ITAR reforms for defense and satellite industries take hold

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June 14, 2015

Over the last two years, the Obama administration has implemented reforms to export regulations aimed at improving the competitiveness of U.S. military and satellite companies in the global technology market. In this article, export attorneys from Arent Fox, LLP provide an overview of those changes and discuss which items with electronic content are affected.

Responding to industry concerns that export controls – specifically the State Department’s International Traffic in Arms Regulations (ITAR) and the Commerce Department’s Export Regulations (EAR) – are stifling business opportunities for U.S. military and space electronics companies in the global economy, the U.S. government has implemented reforms – or rule changes – that essentially move a number of controlled items from the State Department’s U.S. Munitions List (USML) to the Commerce Department’s Commerce Control List (CCL).

We wrote a detailed review – “Export Control Reform – 2014 in Review” – of the reforms and what items were transferred from the USML to the CCL under the rules changes in 2014. To read the review in full, visit http://bitly.com/1GIlI1W.

This is a high-level overview and those seeking to classify their items post-Export Control Reform (ECR) of their category should seek expert advice and assistance. These changes affect a wide range of industries. As with all changes associated with ECR, the amendments to the ITAR and the EAR have resulted in the creation of positive or enumerated lists of ITAR-controlled items in the USML and the transfer of many commodities, parts, components, and accessories to the new Commerce 600 Series (in the case of spacecraft, to the 500 Series). The 600 Series refers to a new sequence of Export Control Classification Numbers (ECCN) that contain the number 6 in the third position from the left to indicate the military nature of the controlled items.

Those products that move over to Commerce are now authorized for export to 36 countries – provided that exporters meet all requirements of license exception Strategic Trade Authorization (STA). However, they will not just be able to export to just anyone. Exports are only for the approved countries and must be for the end use of government organizations such as the military, police, search and rescue, etc.

Below are excerpts from our review that apply to suppliers of electronic systems and components for military and space applications.

Changes common to all USML and CCL categories

Many of the less important parts, components, accessories, and attachments that are used in and with defense articles have been removed from the USML. Instead, unless such items are enumerated on the revised USML or fall within one of the remaining “specially designed” catch-alls, such items are controlled in their respective CCL category, either specifically enumerated in ECCNs XA6XX.y or potentially caught in ECCNs XA6XX.x. More significant parts and end items are typically enumerated in XA6XX. [Editor’s note: “An ECCN categorizes items based on the nature of the product, i.e. type of commodity, software, or technology and its respective technical parameters,” according to the Bureau of Industry and Security (BIS).]

The USML now provides a generally positive list of parts, components, accessories, and attachments that are still controlled under the ITAR. The USML still contains, however, a number of “catch-all” categories for “specially designed” parts, components, accessories, and attachments for certain special defense articles. The USML also continues to control commodities even if not specifically enumerated in the USML, but that are classified or are being developed using classified information.

[Editor’s note: Even if all the technology that a company produces is controlled under the CCL, it is possible that some technical data a company receives from its prime contractors will remain under the USML. Thus, even a company now producing 100 percent Commerce-controlled products, it might still need to ensure internal ITAR compliance to protect ITAR controlled technical data from unauthorized export, for example, to foreign person employees.]

“Specially designed”

The changes have defined “specially designed” such that it becomes a complicated catch-and-release system. The first part of the test – the catch – defines the universe of items that may be “specially designed.” The second part – the release – provides several criteria that, if any one of which is met, will release the item from being treated as “specially designed.” The new “specially designed” definition plays a major role in determining which items that are not specifically enumerated in the USML or in the 600 or 500 Series will nevertheless remain there, because they are “specially designed” for an item that is called out in the USML or 600 or 500 Series. For example, printed circuit board (PCB) manufacturers will need to evaluate whether their PCBs are “specially designed” for an item on the USML or in the 600 or 500 Series.

Military electronics, USML Category XI

The final rule for military electronics – which impacts nearly all who read this publication – went into effect on December 30, 2014.

Military electronics that State and Commerce have transferred to ECCN 3A611 include radar, telecommunications, acoustic, or computer equipment specially designed for military application and are not enumerated in the USML, high frequency surface wave radar; application specific integrated circuits (ASICs) and programmable logic devices (PLDs) programmed for 600 Series items, certain printed circuit board assemblies; and multichip modules. BIS has included all these items in 3A611 instead of creating new 600 Series ECCNs in CCL Categories (Computers), 5 (Telecommunications), 6 (Radar), and 7 (Avionics). Those categories contain references to the Category 3 600 Series. Technology, software, materials, and equipment for these commodities are controlled under the related 3X611 product groups. Other than the .y paragraph, which is only controlled for antiterrorism reasons, the remainder of Category 3’s 600 Series is controlled for national security, regional stability, antiterrorism, and U.N. embargo reasons.

Certain microwave monolithic integrated circuit (MMIC) power amplifiers and discrete microwave transistors are now controlled as ECCN 3A001.b.2 and b.3 and not in the 600 Series. In exchange for this reprieve, BIS has added a control for NS1, except if the commodities are exported or re-exported for use in civil telecommunications applications.

While the majority of Category XI consists of enumerated lists, XI(b) is a catch-all for electronic systems or equipment specially designed for intelligence purposes that collect, survey, monitor, or exploit the electromagnetic spectrum or for counteracting such activities. The corresponding CCL subcategory, 3A611.b, is reserved for the time being.

Spacecraft and related articles, USML Category XV

On November 10, 2014, the Departments of State and Commerce implemented final rules for spacecraft and related articles. The Departments of State and Commerce staggered the implementation of this rule in response to industry concerns highlighting the quickly evolving nature of microelectronic circuits. On June 27, 2014, controls on radiation-hardened microelectronic circuits currently in USML Category XV(d) and microelectronic circuits in Category XV(e) were transferred to the ECCNs 9A515.d and .e, and related software and technology transferred to 9D515.d and .e, respectively. On November 10, 2014, the rest of the proposed changes concerning all other spacecraft, satellite, and related items were implemented.

BIS has determined that spacecraft will be included in a new 500 Series rather than a 600 Series in Category 9 Aerospace and Propulsion, which recognizes the commercial nature of many of the items transferring to the 500 Series.

Commerce will treat licensing for the 500 Series as it has for the 600 Series – there will be a policy of denial for China and Country Group E:1 (Cuba, Iran, North Korea, Sudan, and Syria), and license applications for Country Group D:5 will be reviewed consistently with ITAR § 126.1.

Defense services definition in relation to spacecraft and related articles

Category XV contains a revised definition of “defense services” as applicable to spacecraft and satellite that is broader than the ITAR’s general definition of defense services as it may apply to the furnishing of assistance and training for spacecraft and satellites now subject to the EAR.

Specifically, defense services as related to spacecraft and satellite include the furnishing of assistance, including training, in 1) the integration of a satellite or spacecraft to a launch vehicle, including both planning and onsite support, regardless of the jurisdiction, ownership, or origin of the satellite or spacecraft, or whether technical data is used; and 2) the launch failure analysis of a satellite or spacecraft, regardless of the jurisdiction, ownership, or origin of the satellite of spacecraft, or whether technical data is used.

Generally, an ITAR-controlled item continues to be subject to the ITAR even if it is incorporated into a higher-level assembly, making that assembly also subject to the ITAR. Manufacturers of ITAR-controlled spacecraft and satellite components are often unable to compete in the global market because their parts will “taint” the satellite or spacecraft into which these ITAR-controlled parts are incorporated. The Departments of State and Commerce have added notes to Category XV(a) and ECCN 9A515, respectively, resolving this concern.

USML Category IV: Launch vehicles, missiles, rockets, etc.

On July 1, 2014, the Directorate of Defense Trade Controls (DDTC) and the BIS implemented final rules for launch vehicles, guided missiles, ballistic missiles, rockets, torpedoes, bombs, and mines.

Changes to Category IV transfer demolition blocks, blasting caps, and military explosive excavating devices from the USML to the CCL. Category IV continues to control certain rockets, space launch vehicles (SLVs), missiles, bombs, torpedoes, depth charges, mines, grenades, and launchers, together with the apparatus and devices specially designed for handling, controlling, activating, monitoring, detecting, protecting, discharging, or detonating such commodities. Also controlled under the USML are certain rocket, SLV, and missile power plants and non-nuclear warheads.

Ground vehicles, USML Category VII

On January 6, 2014, the Directorate of Defense Trade Controls (DDTC) and BIS implemented final rules for ground vehicles. Major changes to the USML include adding 121.4, which explicitly defines “ground vehicles.” Similarly, the CCL also defines ground vehicles in a note to the new ECCNs.

Additionally, DDTC has removed most manned and unmanned unarmored and unarmed military vehicles from the USML, unless such vehicles are specifically designed as firing platforms for weapons above .50 caliber, and armored vehicles, either unarmed or with inoperable weapons manufactured before 1956. Armed vehicles and vehicles that incorporate “mission systems,” as defined above, remain subject to the ITAR.

For more information on working with Arent Fox, visit www.arentfox.com.