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As we begin the second half of the 1990’s, I thought it might be useful to reflect on the important changes to United States and multilateral export controls which occurred in 1995, and to assess the priorities for industry, and the prospects for changes, in 1996.

For your convenience, a summary of changes to the various regulatory regimes in 1995, with citations to the Federal Register, is enclosed with this memorandum.

The United States participates in five significant multilateral export control regimes, where member countries agree to implement parallel export controls on products and technologies. Meetings of the Australia Group prompted several minor amendments to the multilateral export controls on chemicals and related equipment. However, the most potentially far-reaching developments with respect to multilateral export controls in 1995 occurred in the so-called New Forum, which will be the successor to the Cold War-era COCOM.

In the fall of 1995, the New Forum members met for the first time in a plenary session which included the Russians. According to State Department officials, this meeting resulted in a breakthrough which will permit the formal establishment of the New Forum as a successor to COCOM, “soon”. As with COCOM, the operational details of the New Forum are not public documents. However, they appear to be as follows:

The New Forum will include all of the members of the old COCOM, which was comprised of the NATO countries plus Japan, Australia and New Zealand. The New Forum also will include several of the so-called “5(k)” countries: Austria, Finland, Switzerland, Luxembourg and Sweden. More surprisingly, the New Forum also will include the Czech and Slovak Republics, Hungary, Poland and, of course, Russia.

Against the stated desires of the United States, the New Forum has agreed to “target” only four countries of concern: Iran, Iraq, Libya and North Korea. Since these countries are subject to a virtually complete unilateral embargo by the United States, the net effect on American exporters is likely to be small. The United States attempted to get the New Forum also to target “regions of concern” -- the Middle East and South Asia -- but these efforts were thoroughly rebuffed. In fact, the New Forum will not even target Cuba, Sudan or Syria, which also are subject to nearly complete unilateral U.S. embargoes.

The New Forum will operate on a “national discretion” basis, meaning that each country will be authorized to issue export licenses on any basis it may deem desirable. There would be a “presumption of denial” of sensitive exports to the four target countries. However, no member of the New Forum will be able to veto the issuance of an export license by another member, as had been the operating procedure at COCOM.

In another defeat for the United States, the New Forum decided not to adopt a procedure requiring prior notification of members’ intent to issue export licenses. Thus, even the opportunity for the United States Government to demarche foreign governments on a case-by-case basis in advance of license issuance will not be available.

The final control lists for the New Forum have not been definitively established. However, the New Forum is expected to adopt some modest changes to the control lists agreed to in the last 18 months by various working groups.

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The New Forum has significant flaws. The most conspicuous problem is that the New Forum does not include China. Whether the regime can succeed without one of the world’s largest exporters of weapons in problematic, at best. At present, there are no serious discussions with the Chinese government about joining the New Forum, or even agreeing to “adhere” to the principles of the New Forum, as it has agreed in the past to adhere to the Missile Technology Control Regime.

Another serious problem is that the New Forum lacks not only single-member veto power but also procedures for prior notification of intent to issue an export license. This means that it will be virtually impossible to ensure a “level playing field” with respect to issuance of licenses. If the United States takes the most restrictive interpretation of the control lists and licensing policy, as it did at COCOM, then U.S. exporters are likely to be at an even greater disadvantage than they have been for the past 45 years, not only with respect to the four pariahs, but also in its trade with other countries in the “regions of concern”, like India, Pakistan and others.

Industry is not likely to have much impact on the membership, targets or procedures of the New Forum. However, industry will have a significant opportunity to influence the development of the New Forum’s control lists in 1996. These lists will form the basis for controls to countries in addition to the four pariahs, so the upcoming meetings of the Technical Advisory Committees dealing with computers, telecommunications, electronics and sensors will be very important.

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Since the fall of the Berlin Wall, successive Congresses have struggled without success in re-writing the Export Administration Act (“EAA”) to confront the new threats of the post-Cold War world.

Early in the First Session of the 104th Congress, there appeared to be some momentum toward enactment of a new EAA. On January 4, 1995, the new Chairman of the House International Relations Committee’s Subcommittee on International Economic Policy and Trade, Representative Toby Roth (R-WI), introduced H.R. 361, the Omnibus Export Administration Act of 1995. This bill essentially picked up where the 103rd Congress had left off, with important issues, like Commodity Jurisdiction, unresolved.

In stark contrast to the 103rd Congress, the 104th held few hearings and no mark-ups, preferring closed door sessions with officials from the Clinton Administration and largely excluding industry from the process. Despite periodic assurances that progress toward resolution of outstanding differences was being made in 1995, such progress was barely discernible.

Administration officials have stated repeatedly that a new EAA is one of its important objectives. However, it is not at all clear that the Republicans in the Congress agree. Given other priorities, like the budget, the prospects for passage in 1996 are not very good at this time, unless industry elevates EAA reform to a higher priority.

In light of the various changes to export control policy and practice made by executive orders and amendments to the Export Administration Regulations summarized in Sections III and IV below, industry does not have a great deal of incentive to lobby vigorously for a new EAA. Rather, by staying on the sidelines, industry appears to be betting that no EAA is better than any bill that could be cobbled together by the 104th Congress. Nevertheless, industry needs to remain vigilant, and must be prepared to go into a “damage control” mode if it appears that the secret discussions between Rep. Roth and the Administration are likely to result in a bill which is unfavorable to industry.

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When the Export Administration Act (“EAA”) expired, the President continued his authority to control exports by invoking the International Emergency Economic Powers Act, pursuant to Executive Order 12924. On August 15, 1995, the President issued a Continuation of this Order, which was published in the Federal Register on August 17, 1995 (60 FR 42767).

Exercising his authority under the International Emergency Economic Powers Act and Executive Order 12924, on December 5, 1995, the President issued Executive Order 12981. This Executive Order affects the processing of export license applications for dual-use products and technologies in a number of important respects:

The Departments of State, Defense and Energy, and the Arms Control and Disarmament Agency (“ACDA”), shall have authority to review all export license applications. This is a significant expansion of the various agencies’ existing authority to review applications.

All export license applications are to be resolved, or sent to the President for resolution, within 90 days. This represents a possible improvement over current practice. However, there are a number of factors which can “stop the clock”, including: (1) agreement by applicant, (2) pre-license checks, (3) government-to-government assurances, (4) multilateral review, and (5) consultations.

The time lines for initial review by the Commerce Department, review by other agencies, and escalation to the Operating Committee, the Advisory Committee on Export Policy and the Export Administration Review Board have been compressed, significantly.

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We expect that the Clinton Administration will issue a new Continuation of Executive Order 12924 next summer, if necessary to preserve his authority to control exports while Congress dithers over the re-authorization of the Export Administration Act. This should be a pro forma exercise, however.

The real action in 1996 will revolve around the implementation of Executive Order 12981, affecting the administration of dual-use export controls. There are some important steps which need to be taken in order to fully implement Executive Order 12981. These include the following:

Agencies must negotiate reasonable Memoranda of Understanding narrowing the scope of applications that they will review.

Agencies must resist the temptation to request more information from applicants, simply to stop the clock.

The inter-agency dispute resolution bodies will have to meet more frequently. The Advisory Committee on Export Policy, in particular, will have to meet more often than once each month in order to resolve cases within these time lines.

Bottom line, there are some positive elements, and some important unknowns which remain to be resolved, in Executive Order 12981. Resolution of these issues in 1996 will have a profound effect on the export licensing system at the Department of Commerce. Industry should insist that the Memoranda of Understanding be made public, and that the “clock stopper” provisions are not used to frustrate the intent of Executive Order 12981.

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The Department of Commerce only published 14 proposed, interim and final rules and notices to the Export Administration Regulations (“EAR”) in 1995. The small number resulted from several factors. The huge effort required to draft the comprehensive re-codified EAR drained resources from other, more modest efforts to change specific portions of the regulations. The fact that the New Forum did not conduct any meaningful reviews of the Industrial List meant that there were few changes to the Commerce Control List. Finally, the government shut downs in November and December resulted in the a delay in publication of rules that were “in the pipeline”. However, there were a few important developments, including the following:

The Bureau of Export Administration did not publish its first rule amending the EAR until April of 1995, when it issued a final rule implementing a new General License G-BETA. This general license authorizes the export of pre-release mass market software to all destinations, except the terrorist and embargoed countries. This important new rule, which was recommended initially by Novell with the support of AT&T, Lotus and Microsoft, provides substantial relief to developers of mass market software incorporating encryption, who otherwise would be required to obtain individual validated licenses for export to each individual beta test site.

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The Bureau of Export Administration also published a final rule expanding the list of products eligible for export under General License GLX, including: (1) portable (personal) or mobile radiotelephones not capable of end-to-end encryption (like DECT and GSM); (2) microprocessors with a composite theoretical performance not exceeding 500 million theoretical operations per second; (3) memory integrated circuits, certain digital integrated circuits and field programmable gate arrays; and (4) anti-virus software. These changes will be most beneficial to the semiconductor industry, although extension of General License GLX to include additional semiconductor manufacturing equipment would be a nice bonus in 1996.

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The Bureau of Export Administration has concluded the drafting of its comprehensive re-write of the Export Administration Regulations. The most recent draft was forwarded to other interested agencies for review in November of 1995. It includes a number of changes from the Notice of Proposed Rulemaking published in May of 1995, including a greatly simplified list of “license exceptions”, creation of a new “basket” entry on the Commerce Control List for items previously under xx96G, a single Destination Control Statement, a clarification of the de minimis rule for software and technology, and other important items.

The target date for delivery to the Federal Register was December 31, 1995, with publication expected in January or February of 1996. However, it seems highly doubtful that the Bureau of Export Administration will meet this aggressive time line, in light of the two week shut down of the Government in December, which is continuing as of this writing.

Frankly, it is difficult to be very enthusiastic about the re-write of the EAR. The premise of this exercise continues to be that it is simply a “plain English” exposition of existing policy, not a liberalization. Still, compliance with new terms (like the replacement of general licenses with “exceptions”) and the re-numbering of the Commerce Control List will exact a significant cost from exporters by requiring re-classification of products and technologies on the Commerce Control List and re-training of staff.

The costs are so high, in light of the meager benefits to be received, that the entire exercise may make Commerce Secretary Ron Brown the “poster child” for regulatory reform that has run amok. Nonetheless, like so many well intentioned bureaucratic initiatives, the re-write of the EAR looks like a fait accompli. The only question appears to be one of timing.

The Bureau of Export Administration also is planning to publish a final rule implementing the Clinton Administration’s proposal to liberalize the export controls on computers, which was announced on October 6, 1995. This new regulation, a version of which was circulated to the Technical Advisory Committees for comment in mid-December, is expected to be published early in 1996. It essentially sorts the world into four groups for export licensing purposes:

Group A consists of Western Europe, Japan, Canada, Mexico, Australia, and New Zealand. General license G-DEST will authorize exports of all computers, but some unspecified requirement to keep records and report on exports of “higher performance” computers.

Group B consists of South America, South Korea, ASEAN, Hungary, Poland, Czech Republic, Slovak Republic, Slovenia, and South Africa. General License G-DEST will authorize exports of computers up to 10,000 MTOPS, with recordkeeping and reporting “as directed”. Validated licenses will be required for computers above 10,000 MTOPS, with exports of computers above 20,000 MTOPS requiring “certain safeguards” at the end-user location.

Group C consists of India, Pakistan, all Middle East/Maghreb, the former Soviet Union, China, Vietnam, rest of Eastern Europe. General License G-DEST will authorize exports of computers up to 2,000 MTOPS. A new General License G-CTP will authorize exports for civil end-users/uses up to 7,000 MTOPS with recordkeeping and reporting. Validated licenses for military end-users and proliferators will be required for computers in the range of 2,000 - 7,000 MTOPS. Validated licenses also will be required for all end-users above 7,000 MTOPS, with safeguards for computers exceeding 10,000 MTOPS.

Group D consists of Iraq, Iran, Libya, North Korea. There would be no changes to existing licensing policy (virtual embargo).

There are a few areas of this new regulation which industry might recommend be changed prior to implementation. For example, the reporting requirements are onerous, and should be deleted. In addition, the “safeguards” are entirely inappropriate for workstations which sit on top of, or beside, the desktop. Also, the new General License G-CTP is a further example of the fact that general licenses are proliferating faster than weapons of mass destruction -- it should be eliminated. Industry’s input on these topics -- either individually or through trade associations -- would be timely and welcomed.

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The Department of State’s Office of Defense Trade Controls did not publish many significant amendments to the International Traffic in Arms Regulations (“ITAR”) in 1995. We did see a suspension of all export licenses to Ecuador and Peru, followed by a partial lifting and complete lifting of the embargo in the course of 1995. At the end of 1995, we saw a new embargo imposed on exports to Nigeria.

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Admitting that the Clipper Chip had failed to capture significant sales outside of the U.S. Government, the Clinton Administration announced a new policy which, when fully implemented, is expected to result in approval for transfer to the Commerce Department’s jurisdiction of products which incorporate so-called Commercial Key Escrow. The parameters of the Commercial Key Escrow policy were released at a series of conferences sponsored by the National Institute of Science and Technology in September and December of 1995. As most recently re-stated, they are as follows:

Key Escrow Feature

1.   The key(s) required to decrypt the product's key escrow cryptographic functions' ciphertext shall be accessible through a key escrow feature.

2.   The product's key escrow cryptographic functions shall be inoperable until the key(s) is escrowed in accordance with #3.

3.   The product's key escrow cryptographic functions' key(s) shall be escrowed with escrow agent(s) certified by the U.S. Government, or certified by foreign governments with which the U.S. Government has formal agreements consistent with U.S. law enforcement and national security requirements.

4.   The product's key escrow cryptographic functions' ciphertext shall contain, in an accessible format and with a reasonable frequency, the identity of the key escrow agent(s) and information sufficient for the escrow agent(s) to identify the key(s) required to decrypt the ciphertext.

5.   The product's key escrow feature shall allow access to the key(s) needed to decrypt the product's ciphertext regardless of whether the product generated or received the ciphertext.

6.   The product's key escrow feature shall allow for the recovery of multiple decryption keys during the period of authorized access without requiring repeated presentations of the access authorization to the key escrow agent(s).

Key Length Feature

7.   The product's key escrow cryptographic functions shall use an unclassified encryption algorithm with a key length not to exceed sixty-four (64) bits.

8.   The product's key escrow cryptographic functions shall not provide the feature of multiple encryption (e.g., triple-DES).

Interoperability Feature

9.   The product's key escrow cryptographic functions shall interoperate only with key escrow cryptographic functions in products that meet these criteria, and shall not interoperate with the cryptographic functions of a product whose key escrow encryption function has been altered, bypassed, disabled, or otherwise rendered inoperative.

Design, Implementation, and Operational Assurance

10.  The product shall be resistant to anything that could disable or circumvent the attributes described in #1 through #9.

Frankly, the revised Guidelines do not differ significantly from the original version issued earlier in the year. They have been rearranged and reworded for clarity, but the thrust and effect has not changed, substantially.

The Clinton Administration has professed repeatedly that it is developing the Commercial Key Escrow guidelines with the intention of amending Category XIII of the ITAR in order to provide for the transfer of qualifying products to the jurisdiction of the Commerce Department. Given the controversy surrounding the development of Commercial Key Escrow guidelines to date, however, it seems unlikely that this effort will be completed prior to the election in November of 1996. Indeed, some pundits have suggested that the entire Commercial Key Escrow guideline development effort is simply an effort on the part of the Clinton Administration to appear reasonable, while actually doing nothing to actually facilitate the export of products which the market clearly wants -- like DES. It is quite possible that nothing at all will change in 1996!

Industry should continue to demand an increase in the key length permitted for non-escrowed encryption beyond the aging 40 bit standard agreed to in 1992. In addition, industry should continue to participate in the Commercial Key Escrow debate, if only in order to ensure that any Commercial Key Escrow guidelines which are adopted do not discriminate between competing hardware and software solutions.

You may recall that in February of 1994, Deputy Assistant Secretary Martha Harris promised to introduce the so-called Personal Use Exemption, which would permit U.S. persons to export on a temporary basis cryptographic hardware and software products for their personal use. We expect that the State Department will issue a final rule implementing the Personal Use Exemption early in 1996. It is likely to be similar to the following requirements:

The exporter must be a United States citizen or permanent resident;

Only one cryptographic hardware product, and not more than one copy each of any cryptographic software product, may be exported for use by the exporter;

The cryptographic hardware and software product(s) must remain in the possession of the exporter, and be exported for the traveler’s exclusive use, not for copying, demonstration, etc.;

The cryptographic hardware and/or software product(s) must be carried in the exporter’s baggage or effects accompanying the exporter at departure. They may not be exported as unaccompanied baggage or by any other means (e.g., electronically);

Upon request of the Customs Service, the exporter must submit to inspection upon departure from, or arrival to, the United States; and

In lieu of filing a Shipper’s Export Declaration, the exporter must maintain records for five years reflecting and certifying, at minimum, that the individual has complied with these requirements and has no reason to believe that any of the cryptographic products were lost, stolen, etc., during the sojourn. These records shall reflect, at minimum, the following: (1) a description of the cryptographic product exported; (2) the countries of sojourn; and (3) the date of exportation/importation.

These requirements certainly are less onerous than prior drafts, which would have required that travelers provide (up to 30 days) advance notice of intent to export cryptographic products from the United States. Still, they require a significant due diligence with respect to personnel who wish to take off-the-shelf programs, like Norton Utilities, with them on their portable computers on a temporary sojourn.

It has been almost two years since Martha Harris promised to implement the Personal Use Exemption. Industry should press hard for publication! Note, however, that publication of the Personal Use Exemption as currently formulated has an important weakness -- it only applies to U.S. Persons! It does not apply to foreign nationals who may work for U.S. companies, and who may wish to temporarily import cryptographic products into the United States! Industry therefore might wish to consider lobbying to extend the Personal Use Exemption to cover foreign nationals who are employed by U.S. companies, in order to facilitate the deployment of a single solution for the protection of American intellectual property and trade secrets worldwide.

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Determined not to let Senator D’Amato make his Administration look weak on terrorism, President Clinton attempted a preemptive strike, imposing a unilateral embargo on Iran by issuing Executive Order 12959 on May 6, 1995 (60 FR 24757). The Executive Order contains important exemptions, which will authorize continued trade in certain U.S.-origin goods by subsidiaries of U.S. companies and third parties. However, the Clinton Administration has not convinced a single ally, even the British, to impose similar controls on Iran.

On September 11, 1995, the Treasury Department’s Office of Foreign Assets Control amended the Iranian Transactions Regulations (31 CFR Part 560) to implement President Clinton’s declaration of national emergency and imposition of sanctions against Iran. These regulations provide important guidance with respect to the scope of transactions prohibited under the Executive Order.

The regulations prohibit almost all direct trade with Iran. They also prohibit most indirect trade, subject to three important exemptions:

A U.S. Person may reexport U.S.-origin goods and technologies to Iran if: (1) the goods or technologies were exported from the United States prior to May 7, 1995, and (2) such goods or technologies were not subject to export license application requirements under the EAR in effect prior to May 7, 1995

Reexportation of goods which have been “substantially transformed” outside of the United States is permitted. Note in particular that this exemption uses the term “substantial transformation”, but does not provide any guidance on what constitutes “substantial transformation”.

Reexportation is permitted of U.S.-origin goods incorporated into another product outside of the United States, if the U.S.-origin goods constitute less than 10% by value of that product.

For all other transactions, the Office of Foreign Assets Control is issuing licenses for exports to Iran and Iranian nationals on a case-by-case basis. However, few licenses are being granted, even where the regulations appear to reflect the sense that favorable consideration should be accorded.

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The Treasury Department’s Office of Foreign Assets Control lifted the licensing requirement with respect to transactions by foreign subsidiaries of U.S. companies trading in goods subject to the COCOM Industrial List. Note, however, that the licensing requirement remains in place with respect to goods on the Munitions List and the Atomic Energy List.

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The Clinton Administration for the first time extended the embargo regulations so that they also apply to terrorists who threaten to disrupt the Middle East peace process and to designated narcotics traffickers in the past year. Before 1995, the embargo statutes and regulations had been aimed solely at countries (like Iran) or subsets thereof (like Serbia) rather than against individuals engaged in criminal activity. This represents and important new concept in the application of the embargo regulations under “emergency” authority.

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Relations between the United States and Iran have ebbed and flowed over the past fifteen years, depending on whether the prevailing strategy was to “isolate the radical leaders” or to “engage the moderate factions” in the Iranian government. The Executive Orders and implementing regulations appear to have learned a few lessons from past experience with unilateral controls. The exceptions to the reexport requirements reflect a small, but measurable, improvement over other unilateral sanctions, like those currently imposed on Cuba.

However, there also remains a possibility that the sanctions will be increased in 1996. Senator D’Amato has introduced legislation which would impose a secondary boycott on foreign companies that do business with Iran. Such legislation would seriously annoy U.S. allies, who may be prepared to join the New Forum and impose some level of export controls on Iran, but who have demonstrated no intention of imposing a broad, U.S.-style embargo.

Industry should continue to emphasize that unilateral embargoes are a self-inflicted wound, which do little, if anything, to affect the behavior of foreign governments which can simply shift their purchasing to competitive suppliers in Europe and Asia.

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In conclusion, it appears that 1996 will bring significant changes to the multilateral export control regimes, as well as the executive orders and regulations which govern exports from the United States.

As a result of the EAR re-write, companies will have to reclassify their products, re-designate eligibility for export under license exceptions, and use a new form when applying for licenses. They also will have to re-train their staff and foreign consignees in order to ensure compliance. The proposed changes to the computer regulations are welcomed, but will necessitate design and implementation of burdensome new reporting mechanisms.

Significant changes to the ITAR are more difficult to predict. Publication of the personal use exemption would relieve the anxiety suffered by many export administrators who are concerned about the software that their own companies may be exporting on laptop computers, but it will not earn any company an extra dollar of revenue. Real reform of the export controls on cryptography would be welcomed, but the prospects for Commercial Key Escrow being implemented in 1996 and finding a market outside of the United States are problematical, at best.

Embargo regimes are even more subject to political vicissitudes than are the EAR and ITAR. It is difficult to discern who the next “rogue regime” might be. However, the novel use of “emergency” powers by the Clinton Administration in 1995 with respect to terrorists and drug traffickers may be a harbinger of increased use in 1996, as well.

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Notwithstanding the end of the Cold War, it is clear that there are still a host of export control issues on the agenda for 1996. As in the past, we will keep you informed regarding future developments.