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Between a Rock and a Hard Place- World ECR November 2012

In Australia, as in many countries, the defence industry struggles to balance the need for compliance with the U.S. ITAR regulations and domestic anti-discrimination legislation when employing dual and third-country nationals. Eva Galfi examines the impact of current legislation on the Australian defence industry and the challenges faced by employers in complying with both U.S. and Australian law.

The Australian defence industry is faced with a dilemma. Australian law (1) prohibits discrimination on the basis of race or national origin. However, compliance with the U.S. Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR) requires companies to ask employees and job candidates details about their nationality and country of birth to determine if they are eligible to access ITAR controlled articles as part of their job. The ITAR requires companies to guard against the diversion of, and restrict access to, ITAR controlled defence articles, including technology. In administering the ITAR, the U.S. State Department has taken the position that dual and third-country nationals are to be considered persons presenting a higher risk of diversion. Consequently, they require special authorisation to access ITAR controlled articles. As a result, Australian defence companies may need to restrict access to ITAR controlled articles for persons of certain nationalities or national origins. This requirement to restrict access may leave Australian defence companies in a difficult position. In complying with their obligations under the ITAR, Australian defence companies may violate domestic anti-discrimination and equal opportunity legislation when evaluating job applicants and assessing employees. Conversely, when hiring dual and third-country nationals and complying with domestic anti-discrimination legislation, they may risk violating the ITAR. The result is that the Australian defence industry must perform a difficult and expensive dance in its efforts to comply with both U.S. and Australian legislation.

To paraphrase U.S. Department of State (State) guidance(2), a dual national is someone who is a national of the country of the foreign signatory to an ITAR Agreement(3), in this case Australia, and also of another country. A third-country national is a person who is not a national of the foreign signatory (Australia), but is instead a national of another country. State also considers country of birth to be a factor in determining nationality. These distinctions become important when an Australian company is seeking to import ITAR controlled articles, including technical data, from a U.S. entity, or granting access to ITAR controlled articles already in its possession to certain employees. Granting access to ITAR controlled articles is considered to be a ‘deemed export’ under the ITAR. If the access is granted to a dual or third-country national, it is tantamount to an actual export to the country of their nationality and requires approval from State.

Recent ITAR reforms have not solved the problem of dual and third-country nationals
It is estimated that approximately fifty per cent of the Australian Defence Force’s inventory is sourced from the U.S., which is why ITAR compliance is important to the Australian defence industry and ultimately to Australia’s defence capability. The Obama Administration’s Export Control Reform Initiative has resulted in several amendments to the ITAR, many of which were made with the intention of making it easier for U.S. allies to access ITAR controlled technology. Specifically, two amendments (124.16 and 126.18) seeking to eliminate DDTC approval requirements for the transfer of unclassified ITAR controlled technical data to certain types of employees of foreign companies were incorporated into the ITAR in 2011.

Under the ITAR, where an Australian company is contracting with a U.S. entity to manufacture, assemble, repair, test, distribute or participate in the design of ITAR controlled articles, an appropriate DDTC approved ITAR Agreement must be put in place between U.S. entity and Australian company to allow for ITAR controlled information to be transferred between the parties(4). It is generally required that Agreements list the nationalities of all dual and third-country nationals employed by the Australian company (and by its sub-licensees) that will have access to the ITAR controlled articles, unless the company is able to take advantage of the two exemptions created in 2011. These are exemptions 124.16(5) and 126.18(6). Exemption 124.16 allows for the transfer of unclassified technical data and defence services to dual and third-country nationals who are “regular employees”(7) of the Australian signatory to the Agreement, or its sub-licensees, provided they are nationals of certain countries named in the exemption, and only if the transfer takes place in the physical territory of Australia. Exemption 126.18 allows for the transfer of unclassified defence articles and technical data to or within the facilities of the Australian signatory to the Agreement, including to dual and third-country nationals provided they are “regular employees” of the Australian company or its sub-licensees. Of note is that both exemptions apply to unclassified articles only; classified articles are outside the scope of these exemptions.

Although the Defence Export Control Office (DECO) estimates that 90% of ITAR controlled goods imported into Australia are as categorised as ‘unclassified’(8), this nevertheless limits the application of these two exemptions for the remaining 10% of imported goods, which can be key to the fulfilment of important defence company contracts. Furthermore, the use of 126.18 is limited by a condition that may place a large administrative burden on companies intending to use this exemption.

There are two methods of complying with the ITAR 126.18 exemption’s condition that a company must have ‘effective procedures’ be in place to prevent diversion to unauthorised users or for unauthorised uses.

The first way in which an Australian company can satisfy this condition is to require that all employees who are to access the ITAR controlled defence articles have a security clearance from the Australian Department of Defence (DoD). To meet this condition, a company may choose to hire or assign employees with the appropriate security clearance to projects requiring access to ITAR controlled articles.

In addition to hiring individuals that already have a security clearance, certain defence industry jobs advertised by the company may list Australian citizenship as a requirement. Requiring Australian citizenship is not discriminatory under the Racial Discrimination Act 1975 and employers may choose to add this requirement to their job descriptions to increase the likelihood of obtaining a security clearance from the DoD for the employee after they are hired. One issue with obtaining a security clearance is that it can be a time consuming process where the desired result is ultimately not obtained. Another issue is that, as a matter of policy, the Australian Department of Defence (DoD) will not issue security clearances for the sole purpose of authorising access to ITAR controlled articles(9). DoD lacks the financial resources and staff to provide this service to the Australian defence industry. Processing a security clearance can take several months and recent federal budget cuts for defence spending will not aid DoD in resourcing for this activity.

Furthermore, obtaining a security clearance from the DoD requires that the applicant be an Australian citizen, unless a waiver for this requirement can be obtained. For this reason, only Australian citizens and certain dual and third-country nationals would be eligible to receive a security clearance. Given Australia’s skills shortages and the fact that approximately 25% of the population was born overseas, many coming from countries in Southeast Asia(10) including China and India, the requirement for either a security clearance or citizenship may narrow the pool of talent from which Australian defence companies can draw.

An alternative method of complying with the ITAR 126.18 exemption’s condition that a company must have ‘effective procedures’ in place, is for the Australian signatory to the Agreement to have in place a screening process to determine if dual and third-country national employees working with ITAR controlled articles have ‘substantive contacts’(11) with restricted or prohibited countries listed in ITAR 126.1. DoD’s Defence Export Control Office has issued guidance(12) for Australian companies considering creating a substantive contacts screening process. Conducting such checks not only places a great administrative burden on the company, but also opens the company to potential violation of domestic anti-discrimination legislation as the screening process involves asking the employee potentially personal or invasive questions, in addition to requesting police checks and character references from the employee(13). Furthermore, the final determination of eligibility to work with ITAR controlled articles is left to a representative of the company, unless they have identified a risk and request assistance from the U.S. Department of State in making the final determination.

As with all ITAR exemptions, if exemption 126.18 is incorrectly administered, the company may be found in violation of the ITAR and could face penalties. For this reason, companies considering developing a process for substantive contacts screening may instead take a conservative approach and choose not utilise the exemption.

Implementation of the U.S.-Australia Defence Trade Cooperation Treaty will not be the answer for dual and third-country nationals
Implementation of the highly anticipated U.S.-Australia Defence Trade Cooperation Treaty (the Treaty) will create an ITAR exemption under which controlled goods can be shipped between the U.S. and Australia without a license or State approval, provided certain conditions are met. One such condition is that the Australian company join the Treaty’s Approved Community, which involves applying for membership to the Department of Defence. Section 6 of the Treaty’s Implementing Arrangements specify that personnel within the Australian Community requiring access to defence articles pursuant to the Treaty must have a security clearance of ‘Restricted’ or above and must also undergo an additional check for ‘significant ties’ to a country proscribed under ITAR 126.1. As previously discussed, few dual and third-country nationals will be able to obtain security clearances from the DoD, thus implementation of the Treaty will not solve the problem of restricted access to ITAR controlled articles for them. Furthermore, this requirement is significantly more onerous than the requirements of ITAR exemption 126.18 as there is an additional ‘significant ties’ check requirement. Australian defence companies considering becoming Approved Community members will undoubtedly weigh the Treaty’s advantages against the advantages of using other ITAR exemptions, State Department licenses, or other approvals to import, re-export or re-transfer ITAR controlled articles.

Given that neither the Treaty nor recent ITAR reforms offer a solution to the issue Australian defence companies face when employing dual and third-country nationals, companies will need to continue to ask employees and job applicants about their nationality and country of birth in order to comply with the ITAR. As a consequence, they may be faced with potentially engaging in discriminatory practices in making staffing decisions for positions that involve access to ITAR controlled articles.

Australian anti-discrimination legislation
At a federal level, Australia administers the Racial Discrimination Act 1975 (RDA). Section 15 of the RDA prohibits an employer from discriminating against an employee or person seeking employment on the basis of race, colour or national or ethnic origin. Anti-discrimination and equal opportunity legislation at the Australian state and territory(14) level also prohibits discrimination based on national origin. Though the wording of the legislation varies from jurisdiction to jurisdiction, generally employers must not discriminate based on national origin when it comes to making offers of employment, providing advancement opportunities and making decisions to terminate employment. As a practical matter, this means employers must not make decisions based on the employee or job candidate’s county of birth.

Depending on the laws of the particular state or territory, exemptions from compliance with certain provisions of state and territory legislation may be available to employers for up to 10 years in certain circumstances. Generally, exemption applications are only successful where it can be demonstrated that there is a need to favour a particular group of people over another group as a genuine requirement for the occupation.

Exemptions are granted with a raft of conditions that often include creating anti-discrimination policies, dispute resolution and training programs, a promise to take all steps reasonably available to avoid discrimination, and a requirement to report to the administrative body granting the exemption on a regular basis about compliance with the conditions of the exemption and the extent of discriminatory conduct.

Applying for an exemption can be a time consuming and expensive process. Companies seeking exemptions to anti-discrimination and equal opportunity legislation at the state and territory level will do so in each jurisdiction in which they operate. In addition to the cost of the initial application process, and the costs associated with meeting the conditions of the exemption, exemptions must be renewed when they expire or the company will be in breach of its obligations.

Current industry approach
Despite the expense, the approach that seems to have been broadly adopted by Australian subsidiaries of multinational defence companies is to ask the various governments of the Australian states and territories in which they have operations to exempt them from compliance with certain provisions of domestic anti-discrimination legislation in order to ensure their ability to comply with the U.S. ITAR. In fact, such exemptions have been granted to Raytheon Australia Pty Ltd, BAE Systems Australia Pty Ltd, Boeing Australia Pty Ltd, Lockheed Martin Australia Pty Ltd, Thales Australia Limited, and others over the past decade. However, obtaining exemptions at the state and territory level is a complicated matter involving expensive lawyers and can cost the company tens of thousands of dollars in legal fees and administrative costs. Therefore, obtaining an exemption is not a preferred option for some small to medium sized (SME) defence companies with up the same issue.

SMEs may choose to require that an employee have a security clearance in order to work on a particular project or take on a certain role involving ITAR controlled goods. However, this requirement may reduce the number of job applicants or current employees that are otherwise qualified for the role. They may instead choose to require Australian citizenship for the role in order to be able to use ITAR exemptions 124.16 for dual nationals or in the hopes that the dual national Australian citizen will be able to obtain a security clearance so that exemption 126.18 can be utilized. However, obtaining a security clearance can take months, is not guaranteed, and can be dependent on external factors including who the Australian citizen is closely related to and the nationality of current and former domestic partners. Obtaining a security clearance is difficult for third-country nationals and they are not, by definition, Australian citizens. Thus the issue remains difficult to solve. Furthermore, a security clearance can only be obtained from DoD if the job requires the applicant to work with goods that are Australian security classified. It is unlikely that ITAR unclassified articles would meet this requirement and, as previously discussed, DoD will not issue a security clearance for the sole purpose of accessing ITAR controlled articles. In the case of ITAR exemption 128.16, this leaves the SME with the option of creating a substantive contacts check program or requesting approval from State for dual and third-country national employees.

Nevertheless, it is common to see both the security clearance and citizenship requirements clearly stated in job advertisements and this is not considered discriminatory under the RDA(15). The question of discrimination arises when a particular dual or third country national job candidate or employee is not hired, promoted, assigned to, or allowed to continue to work on a certain project because they do not, or where it is believed that they would not, pass a company ‘substantive contacts’ check or receive approval from State to access ITAR controlled articles due to their nationality or country of birth. Each SME must therefore weigh the risks, costs of compliance and potential penalties of violating domestic anti-discrimination laws or the ITAR and determine if applying for an exemption to domestic anti-discrimination legislation is the best course of action. They must also consider the potential cost of non-compliance, including defending their actions in a court of law, and likely strength of their defence, should they be accused of wrong doing.

Inherent conflicts between the ITAR’s need to protect U.S. defence technology from the risk of diversion and Australia’s domestic anti-discrimination legislation result in Australian defence companies finding themselves in a difficult position when attempting to comply with both U.S. and Australian legislation.

Neither recent ITAR reforms nor the yet to be implemented U.S.-Australia Defence Trade Cooperation Treaty have offered solutions to this dilemma. Although neither a security clearance, nor special screening procedures are required to access ITAR controlled articles under ITAR exemption 124.16, it is only applicable to dual and third-country nationals from a very short list of countries. Exemption 126.18 requires that the company have ‘effective procedures’ be in place to prevent diversion. The practical application of this exemption is limited in that in order to satisfy the requirement the company must either insist on difficult to obtain security clearances for its dual and third-country national employees or implement a complicated and potentially invasive screening program. Furthermore, both 124.16 and 126.18 are only applicable to unclassified ITAR articles. The Treaty provides for even more onerous compliance requirements when it comes to dual and third-country nationals as it requires investigating ‘significant ties’ in addition to obtaining a security clearance. As with all exemptions, should the company administer any of these exemptions incorrectly, it will have violated the ITAR, putting it at risk of serious commercial consequences, fines and penalties. Thus, obtaining approval from State remains the most conservative option, but leaves the company exposed to potentially violating domestic anti-discrimination legislation.

The most practical option for companies will likely be to continue with their current approach of applying for exemptions from state and territory anti-discrimination legislation in order to be able to comply with both the ITAR and domestic anti-discrimination legislation. However, the current economic uncertainty’s effects on the Australian defence industry mean that only larger companies can afford to adopt the approach of applying for these costly exemptions. SMEs are left in a position of having to choose between compliance with the U.S. ITAR and domestic anti-discrimination legislation and must weigh the costs of compliance against the costs of penalties and consequences for potential violations of these laws. Given that the expense and effort in obtaining an exemption is undertaken for the sole purpose of enabling dual and third-country nationals to access ITAR controlled articles, a company conducting a return on investment analysis and risk assessment may conclude that it is less costly to pay any potential penalties assessed for breaching domestic anti-discrimination legislation than to either apply for an exemption in every jurisdiction in which they operate, or to risk the consequences of violating the ITAR.

Baring further reforms to the ITAR, or changes to the DoD’s policy of not issuing security clearances for the sole purpose of allowing access to ITAR controlled articles, the Australian defence industry will remain in the complicated and potentially expensive position of finding ways to maintain compliance with the ITAR while not violating domestic anti-discrimination legislation when employing dual and third-country nationals.

Links and Notes:
(1) Australian anti-discrimination legislation includes the Racial Discrimination Act 1975 at the Commonwealth level, and various ‘anti-discrimination’ and ‘equal opportunity’ Acts at the State and Territory levels including Australian Capital Territory Discrimination Act 1991 (ACT), New South Wales Anti-Discrimination Act 1977 (NSW), Northern Territory Anti-Discrimination Act 1996 (NT), Queensland Anti-Discrimination Act 1991 (QLD), South Australia Equal Opportunity Act 1984 (SA), Tasmania Anti-Discrimination Act 1998 (TAS), Victoria Equal Opportunity Act 1995 (VIC) and the Western Australia Equal Opportunity Act 1984 (WA) (

(2) Federal Register/Vol. 72, No. 243/ Wednesday, December 19, 2007 pg 71785. Amendment to the International Traffic in Arms Regulations: Regarding Dual and Third Country Nationals.

(3) ITAR Agreements include Manufacturing License Agreements (MLA), Technical Assistance Agreements(TAA) and Warehouse and Distribution Agreements (WDA). Each type of Agreement confers different types of authorizations for access to ITAR controlled technology including access to data, manufacturing know-how, and defence services.

(4) Guidelines for Preparing Agreements (Revision 1B), March 8, 2010.

(5) 124.16 Special Retransfer Authorisations for Unclassified Technical Data and Defence Services to Member States of NATO and the European Union, Australia, Japan, New Zealand and Switzerland.

(6) 126.18 Exemptions Regarding intra-company, intra-organization, and intra-governmental Transfers to Employees who are Dual Nationals or Third-country Nationals (This exemption does not apply to nationals of a proscribed country).

(7) “Regular Employee” is defined in ITAR 120.39 and includes individuals permanently and directly employed by the company as well as individuals with long-term contractual relationships with the company that meet the requirements of the definition.

(8) Australian Guidance to develop an Employee Sceening Model for the 126.18 U.S. ITAR exemption.

(9) Ibid

(10) Table 5. Net Overseas Migration- top 10 countries of citizenship 2003-2010, page 10 of The Outlook for Net Overseas Migration (June 2012). Published by the Australian Government- Department of Immigration and Citizenship. (

(11) The meaning of substantive contact is outlined in ITAR 126.18(c)(2).

(12) Australian Guidance to develop an Employee Sceening Model for the 126.18 U.S. ITAR exemption.

(13) Ibid

(14) Ibid(1)

(15) The courts have interpreted that the RDA prohibits discrimination on the basis of ‘national origin’, ie country of birth, but it does not prohibit discrimination based on citizenship or nationality. Refer to Australian Medical Council v Wilson and Macabenta v Minister for Immigration & Multicultural Affairs.

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