the mid-’90s, we have made only marginal improvements. The repeated failure to successfully implement broad based reform has placed U.S. exporters at an increasing disadvantage in a world where cutting edge technologies are no longer the exclusive province of U.S. industry and many traditional foreign customers are turning to non-U.S. sources to avoid stifling export regulation issues. Read more here.

Announced Overhaul of U.S. Export Control Regime Likely to Impact Canadian Businesses

(Mondaq – Cliff Sosnow et al., Blake, Cassels & Graydon LLP)

On August 31, 2010, President Obama announced that the U.S. government is in the process of making significant changes to its system for the control of exports from the United States. Some of these changes may be significant for Canadian companies, particularly those that import goods from the U.S. whether for domestic consumption or as an input into goods that are subsequently exported from Canada. While these changes are yet to be implemented, Canadian companies would be well advised to closely monitor any developments and consider the potential impact on their operations.

The U.S., like Canada, maintains a system of export control. Certain goods and technology require a permit in order to be legally exported. These rules are for the purpose of controlling the movement of military goods, “dual use” items (items that could have both military and civilian applications) and materials for use in nuclear proliferation, among other sensitive goods and technologies. These rules can be complicated. For instance, items subject to export controls may fall under one of two lists, each of which is administered by different bodies within the U.S. government – the Munitions List (USML) administered by the U.S. Department of State or the Commerce Control List (CCL) administered by the U.S. Commerce Department – and the requirements imposed on exporters may differ depending on which list the item falls under. As the U.S. government notes, this has resulted in, among other things, ambiguity in jurisdiction, delays in issuance of licences, disparate licensing requirements and redundancies, etc. Read more here.

U.S. Official Highlights “Harder Line” on Export Enforcement

(World Trade Interactive)

David Mills, assistant secretary of commerce for export enforcement, told the Bureau of Industry and Security’s annual Update conference last week that BIS is moving to further increase its export enforcement efforts. Mills said that BIS will continue to encourage voluntary self-disclosures and minimize penalties in VSD cases where appropriate and that if a company has a good internal compliance program in place before a violation and the violation was inadvertent these will be considered significant mitigating factors. However, Mills added, “we will also be taking a harder line in other circumstances involving willful misconduct.” Read more here.

Loosening of Controls on Exports Draws Fire

(Washington Times – Eli Lake)

Trade groups laud new Obama policies

The Obama administration’s overhaul of regulations aimed at loosening controls on the export of some military technology is drawing fire from groups that monitor arms proliferation but praise from trade groups.

President Obama on Tuesday announced the export-control policies in a video during the Commerce Department’s annual conference on updates to export controls. The policy seeks to streamline and standardize the licensing process for defense-related exports and create a new unified enforcement agency to crack down on violators of the export controls. [...]

Gary Milhollin, director of the Wisconsin Project on Nuclear Arms Control, called the new policy a “defense industry bailout.” “The financial industry and the auto industry had their bailouts, now it is the defense industry’s turn,” he said. Mr. Milhollin also said the United States steadily relaxed arms-export controls since the end of the Cold War. “We have already reduced controls to the bone,” he said.

Mr. Milhollin said most defense technology being deregulated was developed with public money. “The lion’s share of the technology we are decontrolling has been developed with taxpayer dollars,” Mr. Milhollin said. “This is taxpayer-owned technology that the companies now want to sell to the whole world.” Read more here.

President to Announce Reforms to Export Control Lists, Licensing, Enforcement

(World Trade Interactive)

President Obama will announce Aug. 31 a “major step forward” in his efforts to “fundamentally reform the export control system,” according to a White House press release. The forthcoming changes in “what we control, how we control it, how we enforce those controls and how we manage [those] controls” will help strengthen national security by “focusing our efforts on controlling the most critical products and technologies and by enhancing the competitiveness of key U.S. manufacturing and technology sectors.”

The press release states that a broad-based interagency review of the U.S. export control system determined that it is overly complicated and contains too many redundancies. For example, the system operates under two different control lists that have fundamentally different approaches to defining controlled products and are administered by two different departments. There are also three different primary licensing agencies, each applying their own policies, leading to gaps in the system and disparate licensing requirements for nearly identical products. Enforcement is spread among a multitude of agencies with overlapping and duplicative authorities, creating redundancies and jeopardizing cases. Finally, all of these agencies operate on a number of separate information technology systems, none of which is compatible with the others or accessible to other licensing or enforcement agencies. Read more here.

Export Controls & Economic Sanctions: A Guide to Canadian Trade Restrictions

(Carswell)

The first of its kind in Canada, Export Controls & Economic Sanctions: A Guide to Canadian Trade Restrictions contains a comprehensive review of Canada’s system of trade restrictions, with emphasis on Canadian export controls but covering as well U.N.-mandated sanctions and a range of other measures that may be less well-known but which have a critical impact of Canada’s external trade and on the conduct of business in the international marketplace. Find out more here.

Former Blackwater Firm to Pay U.S. Fine

(Nathan Hodge — Wall Street Journal)

Xe Services LLC, the private security firm formerly known as Blackwater, reached an agreement with the State Department to pay a multi-million-dollar fine over alleged violations of U.S. export-control law.

The agreement spares the firm from possible criminal charges over allegations that it violated arms export restrictions, and allows the company to continue doing business with the U.S. government.

Among other things, the company was said to have proposed a package to train and equip the armed forces of southern Sudan, which emerged as an autonomous region after a U.S.-brokered peace deal in 2005. McClatchy newspapers reported details of Xe's Sudan business aspirations, which were said to include a proposal to train a security detail for south Sudanese leadership and a more ambitious deal worth $100 million to train and equip the south's army. Xe was under scrutiny for other alleged export violations. Read more here.

Few “Green” Technologies Subject to Export Controls but BIS Pledges Further Improvements

(World Trade Interactive)

An assessment of the impact of U.S. export controls on “green” technology items released this month by the Bureau of Industry and Security finds that while most such items do not currently require an export license there are steps BIS can take to further promote and expedite exports in this sector.

This assessment examines the potential effects of export controls on commodities, software and technology that either are or can be used to create products that contribute to clean energy, energy efficiency and other environmental or green initiatives (i.e., green technology). BIS states that although this is not an exhaustive assessment of all green technology items and initiatives that may be captured by dual-use export controls, it is an attempt to anticipate ways that BIS can support the creation of green jobs and advances in green technology by facilitating secure trade while mitigating national security concerns. Read more here.

Exporting Software and Technology Abroad – Controls on Ancillary Encryption to be Liberalized

(John W. Boscariol, McCarthy Tétrault LLP)

In what will come as welcome news to Canadian tech companies, Canada is planning on easing export controls over "ancillary encryption" items. These are items designed to work with encryption but encryption is not their primary function. Recently, the Canadian government agreed to implement an exemption to the current export permit requirement for these goods, software and related technology, provided they meet certain criteria.

Canadian companies must currently apply for and obtain export permits in order to export information security items or transfer any related technology from Canada to destinations other than the United States. Canada’s Export Control List identifies the goods and technology covered by these requirements, and imposes a very low threshold of control – encryption with key lengths in excess of 64 bits (in the case of symmetric algorithms). Further, the available exemptions for mass market items and technology and software in the public domain may only be relied upon in very limited circumstances.

Canadian authorities have been consulting with the business community on how the mass market exemption for encryption items is interpreted and administered in jurisdictions outside of Canada. They have also recently announced industry consultations on the export control permit process.

These consultations appear to be part of an effort to address concerns that, because of the burdens imposed by the permit regime, Canadian companies are not on a level playing field with their competitors in the United States and other countries when it comes to the sale of their products and technology in international markets. Read more here.

Golf President Battles Extradition to US for ‘selling batteries for Iran missiles’

(Helen Pidd — The Guardian)

Christopher Tappin, 63, made £320 from freight deal which he says was unlawful sting by US agents posing as exporters

A retired businessman from London is battling extradition to the US over claims he sold batteries for missiles to Iran in a deal that he says netted him £320 profit.

Christopher Tappin, 63, from Orpington, is the latest Briton to become caught up in the controversial extradition agreement with the US. He could face 35 years in jail if convicted in an American court.

At a press conference today, the Kent county golf union president insisted he was innocent and said he had been the victim of a sting carried out by US agents posing as exporters.

Tappin, who ran a freight forwarding company for 35 years, is accused of “knowingly” plotting to export five batteries for surface-to-air missiles to Tehran. Read more here.

BIS Clarifies Scope of Commodity Classifications, Advisory Opinions

(Lexology – Jimmie V. Reyna, Williams Mullen)

According to a recently issued interim final rule amending the Export Administration Regulations (EAR), exporters may not rely on commodity classification determinations and advisory opinions issued by the Commerce Department’s Bureau of Industry and Security (BIS) as official U.S. Government determinations of whether an item is subject to the EAR or to another agency’s exclusive jurisdiction. BIS has jurisdiction over items only if they are described in the EAR and not exclusively controlled by another agency.

Some agencies, such as the State Department’s Directorate of Defense Trade Controls, issue “commodity jurisdiction” determinations as official statements of whether a specific item is subject to the agency’s jurisdiction. The EAR does not authorize BIS, however, to issue commodity jurisdiction determinations. Instead, it may provide only “commodity classifications” – official determinations only of which Export Control Classification Numbers (ECCNs) describe an item. BIS may also issue advisory opinions that describe how BIS interprets the EAR.

Thus, while BIS may officially state whether the ECCNs describe an item, BIS may not state officially whether an item is subject to another agency’s exclusive jurisdiction or whether the item is subject to the EAR.

The new rule does not change BIS policy but simply reminds the public that BIS may not make commodity jurisdiction determinations and that exporters may not rely on commodity classifications and advisory interpretations as official U.S. Government determinations of whether an item is subject to the EAR or to another agency’s exclusive jurisdiction.

Treasury Publishes Names of 21 Entities Determined to be “Government of Iran”

(World Trade Interactive)

The Treasury Department’s Office of Foreign Assets Control has published the names of 21 entities it has determined to be the “government of Iran,” as that term is defined in the Iranian Transactions Regulations.

The ITR, in implementing executive orders imposing comprehensive trade and financial sanctions on Iran, prohibit various transactions, including those with the government of Iran. As defined in the ITR, that term includes (a) the state and the government of Iran, as well as any political subdivision, agency or instrumentality thereof, (b) any entity owned or controlled directly or indirectly by the foregoing, and (c) any person to the extent that such person is or has been, or to the extent that there is reasonable cause to believe that such person is or has been, acting or purporting to act directly or indirectly on behalf of any of the foregoing. OFAC is now publishing the names of 21 additional persons it has determined to fall within this definition, and the names of these persons will be added to Appendix A to Part 560 of the ITR at a later date. Read more here.

BIS Clarifies Country Scope of Direct Product Rule

(World Trade Interactive)

The Bureau of Industry and Security has issued a final rule that, effective July 30, clarifies the scope of the “direct product rule” set forth in the Export Administration Regulations. BIS is also making parallel revisions or clarifications to written assurances required under license exception TSR (Technology and Software Restricted), information required on the license application for national security controlled technology, and the instructional steps in the EAR that provide guidance on how to apply the direct product rule.

Under the direct product rule, foreign-made items are subject to the EAR and require an export license or license exception if they are (a) located outside of the U.S., (b) subject to national security controls under the EAR, (c) the direct product of U.S.-origin software or technology that requires a written assurance as a supporting document for a license or as a pre-condition for the use of license exception TSR, and (d) being re-exported to a destination in a country of national security concern or a terrorist supporting country. Read more here.

NRC Amends Regulations on Imports and Exports of Nuclear Equipment and Material

(World Trade Interactive)

The Nuclear Regulatory Commission has issued a final rule that, effective Aug. 27, will make various amendments to its regulations that govern the export and import of nuclear equipment, material and radioactive waste.

One of the primary changes in this final rule is to allow International Atomic Energy Agency Code of Conduct on the Safety and Security of Radioactive Sources Category 1 and 2 quantities of radioactive materials to be imported under a general license instead of a specific license. The NRC is taking this action in light of the many security enhancements it has made to its domestic regulatory framework in recent years. Read more here.

Canadian Government Undertaking Industry Consultations on Cryptography Export Permit Process

(Mondaq – John Boscariol, McCarthy Tétrault)

The Export Controls Division of Foreign Affairs and International Trade Canada (ECD) has launched another consultation with industry regarding the control of encryption goods and technology for export or transfer from Canada. This comes on the heels of earlier consultations on the mass market exemption launched in March of this year and further described at Canadian Government Launches Consultations on Encryption Controls (March 2010).

Canada, as a Participating State of the Wassenaar Arrangement, controls cryptography under Category 5, Group 1 of its Export Control List. The threshold for control is relatively low — e.g., cryptography having a symmetric algorithm employing a key length exceeding 56 bits. Those seeking to export or transfer from Canada covered goods, software and related technology employing cryptography must apply for and obtain a permit for destinations other than the United States. Read more here.

Canada Set to Enhance Export Permit Restrictions on Goods and Technology Potentially Useful in the Proliferation of Weapons

(Mondaq – Cliff Sosnow et al., Blake, Cassels & Graydon LLP)

Foreign Affairs and International Trade Canada (DFAIT) published a proposed amendment to the Export Control List (ECL) in the Canada Gazette Part I on June 19, 2010. The proposed amendment is intended to clarify the scope of item 5505 – Goods and Technology for Certain Uses. This “catch-all” provision was first included on the ECL in 2002, in response to Canada’s international commitment to non-proliferation. It covers goods and technology not included elsewhere on the ECL that are intended for use in chemical, biological or nuclear weapons. Read more here.

Clarification of Grace Period for Encryption Registration Requirement

(World Trade Interactive)

The Bureau of Industry and Security has issued a final rule clarifying the intent of the encryption registration requirements that appeared in a June 25 interim final rule June 25 interim final rule liberalizing export controls on encryption products.

According to BIS, the June 25 rule established an encryption registration requirement for authorization under provisions of license exception ENC and for transactions in connection with mass market encryption transactions. The rule specified that an encryption registration must be filed the first time a party submits an encryption classification request or performs an encryption self-classification on or after Aug. 24. The rule also stated that an encryption registration must be submitted in support of an encryption classification or in circumstances where a party is making a mass market encryption item eligible for export and re-export for the first time on or after Aug. 24. Read more here.

New US Sanctions Expand Risks for Non-US Companies Doing Business With Iran

(Lexology)

On July 1, 2010, President Obama signed into US law new and tougher sanctions designed to discourage and punish non-US firms that provide support to Iran’s energy and financial sectors. Building and expanding on existing laws that the US Congress asserted needed to be strengthened, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 expands the range of activities, persons and entities that could be penalized under US law.

This Alert discusses the key provisions of the new sanctions rules and their potential effect on an expanding list of targeted activities and actors. Read more here.

Order Amending the Area Control List – Addition of North Korea

(FAITC)

On July 13, 2010, the Government of Canada concluded the regulatory process to add the Democratic People’s Republic of Korea (North Korea) to the Area Control List (ACL). As a result of the addition of North Korea to the ACL, all exporters wishing to export any goods or technology to North Korea will be required to obtain an export permit from the Export Controls Division of the Department of Foreign Affairs and International Trade in order to lawfully export or transfer such items to North Korea.

The order will be published in the August 4, 2010 edition of the Canada Gazette, Part II. A copy of the Notice to Exporters regarding exports to North Korea is available: Export Controls to the Democratic People’s Republic of Korea Export Controls to the Democratic People’s Republic of Korea.

Export Controls Alert: Canada’s Response to Liberalization of Controls on Ancillary Encryption

(John W. Boscariol, McCarthy Tétrault LLP)

Canadian controls over the export or transfer of goods, software and technology containing or designed to work with encryption continue to present challenges for Canadian companies. Export permits must be applied for and obtained in order to export information security items or transfer any related technology from Canada to destinations other than the United States.

Canada’s Export Control List identifies the goods and technology covered by these requirements and imposes a very low threshold of control – encryption with key lengths in excess of 64 bits (in the case of symmetric algorithms). Further, the available exemptions for mass market items and technology and software in the public domain may only be relied upon in very limited circumstances. Read more here.