DeAnna Luna

President

DeLuna Group LLC

Tel: 619-334-9436

E: D.Luna@Delunagroup.net

Overview

of

US Export Regulations

WHAT ARE EXPORTS?

• Exporting Product Outside US Customs Zone

• Exporting Certain Technical Data Outside US Customs Zone

• Disclosing Certain Technical Data In US To Certain Non-US Nationals (Foreign Nationals)

• US Nationals = Citizens + Permanent Residents of Any Ethnic Origin

TERMS

• Subject to EAR/ITAR: ALL US Exports Subject to EAR but Only Defense Articles Subject to ITAR

• “Dual-Use”: Commercial Product With Significant Military Applicability

• “Defense Article”: Everything From Major Weapons Systems to Specially Designed Parts/Components for Defense Systems, Including Commercial Satellites AND Potentially Commercial Products BUT Predominant Use of Military

• Major Military Equipment: Complete Systems/ Services Over $14,000,000/$50,000,000; Congressional Notification

TERMS-2• Foreign National (FN) Unclassified: Non-US Citizen or

Permanent Resident Alien (Exemption for Certain Canadian Nationals)

• Foreign National (FN) Classified: Non-US Citizen Only

• IML/USML: International Munitions List; US Munitions List

• Technical Data: Proprietary/Classified Technical Data (TD) Pertaining to USML Items in Tangible and Intangible (Discussions Form)

• Registration: ALL Parties (Manufacturing, Sales, Brokers, etc.) Must Formally Register With DDTC

• “Controlled”: Specifically Listed Product AND Related TD

TERMS-3

• Significant Military Equipment (SME) : Complete Weapon Systems, Etc., Identified in ITAR

• Delegation of Authority (DoA): DDTC Decides on Behalf of DoD

• Commodity Jurisdiction: Formal Application to DoC/DoS to Determine Jurisdiction

• Technology Assistance Agreement (TAA): Formal DDTC Approval for Technology Transfer

• Compliance Program: Similar to DoC, BUT Focused on FN’s

• Special Security Arrangement (SSA): DeFacto Compliance; Allows for Classified Work at Foreign-Owned US Companies

TECHNOLOGY EXPORTS

Terms of Reference

• Disclosure To Any Foreign National Of “Controlled Technology” Any Way, Anytime, Any Media

• “Controlled Technology” Technology Related To “Defense Article” Plus Other

Specifically Identified Technologies» Unique Aspects For Military Use» Satellites

Technology Exports

• ANYWHERE– U.S. Sites– Foreign Sites– Airplanes– Home, Etc.

• ANY FOREIGN NATIONALS– Non-U.S. Citizens And Non-Resident Alien (Green

Card)– Includes:

– Company Employees– Family– Friends– Visitors, Etc.

Technology export types

• ANY WAY

-Blueprints

-Documents (Hard & Soft)

-Presentations

-Casual Discussions

-E-mail/FTP, Etc.

T angible and Intangible

ENFORCEMENT

Sanctions and Authorities for Various US Export Controls

• Denial of export privileges and blacklisted • Revocation or suspension of licenses• Criminal sanctions:• IEEPA

– Ten years in prison– $50,000 fine individuals and corporations

• General Criminal code:– Twice the gain or loss– $500,000 for corporations– $250,000 for individuals

• Iran Sanctions Act:– One million dollars for corporations and individuals– 12 years in prison

• United Nations Participation Act:– Forfeiture of funds or other property

Sanctions (Other Civil Penalties)

• IEEPA $11,000 per violation• Trading with the Enemy Act $55,000 per

violation• Iran Sanctions Act $275,000 per violation• Foreign Narcotics Kingpin Designation Act and

Antiterrorism and Effective Death Penalty Act $1,000,000 per violation

PENALTIES

• Criminal For Both EAR/ITAR

• Administrative Fines - $50,000 + Per Violation

• Even Major Companies Have Problems– IBM - Loral Space– Boeing- Lockheed-Martin– Thales

• Enforcement By FBI, US Customs, DoC And DoS

INTERNATIONAL TRAFFIC IN ARMS REGULATIONS

• Civil Penalties:– The Civil Penalty For Each Violation Involving Controls Imposed

On The Export Of Defense Articles May Not Exceed $500,000.– The Civil Penalty For Each Violation Of The Prohibition On

Incentive Payments Shall Not Exceed $500,000 Or Five Times The Amount Of The Prohibited Payment, Whichever Is Greater.

• Criminal Penalties:– A Fine Of Not More Than $1,000,000 Or Imprisonment Not More

Than 10 Years Or Both For Each Violation.• Other Sanctions:

– Seizure And Forfeiture Of Arms, Munitions Or Other Articles Which Are Attempted To Be Exported In Violation Of The ITAR.

STATUTORY/BASIC

REGULATIONS

GOVERNING REGULATIONS

• US Department of Commerce:Export Administration Regulations (EAR) Coverage: All With Emphasis On “Dual-Use” And “Foreign Policy”

Controls

• US Department of State:International Traffic In Arms Regulations (ITAR)

Coverage: “Defense Article” and Certain Commercial (Commercial Satellites)

• US Department of Treasury:Office of Foreign Assets Control (OFAC)Coverage: Embargoed Countries (Cuba, Iraq, Iran, etc.)

Transactions

Split Jurisdiction in US Government• Office of Defense Trade Controls (ODTC) & International Traffic in

Arms Regulations (ITAR)– US Munitions List (USML)– USML is unique to the US– Prevails in the event of conflict with the Commerce Control List– ODTC determines its jurisdiction under the ITAR and USML

• Bureau of Industry and Security (BIS) and Export Administration Regulations (EAR) – Multilateral regime lists largely in Commerce Control List (CCL)– Single dual-use list approach– Follows the European Union single dual-use list– One proper classification

• Office of Foreign Assets Control (OFAC) & many different sets of regulations implementing embargoes, counter-terrorism rules, and narcotic trafficker rules

• Split jurisdiction is a practice generally not followed by most other countries

Methods to Exercise Jurisdictionor Control

• Territorial jurisdiction to waters edge (or to edge of sovereignty over waters and the seabed)

• Sovereignty over citizens (natural persons and corporate bodies)

• Reexport controls—the flag following the item around the world (commodity, software, technology)

• US exercises each type of sovereignty• US allies express opposition to extraterritorial reach• In practical terms, reexport restraints by license

condition and other means are important to constrain circumvent of the goals of export control programs (to deny access to target countries or persons)

EAR

Statutory Authority for EAR

• International Economic Emergency Powers Act (IEEPA)

• Export Administration Act has expired and Congress has renewal legislation under consideration; however, that legislation has not passed yet to date

Purpose of the EAR

• National Security• Non-proliferation of weapons of mass destruction

and the means to deliver them• Counter-terrorism• Other Foreign Policy goals of the United States• Government best practices: state purposes for the

controls

Key Points Regarding the EAR• Principal dual-use regulations• The four basic parts of the EAR MUST be

considered only in order and never out of order• That order is scope, general prohibitions, license

exceptions, and license applications• If you deviate from this order, you will not reach

the right answer to the question, “Do I need a license?”

• Departments of Defense, State, Energy, and Intelligence community can be involved in licensing decisions

WHAT IS EAR?• Export Regulations For Commercial/Dual-Use

– National Security − Anti-terrorist– Foreign Policy − Other

• National Security: 4 Regimes Plus Unilateral– Missile Technology − Wassenaar Arrangement

Control Regime − Nuclear Suppliers Group– Australia Group

• Administered By Commerce– Reviewed By Defense, State, Intel, Energy

• Very Few Licenses Necessary To Friends and Allies– Still Requires Internal Corporate Paperwork

STRUCTURE OF EAR

High-Level Structure of EAR

• Scope• General Prohibitions• License Exceptions• Licenses

Scope Part 734

• Items in the U.S• Items of US-origin (vs foreign items remaining

unchanged)• Foreign-made computers• Foreign produced direct product of US tech data

or software• Territory of free trade zones or other areas of land

in the United States where items have not entered the customs territory of the US

Technology and Software

• Export or reexport in any form (tangible or intangible)• Export or reexport via any means (release abroad, e-mail,

FAX, conversations, phone conversations, and physical exports regardless of whether technology or software goes through the customs house or requires an export declaration)

• Transfers in Cyberspace• Deemed Export rule (release to a non-US person or

permanent resident)(more in another session)• Server access is the most important issue in the modern

corporate environment

GENERAL PROHIBITIONS(SUMMARY)

General Prohibitions Principles

• EAR99 items include, for example, basket balls, refrigerators, hammers, and paper clips are generally not subject except for WMD

• A foreign made item is not subject to the EAR unless it incorporates more than de minimis content or is the FPDP of defined technology or software (General Prohibitions 2 and 3 define scope as well as the nature of the prohibitions)

• US imposes many list-based unilateral controls—this accounts for about 60% of the CCL

General Prohibition One – Export & Reexport List Based

• You may not export or reexport• An item designated on the Commerce

Control List (CCL)• To a designated country• See the Country Chart at Part 738• First of three list-based prohibitions

General Prohibition Two

• You may not reexport/export from abroad• An item designated on the CCL• To a designated country• See the Country Chart at Part 738• 25/10% de minimis rule (exceptions)• Defines scope for foreign made items with US

commodities incorporated

General Prohibition Two – P&C

• You may not reexport/export from abroad• A foreign-made item designated on the CCL• Incorporating US parts, components, or materials• To a designated country• See the Country Chart at Part 738• 25/10% de minimis rule (exceptions)• Defines scope for foreign made items with US

commodities incorporated

General Prohibition Three• You may not reexport/export from abroad• A foreign-made item on the CCL• That is the direct product of US Tech Data• That itself requires a written assurance vs reexport

to the former Soviet, China, & embargoed destinations

• And that is controlled only for NS reason• Also extends to direct product of a plant & major

component of a plant

General Prohibition Four – Denied Parties

• You may not deal with a denied party• Applies to all items “subject to the EAR” and is not limited to the CCL• Prohibits domestic transfer abroad to denied parties• Prohibits domestic transfers in the US with knowledge denied party

will benefit from its export• Do you have to screen? Yes to avoid liability in the event of a sale to a

restricted party..• Do you have to screen domestic transactions? Yes to avoid liability in

the event of a sale to a restricted party.• Beyond the EAR, you may not deal with a blacklisted party in any

way under the various OFAC rules (totals about 11,000 records in more than two dozen lists)

General Prohibition Five – End Use

• You may not export or reexport– An item “subject to the EAR”– To a prohibited end-use or end-user

• (EPCI) Nuclear, chemical & biological, missile• Marine nuclear• Prohibits dealing with Entities List of firms of

proliferation concern and Unverified List of firms that have not permitted verification visits by US Government personnel

• Do you have to affirmatively inquire?• License Exception end use limits distinguished

General Prohibition Six--Embargoes

• You may not export or reexport – An item “subject to the EAR”– To an embargoed destination

• Note the relationship of the EAR and OFAC rules• Each set of OFAC regulations addresses a single

boycott, terrorism, or narcotics trafficking

General Prohibition Seven – US Person Activity Rule

• A US person may not engage in– Activity that supports proliferation (financing, contracting, freight-

forwarding, employment, etc.)(744.6)

• Does not apply to foreign subs—does apply to branches• US citizens are restricted for proliferation activities even

though they use no US-origin commodities, software, or technology

• An exercise of the citizenship theory of sovereignty• This is broader than a restriction on brokering and

trafficking related to proliferation

General Prohibition Eight – Transit Prohibition

• You may not transit or unladen– Items subject to the EAR– In certain countries – North Korea, Cuba

• Relic of Cold War• May suggest duty to take care in avoiding

shipping routes that present the risk of diversion

General Prohibition Nine – Orders & Conditions

• You may not violate any:– Orders– Terms– Conditions

General Prohibition Ten – Knowledge Violation About to Occur

• You may not transfer, store, finance, transport or do virtually anything else

• With knowledge a violation has occurred or is about to occur

• In connection with the item• If it is subject to the EAR• See Know Your Customer Guidance • Goal is to prevent circumvention • Makes clear that more than one party may be liable for a

violation

If no general prohibition applies, ship NLR, file the export declaration, and maintain the necessary records

– If a general prohibition applies, go on to consider each license exception

– NEVER consider license exceptions until you have completed the analysis of general prohibitions

COMMERCE CONTROL LISTAND COUNTRY CHARTS

CCL Structure – Ten Categories

• 0-Nuclear Materials, Facilities and Equip• 1-Materials, Chemicals, etc.• 2-Materials Processing• 3-Electronics• 4-Computers• 5-Telecommunications Part 1• 5-Information Security Part 2

• 6-Lasers and Sensors• 7-Navigation and Avionics• 8-Marine• 9-Propulsion Systems

CCL Structure – Ten Categories

ECCN NUMBERS

• Specific ECCN Has Differing Licensing/Regulatory Requirements

• ECCN Determination Is Critical For Compliance

CCL Structure - Five Groups in Each Category

• A-Equipment, Assemblies, Components (Ex. computers at 4A003)

• B-Test, Inspection and Production Equipment (Ex. semiconductor manufacturing equipment at 3B001)

• C-Materials (Ex. precursor chemicals at 1C350)• D-Software (Ex. encryption software at 5D002)• E-Technology (Ex. technology for controlled gas

turbine engines at 9E001)

B. The equipment to make and test “the product”

A, B & C = commodities

only

A, B & C = commodities

only

E = information and technical assistance only (technology)

E = information and technical assistance only (technology)

D = software onlyD = software only

A. “The product”

E. The technology to develop, produce or use “the product”

D. The software to develop, produce or use “the product”

C. The materials to make “the product”

CCL Structure - Groups within Each Category

CCL Structure – ECCN Format Overview

• Each ECCN is composed of 5 characters which identify the category, group, control regime and numerical sequence within the specified CCL Category.

• The first character is a number denoting one of the CCL categories.

• The second character is a letter denoting one of the groups within a specific category.

• The last three characters loosely reflect the control regime(s):

001 - 099 Wassenaar Arrangement

101 - 199 Missile Technology Control Regime

201 - 299 Nuclear Suppliers Group

301 - 399 Australia Group (Chemical & Biological weapons controls)

901 - 999 Unilateral US Controls

Non-listed items

EAR99 - A “Bucket” Classification Entry at the end of Each CCL Category

“Items subject to the EAR that are not elsewhere specified in this CCL Category or in any other category in the CCL are designated by the number EAR99.”

CCL

EAR99Items

Classification - ECCN

• Each item has to be classified (Export Control Classification Number) by an exporter, reexporter or party subject to disclosure or deemed export rule

• Classification is a major burden for the trade• Classification burden is the inevitable tradeoff for

government review prior to export or reexport of some but not all items in the economy

Key Points

• Country and item pairings define the license requirements• An “X” in the box means a license is required for that

reason for control to that country if there is no available license exception

• Selected reasons for control are not identified on the Country Chart, and EI (Encryption Item controls are an example)

• Classification is only one use of the Commerce Control List among others

ITAR

WHAT IS ITAR?• Export/Import Regulations For Defense Articles/Space

• National Security And Foreign Policy

• Administered By State (Directorate of Defense Trade Controls)

– Reviews By Defense And Intel Community

• Almost Any Interaction With Foreign Parties Requires “Licensing”

SCOPE• “Defense Articles”

– Weapons

– Components – Services – Technology – Brokering – Unclassified And Classified

• Certain Commercial – Space Applications

– Originated as Defense Article but Migrated to Commercial

• Application NOT Determinative

DEFENSE ARTICLES AND SERVICES

Sec. 120.3 Policy on designating and determining defense articles and services. An article or service may be designated or determined in the future to be a defense article (see Sec. 120.6) or defense service (see Sec. 120.9) if it:

(a) Is specifically designed, developed, configured, adapted, or modified for a military application, and (i) Does not have predominant civil applications, and (ii) Does not have performance equivalent (defined by form, fit and function) to those of an article or service used for civil applications; or

(b) Is specifically designed, developed, configured, adapted, or modified for a military application, and has significant military or intelligence applicability such that control under this subchapter is necessary. The intended use of the article or service after its export (i.e., for a military or civilian purpose) is not relevant in determining whether the article or service is subject to the controls of this subchapter. Any item covered by the U.S. Munitions List must be within the categories of the U.S. Munitions List. The scope of the U.S. Munitions List shall be changed only by amendments made pursuant to section 38 of the Arms Export Control Act (22 U.S.C. 2778).

ADMINISTRATION

• US Department of State: Directorate of Defense Trade Control (DDTC) Review by Regional Bureaus for Major Sales

• US Department of Defense Defense Threat Reduction Agency (DTRA) Military Services – Major Sales

• White House – Major Sales

• Congressional Notifications/Approvals

• Department of Commerce – Jurisdiction Resolution Only

• Intelligence Community

USML CATEGORIES*• Category I – Firearms• Category II-Artillery Projectors• Category III-Ammunition• Category IV-Launch Vehicles, Guided

Missiles, Ballistic Missiles, Rockets, Torpedo

• Category VI-Vessels of War and Special Naval Equipment

• Category VII- Tanks and Military Vehicles

• Category VIII-Aircraft and Associated Equipment

• Category IX-Military Training• Category X – Protective Personnel

Equipment• Category XI- Military Electronics• Category XII-Fire Control, Range Finder,

Optical and Guidance and Control Equipment

• Category XIII-Auxiliary Military Equipment

• Category XIV-Toxicological Agents and Equipment and Radiological Equipment

• Category XV-Spacecraft Systems and Associated Equipment

• Category XVI-Nuclear Weapons Design and Test Equipment

• Category XVII-Classified Articles, Technical Data and Defense Services

• Category XVIII-Reserved• Category XIX – Reserved• Category XX-Submersible Vessels,

Oceanographic and Associated Equipment

• Category XXI-Miscellaneous Articles

ITAR STRUCTURE

• Concise– Broad Categories (electronics, aircraft)– Equipment, TD, and “specially designed for…”

• Guidelines on Definitions

• Registration

• Enforcement

• “Debarred” Parties: “Violators”

• No Policy Guidelines/Licensing Schedules – USG Retains MAXIMUM FLEXIBILITY

• Unilateral Items; Wassenaar; United Nations; MTCR (Annex 2)

• No “Bulk” Licenses/Exceptions

EXTREMELY IMPORTANT

• EAR/ITAR Apply To All FN’s, Even FN Employees From Overseas Affiliates Visiting US Facilities: NO EXCEPTIONS

• ITAR/EAR Licenses/Procedures Must Be Completed Before Export/Disclosure

• Certain Marketing Efforts Subject To ITAR

• Casual Shipments/Transfers Subject To EAR/ITAR, Including Prototypes, Small Quantities In Briefcase, E-mail, File Transfers, Etc.

What is OFAC?

– Office of Foreign Assets Control• administers and enforces economic and trade sanctions based on US foreign policy and national security goals • targeted

– foreign countries and regimes, – terrorists, – international narcotics traffickers, – those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States

• Country based – N. Korea, Cuba, Burma, Sudan, Syria, Iran, Iraq,

• List based– SDN– Rough Diamonds, Terrorist activities– Non Proliferation– Counter Narcotic Trafficking

SUMMARY

• Complicated Environment

• Increasing Enforcement

• Not Intuitively Obvious

Your Trade Management Solution…

DeLuna Group, LLC

3755 Avocado Blvd.

Suite 443

La Mesa, CA 91941

www.delunagroup.net