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U.S. Export Control Reform Update – what U.S. reforms will mean for Australian companies

Last month’s U.S. Bureau of Industry and Security (BIS) annual update conference in Washington D.C. provided some valuable insights on the progress of U.S. export control reform, the outcome of which will directly affect Australian defence companies trading in U.S. military and dual use articles.

In this blog post, I will highlight some of the key points presented at BIS Update 2012 that will be important to how Australian defence companies conduct their operations and trade with U.S. business partners.

Export reform in the U.S. has been moving at an impressive pace since the initiative was announced by President Obama in 2009, especially considering the number of government agencies involved. Last week, the three key reasons for the reform initiative were reiterated by the Undersecretary for Industry and Security, Eric Hirschhorn:

1. The U.S. wants to focus its limited resources on the threats that matter most;

2. The U.S. wants to facilitate military interoperability with their close ‘fiends and allies’. It is seeking to build stronger partnerships with allies, including Australia, by helping them to increase their military capability though facilitating access to U.S. military technology.

3. The U.S. wants its defence industry to remain competitive and seeks to reduce incentives for foreign manufacturers to ‘design out’ U.S. origin parts that are controlled under ITAR. Currently, ITAR’s “see-though” effectively causes the entire foreign product to be controlled under the U.S. ITAR, regardless of the amount of U.S. ITAR controlled content.

These reforms will likely have a positive impact for Australian defence companies trading in U.S. goods and technology. However, as the U.S. is ‘building a higher fence around a smaller yard’ in reforming their export controls, Australian companies trading U.S. defence articles will need to ensure their compliance programs are keeping pace with new requirements.

What will U.S. export reform mean to Australian defence companies?

Let’s examine two key U.S. initiatives that directly affect Australian companies:

1. The U.S. is easing licensing restrictions on parts and accessories by moving certain goods from ITAR’s U.S. Munitions List (USML) to the Commerce Department’s Commerce Control List (CCL).

2. The U.S. is working to make it easier to trade with ‘friends and allies’, but expects that Australian companies will be able to safeguard U.S. controlled articles and technology.

The easing of licensing restrictions:

A key part of U.S. export control reform is reviewing the USML and identifying which items need to remain on the list. The reforms will produce a revised USML with items that provide a strategic military, intelligence, or national security advantage to the United States. Items that do not meet this criteria, and which are commercially available outside the U.S., will move to the CCL. (The process of how this review was undertaken is explained in more detail on our website.) The goal of the control list reform is to better protect ‘crown jewel’ technology, while allowing partners allies like Australia to have better access to U.S. goods.

The reform will make it easier to obtain parts and accessories that were ‘specially designed’ to be used for a military application but do not have a military function on their own. Examples include items such as bolts cut to a special length to fit a certain fighter jet. Once the articles move from the USML to the CCL, they can ship under a license from the U.S. Commerce Department, or may be eligible for one of several license exceptions and can ship to Australia without a license. Many of the items moving from the USML to the CCL will move to a newly created ‘600 series’ category, and their exports will be closely monitored by the U.S. Government.

The USML reform creates a significant advantage to Australian companies purchasing ITAR controlled goods that are proposed to move to the CCL. First, it will be easier to obtain these articles. Second, the U.S. will exert less control over Australian made defence 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 any retransfer (sale, movement, or access to the article by a foreign national). However, once the U.S. moves certain items to the CCL, it is proposed that the 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 under the Export Administration Regulations. This proposed de minimis rule will ease the licensing burden on Australian companies incorporating U.S. origin components.

In addition to ITAR reform, the U.S. is making submission to various multi-lateral regimes including Wassenaar, the Nuclear Suppliers Group, the Australia Group, and the Missile Technology Control Regime, to recommend items that should be added to or removed from control under these regimes. What this means is that changes made in the U.S. will eventually trickle down as changes to the DSGL, which controls defence articles as part of Australia’s multi-lateral obligations under these regimes.

Making it easier to trade with ‘friends and allies’

The reforms being undertaken in the U.S. to reform the ITAR will have concrete benefits for Australian manufacturers. One of the overarching goals of the export control reform initiative in the U.S. is to make it easier for U.S. technology to be shared allies and their armed forces. The U.S. recognises that making it easier for Australian defence companies to obtain U.S. military technology will translate to greater Australian defence capability, stronger coalition operations, and an anticipated greater funding by the Australian government of joint research and development projects.

One key way in which the U.S. is proposing to facilitate access it through a license exception to the Export Administration Regulations’ licensing requirements called the Strategic Trade Authorisation (STA), which was created in 2011. In 2012, changes to STA have been proposed in order to allow the export, re-export and re-transfer of certain items to a non-government entity, such as an Australian defence company, provided certain conditions, including the condition that the item is for ultimate end-use by the Australian government, are met.

STA can be used for multiple shipments of various eligible items to the same consignee, but this exception is subject to both Export Classification Control Number (ECCN) specific conditions as well as ‘special conditions’ listed in Part 740.2 of the Export Administration Regulations (EAR), that must be met for each transaction.

Once an item has been approved for shipment under STA by the U.S. Government, it will be published in a list of STA eligible items. All exporters wishing to use STA for shipments to eligible consignees may refer to this list to verify that their item is eligible. However, the proposed rule contains a provision that all parties to the transaction, including the purchaser, consignee and end user of 600 series items will need to evidence that they have previously been authorised to receive that item under a license from the U.S. government. Otherwise, a license application will need to be lodged with the U.S. Department of Commerce requesting the use of STA. An inter-agency review will determine if the export is eligible for STA going forward, or whether a license is required instead.

To put it plainly, if your company has been importing an item that was previously ITAR controlled but is now moving to the CCL, your U.S. business partner may be able to export it to you under license exception STA, provided the transaction meets the conditions of the license exception. This will make it easier for Australian companies to obtain certain spare parts and accessories from the U.S. If your company is seeking to import the same items but has not previously been listed on a license for those items, then your U.S. partner can submit a license application and request the use of STA on the same application. If they are not eligible to use STA for the export to your company, then a license may be granted for the export by the U.S. Department of Commerce, which has a 26 day average license application turnaround.

To understand how STA works, a practical example may be useful. An Australian company manufactures jet engines. They import a ‘600 series’ component item from the U.S. that ships under the STA. They assemble the part into an Australian made engine, which is sold to a prime defence contractor. The prime then on-sells the jet to the Australian government. In this case, the end-use is the Australian government, so the 600 series component is eligible for export without a license under the STA, provided it meets all conditions of the STA exception.

The benefits and consequences to Australian companies of U.S. export reform

Regardless of whether STA is available for a particular export, or a license from the U.S. Department of Commerce is required for the export, the problems associated with obtaining certain ITAR controlled goods will be mitigated for Australian companies.

The movement of goods from the USML to the CCL’s 600 series will eliminate the ‘ITAR taint’ issue that many Australian manufacturers struggle with. Not only will licensing requirements be eased, as a result of both items moving from the USML to the CCL, but Australian made items that incorporate only CCL controlled goods will not fall under the control of the U.S. Export Administration Regulations until they exceed the proposed 25% de minimis rule for U.S. content. The ITAR affords no de minimis allowance.

Now for the ‘catch’. In order to receive articles under the STA exception for the first time, the Australian company will need to agree in writing to the following:

1. That your company is aware the shipment was made under STA and you understand the re-export and re-transfer restrictions of this license exception;

2. That your company received an Export Commodity Classification Number (ECCN) from your U.S. supplier and will provide that to any party that receives the item as part of a re-export or re-transfer;

3. That your company understands that you may not use sections (a) or (b) of license exception APR to further export or re-transfer the item;

4. That the ultimate end-user of the item shipping under STA is the government of an eligible country, including the Australian Government;

5. That your company agrees not to re-export or re-transfer the item in violation of the Export Administration Regulations (EAR);

6. That your company agrees to provide records to the U.S. government upon request.

The last three requirements will mean that your company may need to implement new processes and procedures to both protect EAR controlled items and institute new record-keeping requirements for tracking EAR controlled items. In other words, there is no free lunch. Though it will be easier for your company to obtain certain items, the U.S. government will expect your cooperation in safeguarding these items in accordance with U.S. export regulations. This may mean reviewing and improving your company’s current export compliance program.

STA has different levels of controls for end-items, parts components, accessories and attachments and software and technology as well as various conditions that must be met for its use in re-export or re-transfer. Your company’s ERP system will need to allow for the tracking and record keeping required to meet STA’s conditions.

The U.S. government is intending to conduct end-use checks in Australia to ensure that items shipped under the STA exception were in-fact incorporated into items that were sold or will be sold to the Australian government. Refusing to allow an end-use check at your company can lead to the U.S. government putting your company on the entity list, which will result in an automatic denial of Department of Commerce licenses for shipments to your company.

Watch this two minute video with comments from Kevin Kurland, the Director of the Office of Enforcement Analysis at the U.S. Bureau of Industry and Security about the U.S.' intention to conduct end-use checks in Australia.

What can your company do to prepare for export reforms in both the U.S. and Australia?

In conclusion, though there will be an additional compliance burden on Australian companies trading in U.S. controlled articles, the reduced lead times and administrative efficiencies realised as a result of U.S. export reform may be worth the effort.

The U.S. has made its expectations and intentions clear. They will expect that Australian companies accessing goods using the STA exception have robust recordkeeping and compliance programs. The U.S. government has said plainly and repeatedly that it will conduct end-use checks in Australia to ensure that controlled technology is adequately safeguarded. This means that Australian companies will need to:

1. Ensure processes and procedures are in place to protect U.S. controlled goods;

2. Develop robust and auditable compliance programs to ensure that a high level of compliance with both U.S. and Australian export controls is maintained;

3. Implement a training program to create awareness throughout the company about the sensitivities around U.S. controlled technology, employee responsibilities for managing access to that technology, and the consequences of non-compliance.

With the imminent implementation of the U.S.-Australia Defence Trade Cooperation Treaty and eventual royal assent of the Defence Trade Controls Regulations bill, the future holds an increase in audits of Australian defence companies, not just by the Australian government, but by the U.S. government as well. Now is the time for Australian companies to review their compliance programs to ensure the program is able to keep up with evolving export control requirements.

Please visit our website for a comprehensive overview of U.S. export reform, its progress and the implications for Australian companies.

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