|
|
EXPORT CONTROL REGULATIONS IN 1997 AND BEYOND
by Roszel C. Thomsen II
Happy New Year! As is our custom, at the end of each year, we take this opportunity to step back from day-to-day concerns. In this memo, we will review the important changes to the various export control regulations that were issued in the past year, preview some of the changes that we expect will be published in 1998, and pass along our recommendations.
Enclosed is a copy of our Summary of Final Rules, Proposed Rules and Notices Published in the United States Federal Register by the Commerce, State and Treasury Departments Amending Provisions of the Export Administration Regulations, International Traffic in Arms Regulations and Foreign Asset Control Regulations During 1997, for your archives.
As you can see, approximately eighty changes to the various export control regulations were published in the Federal Register during 1997, representing on average one new change every third business day throughout the year. This pace is about the same as last year, although it is somewhat slower than the early 1990’s.
A. Enhanced Proliferation Control Initiative/Entity List
Arguably the most important changes published in 1997 involved the long-awaited “Entity List” set forth in Supplement No. 4 to Part 744 of the Export Administration Regulations (“EAR”). For years, exporters have complained about the lack of guidance with respect to those specific entities that are engaged in the proliferation of so-called “weapons of mass destruction” under the Enhanced Proliferation Control Initiative (“EPCI”). In five final rules, published in the Federal Register on February 3, May 16, June 30 (two) and October 1, the Bureau of Export Administration (“BXA”) finally identified certain entities engaged in EPCI-related activities, and delineated the scope of the licensing requirements for each such entity. For complete details, please refer to the enclosed Summary.
There are a number of remaining problems with the Entity List. The inter-agency working group is deadlocked on the question of whether to add approximately 40 or so new entities to the list. Also under consideration is whether to exempt from licensing items classified under EAR99 of the Commerce Control List, as was done in the case of Baharat Electronics. Refinement of the Entity List and related processes should be a high priority of the various technical advisory committees and industry trade associations in 1998.
Recommendation: Publication of the Entity List requires all exporters to add a new screening element to their Export Management Systems. We recommend that you seize this opportunity to review and update your entire Export Management System.
B. Decontrol Initiatives
The Commerce Control List remained relatively stable in 1997. BXA did publish several narrow changes affecting exports of chemicals, oscilloscopes and satellite parts. However, it has become increasingly clear that the Commerce Control List needs to be overhauled, completely, in light of new technologies in the areas of electronics, computers and telecommunications, in particular. Publication of the changes agreed to by the member countries of the Wassenaar Arrangement in July of 1995 would help. However, this draft regulation remains mired in the inter-agency review process, as further described below.
Recommendation: In the first half of 1998, various technical advisory committees will be developing recommendations with respect to revisions to the Wassenaar List for the next round of list reviews. We recommend that you take advantage of this opportunity to provide inputs to the various technical advisory committees (and through them, BXA) in developing new control lists for products and technologies that are subject to multilateral export controls.
C. New Trade Sanctions
The President issued important new executive orders implementing sanctions against Burma, Sudan and UNITA (Angola) in 1997. Despite repeated assurances that it will exercise restraint with respect to imposition of unilateral export controls, the Clinton Administration’s actions demonstrate that export controls are the trade sanction of first resort, not the last resort, in most cases. According to the National Association of Manufacturers (“NAM”), in the past four years President Clinton has signed 62 laws and executive orders targeting 35 countries for various trade sanctions, accounting for more than half of all trade sanctions imposed in the past 80 years.
Recommendation: Oppose all unilateral export controls, and support the effort by NAM to limit Congressional micromanagement!
II. Prospects for Changes to Export Control Regulations in 1998
There are three major changes to the export control regulations that currently are circulating inter-agency. One would hope that these changes could be published early in 1998.
A. Wassenaar Implementation Regulation
In July of 1995, the members of the Wassenaar Arrangement (the successor to COCOM) agreed to impose multilateral export controls on three lists of items, known as the “Basic List”, the “Sensitive List” and the “Very Sensitive List”. The new lists became effective on November 1, 1995, in all member countries, including the United States. Nevertheless, BXA has struggled to obtain inter-agency consensus on how these lists should be integrated into the Commerce Control List of the EAR.
In particular, the Departments of Commerce and State have not been able to agree on whether items classified under Export Control Classification Numbers xx018 on the Commerce Control List of the EAR should be transferred to the jurisdiction of the Office of Defense Trade Controls under the International Traffic in Arms Regulations. Affected products include certain defense articles and equipment for manufacturing defense articles, which have been subject to the Commerce Department’s jurisdiction for decades. As a result, publication of a final rule implementing the Wassenaar Lists has been delayed, again.
Setting aside for the moment disputes with respect to items classified under ECCNs xx018, the other changes to the Commerce Control List agreed to in 1995 are modest, but useful. For example, the control level governing microprocessors classified under ECCN 3A001 has been increased from 80 million theoretical operations per second (“MTOPS”) to 260 MTOPS. The control level governing digital computers classified under ECCN 4A003 has been increased from 260 MTOPS to 2,000 MTOPS. The control level for “communications channel controllers” on routers and switches has been increased from 64,000 bits per second to 2.1 million bits per second. The control level for “network access controllers” on routers and switches has been increased from 33 million bits per second to 156 million bits per second.
Nevertheless, most products that are released from multilateral export controls under Wassenaar remain subject to unilateral foreign policy controls and continue to require a licenses for export to embargoed and terrorist countries. This creates unnecessary complexity for companies that must review numerous ECCNs and reclassify products as subject to “AT” controls, rather than simply defaulting to “EAR99”.
Finally, it is worth noting that the Wassenaar Implementing Regulation imposes new reporting requirements with respect to exports of certain products. Reports are required to be submitted to BXA semiannually for specified items controlled under the Wassenaar Arrangement exported under License Exceptions LVS, GBS, CIV, CTP, TSR and GOV. BXA must receive such reports no later than August 1 for exports during the reporting period January 1 through June 30, and no later than February 1 for exports during the reporting period July 1 through December 31. The Export Control Classification Number and paragraph reference as identified on the Commerce Control List, number of units in each shipment, and the country of ultimate destination must be included in each report for each export during the reporting period.
Recommendations: It would be prudent to start developing and implementing a data collection and reporting system for exports under License Exceptions LVS, GBS, CIV, CTP, TSR and GOV, in accordance with the Wassenaar Implementing Regulations, early in 1998.
B. Encryption Regulations
In July, BXA circulated a draft encryption regulation that would correct defects in the interim rule published on December 30, 1996 and implement the Clinton Administration’s Announcement Encryption Exports Approved for Electronic Commerce. The draft encryption regulations are still undergoing inter-agency review, because of questions regarding the appropriate definitions of the term, banks and financial institutions.
In the draft encryption regulations, BXA proposed the following definition:
Banks and Financial Institutions. For purposes of this part, “banks and financial institutions” means:
a) a bank or savings association, as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813 (a) or (b)); a credit union, as defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752);
b) a subsidiary, holding company, branch located outside the United States, of the entities described in paragraph (a);
c) a bank service company as defined in section 1 of the Bank Service Company Act (12 U.S.C. 1861); or a service corporation under section 5 of the Home Owners’ Loan Act (12 U.S.C. 1464(c)(4)(B)); a corporation charted under section 25A of the Federal Reserve Act (12 U.S.C. 611), including any branch thereof; or a corporation having an agreement or undertaking with the Board of Governors of the Federal Reserve System under section 25 of the Federal Reserve Act (12 U.S.C. 611), including any branch or subsidiary thereof;
d) a company organized under the laws of a foreign country which engages in the business of banking, including, without limitation, foreign commercial banks, foreign merchant banks and other foreign institutions that engage in banking activities usual in connection with the business of banking in the countries where such foreign institutions are organized or operating, including any branch or subsidiary thereof;
e) a interbank clearing system that is, or whose members are subject to state or national regulation or supervision;
f) a broker or dealer in securities registered with the Securities and Exchange Commission; a foreign broker or dealer in securities subject to governmental supervision or regulation by a foreign securities authority; an investment company, registered with the Securities and Exchange Commission; an investment adviser, as defined in § 2(20) of the Investment Company Act of 1940 (15 U.S.C. 80a-2), that is registered with the Securities and Exchange Commission and is engaged solely in the business of advising one or more investment companies; a foreign investment company; or a securities, commodity, futures, or option exchange or other financial market that is subject to governmental supervision or regulation;
g) an issuer of a general purpose charge, credit or debit card; or
h) a company engaged in the electronic transmission of money, credit or financial instruments between a financial institution (as defined in this section) and a customer or other financial institutions.
In essence, the draft language set forth above codifies the working definition under the old ITAR. It is considerably broader than the working definition used by BXA today as a rider and condition on export licenses, which is as follows:
The class of end-users is restricted to Banks, defined to include Holding Companies, Community, Regional, and Money Center Banks as well as Savings Associations, Trust Companies and Savings Banks which are regulated under or in a manner consistent with title 12 or title 31 of the United States code. Other financial institutions are not authorized under this license. However, this license may be amended to include other financial institutions after the administration has defined this term for regulatory purposes. In the interim, applicant may submit proposed exports to individual financial institutions other than those defined above for interagency review and approval during this interim period (though a request for an advisory opinion).
This working definition used by BXA today itself is broader than the definition that the Treasury Department and Federal Bureau of Investigation would like to see adopted, prospectively. Basically, Treasury and FBI would like to restrict exports to banks that located in countries that are members of the Financial Action Task Force (“FATF”). FATF member countries have adopted the international standard as outlined in the FATF’s forty recommendations and have submitted themselves to outside, expert peer review to examine performance and implementation. The following twenty-six countries are members of FATF:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States
Until BXA and the other interested agencies can resolve the definition of “bank”, the other corrections and reforms contained in the draft encryption regulations are not likely to be published.
Recommendation: BXA and the other agencies involved should be encouraged to retain the status quo under the ITAR, by adopting the language of the original July 25, 1997 draft encryption regulation.
C. Computer Controls
On November 18, 1997, Congress passed H.R. 1119, the National Defense Authorization Act for Fiscal Year 1998 (“NDAA”, Public Law 105-85). Title 12, Subtitle B, Sections 1211-1215 of the NDAA impose new requirements on exports of computers under License Exception CTP. The NDAA’s provisions affecting exports of computers are not “self-executing”. Therefore, exporters of computers do not have to comply, until BXA has published a rule amending the EAR.
Under Section 1211 of the NDAA, a company that intends to export or reexport a computer having a composite theoretical performance (“CTP”) between 2,000 and 7,000 million theoretical operations per second (“MTOPS”) to a Computer Tier 3 country (e.g., China, India, Israel and Russia) must provide advance notification to BXA. In addition, if a company knows that an item will be used to upgrade a computer beyond the eligibility limit for that country, then it must file an advance notification with BXA. Although exporters have been allowed to self-certify eligibility for License Exception CTP in the past, Congress evidently does not trust exporters to self-certify due to recent, well publicized allegations that computers have been exported to military end-users in Russia and China under License Exception CTP.
Under Section 1213 of the NDAA, post-shipment verifications are required for exports of computers with CTP greater than 2,000 MTOPS to Tier 3 countries. Typically, post-shipment verifications have been conducted either by BXA or by the Foreign and Commercial Service (“FCS”) of the Commerce Department. However, neither BXA nor FCS has sufficient resources to conduct post-shipment verifications. Therefore, under the draft computer rule, this burden would be met through enhanced reporting requirements on the part of the exporter, reseller and end-user.
Recommendation: The draft computer regulation contains a very brief, two week “savings” clause. Therefore, you should consider taking two actions, early in the New Year. First, you should consider informing BXA if you feel that the reporting requirements (in particular the end-user and reseller reporting requirements) are unnecessarily onerous. Second, you should consider designing procedures for compliance with the NDAA reporting requirements promptly, in light of the very brief “savings” period.
Conclusion
We anticipate that approximately one new change to the export control regulations will be published every third business day during 1998, based on historical patterns. In addition, we expect that BXA will introduce legislation in the Congress to repeal provisions of the NDAA governing exports of computers. Representatives of BXA also have indicated that they may introduce legislation to reform the export controls on cryptography, similar to S. 909 (the McCain-Kerrey bill) early in 1998. As in the past, we will keep you informed of new developments monthly.