US EXPORT CONTROLS PAST,
PRESENT AND FUTURE
(2000 EDITION)
By Roszel C. Thomsen II and Antoinette D. Paytas
I. Legislation
II. Regulations
A. Computers and Microprocessors
B. Cryptography
C. Satellites
E. Embargoes
1. North Korea
2. Serbia
III. Enforcement
A. First Indictment for Violating the “Deemed Export” Rule
B. Penalty for a Voluntary Disclosure
C. Lockheed
Executive Summary
There was one major legislative development in 2000:
EAA Renewal – On November 13, 2000, President Clinton signed H.R. 5239 enacting the so-called “Mini-EAA” as Public Law 106-508. The Mini-EAA changes the expiration date of the Export Administration Act (“EAA”) from August 20, 1994 to August 20, 2001. Most importantly, it reinstates the confidentiality provisions in Section 12(c) of the Export Administration Act and increases substantially the penalties for civil and criminal violations. The Bush Administration will have to face the next expiration within seven months of taking office. Another extension seems likely.
There were four major regulatory developments in 2000:
Computers and Microprocessors – The Administration issued rules increasing the thresholds for exports of computers and microprocessors under license exception on March 10, June 13, July 12 and October 13, 2000. Another regulation was circulating inter-agency at the end of the year, that would make further changes. The Administration’s room to maneuver was significantly circumscribed by the National Defense Authorization Act, however, as will the Bush Administration, so progress is likely to remain slow and incremental in the first half of 2001.
Encryption – On January 14, 2000, BXA published the long-awaited interim rule amending the export controls on encryption products. This rule not only implemented the encryption export control reforms announced by the White House on September 16, 1999, but also implemented changes to the encryption items that are subject to export controls under the Wassenaar Arrangement. On October 19, 2000, BXA published a Final Rule that modified the export controls on cryptography to reflect the creation of a license free zone for cryptographic products in the European Union (EU) and ten strategic trading partners. This rule also made subtle changes to other rules governing exports of cryptographic products, but by no means eliminates the pre-export review and post-export reporting requirements.
Exporter of Record – In July, BXA and the Census Bureau published changes to the Export Administration Regulations and the Foreign Trade Statistics Regulations that implement the new “exporter of record” rules. These new rules govern how exporters and forwarders must complete the Shipper’s Export Declaration with respect to the “shipper” and the “principal U.S. party at interest” and other fields. They also clarify how U.S. companies can shift the burden of export compliance to foreign parties and their forwarding agents for so-called “routed” or ex works transactions.
Embargoes – BXA and the Office of Foreign Assets Control modified the various country-specific embargoes on numerous occasions in 2000. The trend is toward loosening the various embargoes, as exemplified in the cases of North Korea and Serbia.
There were three major developments in the enforcement of export controls.
Deemed Export Rule – The Office of Export Enforcement and the Department of Justice obtained the first indictment of a company for violating the so-called “deemed export” rule in October of 2000. The indictment, handed down by a Grand Jury in San Jose, California, alleges that two Silicon Valley companies and their principals hired Chinese nationals for the express purpose of exporting manufacturing technology to China.
Penalty for a Voluntary Disclosure – BXA’s Office of Export Enforcement announced a $25,000 civil penalty on NEC Technologies for alleged illegal exports of finger print identification systems to Argentina, Peru, Singapore, South Africa and Taiwan. NEC voluntarily disclosed the alleged violations.
Lockheed - Lockheed agreed to pay the largest fine ever imposed by the State Department's Office of Defense Trade Controls - $13 million to settle allegations that it illegally exported missile technology to China in connection with the failed launch of a commercial satellite.
Introduction
There were a number of important changes to U.S. export controls in 2000. The statutory changes are described in Section I of this memorandum. The regulatory changes are described briefly in Section II of this memorandum. (They also are described in greater detail, with accompanying citations to the Federal Register, in 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, Foreign Asset Control Regulations and Foreign Trade Statistics Regulations During 2000.) The third section of this memorandum describes several important enforcement cases.
I. Legislation
As you will recall, the Export Administration Act ("EAA", 50 USC App 2401 et seq.), which provided the statutory basis for the imposition of U.S. export controls during the Cold War, expired in 1994, five years after the fall of the Berlin wall. Since then, the President has retained his authority to control exports under the Export Administration Regulations ("EAR", 15 CFR 730 et seq.) pursuant to various Executive Orders invoked under authority of the International Emergency Economic Powers Act ("IEEPA", 50 USC 1701 et seq.).
On
November 13, 2000, President Clinton signed H.R. 5239 enacting the so-called
“Mini-EAA” as Public Law 106-508. The Mini-EAA changes the expiration date of
the Export Administration Act (“EAA”) from August 20, 1994 to August 20, 2001.
It also has two other important effects.
The good news is that the confidentiality provisions in Section 12(c) of the
EAA are reinstated. During the lapse, a Florida newspaper and the Wisconsin
Nuclear Arms Project had filed suits in the Federal District Courts of Florida
and the District of Columbia, respectively, challenging the validity of the
confidentiality provisions under the various Executive Orders and the
International Emergency Economic Powers Act (“IEEPA”) that extended the EAA. In
a statement in the Congressional Record, Senator Phil Gramm, Chairman of the
Senate Banking Committee, stressed that the Congress intends for the
confidentiality protection to be considered as covering information obtained
during the lapse of the EAA as if there had been no interruption of authority.
However, this language is only in the legislative history, not in the Mini-EAA
itself.
The bad news is that the higher penalties of the EAA now apply, rather than the
lower penalties of IEEPA. For example, the maximum civil penalty for violation
of national security controls increases from $10,000 under IEEPA to $100,000
under the EAA. This increase is not as steep as some of the proposals that died
in the Senate Banking Committee, but it is significant, nonetheless.
The 107th Congress will have to consider EAA renewal legislation
early in its first session, in order to avoid another lapse next August.
Senator Gramm has indicated a strong desire to move forward with new EAA
legislation. No one is sure if he will re-introduce this year’s Senate
bill or a new bill. However, we believe he plans to introduce something
in the next session.
Strategy for 2001. Industry has basically three options. The first option is to work with Senator Gramm to craft acceptable language. The second option is to aggressively oppose Senator Gramm’s bill. The third, and perhaps the default, option is to do nothing, and hope that the bill dies in a deeply divided Senate.
II. Regulations
A. Computers and Microprocessors
On March 10, BXA published new composite theoretical performance (“CTP”) thresholds for computer exports to certain countries. The level for Tier 2 countries increased from 20,000 million theoretical operations per second (“MTOPS”) to 33,000 MTOPS. The level for civilian end-users in Tier 3 countries increased from 12,300 to 20,000 MTOPS and for military end-users in Tier 3 from 6,500 to 12,500 MTOPS. There were no changes to Tier 1 or 4.
On June 13, BXA published an increase in the threshold governing exports of microprocessors from 3,500 to 4,500 MTOPS and for graphics controllers from 75 million to 100 million 3D Vectors.
On July 12, BXA published increases in the computer and microprocessor decontrol levels in conformance with agreements reached at the fifth plenary session of the Wassenaar Arrangment in December of 1999.
On October 13, BXA published a new computer rule that increased the threshold for computers eligible for export under License Exception CTP to 45,000 MTOPS for Tier 2 countries and to 28,000 MTOPS for Tier 3 countries. In addition, Argentina was moved from Tier 2 to Tier 1, and Estonia was moved from Tier 3 to Tier 2.
We expect that BXA will publish additional changes to the computer controls early next year, implementing the new control lists adopted by the Wassenaar members at their December plenary. This should include increasing the microprocessor decontrol level to 6,500 MTOPS and the computer decontrol level to 28,000 MTOPS. However, the prospects for broader reform of computer controls, such as changing the performance metric from MTOPS to some other metric, or decreasing the waiting time before such performance increases may become effective for Tier 3 countries (like China and Russia), are going to have to be addressed by the Bush Administration on a priority basis in 2001.
B. Cryptography
On
Friday, January 14, 2000, BXA published the long-awaited interim rule amending
the export controls on encryption products. This rule not only implemented the
encryption export control reforms announced by the White House on September 16,
1999, but also implemented changes to the encryption items that are subject to
export controls under the Wassenaar Arrangement.
Overall, the White House delivered on its promise to reform the onerous
encryption export controls. In some respects, like the favorable treatment
accorded to source code, the rule was even more liberal than the White House
had promised. In other respects, like the remaining restrictions on network
infrastructure products, it was disappointing. Moreover, by overlaying the new
encryption export control policy on top of the Wassenaar control list, the new
regulations are more liberal in their treatment of encryption exports, but
remain fiendishly (and, arguably, unnecessarily) complex.
While the number of transactions requiring export
licenses was reduced under the new policy, the administrative burden on
companies to comply with the encryption export controls remained high. With few
exceptions, every new product must be reviewed by BXA and the National Security
Agency ("NSA"), prior to export.
On October 19, 2000, BXA published a Final Rule that modified the export controls on cryptography to reflect the creation of a license free zone for cryptographic products in the European Union (EU) and ten strategic trading partners. This rule also makes subtle changes to other rules governing exports of cryptographic products, but by no means eliminates the pre-export review and post-export reporting requirements. For a detailed article describing these changes, a slide presentation and a useful checklist of items required in classification requests, please visit our web site at www.t-b.com/export.htm.
C. Satellites
On May
10, a long-time champion of export control reform, Representative Sam Gejdenson
(D-CT) introduced the Satellite Exports with Security Act of 2000 which
would have returned jurisdiction with respect to satellite export licensing
from the State Department to the Commerce Department. The bill was a reaction
to the nearly 40% decline in U.S. companies’ market share since the Congress
mandated transfer from Commerce to State in 1999. Major companies, like
DaimlerCrysler Aerospace, had issued instructions to their satellite business
units “to reduce their dependency on U.S. suppliers by finding where possible
and establishing where necessary alternate sources for components purchased in
the United States.” In response, the State Department’s Office of
Defense Trade Controls (“ODTC”) published a new regulation that does not go
nearly so far in removing onerous restrictions on satellite exports.
Does the State Department in general, and ODTC in particular, know (or care)
about the extent to which they are failing at their task and the exporting
public disdains them? Plainly, the munitions export licensing system is badly
broken, as evidenced by the loss of U.S. market share in satellite exports and
the deplorable state of international defense procurement cooperation between
the U.S. and its major allies. On the one hand, at the Ministerial Meeting of
the North Atlantic Council on May 24, Secretary of State Madeleine Albright
announced the new Defense Trade Security Initiative, which includes a number of
promises to expedite the license review process. On the other hand, it was not
able to negotiate a single license free zone agreement with even our closest
allies, like the United Kingdom and Australia. Adding insult to injury,
ODTC decided to shut down its offices including all approvals of export
licenses for nearly a month to accommodate an office move in 2000.
Fixing the morass in licensing of munitions items at the State Department should be a priority of the incoming Bush Administration. Probably, the preferred approach would be to remove export licensing from the State Department, altogether.
D. Exporter of Record
On July 10, BXA and the Census Bureau published changes to the Export Administration Regulations and the Foreign Trade Statistics Regulations that implement the new “exporter of record” rules. These new rules govern how exporters and forwarders must complete the Shipper’s Export Declaration with respect to the “shipper” and the “principal U.S. party at interest” and other fields. They also clarify how U.S. companies can shift the burden of export compliance to foreign parties and their forwarding agents for so-called “routed” or ex works transactions.
These new regulations are important reading for all exporters and their forwarding agents, but they are neither widely known nor well understood. Broader understanding probably will come in April of 2001, when Census revises the Shipper’s Export Declaration form to replace “exporter” with “U.S. Principal Party at Interest”.
E. Embargoes
1. North Korea
BXA and the Treasury Department's Office of Foreign Assets Control published new regulations easing the sanctions against North Korea on June 19. The rules introduce a set of commodities that may be exported to North Korea without a license, including most consumer goods. However, virtually nothing in the electronics, computers or telecommunications lists may be exported without a license to North Korea.
2. Serbia
After the defeat of Slobodan Milosovich in the Serbian elections, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued two new General Licenses authorizing air transportation related activities and transactions related to petroleum exports. In addition, OFAC and BXA are handling applications for specific licenses now on a case-by-case basis, rather than under the policy of denial that applied heretofore.
3. India and Pakistan
On March 17, BXA modified its sanctions that were imposed against India and Pakistan because of their nuclear proliferation activities. The list of entities that require licenses was reduced, and the list of commodities that require licenses was restricted. At the same time, BXA adopted a somewhat more liberal licensing policy with respect to applications, on a case-by-case basis.
III. Enforcement
There were some interesting developments in enforcement in 2000. We strongly recommend all exporters audit all areas of their compliance programs. These audits may done internally or be outside personnel. The key question to ask during the audit is can your company survive an enforcement investigation on one of the priority enforcement areas, like intangible exports, and should you make a voluntary disclosure in light of the penalties imposed against NEC?
A. First Indictment for Violating the “Deemed Export” Rule
The Office of Export Enforcement (“OEE”) and the Department of Justice obtained the first indictment of a company for violating the so-called “deemed export” rule in October of 2000. The indictment, handed down by a Grand Jury in San Jose, California, alleges that two Silicon Valley companies and their principals hired Chinese nationals for the express purpose of exporting manufacturing technology to China.
B. Penalty for a Voluntary Disclosure
OEE announced a $25,000 civil penalty on NEC Technologies for alleged illegal exports of finger print identification systems to Argentina, Peru, Singapore, South Africa and Taiwan. NEC voluntarily disclosed the alleged violations. This case could have a chilling effect on the willingness of companies to make voluntary disclosures, at least until the enforcement posture of the Bush Administration is better understood.
C. Lockheed
Lockheed agreed to pay the largest fine ever imposed by the State Department's Office of Defense Trade Controls - $13 million to settle allegations that it illegally exported missile technology to China in connection with the failed launch of a commercial satellite. Coming on the heels of record fines imposed against Boeing and IBM in the last couple of years, the Lockheed case is further evidence that even the largest companies with the most sophisticated compliance programs nevertheless may find themselves in serious trouble. It is a reminder that all companies should periodically audit and assess their export control compliance programs to ensure not only compliance with the export control regulations but also conformance with best industry practices, in order to avoid the fines, penalties and embarrassment associated with vigorous export control enforcement actions.
Conclusion
We anticipate that approximately one new change to the export control regulations will be published every third business day during 2001, based on historical patterns. In addition, we expect that there will be new bills introduced to the Congress and an additional enforcement cases worthy of note. As in the past, we will keep you informed of new developments monthly.