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Australian industry to benefit from the relaxation of U.S. Export Controls June 2014

By Eva Galfi
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U.S. export control reforms will have a positive impact on the Australian defence industry. The re-allocation of a majority of U.S. military articles from the control of the International Traffic in Arms Regulations (ITAR) to the control of the Export Administration Regulations (EAR) will have a significant effect on the way Australian industry services key contracts with Defence. It will also reduce the ITAR taint issues that prevent certain business initiatives from moving forward. Those Australian companies that understand the impact of U.S. reforms, and act to quickly manage the transition of U.S. assets and technology from the ITAR to the EAR, stand to reap benefits including project cost reductions, reduced lead-times and increased business opportunities as a result of the legislative changes.

A change for the better
As a result of U.S. reforms, more than half of the ITAR has already been revised to create a list of inherently military articles that continue to require stringent controls due to their unique technological capabilities. Less sensitive military items have been removed from the ITAR’s US Munitions List (USML) and added to the EAR’s Commerce Control List (CCL), which controls both dual-use and military technologies. It is estimated that 90% of articles governed by the ITAR pre-reform will be under the jurisdiction of the EAR post-reform. The main advantage of this re-organization of controls is that the EAR is managed by the U.S. Commerce Department’s Bureau of Industry and Security (BIS), an agency that is as interested in supporting the export of U.S. produced goods as it is in export controls.

While the EAR does have strict controls on some items and technologies, many items on the CCL are available globally and therefore are less tightly controlled than items on the USML. In fact, there are many re-export and retransfer transactions for which no license is required because either an EAR license exception can be used to re-export or retransfer without express permission, or because the transaction itself is deemed low-risk under the EAR and does not require a license. In some instances, items that were on the USML pre-reform can now be re-exported or retransferred to subcontractors in Australia and abroad without any form of approval from the U.S. government.

A key advantage of the EAR is that EAR allows for self-assessment of licensing requirements by industry. The EAR is structured in a way that is less ambiguous than the ITAR in terms of outlining what is controlled and how controls apply. Controlled items are described in detail on the CCL and licensing requirements are clearly outlined for each item. Australian companies that understand the EAR can determine if a license is required for their re-export or retransfer. Of course, a robust compliance program must be implemented in order to prevent mistakes that may result in inadvertent violations.

Where a license is required, the BIS license application review process takes an average of three weeks, which is much faster than the processing of ITAR export approval applications, or the preparation, execution or amendment of an ITAR agreement such as a TAA. Unlike the ITAR, which requires that a DDTC registered entity apply for licenses, the EAR allows Australian companies to apply for export licenses directly with the U.S. government. Australian companies can register with the Bureau of Industry and Security for an account that allows access to an on-line portal where license applications can be made and managed. Consequently, it will be easier and faster for Australian companies to obtain export licenses for the re-export and retransfer of items and technologies that have been moved from the USML to the CCL.

Commercial benefits of U.S. reforms
The ability to re-export or retransfer items under the EAR instead of the ITAR will result in a reduction in the lead times associated with obtaining approvals from the U.S. government, thereby reducing overall project costs for companies servicing U.S. origin military assets and equipment in Australia.

In addition, the EAR offers a more relaxed view of dual and third country nationals than the ITAR. Australian companies that understand where the lines are between the ITAR and EAR can more skillfully and cost-effectively manage their human resources. For example, Australian companies can reduce the red tape associated with obtaining security clearances or managing costly anti-discrimination legislation exemption programs, neither of which may be required for some projects post-reform.
Companies that choose to understand the impact of reforms on their operations, including how to use the movement of articles and technologies from the USML to the CCL to their advantage, will be rewarded with the ability to tender more competitively for both Defence and commercial contracts. Where items have moved from the ITAR to the EAR, there is no requirement to sign a TAA or similar agreement prior to providing information required for preparing a proposal or tender to service those items, though in some instances a license from BIS may be required. In addition, with the movement of so many articles from the USML to the CCL, the ITAR taint issue is significantly reduced, allowing Australian companies to more competitively source spare parts, tooling and other equipment. In addition, the reforms will result in more Australian sub-contractors being able to bid on projects in both the U.S. and Australia where previously they were prevented from doing so due to ITAR restrictions.

The way forward
As a consequence of revisions made to the ITAR, all ITAR classifications that have not been updated to reflect the legislative reforms are now incorrect. In addition, while there are grandfathering provisions for existing export approvals issued by the U.S. State Department, these provisions will not continue to be available indefinitely. Ultimately, all ITAR Agreements and Defence service contracts will need to be updated to reflect the changes to the ITAR.

Unfortunately, many Australian companies are under the impression that they are required to wait for advice from U.S. suppliers and business partners about managing the transition process, including determining the jurisdiction and classification of articles that have historically been ITAR controlled. This is simply not the case. Australian companies waiting for advice from the U.S. are not only putting their compliance records at risk, but may face the prospect of losing-out on important contracts as their tenders will be costed higher than that of a competitor who does understand the advantages of quickly and effectively managing the transition to the EAR. It is therefore imperative that Australian companies seeking to remain competitive in tendering for key Defence and commercial contracts understand the impact of the legislative changes in the U.S.

Key changes to the ITAR
Australian industry must work to understand the impact of the changes on their business, including key contracts and tendering opportunities. The U.S. has published three sets of revisions to the ITAR that can be consulted as part of this analysis. The first set of revisions to the ITAR became effective on 15 October 2013. These revisions included a re-organization of Category VIII (Aircraft and Related Articles) and the creation of a new Category XIX for Gas Turbine Engines. On 6 January of this year, the second set of revisions became effective. The second set of revisions made changes to important categories including Category VII (Military Vehicles), Category XX (Submersible Vessels) and Category VI (Vessels of War). The third set of ITAR revisions, covering Categories IV, V, IX, X ad XVI, will become effective on 1 July of this year. Items not listed in the revised Categories have been moved to the CCL and are controlled by the EAR following their respective effective dates.

In addition, several key terms were defined or re-defined as part of reforms. These include “specially designed”, “system”, “aircraft”, “submersible”, and “equipment” among others. Australian companies with Defence contracts to service equipment classified in these revised Categories need to understand the changes. Furthermore, the U.S. government has issued a proposed new definition of “defence service”, which will be significant to Australian companies servicing military assets.

Tasks for Australian industry
In order to take full advantage of the U.S. reforms, Australian industry needs to take action. Effective management of the reforms will result in a reduction of costs, increased business opportunities and the ability to remain compliant with the U.S. regulations. The following actions may be prudent at your company:

1. Understand how the reforms impact your company's supply chain and key contracts. How much of what your company sells or services is affected by the jurisdictional change from the ITAR to the EAR. Under which set of regulations do a majority of your assets, technology and services now fall?

2. Understand the cost reduction benefits of the reforms, including reduced lead times resulting from the ability to execute re-exports and retransfers without express permission or under licenses from the U.S. Bureau of Industry and Security, instead of under State Department approvals. What do these cost reductions mean to existing projects and new tendering opportunities?

3. Understand the immediate opportunities for cost savings, including the reduced administrative burden related to obtaining licenses, managing dual and third country nationals and ITAR Agreement reporting requirements;

4. Understand the commercial advantages brought about by the reforms, including reduction of ITAR taint and the resulting ability to both sell and source goods and services more cost effectively;

Australian companies that act quickly to understand the U.S. reforms and how to use the EAR to their competitive advantage will be rewarded with the ability to deliver products and services faster and at a lower cost to their key customers, including Defence.

Bio: Eva Galfi is Principal at International Trade Advisors in Sydney Australia, a boutique consultancy specialising in advising clients on Australian and U.S. export controls.

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