There were a number of important changes to the export control laws and regulations in 2005. In addition, enforcement activity, including criminal penalties, increased substantially in 2005, when compared with prior years. As is our custom, this memorandum summarizes these and other developments in the field of U.S. and multilateral export controls. It concludes with several suggested New Years Resolutions suitable for adoption by all companies that engage in the export of products and technologies that are subject to export controls.

Legislation

Congress adjourned (yet again) without passing Export Administration Act (“EAA”) renewal legislation. Thus, on August 2, 2005, President Bush issued (yet another) declaration of national emergency with respect to the EAA. President Bush will continue to control exports for another year under the authority of the International Emergency Economic Powers Act. In December, House International Relations Committee Chairman Henry Hyde (R-IL) introduced H.R. 4572 to revise and extend the EAA. The text of the bill is not yet available.

The House and Senate finally reached agreement on the National Defense Authorization Act for Fiscal Year 2006 (H.R. 1850) on December 21. The bill has been forwarded to the President for signature and we expect him to sign it early in 2006. This legislation contains both good news and bad news for exporters. First, the good news, Conferees dropped Section 1212, which would have imposed a DOD contracting/procurement sanction on any entity (read EU) that transfers certain military items to China. On Section 1213 (banning DOD purchase of items or parts from Chinese “military companies”), Conferees included a significantly narrower-scope provision that will limit its impact on DOD suppliers/contractors. Now on to the bad news, Section 1205 increases the penalties, both civil and criminal, for violations of any regulation, etc. issued under the International Emergency Economic Powers Act (“IEEPA”). Civil penalties are increased from $11,000 to $250,000. Criminal penalties are increased from $50,000 to $500,000. The only good news regarding penalties is that the criminal intent standard remains “willful”. IEEPA remains the statutory authority for administering the Export Administration Regulations (“EAR”), as well as providing authority for numerous U.S. sanctions regulations.

Regulations

EAR

It was a very busy year for new regulations at BIS. For fiscal year 2005, BIS published 32 regulation changes (three more than were published in FY 2004). Although there were many changes, most of them were minor.

Libya

In March, BIS published the long-awaited regulation providing guidance to U.S. companies on dealing with "installed base" items in Libya and making other changes to export and reexport controls on Libya. Activities involving installed base items are divided into two categories: those that require a report to BIS, but not a license, in order to overcome the prohibition stated in Section 764.2(e), and those that require a license in order to overcome the prohibition. The rule also makes a number of other changes to the EAR involving Libya which are described in the attached regulatory summary – see Item # 10 in the summary of changes to the EAR.

In November, BIS published an interim rule amending the EAR by creating a new License Exception (United States Persons In Libya “USPL” at 740.19 of the EAR) authorizing the export or reexport of certain items controlled for anti-terrorism (“AT”) reasons only on the Commerce Control List (“CCL”) to U.S. persons in Libya. Items exported or reexported to Libya pursuant to the new License Exception USPL may only be used by U.S. persons or by non-U.S. person employees within the scope of their employment and must remain under the control and supervision of the U.S. person employer. They may not be transferred to non-U.S. persons in Libya. Further, AT-controlled items not specifically identified as eligible under License Exception USPL continue to require a license if exported or reexported to U.S. persons in Libya. Please see the attached summary for the complete list of applicable Export Control Classification Numbers (“ECCNs”). [Item #30 in the attached summary of changes to the EAR].

Iraq

In September, BIS clarified Section 748.8 of the EAR regarding the instructions for applying for authorization to transfer items subject to the EAR in-country using the BIS Multipurpose Application (Form 748-P) and its electronic equivalent in the Simplified Network Application Process (“SNAP”). In July 2004, the EAR was amended creating a new requirement for authorization to make certain in-country transfers in Iraq. BIS created a unique process to apply for authorization to transfer items in-country, which did not require use of either BIS Form 748-P or its electronic equivalent, but required the applicant to submit a letter request to BIS. From November 17, 2004 to June 17, 2005, BIS received 209 applications for in-country transfer authorization under Section 746.3 and part 744 of the EAR, and pursuant to conditions that had been placed on licenses issued by BIS. Only one of these applications was submitted according to the letter process set up in July 2004, and the rest were submitted using BIS Form 748-P. To improve the handling of these applications, BIS updated its software, which can now more effectively process and track in-country transfer application data received from the Multipurpose Application. [Item #24 in the attached summary of changes to the EAR].

New NATO Members

In November, BIS published a final rule changing the controls on new NATO members such that Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia, Hungary, Iceland, and Poland, were granted treatment consistent with all other NATO member states with respect to national security license requirements (Sec. 742.2(a)) and Supplement No. 1 to part 738 (Country Chart)). This rule also removes Bulgaria, Estonia, Latvia and Lithuania from General Prohibition Eight, which requires a license for exports that transit through certain countries, (Sec. 736.2(b)(8)), and removes restrictions on License Exceptions related to crime control from Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Poland, Romania, Slovakia, and Slovenia (Sec. 740.2). Additionally, it adds Bulgaria, Estonia, Latvia, Lithuania and Romania to Country Group B, and removes them from Country Group D:1 (Supplement No. 1 to part 740). This means that these countries are now eligible for certain license exceptions (most importantly license exception GBS). It also means that all of the new NATO members (Bulgaria, Czech Republic, Estonia, Hungary, Iceland, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia) are no longer subject to certain national security licensing requirements (in particular, these countries are no longer listed in the country control chart with a license requirement X in the National Security column 2 (NS2 column). [Item # 28 in the attached summary of changes to the EAR].

Deemed Exports

In March, BIS requested comments on proposed changes to the deemed export policy based on the recommendations contained in the U.S. Department of Commerce Office of Inspector General Report entitled “Deemed Export Controls May Not Stop the Transfer of Sensitive Technology to Foreign Nationals in the U.S.” (Final Inspection Report No. IPE-16176-March 2004). Adopting the OIG's recommendations would entail regulatory or other administrative action that would clarify the definition of “use” technology subject to the EAR, base the requirement for a deemed export license on a foreign national's country of birth (instead of a foreign national's most recent citizenship or permanent residency), and modify regulatory guidance on licensing of technology to foreign nationals working with government-sponsored research and research conducted in universities. In August, BIS published the comments from a total of 307 respondents. Some 1,100 pages of public comments rendered little, if any, support for the proposed change. In December, an op-ed article by U.S. Under Secretary of Commerce David McCormick appeared in the December 13 edition of the Financial Times. In the article, McCormick rejected the use of country of birth for deemed export licensing. According to the article, the Commerce Department will “soon publish a policy basing controls on access to sensitive technology on a foreign national's most recent country of citizenship or permanent residency, not country of birth. We believe that by acquiring permanent residency or citizenship in another country, foreign nationals have demonstrated strong ties to their adopted country and are subject to rigorous screening processes by our closest allies. The U.S. will continue to deny the transfer of sensitive technology to foreign nationals who could pose risks to national security.” [Item # 11 in the attached summary of changes to the EAR].

Parties Subject to State Department Sanctions

In March, BIS published important changes to its policy with respect to entities sanctioned by the State Department under three statutes: Iran-Iraq Arms Nonproliferation Act of 1992 (Pub. L. 102-484); a sanction issued pursuant to the Iran Nonproliferation Act of 2000 (Pub. L. 107-178); or a sanction issued pursuant to Section 11B(b)(1)(B)(ii) of the Export Administration Act of 1979, as amended (also known as the Missile Technology Control Act of 1990). This new policy imposes a new license requirement for certain entities sanctioned by the State Department, and identifies one specific entity, Tula Instrument Design Bureau of Russia, subject to this new license requirement. This policy was finalized in June. Companies that may not be screening against such parties would be well advised to start doing so. [Item # 6 in the attached summary of changes to the EAR].

India

As a result of completion of the Next Steps in Strategic Partnership (“NSSP”) with India, BIS published two final rules to implement three steps the United States has agreed to take as part of the final phase of NSSP: (1) the removal of license requirements for export and reexports of items controlled for nuclear nonproliferation reasons to India, (2) the removal of six Indian entities from the Entity List, and (3) removal of the Import Certificate requirement for exports to Indian Government entities under Section 748.9(a)(2). See the attached summary for details. [Items # 23 and 31 in the attached summary of changes to the EAR].

Military End Use Restrictions

In the fall, BIS and industry had some heated discussions regarding the proposed Military End-Use Restrictions, sometimes referred to as the “China Catch-All” rule. This rule is an end use rule; not an end user rule. The end users caught by this rule could be civilian or military – the question is “what is the end use?” We had expected the proposed rule to be published after the President’s visit to China in November, but before the Wassenaar Plenary meeting in mid-December. However, the publication of the proposed China Catch-all regulation seems to have been slowed by the Administration. In fact, it was not published prior to the Wasseanaar plenary meeting in December. Rumor has it that Rep. Henry Hyde, Chairman of the House International Relations Committee, has asked that the proposed rule not go forward until he had a chance to review it and comment. This request will slow the process; however, the result may be recommendations from Chairman Hyde to toughen the regulation.

Wassenaar Implementation

In July, BIS published a final rule and later some corrections implementing the changes from the December 2004 plenary meeting of the Wassenaar Arrangement. The rule revises certain entries controlled for national security reasons in Categories 1, 2, 3, 4, 5 Part I (telecommunications), 6, 7, 8, and 9. The affected ECCNs are: 1C008, 2B001, 2B005, 2B006, 2B201, 3A001, 3A002, 3B001, 3B002, 3B991, 3B992, 4D001, 4E001, 5A001, 6A001, 6A002, 6A003, 6A006, 6A993, 6A996, 6E001, 6E002, 6E003, 6E991, 6E993, 7A002, 7A007, 8A002, and 9A001. [Items # 19 and 21 in the attached summary of changes to the EAR].

Category 6

The amendments to ECCNs 6A002 and 6A003 (and indirectly 6E001 and 6E002) were agreed to by the Wassenaar Arrangement because, while silicon infrared focal plane arrays (“SIIRFPAs”) are used in cameras and other systems for civilian fire fighting, commercial collision avoidance (e.g. automotive, aircraft, maritime), predictive/preventative maintenance, and medical imaging applications, they also have the potential to be used in strategic military applications including surveillance systems, vehicle systems, soldier systems, rifle sights, and unmanned vehicle systems. The focal plane array industry is changing rapidly and needs to be monitored. The amendments to ECCNs 6A002 and 6A003 are subject to a Validity Note. Control of these items is valid until December 5, 2007. Renewal of controls will require unanimous consent by all Wassenaar Arrangement Participating States. Applying a validity note on these items requires Participating States to reassess the need for controlling these items based on technological developments and strategic applications. The revisions to ECCNs 6A002 and 6A003 affect U.S. exporters of imaging cameras and non-space qualified SIIRFPAs, original equipment manufacturers who use non-space qualified SIIRFPAs in their products, and distributors of these products and technologies. Based on discussions with industry, BIS expects that the imposition of license requirements on systems that contain these non-space qualified SIIRFPAs and related software and technology will increase the number of Category 6 license applications received by BIS by more than 40 percent (i.e., 800 to 1000 applications) over the next 6 months.

CTP Limits

This rule also raises the Composite Theoretical Performance (“CTP”) eligibility limit from 75,000 MTOPS to 190,000 MTOPS for deemed exports of computer technology and source code to foreign nationals of Computer Tier 3 destinations, because doing so will assist the computer industry in the area of research and development to advance computer technology, and because it will not adversely affect the national security of the United States. Certain deemed exports to Computer Tier 3 foreign nationals are subject to a Foreign National Review requirement.

Slovenia

Slovenia was welcomed as a new Participating State to the Wassenaar Arrangement at the December 2004 Plenary Meeting. To reflect this change, this rule adds Slovenia to the list of Wassenaar Arrangement member Countries in Supplement No. 1 to part 743.

ITAR

In June, the State Department published several changes to the International Traffic in Arms Regulations (“ITAR”). The changes are relatively minor and are summarized in more detail in the attached regulatory summary. The changes included (1) the threshold amounts for Congressional notification for member countries of NATO, Australia, Japan, and New Zealand are established at $25 million for the export of major defense equipment sold under a contract and $100 million for the export of defense articles and services sold under contract; (2) a Congressional notification threshold level of $1 million is established for proposed exports to all countries involving firearms controlled under Category I of the USML; and (3) Section 126.5 (the Canadian exemption) was modified to clarify the range of defense articles, related technical data, and defense services that will continue to require a license issued by DDTC for export to or temporary import from Canada. [Item # 10 in the attached summary of changes to the ITAR].

In August, the State Department published a final rule amending various sections of the ITAR. Among other changes, this final rule includes an explanation of the requirements for registrants maintaining records in an electronic format. These include the ability to reproduce the records legibly on paper and the stored information, if altered, must keep track of all changes, who made them and when they were made. See the attached summary for details. [Item # 18 in the attached summary of changes to the ITAR].

The State Department published a notice on its website regarding support documentation for license applications. According to the website, the State Department finds it prudent to reiterate to exporters of defense articles the fundamental ITAR requirement for supporting documentation. In addition to requiring a purchase order, letter of intent, or other documentation, Licensing Officer’s may require a signed contract to be submitted with any application for the permanent export of defense articles. All applications submitted after September 16, 2005, not in compliance with this requirement will be Returned Without Action. The notice can be found at http://www.pmdtc.org/license_support.htm.

The State Department suspended the application of Section 564(a) of the Foreign Relations Authorization Act to