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Preparing for U.S. Export Control Reforms- ADM December 2012

Since the U.S. export reform initiative was announced by President Obama in 2009, the U.S. has been moving quickly to ‘build a higher fence around a smaller yard’ and institute reforms that will make it easier for its allies, including Australia, to access U.S. military technology.

The outcome of U.S. export control reform will directly affect how Australian defence companies trading U.S. military and dual use articles conduct their operations and trade with business partners. U.S. reforms will likely have a positive impact for Australian industry, however the changes to U.S. export controls will require Australian companies to prepare for the coming changes in 2013 and ensure that their compliance programs are keeping pace with new legislative and commercial requirements.

What is changing
One of the most significant changes is the easing of licensing restrictions on parts and accessories currently controlled by the U.S. ITAR. Certain articles not performing an inherently military function will move from the U.S. ITAR’s U.S. Munitions List (USML) to the U.S. Commerce Department’s Commerce Control List (CCL), with the aim of making it easier to export these articles. Many of the moved articles will form part of a newly created ‘600 series’ category in the CCL, commonly referred to as the ‘Commerce Munitions List’. It is expected that exports of 600 series items will be closely monitored by the U.S. Government and that there will be an increase in enforcement action related to non-compliance with the regulations governing the export of 600 series items.

Other important changes include improvements to the way in which license applications are processed, new opportunities to export some articles without a license provided certain conditions are met, and changes to important definitions in U.S. regulations, including the definition of ‘specially designed’.

Pros and cons for Australian industry
Perhaps the most significant positive impact of the reforms will be the reduction ‘ITAR taint’ in Australian products incorporating U.S. content as items are moved from the USML to the CCL. Consequently, the U.S. will exert less control over Australian made defence and dual use articles.

Currently, if an Australian-produced defence article contains just one item that is ITAR controlled, even if it is as insignificant as a bracket, the entire end item is subject to the ITAR and requires U.S. State Department licensing for any export from Australia or for any retransfer (sale, movement, or access to the article by a foreign national).

The ITAR affords no de minimis allowance, and this will not change, but there is a de minimis allowance for articles controlled by the U.S. Department of Commerce’s Export Administration Regulations (EAR). Under proposed reforms to the EAR, an Australian made article must contain at least 25% of U.S. origin content controlled by the CCL before it becomes subject to U.S. export controls. This proposed reform will ease the compliance burden on Australian companies incorporating U.S. origin components.

Another positive for Australian industry is that once articles are moved from the USML to the CCL, they can ship under a license from the U.S. Commerce Department. They may also be eligible for one of several license exceptions under which they can ship to Australia without any license. While these reforms are generally welcomed, they may result in a new compliance burden for Australian companies that are unfamiliar with the EAR’s requirements. Where no license is required, accurate recordkeeping will become vital in order to prove how it was determined that a license was not required or that an EAR exception could be utilized for the export of the article.

With respect to potential negative impact, U.S. export reforms may require investment by Australian industry in the form of additional human financial resources. Compliance, risk management, and supply chain security programs will need to be updated to reflect changes to the way in which certain articles are controlled, stored and shipped. Agreements (TAA, MLA, WDA) may require amendment or re-baseline, commercial contracts may need to be amended, and ERP systems will need to be updated to reflect changes to classifications and controls.

New record keeping processes may also need to be instituted and employees will need to be trained on new legislative requirements and on updated company processes and procedures. In addition, the U.S. government has repeatedly stated that it intends to increase overseas enforcement action, with a special focus on the 600 series items.

In order to prepare for the coming regulatory changes, it is important to understand how the U.S. reforms will affect your commercial operations and contracts. For example, you should determine whether the U.S. products you import and export remain ITAR controlled or if control will transfer to the EAR. Australian companies should communicate with their U.S. suppliers about whether there are any anticipated changes to the business relationship, how licenses for goods transitioning from the USML to the CCL will be managed, whether there will be any new commercial requirements or changes to contracts, and whether any Agreements (TAA, MLA, WDA) will need to be amended or re-baselined as a result of the reforms.

Your company may be eligible to receive and ship certain articles no longer regulated by the ITAR under a Commerce license or license exception. If this is the case, it will be important to understand the EAR’s requirements and your U.S. supplier’s expectations. Estimating the resources required in terms of human capital and dollars for required changes to your business processes and ERP system will allow your company to prepare for the coming changes.

The U.S. export control reforms have been moving at an impressive pace and are seen as a priority by both major U.S. political parties. Important changes to the ITAR and EAR are expected to be implemented in 2013 under a transition plan that addresses product classification changes, export license validity, and existing ITAR Agreements. Waiting for proposed changes to U.S. export legislation to become finalized before assessing their impact on your business is not prudent given the potential commercial and legal consequences of non-compliance for you and your business partners. By understanding how your business will change as a result of U.S. export control reform, you can adequately prioritize operational, commercial and administrative changes and prepare for the revised legislation’s impending impact.

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