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U.S. EXPORT CONTROLS PAST, PRESENT AND FUTURE
(2002 Edition)
Copyright © 2002 by Roszel C. Thomsen II and Antoinette D. Paytas, Thomsen & Burke LLP
Introduction – Looking Back at 2002.
Export Administration Act Renewal
Foreign Relations Authorization Act, Fiscal Year 2003.
Computers and Microprocessors.
Conclusions – Looking Forward to 2003.
As is our custom at the end of each year, we take this opportunity to look backward at the highlights of 2002. In addition, in the conclusion section of this memo, we review the prospects for the new year and provide our recommendations to Industry and the Government as to what their priorities should be in 2003.
On Capitol Hill
The 107th Congress, like its recent predecessors, failed to enact legislation that would amend and extend the Export Administration Act (“EAA”). Indeed, the 107th Congress did little of note that affected U.S. export controls, aside from making the Automated Export System mandatory and increasing the penalties for misfiled Shipper’s Export Declarations in the Foreign Relations Authorization Act of 2003.
The Senate did manage to pass a bill (S. 149) that was largely derivative of work done by the 106th Congress. It reflected a precarious compromise between Industry and the national security community. However, conservatives on the House Armed Services Committee and the House International Relations Committee added a number of amendments that were not acceptable to either industry or the White House. Despite repeated statements from leading Republicans that passage of a new EAA was a “high priority”, the real reason that the EAA failed to pass was a fight within the Republican party that the President and the leadership in the Congress could not, or would not, resolve.
In the Regulatory Agencies
The Departments of Commerce, State and Treasury published over 100 rules and notices in 2002 – approximately two each week of the year.
The Bureau of Industry and Security (“BIS”) published an important rule that increased the performance threshold for computers that can be exported to sensitive destinations, like China. It also published important changes to the regulations governing cryptographic products. The Office of Export Enforcement concluded several important enforcement cases with leading computer and chemical companies, before Assistant Secretary Michael Garcia resigned to become the new Commissioner of the Immigration and Naturalization Service.
We saw a number of changes in policy at BIS this year. These policies are the agency’s current interpretation of the regulations. Such interpretations are not published, but are used in evaluating applications for licenses and commodity classification requests.
The first change concerned the use of encryption for management data. Under the old policy, even network infrastructure products could be classified as “retail” if the use of encryption was limited to management data. That is no longer the case. The use of encryption for management data is reviewed in light of the platform.
The second change came on Encryption Licensing Arrangements to civil end users in Country Group D. A new 15-day pre-export notification requirement was added to these ELAs. In addition, China and Russia are being routinely excluded from the authorized territory on these types of ELAs.
The third change we saw concerned wireless bridge products. Early reviews of these products resulted in “retail” treatment. Recent reviews have resulted in non-retail treatment.
BIS and the Office of Defense Trade Controls (“ODTC”) both published important rules that delineate the scope of “space qualified” items. ODTC also concluded important enforcement actions against Loral in connection with exports to China.
At the Multilateral Control Regimes
The Wassenaar Arrangement held a plenary meeting in December of 2002. The United States failed to achieve agreement on either of its top priorities. The U.S. proposal that member countries should engage in “Denial Consultations”, in order to ensure that one country does not issue a license for an item that another country has denied, was rejected because it was perceived to infringe upon the “National Discretion” licensing authority of the members. The U.S. proposal that member countries should institute a “Catch All” provision, in order to ensure that products are not exported to entities engaging in proliferation whether or not such products are on the Dual-use List, was rejected because member countries simply do not want to control products unless the products are sensitive enough to be listed. The Wassenaar Arrangement did manage to implement a number of changes to the Dual-use List, including the decontrol of microprocessors. However, this decontrol is not yet reflected in the U.S. regulations.
There were a number of other significant developments in export controls in 2002. The statutory developments are described in the Legislation section of this memorandum. The regulatory changes are described briefly in the Regulations section 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 2002.) Enforcement activities and events are described in the Enforcement section of this memorandum. Also included is a special section on Wassenaar developments. In the Conclusion section of this memorandum, we offer our thoughts on 2003, for your use in advance planning.
The 107th Congress again failed to pass EAA renewal legislation, despite the concerted efforts of members in both chambers and the Administration. The EAA bill perennially pits against each other members with traditional and progressive views on exports of products with potential dual civilian and military uses, such as high-performance computers. Since Sept. 11, 2001, both sides of the issue claim their approach would better protect the nation, with the traditionalists preventing more exports of dual-use technologies to rogue nations, and reformers seeking the greater effectiveness of up-to-date controls. Congress was unable to strike a compromise that satisfied the differing philosophies of members on this issue.
The Senate had passed its EAA renewal bill, S.149, on September 6, 2001 by an 85-14 vote. The House EAA renewal bill, H.R. 2581, proved more difficult, as several committees (Agriculture, Armed Services, Commerce, Intelligence, Rules and Ways and Means) assigned to consider the bill added numerous controversial amendments.
The White House initially supported the Senate’s bill, but the President and senior White House officials were noticeably absent from the discussion in the House over their version of the EAA renewal. Two powerful House committees, International Relations (HIRC) and Armed Services (HASC), approved heavily amended versions of the Senate bill that were vigorously opposed by Industry. The interested committees, notably HIRC, HASC, and the Rules Committee, met in an attempt to find a way to bring the bill to the House floor, but gave up when it became clear that neither the proponents of S.149 nor the proponents of H.R. 2581 had sufficient votes.
The White House then appointed Gary Edson, deputy national security adviser and deputy assistant to the president for international economic affairs, as lead on the EAA renewal legislation. Mr. Edson had helped construct S.149, and the hope was that he could broker a similar compromise in the House. However, neither HIRC nor HASC would compromise, as the summer wore on.
The Administration remained united behind the Senate bill, but negotiations in Congress slowed with both sides waiting for a proposed White House compromise. In the meantime, on August 17, 2001, President Bush issued Executive Order 13222 declaring a national emergency with respect to the expiration of the EAA. Because the EAA had not been renewed by the Congress, on August 14, 2002, President Bush issued a Notice (67 FR 53721) continuing export controls under the EAR for another year, pursuant to the International Emergency Economic Powers Act.
In mid-September, the White House staff and House leadership restarted efforts to obtain passage of the EAA. The White House held meetings to try to resolve differences among the HIRSC, HASC, and Senate versions of the EAA. HIRC even held a hearing, which was mostly a re-hash of well-rehearsed testimony offered at earlier hearings.
Finally, the 107th Congress adjourned without passing the EAA renewal legislation that the Bush Administration had worked so hard to achieve. The question arises, what should be done in the 108th Congress?
Although S. 149 failed to win ultimate passage, Senator Mike Enzi (R-WY) said recently that the bill remains "a good piece of legislation." Senator Enzi’s goal is to create a framework for strategic export controls. He plans to draft a new bill by the end of January that incorporates some of the provisions of S. 149.
Given the shift in control of the Senate from Democrats to Republicans, and the retirement of Senate Banking Committee Chairman Phil Gramm (R-TX), who was a cosponsor of S. 149, it will be an uphill battle to get the legislation passed by the 108th Congress. Sen. Richard Shelby (R-AL), who voted against the bill on the Senate floor, will most likely replace Gramm as Chairman of the Senate Banking Committee. In the House, Rep. Duncan Hunter (R-CA), a leading critic of S. 149, is likely to become HASC chair in the 108th Congress. Neither Shelby nor Hunter supports EAA legislation that industry might find appealing.
While a majority of Democrats in both the House and Senate have been supportive of S. 149, Republicans in both chambers have been divided. The next Republican Majority Leader, Bill Frist of (R-TN), voted for S. 149. However, he would certainly be less enthusiastic than outgoing Majority Leader Tom Daschle (D-SD) in bringing a bill to the floor that divides Republicans. Expect a strong push from supporters of EAA renewal early in the 108th Congress.
On September 30, 2002, Congress passed Public Law 107-228, the “Foreign Relations Authorization Act, Fiscal Year 2003’’. Buried in this law is Section 1404, “Improvements to the Automated Export System.” These “improvements” include the requirement that all SEDs be filed using AES (Mandatory filing), an increase in civil penalties from $100 per day up to a maximum of $1,000 per violation to $1,000 per day up to a maximum of $10,000 per violation, criminal penalties not to exceed $10,000 per violation and/or 5 years imprisonment. In addition, the Census Bureau was given the authority to delegate investigations to Customs and the Office of Export Enforcement.
Implementing regulations have not been published yet. We suggest exporters review their SEDs to be sure they are compliant. The days of filing SEDs with erroneous information (G-DEST, 4A96G, etc.) are coming to an end. By using the AES system, the agencies will be able to automate finding inaccurate information. Although Census has not pursued these cases historically, now that they can delegate this function exporters should be careful!
Rep. Porter J. Goss (R-FL), chairman of the House Intelligence Committee, introduced legislation (H.R. 3627) that would have authorized the president to impose economic sanctions against countries or entities that assist individuals engaged in "terrorist activity" or that fail to fully cooperate with the United States in its fight against terrorism. The legislation was co-sponsored by Rep. Lindsey Graham (R-SC) and would have allowed the President to levy a range of sanctions including a complete economic embargo and a prohibition against travel to the targeted country. However, the bill died at the end of the 107th Congress.
The "Syria Accountability Act," introduced by Senators Barbara Boxer (D-CA) and Rick Santorum (R-PA) as S. 2215 and in the House by Representatives Dick Armey (R-TX) and Eliot Engel (D-NY) as H.R. 4483, would have imposed sanctions on Syria until the President certified that Syria had ceased its support for terrorist groups, had withdrawn its forces from Lebanon, halted its development of missiles and biological and chemical weapons, and was in compliance with the UN resolutions concerning Iraq. Syria appeared on the State Department list of terrorist sponsors and harbors several Islamic and Palestinian insurgency groups. Neither the Administration nor U.S. business supported the legislation. This bill did not make it past committee in the 107th Congress. However, Syria has few friends in Washington, DC. Similar bills are likely to be introduced in the 108th Congress, raising the possibility of OFAC-style sanctions against Syria.
The Bush Administration has brought a more conservative approach to government regulations, in general. In March, the Office of Management and Budget (OMB) released a Draft Report on the costs and benefits of federal regulations. The report noted that during President Bush’s first year in office, the OMB rejected 17 regulations submitted by various agencies, mainly for inadequate analysis. That is more than the total of 16 rules the Clinton OMB rejected during eight years in office! The Administration noted that this is not a simplistic agenda of deregulation. Instead, the Administration is focusing on smart regulation and quality regulation. Nevertheless, the Bush Administration has not noticeably reduced the number of new export control regulations issued by the Commerce, State and Treasury Departments, which exceeded 100 in 2002.
In March, BIS implemented significant new regulations affecting the exports of computers. Specifically, the United States raised the level above which it requires individual licenses for computer exports to Tier 3 countries (which include Russia, Israel, India, Pakistan, and China) from 85,000 Millions of Theoretical Operations Per Second (MTOPS) to 190,000 MTOPS. Under these new regulations, high-performance computers controlled by Export Control Classification Number (ECCN) 4A003 with a CTP up to 190,000 MTOPS can be exported to military and civilian end-users in Computer Tier 3 countries under License Exception CTP without advance notification. Latvia was moved from Tier 3 to the group of countries for which no prior review is required for computer exports (Tier 1). BIS also published a final rule revising the national security control parameters for computers from 6,500 MTOPS to 28,000 MTOPS to implement agreed changes in Category 4 (Computers) of the Wassenaar List of Dual-Use Goods and Technologies.
The United States raised the level at which it requires individual licenses for exports to many destinations of general purpose microprocessors from 6,500 MTOPS to 12,000 MTOPS. More important, however, is the agreement at Wassenaar to decontrol microprocessors completely. The U.S. is expected to amend the EAR, retaining only controls on exports to certain military end users, in 2003.
BIS regulations added Australia, New Zealand, Norway, Switzerland, and Turkey to the list of countries eligible for exports and reexports of software and technology for computers with unlimited CTP under License Exception TSR. Unfortunately, however, these new regulations did not increase the threshold for License Exception TSR for technology related to computers. Originally, BIS had hoped to increase the threshold from 33,000 to 158,000 MTOPS, but was frustrated by objections from the Department of Defense.
In July, the Department of Commerce requested comments on the current limit for use of License Exception TSR for exports and reexports of technology and software under ECCNs 4D001 and 4E001. The current TSR eligibility level is 33,000 MTOPS for exports and reexports to most countries. BIS is trying to determine if this limit should be adjusted, taking into consideration the control level for the export of computer equipment and the control policies of other member countries of the Wassenaar Arrangement. Originally intended to control technology for high performance computers, License Exception TSR now impacts a much larger range of computer technology than was ever intended, and it badly needs updating.
In June, BIS published the regulations that implement the 2000 Wassenaar agreement by eliminating the 64 bit limitation for "mass market" encryption products. This is important, because mass market products are exempt from the post-export reporting requirements and automatically eligible for de minimis treatment. Exporters have to file new requests for technical reviews in order to obtain mass market eligibility. The qualification for mass market is considerably narrower than for "retail" products and will require more extensive justification by exporters. The rule also makes a number of other important changes to the export controls on encryption.
Following the 9/11 attacks, BIS has a renewed focus on enforcement of export controls. President Bush proposed an increase in spending by BIS for Fiscal Year 2003 of $34.4 million--to $103.3 million--including a $5.3 million rise for export enforcement, which is aimed at preventing the unauthorized dissemination of controlled U.S. goods and technical data overseas. The White House said that the proposed hike in enforcement spending would be used to fund new and existing overseas posts for export control attaches and to open two new field offices in the port cities of Seattle, Wash., and Houston, Texas.
The Commerce Department announced plans to permanently station export control attachés in the United Arab Emirates and Egypt to better monitor shipments of "dual-use" goods and technology that can be used for civilian and military purposes, to countries of concern such as Iran and Iraq. Plans have also been set in motion to expand the onsite U.S. export control presence in the People's Republic of China. Specifically, to post an attaché in Shanghai to assist the Commerce Department official already stationed in Beijing in monitoring China's compliance with U.S. rules governing exports of high-performance computers and other products BIS has also launched a separate initiative in cooperation with the State Department and the U.S. Customs Service aimed at enhancing export controls in countries that handle significant volumes of so-called transshipment trade, including Cyprus, Malta, Malaysia, Singapore, and the UAE.
Consistent with the increased focus on security, BIS levied significant penalties on individuals and corporations in 2002.
Perhaps the most significant BIS penalty was levied against Sigma-Aldrich Corporation for violations resulting from the export of biological toxins. Sigma-Aldrich and two of its subsidiaries agreed to pay a $1,760,000 fine to settle charges involving illegal exports of biological toxins. The penalty is the largest imposed by BIS in a case involving biological toxins, and one of the largest penalties ever paid to BIS for export control violations. BIS had instituted administrative enforcement actions against the Sigma-Aldrich companies, alleging that a company Sigma-Aldrich had acquired in 1997 had made unauthorized exports of controlled biological toxins to Europe and Asia on numerous occasions prior to the acquisition and had continued the unlicensed exports for more than a year after the acquisition.
The Sigma-Aldrich case is important in two respects. First, it was one of the largest fines every imposed on a company by BIS. Second, it clearly established the principal that companies can be held liable for the export control violations of companies they acquire, under a theory of successor liability.
Also worth mentioning was the settlement reached by the State Department and Loral Space and Communications for alleged ITAR violations. Loral agreed to pay a fine of $14 million to settle allegations that they improperly assisted China in a review of a rocket launch failure. When Loral’s involvement with the review became public, it created a firestorm of controversy for the Clinton Administration. Allegations were made regarding improper influence over government policy resulting from political contributions made by people associated with Loral. The settlement will enable Loral to continue exporting products to China despite the fact that a special House committee concluded after a year-long investigation that "[Loral] deliberately acted without the legally required license and violated U.S. export laws" in helping China. The Justice Department has terminated its investigation.
The Commerce Department’s procedures for exporters to self-disclose violations are codified at 15 C.F.R. § 764.5. BIS considers these voluntary disclosures as “mitigating factors” when deciding whether or not to pursue penalties against a violator. Recent history shows that BIS is not giving as much weight to voluntary disclosures in terms of mitigation as it has in the past. Consider the following:
· In July, the Department of Commerce imposed a $135,000 civil penalty on Printrak, a Motorola Company, of Anaheim, California to resolve allegations that the company exported automated fingerprint identification systems, associated fingerprint identification software, and encryption software to numerous destinations in violation of U.S. export control laws. Printrak voluntarily disclosed these alleged violations to BIS and cooperated fully in the investigation.
· Again in July, the Department of Commerce imposed a $508,000 civil penalty against EOTT Energy Operating Limited Partnership, of Houston, Texas, to settle allegations that the company exported crude petroleum to Canada in excess of the authorized quantities. Assistant Secretary Garcia stated that while EOTT received credit for voluntarily self-disclosing some of the violations, there were a number of aggravating factors in this case.
· In August, the Department of Commerce announced that Johns Hopkins Health System Corporation in Baltimore, Maryland agreed to pay the maximum $10,000 civil penalty to settle charges that it violated U.S. antiboycott laws by discriminating against an individual in support of the Arab League boycott of Israel. Johns Hopkins Health System Corporation voluntarily disclosed the incident and was still fined.
The current BIS voluntary disclosure policy leaves companies unsure of what to do if they discover a violation that has taken place. Voluntary disclosure does not seem to have as much of a positive impact on whether the company will face enforcement action by BIS. As such, many companies might be inclined to forgo voluntary disclosure and take their chances on getting caught by BIS Office of Export Enforcement (OEE). The best way to avoid this dilemma is a “pound of prevention” including making sure you have an up to date export compliance program and conducting internal audits, as necessary to ensure compliance.
The Wassenaar Arrangement held its eighth plenary meeting in December of 2002. The main focus of the meeting was implementing measures designed to prevent terrorist groups and individuals from acquiring weapons and dual-use technologies. Member countries agreed to develop new means for sharing information among each other to avoid acquisitions of such items by terrorists. Participating states also adopted guidelines on “best practices” for exports of small arms and light weapons.
Nevertheless, the United States failed to achieve its two highest priorities at the plenary: Denial Consultations and a Catch-All provision. The plenary did manage to achieve a significant accomplishment in decontrolling microprocessors, but this change has not yet become part of U.S. regulations.
On Capitol Hill
Conservatives have taken over the key committees with jurisdiction over export controls in both the Senate and the House. Richard Shelby (R-AL) will most likely be the new Chairman of the Senate Banking Committee. Duncan Hunter (R-CA) will most likely be the new Chairman of the House Armed Services Committee. New Senate Majority Leader Bill Frist (R-TN) seems unlikely to bring a bill to the floor that would risk dividing Republicans. Clearly, a new strategy is in order.
It appears that the Senate may attempt to draft a bill that starts where S. 149 left off, but that also reflects greater deference to national security concerns in a reauthorized EAA. It appears that the House may attempt to draft omnibus legislation that would amend not only the EAA but also the Arms Export Control Act, bringing controls on dual use and military items under one statutory authority. The position of the White House is not known. A new EAA is supposed to be a high priority, now that it has “Fast Track” negotiating authority under the Trade Promotion Act. However, the strength of its commitment to export control legislation is questionable.
Industry has been in a reactive posture since 1992, at the beginning of the Clinton Administration. Industry has essentially given up trying to produce new legislation, and resorted instead to trying to “kill” unfavorable bills and amendments, when necessary. The good news is that it has not been necessary to go into “kill mode” very often, because most export control legislation has died of its own weight. The bad news is that Industry has developed few “friends” willing to support modernization of the current statute.
Industry has to make a decision whether to commit the resources that would be required in order to produce new legislation, and to fight for that legislation in the face of Republicans who are hostile to reform efforts. If Industry is not willing to commit resources to this effort, then “kill mode” is probably the best alternative available. We think that two more years in “kill mode” probably is the best option, in the present political climate.
In the Agencies
The senior management at BIS has been telling Industry for two years that it will pay attention to internal management issues, once the EAA is either enacted or dead. Now, it is well and truly dead, at least for the 107th Congress. So, will senior management of BIS fulfill its commitment to pay attention to internal issues, or will it make another (probably futile) attempt at renewal of the EAA in 2003?
Rather than take another run at the EAA, Industry should encourage the senior management at BIS to address the following internal issues:
License Processing. The Administration certainly is processing license applications more slowly than its predecessors, and it seems to be denying a larger number of applications than in the past. The Executive Order on License Processing is not being implemented. Office Directors have discretion to ignore it when they want to. The Operating Committee has an enormous backlog. The Agency Committee on Export Policy seldom meets. The Administration should either implement the Executive Order on License Processing as written, or replace it with another system. The status quo should be intolerable to Industry and the Administration. This should be the top priority for 2003.
Microprocessors. The State Department finally realized that its attempts to continue export controls on microprocessors were undermining its position on many other issues at Wassenaar. The Administration deserves credit for recognizing this fact. However, now it is time to implement the decontrol of microprocessors in the U.S. Export Administration Regulations! Inter-agency wrangling over the scope of a “military end-user” should be resolved quickly, and a final rule published early, in 2003.
Computers. The Administration has taken the baloney-slicing approach to computer controls. Granted, it took a large slice in 2002, effectively decontrolling most general purpose computers. However, it is time finally to decontrol all computers, including the technology for computers, in 2003.
Cryptography. The Administration seems to realize that the current controls on cryptography are fiendishly complex, almost to the point of being incomprehensible and unenforceable. The Administration’s stated aim, to simplify without new decontrol, is a fool’s errand. Both the Administration and Industry should be prepared to give a little on areas like technical reviews and reporting, in order to simplify and clarify the controls on cryptography. This re-write is not a glamorous task, but it is important nonetheless.
Foreign National Licensing. The Administration seems to think it can reform the licensing of foreign nationals by streamlining the process. Industry should push for increases in the availability of License Exceptions like TSR, TSU and NLR. The model should be the success of License Exception ENC. Streamlining the process is not the answer, in our view.
Partnership between Industry and OEE. There is a desperate need for a fresh approach at OEE. Not so many years ago, OEE viewed private industry as partners in identifying and prosecuting “bad guys” who were trying to circumvent U.S. export controls. Today, OEE increasingly views Industry as “part of the problem” rather than “part of the solution”. Now that Mike Garcia has moved on to the INS, it is time for the next Assistant Secretary to take a hard look at OEE’s enforcement priorities. Industry should suggest, for example, that prosecutions of companies that make voluntary disclosures should be limited to the most egregious cases!
At the Multilateral Control Regimes
The Wassenaar Arrangement is almost a decade old. It still does not offer a level playing field to member states. Sure, member states agree to control a uniform list of products and technologies. However, the way that they implement controls is far from uniform. All too often, U.S. companies are disadvantaged vis-à-vis their competitors in other member countries, because other countries will issue licenses approving transactions where the U.S. will not. The Administration’s Denial Consultation and Catch-all Provisions are intended to address this problem. If we don’t succeed in 2003, when the U.S. is the Chair for the Plenary Session, then some other approach should be attempted, or Wassenaar itself should be abandoned, by the end of 2003.