Remarks of Eric L. Hirschhorn 92nd Annual Conference in Washington, DC

Under Secretary Hirschhorn Remarks

American Association of Exporters and Importers

June 18, 2013

I want to thank Karen Kelly for her kind introduction. I’d also like to thank Marianne Rowden and AAEI for inviting me here today. Two years ago, I spoke before many of you at AAEI’s 90th annual conference in New York City. At that time, we were still in the early stages of our work on President Obama’s export control reform initiative.

We’ve come a long way since then. My department and our counterparts across the federal government have been working around the clock these past three years on this initiative. We’re in a good place thanks to the hard work of many dedicated public servants.

I know many of you are familiar with the reform initiative, but let me briefly describe why we are doing this, as well as some of the tangible national security and economic benefits. I will then provide an update on where we stand today and how Commerce is preparing itself and the exporting community for transition.

Why Reform U.S. Export Controls?

Export control reform is a national security initiative intended to: (1) focus our limited resources on the threats that matter most; (2) improve interoperability with our close friends and allies; (3) strengthen the U.S. defense industrial base by reducing the current incentives for foreign manufacturers to "design out" controlled U.S.-origin parts; and (4) ease the licensing burden on U.S. exporters, which in turn helps sales and creates jobs.

Today’s export control system is confusing and overly complex. For example, under the International Traffic in Arms Regulations (ITAR), a bolt for an F-16 fighter jet is controlled the same as the F-16 itself. Does that bolt warrant a lot of documentation and a wait of weeks or months for issuance of an export license before it can be sent to a reliable foreign government end-user?

A cornerstone of our reform effort is to clarify and rationalize our two control lists, in preparation for ultimately consolidating them into a single positive list.

The Defense Department, assisted by the Departments of Commerce and State, has conducted a detailed analysis of the State Department’s United States Munitions List (USML) to identify those defense articles that continue to warrant the strict, one-size-fits-all controls of the International Traffic in Arms Regulations (ITAR). This has involved working closely with the military services – who are, after all, the experts - to list specifically what should be controlled in order to remove the basket categories that today account for more than half the 85,000 licenses issued annually under the ITAR.

Working from the results of this effort, the Departments of State and Commerce have prepared proposed revisions and new control categories. Those articles that are now ITAR-controlled, but were not identified as warranting continued control on the USML, will become subject to the controls of the Commerce Department-administered Export Administration Regulations (EAR) and its Commerce Control List (CCL).

This will not be a decontrol of such items. Rather, we have created a "600 series" on the CCL to control items that no longer will be ITAR-controlled. Because the EAR allows for country-based exceptions, this will allow the government to "right size" controls on less sensitive military items, such as that bolt for an F-16, that are destined for allies and other multilateral control regime partners.

Commerce, State, and Defense have agreed on almost all the proposed revisions of control list categories, and we have already published proposed rules for most of the USML categories.

Our changes will make it easier for U.S. companies, especially small and medium-sized businesses, to engage in secure trade. This has the tangible benefit of bolstering the security of supply from small companies that are second and third tier suppliers to the U.S. and our allies. At the same time, we are ensuring that the nation’s export control system prevents items from ending up where they should not.

Right now, our ability to compete and cooperate is burdened by overly complicated or overbroad regulations such as the "see-through" rule. Under the "see-through rule," the presence of a single, non-critical ITAR-controlled part, such as a switch or a bolt, will render an entire foreign-made end product, such as an Airbus A-320 passenger aircraft, subject to U.S. reexport controls. That encourages foreign buyers to select non-U.S. parts and components—even when a U.S. solution offers price, schedule, and performance advantages—in order to avoid making the end product subject to the ITAR.

The movement of tens of thousands of U.S.-manufactured parts and components from the USML to the more flexible CCL will enable the U.S. Government to make more nuanced distinctions among destinations and end-users, and apply a greater variety of authorizations, than under the ITAR. The transfer of items will remove: (1) annual registration requirements and related annual registration fees; (2) the requirement for a multitude of authorizations; and (3) the "see-through" rule.

For small business owners, the removal of registration fees will directly affect their bottom line because the law prohibits Commerce from charging licensing fees. Right now, those subject to the ITAR are required to pay a $250 fee to the State Department for an item that sells for $200. The minimum fee is $2,250 per year even if there is no export.

Further, rather than being burdened by the "see-through" rule, companies will be able to take advantage of the EAR de minimis rule. For most ultimate destinations, foreign-made items with transferred components controlled by the EAR constituting 25 percent or less Commerce-controlled U.S. parts will not be subject to U.S. re-export controls. This exclusion will not be available, however, for China and other countries subject to arms embargoes; that is, the de minimis level for those countries for items transferred from the USML to the CCL will remain zero, just as it is today under the ITAR’s "see-through" rule.

Where Export Control Reform Stands Today

In recent months, we have seen significant progress in making this reform initiative a reality.

On April 16, State and Commerce published final rules for the aircraft and engine categories. These are the first two of approximately 19 USML categories to be rewritten and "go final." In addition to these categories, the final rules include a revised definition of "specially designed" and transition rules for items moving from State to Commerce jurisdiction. Both are essential to the reform effort.

The definition of "specially designed" is a critical term that in most instances, you can apply without knowing the design intent. This should bring increased clarity, reliability, and predictability for exporters.

Our transition rule describes how items that were previously controlled by the ITAR will be dealt with under the CCL. This rule addresses: (1) new license periods (4 years instead of 2); (2) the applicability of ITAR exceptions under the EAR; (3) what to do with existing State Department licenses and agreements; and (4) grandfathering periods and arrangements for current licenses.

At the request of industry, the new regulations include a 180-day delay in the effective date (until October 15 for the first set), to allow companies to adjust their internal order processing and compliance programs to the new rules. Although Commerce will accept license applications once a given set of regulations is published in final form, no licenses will be issued until the conclusion of this period.

Once this transition period is complete, companies can begin taking advantage of License Exception STA—Strategic Trade Authorization—for the aircraft and engine items that have been transferred.

STA streamlines exports to and among our 36 closest NATO and multilateral regime partners by removing license requirements for items currently under the CCL. In the case of items transferred from the USML, the items must be for ultimate end use by the governments of those 36 countries.

Exports and reexports to other countries, and of former USML items for other uses within STA countries, still will require a license. Given the expectation of tighter defense budgets domestically, STA presents an opportunity to strengthen our national security not only by improving interoperability with our allies, but also by allowing U.S. defense contractors to take advantage of these markets through more streamlined export requirements.

STA will provide greater flexibility and predictability, while still providing necessary safeguards. Exporters using STA, and their customers, are responsible for compliance with that license exception’s requirements to ensure the items are not reexported outside STA-eligible countries, or employed for unapproved end uses within such countries.

An exporter wishing to use STA must, prior to export, inform its overseas customer of the export classification of the item. The non-U.S. customer must confirm its understanding of that classification, and must undertake to handle that item in accordance with the EAR. These written exchanges provide the information necessary for effective enforcement and are easier, cheaper, and faster for companies to administer than conventional export licenses.

Incidentally, the use of STA is optional. Any exporter who prefers to obtain an actual export license may do so.

Enhanced Enforcement

ECR includes enhanced enforcement capabilities within BIS and across the U.S. government. This is partly the result of the establishment of the Information Triage Unit (ITU) and Export Enforcement Coordination Center (E2C2), which have enhanced our intelligence abilities and interagency collaboration.

The ITU compiles, coordinates and reports intelligence and other information about foreign parties, which enhances our review of license applications. The E2C2 improves interagency export enforcement coordination by ensuring the various agencies are talking to one another.

We are also strengthening our end-use check program in two ways. First, BIS and State are working together to coordinate end-use checks where U.S. Munitions List and CCL items are co-located, so that both organizations can expand the total number of end-use checks while minimizing burdens on your foreign customers from multiple checks.

Second, we're working on a rule that would strengthen the Unverified List to increase U.S. government insight into potential transactions of concern involving foreign parties whose bona fides - meaning their suitability and reliability as recipients of U.S. exports - BIS has been unable to verify. This action will provide more clarity to exporters on how to address "red flags" involving transactions with foreign parties where BIS has been unable to complete an end-use check. When coupled with our other unique administrative authorities, including the Entity List, BIS’s compliance tools provide exporters with more information about the reliability of foreign parties to safeguard your transactions from illicit diversion.

Our changes will benefit national security, foreign policy and our defense industrial base over the medium and long term but we recognize that the transition will require some hard work in the short run.

Preparing for Transition

BIS is helping the exporting community to get up to speed. We have deployed on the BIS website two interactive tools to assist exporters in understanding and complying with the new rules: the "Specially Designed" Decision Tool and the Commerce Control List (CCL) Order of Review Decision Tool. The "Specially Designed" tool will help you determine whether an item is "specially designed" through a series of "yes" or "no" questions. The "CCL order of review" assists in determining whether item is classified as a "600 series" military ECCN, a non-"600 series" ECCN, or EAR99. We will also be updating the on-line interactive STA tool to assist companies in determining whether they are eligible for and compliant with STA to take into account the 600 series.

The Bureau is conducting a series of teleconferences and webinars to assist you in understanding and complying with the Initial Implementation rule and future ECR rules. These webinars are being recorded and made available for later listening on the BIS website. I encourage you to take advantage of this training resource.

We are also ensuring that the Automated Export System (AES) is ready to accept the newly created 600 series ECCNs (9y610 and 9y619) for BIS licenses and for a limited number of license exceptions (LVS, TMP, RPL, GOV, TSU, STA). Of particular note, if a 600 series ECCN is reported under a non-eligible authorization, AES will generate a fatal error. Additionally, all exports of 600 series items (with the exception of .y items) will require an AES filing, regardless of value or destination. We explained these changes in detail in a May webinar that you can access on the BIS website.

On June 12, BIS conducted a webinar to get freight forwarders up to speed on changes they need to be ready for when the Initial Implementation Rule goes into effect. We emphasized the importance of continued and strengthened communication with customers, as well as improved internal processes and automation to ensure that exports of items transitioning from the USML to CCL are compliant.

We’re also helping other government agencies with the transition. Over the next few months, BIS will be working closely with the Outbound Branch of U.S. Customs and Border Protection to implement a CBP port training program, and with the FBI and DHS’s Homeland Security Investigations (HSI). The goal of this training will be to inform CBP, FBI, and HSI of the changes they will be seeing as a result of ECR. We don’t want our law enforcement partners to be surprised when they see a defense part, component, accessory, or attachment exported under a BIS license or license exception instead of an ITAR license. This training should help ensure a smooth transition at ports of export.

Last but not least, we’ve almost fully staffed our Munitions Control Division (MCD) with twenty-two staff trained to process incoming 600-series licenses. A majority of these new hires have Department of Defense (DOD) backgrounds, with almost one-third being combat veterans of Iraq or Afghanistan. They have direct, hands-on experience with military equipment and DOD programs.

In fact, the new division is already receiving license applications for aircraft and engine 600-series items. Although we are accepting license applications once a given set of regulations is published in final form, no licenses will be issued until the delayed effective date.

Satellite Jurisdiction

Unlike the other control list categories, satellites and related components were, until this year, statutorily ineligible for transfer from the USML to the CCL. This was in response to the unauthorized transfer of sensitive technology in connection with satellite launches in the 1990s. Congress required by statute that all satellites, components, and launch services be on the USML regardless of whether a particular item presents a national security risk.

This and other factors had a devastating effect on U.S. industry. According to the Aerospace Industries Association, the U.S. held 73% of the worldwide share of satellite exports in 1995. This fell to 25% by 2005.

In early January though, President Obama signed this year’s National Defense Authorization Act, which restored his authority to determine the appropriate export controls for satellites and related parts and components. We owe thanks to those in the Congress – from both parties - who made this possible.

The proposed satellite rule transferring jurisdiction of satellites from State to Commerce was published on Friday, May 24. Comments are due by Monday, July 8. I encourage all interested members of the public to comment.

In preparing for the transfer of many satellites to Commerce, we are planning to hire two more licensing officers for the new satellite responsibilities.

Next Steps for Export Control Reform

Although publication of the final rule on the first two categories, as well as the proposed rule on satellite jurisdiction, are important milestones for export control reform, much work remains to be done. And we are making significant progress.

We have an ambitious plan over the next year to continue with our proposed rules, congressional notifications, and final rules. Export control reform is far from complete, but the end of the massive list review exercise is in sight. In July, we anticipate publishing a final rule on four categories for which we’ve received public comment—USML categories VI (ships), VII (vehicles), XIII (materials and auxiliary equipment), and XX (submarines). Public comment on the first proposed version of category XI (electronics) has led to some significant changes, so we’ll be publishing it again in proposed form and soliciting another round of comments sometime in July.

We also plan in the next few months to submit congressional notification on the intended transfer of jurisdiction over items related to missiles, explosives, training equipment, and protective personal equipment from the State to Commerce Department.

Let me take a few moments to discuss some other plans and possibilities to make the system more rational, efficient, and user-friendly. I should stress that not all of these ideas have yet been reviewed by our sister agencies.

First and foremost, we need to complete the USML list review effort. Although the drafts of each category are written, we still need to publish the few remaining categories in proposed form, work through public comments on remaining categories, notify Congress of each category change, and make the changes in the revised USML and "600 series" ECCNs with all of the other edits to the ITAR and EAR necessary to allow for the change.

Much of our focus thus far has been on the USML, but we expect to pay a good deal of attention to the CCL and EAR over the coming years. We began this process with the publication on November 29th of our proposed CCL "clean-up" rule, which describes ways to make the CCL more user-friendly for exporters. The proposed rule, in many respects, is the product of public comments in response to an Advance Notice of Proposed Rulemaking from December 9, 2010. In July, we plan to publish a final rule to implement the changes that we – and you, the public – have identified to clarify the CCL.

The Administration is also working diligently to revise controls on radiation-hardened chips. Alternatives to the current control structure must be found to avoid bringing mass-market civilian chips under ITAR controls, which would cause significant disruption to the market for these products. We have actively reviewed solutions and a proposed solution has been included in the proposed rules on satellites that were published May 24.

Our efforts will also involve a review of the CCL with a similar degree of attention to that given to the USML review. Such a review, starting with the strategic rationales for specific controls, has not been attempted since 1991. This effort will be complicated somewhat by the fact that the multilateral regimes are capable of handling only a limited number of changes each year.

Additionally, we want to review the EAR to update, clarify and streamline the regulations. The EAR has not had a comprehensive review since 1996. Our goal is to increase the quality of our controls and provide better service for the exporting community.

Beyond this CCL and EAR review, we would like to revise and simplify encryption controls. The encryption rules, which were streamlined in June 2010, could be made more concise and clear.

Turning to support documentation requirements, we are drafting a proposed rule that would clarify existing requirements, including the International Import Certificate.

With respect to recordkeeping, we are preparing to seek public input on how to revise the current recordkeeping requirements.

On routed transactions, we are preparing a proposed rule that will 1) clarify the responsibilities of the parties under the EAR for determining export license requirements and, if necessary, applying for a BIS license; 2) draw a brighter line between the types of transactions where foreign parties may assume those responsibilities under the EAR and those where they may assume export clearance responsibilities under the FTR; and 3) facilitate better information sharing between the parties.

Although this is not a comprehensive list of possible projects for the President’s second term, we expect to continue to work with all of you on improving our export control system. Your perspectives are essential to this initiative.

In addition to all of the efforts I have described for you, we still find time (in the wee hours) to continue our work in keeping the EAR updated to reflect changes agreed upon by multilateral export control regimes of which the United States in a part. On June 5, we published a rule implementing understandings reached at the 2012 plenary meeting of the Australia Group. On June 20 – this Thursday - we will publish a rule implementing the changes agreed to at the Wassenaar Arrangement 2012 plenary meeting. In the next few weeks, we anticipate publication of a rule to implement changes to the Missile Technology Control Regime Annex.

Over the past three years, the Obama Administration has sought, through export control reform, to achieve greater regulatory efficiency and rationality, focus controls on the most significant items and destinations, increase education to sensitize exporters to their compliance responsibilities, and strengthen enforcement.

As you can see, we are forging ahead.

Thank you for your time and interest in this initiative.

Remarks of Assistant Secretary David Mills at the 8th Annual Export Control Forum

U.S. Department of Commerce
Bureau of Industry and Security

8th Annual Export Control Forum

Remarks of
David W. Mills
Assistant Secretary for Export Enforcement
February 26, 2013

Good morning, and welcome to Day Two of the 8th Annual Export Control Forum. I’m joined on stage by four of my colleagues, each of whom plays a crucial role in Export Enforcement at the Bureau of Industry and Security. After my remarks, they will participate in an Enforcement panel and can answer any of the questions you may have.

This is my third year as the Assistant Secretary for Export Enforcement. And what we’re accomplishing in Export Control Reform is a watershed event. For the first time in a generation, we’re taking significant and concrete steps to make our export control system more efficient and transparent for exporters. Just as critically, we’re creating more effective safeguards – what we call “higher fences” - to keep items and technology away from foreign entities who seek to harm our national interests.

What I’d like to talk with you about today is how Export Control Reform is changing and enhancing our enforcement efforts. I’m also going to update you on new powers Congress granted the Government last year to go after a new category of exports to Iran. And finally, I want to talk about some recent enforcement cases that illustrate how we are bringing our resources to bear to address the threats that violations of export controls pose for our national security and foreign policy.

Before I elaborate on these recent developments, let me say a word about the organization I lead. This past year marked the 30th anniversary of the establishment of a criminal law enforcement capability within what is now known as the Bureau of Industry and Security, or BIS, at the Department of Commerce. Over the past 30 years, Export Enforcement at BIS has evolved into a sophisticated law enforcement agency, with criminal investigators and enforcement analysts who are singularly focused on export control working closely together with licensing officers within a single bureau of the government. Using our subject matter expertise in the area of export controls, coupled with our unique and complimentary administrative enforcement tools, we have also leveraged our relationships with our partner law enforcement agencies and with our partners in industry to maximize the impact we are having.

BIS maintains Special Agents at offices in nine cities across the United States. We also have agents collocated with the Federal Bureau of Investigation in Cincinnati, Ohio, Minneapolis, Minnesota and Portland, Oregon. In addition, BIS has Special Agents assigned with the Department of Commerce’s Foreign Commercial Service to conduct end-use checks to safeguard the disposition of U.S.-origin items exported abroad. These Export Control Officers (ECOs) are assigned to six strategic locations that are critical to our mission: Beijing, China; Abu Dhabi, the United Arab Emirates; New Delhi, India; Moscow, Russia; Singapore; and Hong Kong. Some of these ECO positions have regional responsibilities that extend their reach to an additional twenty nine countries.

Our ECOs play a unique and critical role in the fight against proliferation and illicit diversion by spearheading our end-use checks program. Last year, end-use checks conducted by our ECOs, supplemented by Sentinel trips by our domestically-based agents, reached a five-year high of almost 1,000 checks conducted in more than 50 countries. In addition, our ECOs have helped us establish robust enforcement-led relationships with the governments of our key transshipment partners in Abu Dhabi, Hong Kong, Malaysia and Singapore.

No picture is complete without reference to the Office of Antiboycott Compliance (OAC). This year the Office of Antiboycott Compliance celebrates its 35th year of operation and continues to actively pursue its compliance mission. OAC carries out its mandate through a threefold approach: monitoring boycott requests received by U.S. businesses, bringing enforcement actions when necessary, and guiding U.S. businesses on the application of the Export Administration Regulations (EAR) to particular transactions. In addition to these traditional compliance tools, OAC goes to the source to eliminate boycott requests at their origin. By working with its government partners in the Office of the U.S. Trade Representative and at the Department of State, OAC has met with the ministries of boycotting countries issuing the most boycott-related requests. By meeting with these governments and pointing out the barrier to trade that boycott requests impose OAC is able to remove prohibited language enabling U.S. businesses to compete on an equal footing in this region of the world.

Over the last year OAC officials conducted two antiboycott compliance assessment trips to the Mideast. These trips are designed to assess boycott compliance in boycotting countries and to provide in-country training and support to U.S. embassy and U.S. Foreign Commercial Service officials --- our boots on the ground -- on the antiboycott regulations. OAC officials were able to establish a bilateral arrangement with the United Arab Emirates – our largest trading partner in the Mideast – so OAC is able to utilize the auspices of the UAE’s Commercial Attaché in Washington to resolve boycott-specific problems. We had our first export success story several months after this mechanism was established. The UAE agreed in July 2012 to delete boycott-related language in the registration form of the Emirates Identity Authority (which is required to do business in the UAE). It’s a positive step forward and we look forward to institutionalizing this arrangement with other countries in the region.

A senior OAC official will travel to Baghdad next month to participate in the first meeting of the trade and investment subgroup of the U.S.-Iraq Joint Coordinating Committee (JCC). The JCC trade and investment subgroup focused on nontariff barriers to trade. U.S. companies have encountered a significant number of boycott- related requests contained in commercial documents over the last decade. Nearly all of the prohibited requests from Iraq reported to OAC in 2012 were either tender documents from the Iraqi Ministry of Health or a boycott questionnaire given to U.S. companies from the Iraqi Patent Office. The U.S. committee members proposed an approach to eliminate boycott language that will involve future technical assistance from OAC.

Export Control Reform: Regulatory Developments

As you heard yesterday, the Administration has made significant progress over the past year to implement the President’s Export Control Reform initiative. The transfer of literally tens of thousands of ITAR items to the CCL will facilitate interoperability with our allies and partners, help make our defense industrial base more competitive, and allow the government to concentrate its resources on what really matters. Although the majority of the focus has been on the transfer of items from the U.S. Munitions List (USML) to the more flexible licensing regime of the Commerce Control List (CCL), the effort to erect higher fences around these control list changes has been every bit as important. Enforcement at BIS will carry out its responsibilities to ensure that the regulatory changes implemented under the President’s Export Control Reform initiative are properly monitored and enforced. We have been sitting side-by-side with our regulatory and policy counterparts in Export Administration at BIS as this process unfolds, providing key insights from three decades worth of investigations. Two of those regulatory changes are of particular benefit to our enforcement efforts.

The first – License Exception Strategic Trade Authorization – or STA, will authorize the export of munitions items moved from the USML to the newly established “600 series,” to 36 allied and partner nations for ultimate end use by the governments of those countries. Under STA, the foreign parties to the transaction must have been previously vetted by being included on a previously approved license from State or Commerce. This License Exception also broke new ground in requiring that not only the exporter, but also any subsequent reexporter or transferor, must notify any subsequent consignee of each item shipped under the authority of STA and furnish the ECCN of the item. The consignee must then provide a written statement citing STA, the ECCN, and its agreement to abide by U.S. controls, as well as provide records requested during end-use checks. The consignee STA certification requirement thus travels with the item even after reexport or retransfer from the first consignee on its way to ultimate government end use. In this way, the STA can create, in effect, a chain of custody for the item, and the paperwork trail can be followed throughout the 36 countries, thus increasing our ability to monitor and enforce STA-eligible transactions.

Whether an item is exported under a license or license exception, Customs and Border Protection (CBP) agents are reviewing shipping documentation to guard against illicit exports. Similarly, BIS is monitoring export transactions on a daily basis. This effort will be stepped up as a result of STA’s application to 600 series items, and we will expect exporters to have available the proper paperwork to adhere to the safeguards under this license exception.

On a side note, remember that the 600 series, like the ITAR, contains a zero-percent de minimis threshold for U.S. arms-embargoed destinations. Export Enforcement is going to place a significant emphasis on this policy. By eliminating any ambiguity with regard to the application of de minimis for 600 series items, BIS is harmonizing the EAR with the ITAR for countries subject to U.S. arms embargoes, including countries subject to anti-terrorism controls, thereby creating a higher fence for military parts and component exports. For all other countries, the EAR’s 25% de minimis rule will apply for 600 series items.

I’ll mention one other aspect concerning the new requirement for 600 series “.y” items. These less significant parts and components only require a license if destined for China or the five terrorist-supporting countries or if subject to an end user or other end use license requirement under the EAR. The transition rule that will implement the 600 series requires exporters to explicitly identify “.y” items in the Automated Export System, or AES, and, just as with other CCL items, it is good practice to inform your consignee of the classification and resulting restrictions on reexport. This new information will be extremely useful for those of us in the enforcement community. CBP will collect it, and it will be used by us and CBP to help us better monitor the supply chain for these items.

Another significant regulatory change is the new definition of the term “specially designed.” The current Export Administration Regulations have a definition of “specially designed” for missile technology controlled items, but no definition of “specially designed” for other items, creating uncertainty for exporters, investigators and prosecutors. We are changing that paradigm by establishing one definition to cover the term “specially designed,” wherever it exists in the Regulations, to specifically articulate objective criteria for when an item is captured and objective criteria for when an item that falls under the definition can be released, meaning it is not classified as a “specially designed” item. For example, the documentation requirements established in the definition of “specially designed” as it applies to design-intent will eliminate the need to get into the minds of engineers and require them to document whether an item had non-military design aspirations.

For those persons who have “knowledge” of the original development history, there are certain additional releases under paragraph (b) that may be available, but importantly in determining whether an item is or is not caught under “specially designed,” a person will not need to determine the original development history, which will be a significant improvement. I understand that in some instances, would-be exporters have had to interview engineers in retirement homes to determine what type of end use was in their minds when designing a particular item. This is not an acceptable way of doing business, and creates sometimes insurmountable obstacles to establishing knowledge in the context of criminal prosecutions.

Under the new definition, we are addressing the long-standing controversy surrounding “design intent.” Absent documentation regarding design intent, the item will be subject to control unless released by another element of the “specially designed” definition. And just as importantly, the International Traffic in Arms Regulations (ITAR) will apply, insofar as possible, a common definition in determining whether a defense article is “specially designed.” This definition is based on a catch-and-release construct whereby a person can answer a series of yes/no questions to arrive at a definitive determination whether an item is “specially designed.” Exporters who previously determined that their items were not “specially designed” in particular need to apply this new definition to ensure proper classification of their items.

As we move forward, the more we can harmonize other definitions between the Commerce, State, and Treasury export control regulations – such as on information in the public domain – the more enforceable our regulations become through transparency, clarity, and consistency. These are hallmarks of the Export Control Reform effort and President Obama’s regulatory reform agenda writ large.

Another significant regulatory change under consideration is to reinvigorate the Unverified List (UVL), which currently imposes a red flag on transaction parties where we have been unable to conduct an end-use check. We are aware of industry’s concerns about the open-ended nature of the UVL and the need for BIS to provide guidance on how to overcome a U.S. Government-imposed red flag. We hope soon to issue a revised UVL proposal that would clarify for exporters how to overcome the BIS-imposed red flag through enhanced safeguards which, similar to the Entity List, will create a market-based incentive for foreign cooperation with an end-use check.

Iranian Transactions and Sanctions Regulations

I want to briefly mention another regulatory development that has implications for the enforcement of U.S. sanctions against Iran. Pursuant to the Iran Threat Reduction and Syria Human Rights Act passed last year, the Treasury Department’s Office of Foreign Assets Control (OFAC) amended its regulations, the Iranian Transactions and Sanctions Regulations, in December 2012 to implement expanded sanctions on Iran. One provision in those regulations tightens export controls with respect to knowing re-exports by foreign persons owned or controlled by U.S. persons and authorizes the imposition of liability on those U.S. persons for the foreign persons’ conduct. This enhancement of our Iran sanctions provides new incentives for U.S. companies to make sure their foreign subsidiaries are not knowingly reexporting EAR99 items to Iran.

Export Control Reform: E2C2 & ITU

Another benefit of ECR is the enhanced enforcement posture of the United States Government through more effective interagency coordination of
enforcement efforts. The transfer of munitions items to Commerce actually increases the number of enforcement resources available to monitor compliance. Not only will the same enforcement organizations that have authority today to monitor defense exports - namely the Federal Bureau of Investigation and the Department of Homeland Security - continue to have authority over such items under the Commerce system, but this effort will be augmented by dedicated Commerce enforcement analysts and Special Agents who will assess compliance, including through overseas inspections, conduct investigations and impose administrative penalties and, with the assistance of the Department of Justice, criminal sanctions.

This interagency cooperation on export control enforcement has been formalized by the President under Executive Order 13558, establishing the Export Enforcement Coordination Center, or “E2C2.” The E2C2 is responsible for enhanced information sharing and coordination between law enforcement and intelligence officials regarding possible violations of U.S. export controls laws. The E2C2 is administratively housed in the Department of Homeland Security (DHS) with a leadership team composed of officials from DHS, the Department of Commerce and the Federal Bureau of Investigation. The E2C2 builds on the increased criminal penalties for export control violations and the provision of Commerce’s permanent law enforcement authorities implemented by Congress in the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), further strengthening the enforcement of U.S. export controls.

In addition, within Export Enforcement at BIS, we are hosting the interagency Information Triage Unit, or “ITU.” The ITU is responsible for assembling and disseminating relevant information, including intelligence, from which to base informed decisions on proposed exports requiring a U.S. Government license. This multi-agency screening will coordinate the reviews of separate processes across the government to ensure that all departments and agencies have a full dataset, consistent with national security, from which to make decisions on license applications. Such screening contributes to more timely, predictable, and consistent processes that U.S. exporters engaged in global trade have confirmed are critical to their competitiveness.

Finally, working with State and Treasury, as part of ECR, BIS has established a consolidated screening list to assist you in identifying whether any party to an export transaction requires additional due diligence, from a red flag to a license to a prohibition. The next step is to conduct an assessment of the party yourself, determining whether there is any public information on the party and whether the requested item appears to be consistent with the proposed end use. For example, if you don’t find a company website, that should be a red flag to seek more information from the company, even if the item is not controlled. Through front companies , terrorists and rogue regimes are sourcing innocuous electronics and explosive material that might lead to tremendous harm to our service men and women. Don’t be an unwitting supplier to these illicit schemes. You should apply additional vigilance to requests for exports of controlled items to transshipment countries, whether or not requiring a license, and particularly if an end user is not identified. The majority of our unfavorable end-use checks take place in transshipment destinations, such as the UAE, Hong Kong, Singapore, and Malaysia; therefore, it is critical that you adequately screen your customers in these countries.

Enforcement Cases

These developments complement our broader enforcement posture of working to thwart the illegal diversion of U.S.-origin items to prohibited end uses and end users, stressing the importance of internal compliance programs and focusing on the culpability of individuals. As we prepare to publish the first set of final rules implementing the President’s reform vision, I want to emphasize that even less- sensitive military items that are moving to the CCL, just like dual-use items and even purely civil items, can pose serious risks to national security if they fall into the wrong hands.

About 40 percent of our cases involve Iran as the ultimate destination of U.S.-origin items. Although international sanctions have significantly diminished Iran’s ability to procure sophisticated dual-use and military items, its complex web of front companies and related financing rings remains a significant threat. This front company network is masked further through the use of transshipment hubs where the sheer volume of trade makes enforcement a challenge. Given Iran’s willingness to support terrorist activities through the procurement of unsophisticated electronics and explosive material, the need for extensive domestic and international cooperation is critical.

Arc Electronics

Today, however, I will highlight some recent notable cases to underscore that our enforcement efforts extend far beyond Iran. The Arc Electronics case resulted in the indictment of 11 individuals and the addition of 165 entities in 12 destinations to the Entity List for their role in illicitly facilitating the export of controlled electronics to Russia. An interagency investigative team that included the FBI, Export Enforcement at BIS, Justice, NCIS and the Navy, uncovered a scheme by a Russian military procurement network operating in the United States and Russia - a Texas-based export company and a Russian-based procurement firm - to illegally export high-tech microelectronics from the United States to Russian military and intelligence agencies. These items are under strict government controls due to their potential use in a wide range of military systems, including radar and surveillance systems, weapons guidance systems and detonation triggers. In October of this past year, the indictment was unsealed charging 11 defendants with this illegal export scheme. As Under Secretary Hirschhorn noted, this case is “a perfect example of two of the core benefits of the administration’s export control reform effort – higher enforcement walls around controlled items and extensive coordination and cooperation among enforcement agencies.”

The Arc Electronics case is important in three regards. First, it exposed an entrenched network of conspirators in the United States that created a front company for the express reason of circumventing U.S. export controls. In fact, the owners went so far as to attend BIS seminars to become experts in how the EAR works. It was tips from the U.S. business community to law enforcement officials that led us to identify this front company organization. Second, it exposed a network of trade facilitation companies in western countries, demonstrating the risks bad actors are willing to take, and the need for U.S. companies to screen customers even in allied destinations. Third, many companies associated with these transactions are taking steps to change their business practices that will allow their removal from the Entity List, thus demonstrating the value and market-based incentive of the Entity List from a compliance and enforcement perspective to push companies to establish reputable business practices or risk elimination of U.S. sources of supply.

The Arc Electronics case highlights our use of the Entity List to target offshore actors engaged in the illegal diversion of U.S.-origin items. The Entity List has become a formidable administrative enforcement tool to identify bad actors; foreign parties that are prohibited from receiving some or all items subject to the EAR unless the exporter secures a license because of the risk these persons pose of diversion of U.S.-origin items to weapons of mass destruction (WMD) programs, terrorism or other activities contrary to U.S. national security or foreign policy interests. In fact, we have found that the Entity List has not only inhibited U.S. exports to destinations of concern, but exports to these countries from other
supplier nations as well. In 2012, BIS added 197 new persons on the Entity List while removing 18.

Gormley

As Under Secretary Hirschhorn stated at the 2010 Update Conference in Washington, D.C., BIS will step up enforcement efforts “against individuals who flout the rules and against companies whose inadequate internal compliance programs tell us that they are indifferent to whether they follow the rules.” We continue to place an emphasis on individual responsibility, attempting to differentiate between the actions of one or a few from that of a company. Many times they are one and the same; but on occasion, they are not. We are seeking to punish the willful actor, and once again, a company’s commitment to an Internal Compliance Program, or ICP, can be an important factor differentiating a crime of complicity between an individual and his employer, from that of a sole rogue employee.

One such case is the Gormley case, which was opened based on a Voluntary Self Disclosure, or VSD, submitted by Amplifier Research in Souderton, Pennsylvania. Timothy Gormley was an employee of Amplifier Research. Many of this company’s products are controlled for national security reasons with application in military systems, requiring a license for export to most destinations outside of Europe. According to his guilty plea, Gormley altered invoices and shipping documents to conceal the correct classification of the amplifiers so they would be shipped without the required licenses, listed false license numbers on the export paperwork, and lied to fellow employees about the status and existence of export licenses. Gormley’s actions resulted in at least 50 unlicensed exports of nationaI security items to such destinations as China, India, Hong Kong, Taiwan, Thailand, Russia, and Mexico. In admitting to the conduct, he explained that he was “too busy” to obtain the licenses. The company made the right decision in notifying BIS of the violations and in taking remedial measures. On January 17 of this year, Gormley was sentenced to 42 months in prison, three years of supervised release and a $1,000 criminal fine.

PPG

Another example highlighting the principle of individual and corporate accountability is the PPG case. Xun Wang, a former Managing Director of PPG Paints Trading (Shanghai) Co., Ltd., a wholly-owned Chinese subsidiary of United States PPG Industries, Inc., conspired to export, re-export and transship high performance epoxy coatings to the Chashma II Nuclear Power Plant in Pakistan, a nuclear reactor owned and/or operated by the Pakistan Atomic Energy Commission, which is on BIS’s Entity List. Wang was the most senior PPG Paints Trading corporate executive involved in this export scheme. In December 2012, she was sentenced to one year and one day in prison, agreed to pay a $100,000 criminal fine, and to perform 500 hours of community service. She also agreed to pay a $200,000 civil penalty, with another $50,000 suspended, and to be placed on BIS’s Denied Persons List for five years, with an additional five years suspended. As Under Secretary Hirschhorn noted, “This case clearly demonstrates our resolve to hold individuals responsible for violations of our export control laws. Individuals can no longer hide behind a corporate veil.”

Wang’s cooperation with the government’s investigation resulted in a downward variance at her sentencing. It also led to the China Nuclear Industry Huaxing Construction Co., Ltd. guilty plea in December 2012, believed to be the first time a PRC corporate entity pled guilty to export violations in a U.S. court. Huaxing agreed to the maximum criminal fine of $2 million, $1 million of which will be stayed pending successful completion of five years of corporate probation.

In addition, Huaxing agreed to pay a civil penalty of $1 million, implement an export compliance program, and conduct annual compliance audits for two years. The company also agreed to a five-year suspended denial of export privileges.

Ericsson de Panama, S.A.

As in the Gormley case, the voluntary self-disclosure process is an essential element of any ICP and usually a “great weight” mitigator in a BIS enforcement proceeding. One case illustrating this point is the Ericsson case. Ericsson de Panama, S.A. of Panama City, Panama, knowingly implemented a scheme to route telecommunications items from and to Cuba through Panama. The scheme included repackaging items to conceal their Cuban markings, forwarding the items to the United States for repair and replacement, and returning the items to Cuba. In May 2012, Ericsson entered into a settlement agreement with BIS in which it agreed to pay $1.753 million to settle 262 EAR violations. In addition, an independent third party will conduct an audit of all export transactions connected with Cuban customers. By voluntarily disclosing the violations to BIS and the Department of Justice, and cooperating with the resulting investigation, Ericsson was able to avoid criminal prosecution and heavier fines.
 

Compliance and Conclusion

Finally, let me say this: I understand the challenges you face. I’ve worked in the government and I have practiced in private law firms advising companies on compliance matters. The ECR issues I’ve discussed today are complicated. And even companies that take export compliance seriously make mistakes. So I know from experience that violations are not always black-and-white.

To help industry avoid mistakes, especially in the context of Export Control Reform, we’re going to redouble our outreach efforts. We’re going to begin to boost our visits to companies who will be most affected by the USML to CCL changes, beginning with businesses in the military aerospace industry. And as Export Control Reform increasingly affects other sectors, like satellite, military vehicles and electronic makers, we’re going to focus our outreach efforts on them as well.

We’re doing this for the simple reason that if we can help more companies better understand the regulations, it will benefit both our goals. But let me be clear: The best way to ensure you’re not violating the regulations is to have a comprehensive internal compliance program in place. A good compliance program pays for itself: it keeps you from committing a violation in the first place; and if you do slip up, it will be a mitigating factor in an administrative penalty proceeding.

Let me also emphasize this point for intangible transfers of technology where traditional means of monitoring – for example, shipping documentation, consumption records and purchase orders – may not apply. In these circumstances, and particularly where there are specific EAR restrictions with regard to certain nationalities, you need to ensure that conditions can be complied with. This includes knowing what access controls are in place and the efficacy of the technology control plan to prevent unauthorized access on a recurring basis. The illicit re-export of U.S. technology can have more severe national security consequences than a tangible export, and certainly that may be the case from an intellectual property protection perspective.

Finally, if your company should find itself subject to one of our investigations or enforcement actions, we strongly recommend that you come prepared to explain what compliance procedures you had in place, how things went wrong and exactly how you have or plan to correct your compliance procedures to prevent problems in the future.

I also strongly encourage you to come forward and file a voluntary self-disclosure, or VSD, informing us of any violations you may internally uncover. A VSD typically results in 50 percent mitigation of the proposed civil penalty if a violation is determined to have occurred. In fact, of the VSD cases resolved in 2011 and 2012, only 3 percent in 2011 and 4 percent in 2012 resulted in the imposition of an administrative civil penalty. We have also made substantial progress at BIS in establishing a more streamlined review process so that those who file VSDs receive a timely response on the disposition of their matter.

And now, let me introduce my colleagues who will serve on our Enforcement panel. Doug Hassebrock, the Director of the Office of Export Enforcement; Anthony Levey, Special Agent-in-Charge of the Los Angeles Field Office, Kevin Kurland, Director of the Office of Enforcement Analysis, and Ned Weant, Director of the Office of Antiboycott Compliance

Thank you for your participation in this conference and your attention today. I wish you all great success with your lawful exports.

Remarks of Assistant Secretary Kevin J. Wolf as Prepared for Delivery at the BIS Update Conference July 23, 2013

U.S. Department of Commerce
Bureau of Industry and Security

Update 2013 Conference

Remarks of 
 Kevin J. Wolf
 Assistant Secretary for Export Administration

July 23, 2013

 

As Eric has just described, we are beginning to implement some fairly fundamental changes to the export control system. I’m often asked for a summary of the reactions to the changes. They generally track something along the lines of what I’m beginning to call "The 5 Stages of Export Control Reform Acceptance."

I. The Five Stages

The initial reaction is denial. "It won’t happen." "The departments will never agree." "Congress will stop it." "It’s been tried before." "If Thomas Jefferson couldn’t reform the system, then no one can." "Government officials don’t take risks. They play it safe."

The second stage is curiosity. "You know, if this did work, it would be really good for our business. It would eventually reduce our regulatory burden for sales and work in allied countries." "It would actually accomplish the national security objectives the Administration has laid out." "You know, we do struggle a lot with the borderline between the EAR and the ITAR and, yes, the ITAR does over-control less significant military items." "Nah, it’s never gonna work."

The third stage is panic. "Oh my. This actually might happen. We don’t have enough time for this." "I have to figure out which of my products will be affected." "I have to figure out new rules." "I didn’t like the old rules, but I (mostly) understood them." "I have to re-mark my tech data." "But I liked MY private definition of ‘specially designed.’ This one is too complicated and takes away all my wiggle room." "I know industry has asked the Government for fundamental change, but I just wanted the government to decontrol all my products." "How do I change my order processing software?"

The fourth stage is intense focus. "How will the new rules apply to me and my products?" "What about this fact pattern?" "What about that?" "What did you mean when you wrote this? Really? I didn’t read it that way." "Why did you use an Oxford comma in one place but not another?" "Why so many quotation marks?" "How is Commerce’s definition of ‘required’ technology different from State’s definition of ‘directly related’ technical data?" "How many angels can you fit on top of a paragraph (b)(2) nutplate?"

The fifth stage is acceptance. "You know, this is actually kind of clever. It all holds together rather well now that I understand it." "It’s going to eliminate hundreds of licenses and thousands of pages of MLAs that always get approved anyway." "I can get product out the door to allied countries more quickly." "Having a de minimis rule for sales to most of the rest of the world helps." "I can often go straight to the release paragraphs in the definition of ‘specially designed’ for what is really just a one sentence definition for me." "Gee, this is simpler, although with more words." "There is a little tweaking to be done, but it works." "The definitions do allow for more reliable, predictable, consistent outcomes." "I have the option of getting a license or using License Exception Strategic Trade Authorization (STA) for the 36 countries, whichever works best for me." "OK, there will be more enforcement focused on exports and reexports to countries of concern." "The Administration is listening to me."

There is also a sixth reaction, which is "OK, ECR is great, but what have you done for me lately? What about my products and my markets?"

These are all valid reactions. Yes, there is a lot of work to be done by the aircraft and engine industry, and the government, to get ready for October 15th. Once the new system settles in, it will accomplish all the national security, foreign policy, and economic security objectives that Eric set out. There is a lot of work, though, to get to that point.

II. Work to be Done

We need to finish drafting the new and revised controls on missiles, explosives, personal protective equipment, and training equipment so that we can begin the congressional notification process on these changes. We expect to be able to publish these final rules around Thanksgiving.

We need you all to finish reviewing the second proposed revisions to military electronics, which will be published this Thursday, and send us comments by the September 9th deadline. We will want to review those comments and get a final version ready for congressional notification by the end of the year. Remember, if we have described something on the revised Category XI or in the new 600 series electronics controls that is in normal commercial use, don’t just tell us about it in conclusory fashion, prove it with evidence of such use. That’s one reason why we decided to publish a second pair of proposed rules. Also, for this and all other proposed rules, don’t just tell us what you think is wrong, tell us what you think is good and what works.

We need to finish up and publish next month the CCL "clean-up" rule. This rule will conform various definitions throughout the CCL, such as by making consistent references to "parts" and "components." If the control doesn’t refer to "parts," then "parts" are not controlled. If it does, it does. We’ll standardize the headings in the ECCNs. Sometimes the headings contain control text. Sometimes they just are a summary of what’s controlled. The rule should clear up these and other long-standing CCL issues the public has raised with us in the comment process.

We need to spend a lot more quality interagency time coming to some policy and control conclusions on several difficult issues in the ongoing review of USML categories XII – fire control and night vision -- and XIV – toxins, biologics, and related items. We had put the review of these off for a while so that we could finish up with the initial implementation efforts. Now that those initial rules have been completed, we are focusing on categories XII and XIV again and plan to have out early this fall proposed rules for public consideration.

We need to listen closely to you regarding how the new regulations are actually working in practice to spot any unintended consequences. So far, we think we’ve spotted them all, but with any change this big, there will inevitably be the need for tweaks to get it right. So, do not hesitate to let us know if you spot something that seems odd or unintended. It may have been deliberate, but maybe not.

We need to keep up the training and outreach, not just for the things that change but also for the things that don’t. We don’t have the resources to train everyone, but we can still do a lot. For example, we have conducted approximately 230 outreach events to date in FY2013, including 31 of the weekly conference calls. More than 11,000 people have participated in the training events we’ve conducted so far this year. We need to continue to expand the scope of our outreach to reach the small and medium defense exporters who will significantly benefit from the transfer of less sensitive munitions items from the USML to the CCL. And of course, you are here for the next three days.

We need to keep working with the other agencies, such as Customs and Border Protection, ICE, and the FBI, to make sure they understand the new rules. Much of what we are doing will make it easier for them to do their jobs. For example, we are creating largely positive lists of what the USML items are and also a definition of "specially designed" that allows for a solid, legal conclusion through asking a series of "yes" / "no" questions rather than having to dive into the mind of the original manufacturer to determine whether a part is or isn’t controlled.

We need to make sure that BIS’s new munitions licensing division is running smoothly. This includes making sure that the referrals to and from State and Defense work efficiently and quickly. We need to make sure that exporters who are used to submitting requests for DSP-5s know how to get a Commerce license. We need to make sure that exporters used to using D-TRADE are comfortable using SNAP-R. We must ensure that we smoothly transition to the single licensing database, USXPORTS.

For 600 series items and all other items subject to the EAR, we need to make sure that applicants provide in their applications the information the government needs for processing. We need clear and complete descriptions of the transaction, the items, the end uses, and the end users. We need to get exporters to the point where they can anticipate questions we might ask and be sure to address them in their applications. In general, good, tailored, clear, jargon-free applications lead to shorter reviews and fewer provisos. Don’t ask for the kitchen sink when you only need to export the stopper.

By the way, if you are about to enter into a particularly complex or unusual transaction, please feel free to call your licensing officer before submitting the application. A lot of time can be saved for both you and us by initiating an early dialogue and working through what we need before you submit. Also, if a condition you get back doesn’t make sense or is unworkable, then let us know. When providing information to other parts of the government about an application you’ve submitted to BIS, make sure that BIS has the same information. Finally, you don’t have to wait until October 15th to begin submitting applications to export military aircraft parts and engine parts. The sooner you get them in, the quicker we’ll be able to process them.

We need to keep educating foreign recipients of items subject to the EAR of their obligations associated with the items. U.S. companies can do a lot to help train their foreign buyers and partners. Indeed, we are putting together some standard materials that U.S. aircraft and engine part companies can send to their foreign buyers and partners to explain the new rules.

We need to keep doing our audit and outreach visits to ensure compliance with License Exception STA – that exporters are getting the required certifications and watching out for red flags, for example. As we reported last year, we review the data reported in the Automated Export System (AES) to track STA shipments. Exporters and consignees are required to provide, upon request, copies of their documents pertaining to STA exports. We conduct on-site document reviews to verify compliance. By the way, exporters have made nearly 2,000 shipments of dual-use items, valued at nearly $200 million, under STA. These numbers will certainly grow once it becomes available for 600 series items.

We need to make sure that the AES system is ready to accept the newly created 600 series ECCNs. So far, all seems in order and there shouldn’t be any issues. By the way, if a "600 series" ECCN is reported under a non-eligible authorization, AES will generate a fatal error. Additionally, all exports of "600 series" items other than .y items will require an AES filing, regardless of value or destination. We explained these changes in detail in a May webinar that you can access on the BIS website.

As we finish the drafting on the USML-CCL regulations later this year, we need to have ready a whole series of EAR-specific regulatory reforms to get out to you for review and comment during the remainder of this year and next. These will, for example, include proposed changes to the outdated support document and recordkeeping requirements. There are lots of other housekeeping regulations in the work, such as those that would clear up provisions related to routed transactions, and License Exceptions, particularly BAG and AVS. Eric has already mentioned the goals regarding the encryption regulations. And, as always, we’ll continually be working with our regime partners to update and refine the control list.

III. Big Picture Point about Regulations

When thinking about the creation of new regulations and the revision of old ones, we, of course, think first about the national security or foreign policy reasons for the control. But we next think about how to reduce the policy objective into regulatory text.

When doing so, there is a fundamental tension between complexity and precision, on one hand, and simplicity and over-control, on the other. The two simplest systems would be one that requires a license to export everything, everywhere, all the time and one that that doesn’t require a license to export anything, anywhere, anytime. The latter is unacceptable because, of course, there are significant national security, foreign policy, human rights, and other reasons for why the U.S. Government wants visibility into and the final say regarding whether specific items, technology, software, or services can be exported or reexported to certain end uses, end users, and destinations. The former is unacceptable because, although simple, it would impose an unbearable and unacceptable regulatory burden on U.S. industry -- as well as harming, our national and economic security objectives. So, the solution lies somewhere in the middle.

But once an agency starts treating different items with different parameters differently to different end uses, end users, and destinations, then detail is required -- more words, more definitions, more provisions, more technical specifications, more license exceptions. More complexity.

I mention this because a common -- and a very reasonable -- request from industry is to "simplify the regulations." We are doing everything we can to make the regulations as simple and internally coherent as possible. Indeed, as well said by Under Secretary of Defense for Policy James Miller to Congress, "Our national security will be far better served by a more agile, transparent, predictable, and efficient regime." Our regulatory changes will accomplish this, which will then allow you to be as reliable, predictable, and efficient exporters as possible. The regulations are, however, never going to be simple because of the need to "right size" the controls in world that is no longer bi-polar.

We are, however, doing things that, on first read may not seem simple but whose efficiencies will be more apparent after a second (or third) read. For example, License Exception STA will allow for the export of 600 series military items and most related technology to 36 countries if for ultimate end use by the governments of one of those countries, for return to the United States, or if in connection with a reexport transaction the US government has already authorized. But we realize that complying with the conditions of STA may, in some cases, be more complex than simply having a license to engage in the same transaction, such as if companies in a joint effort are in both STA-36 countries and non-STA 36 countries. That’s okay. That is why we made the use of License Exception STA optional. Either way, the U.S. Government’s objectives are satisfied. You choose the approach that works best for you.

Another example is the definition of "specially designed." Yes, it is longer than the current, non-existent, definition. It has a series of reliable shortcuts, however, that, once understood, allow for consistent, reliable, predictable outcomes in common situations. Again, more words were required, but I’m certain that the amount of time spent analyzing the new definition will be less than the amount of time companies have spent trying to comply with the regulations absent a definition.

IV. Summary of the Essence of the Reform Effort

Another thing I’m often asked to do is to describe the impact of the current stage of the reform effort. If you are a supplier of military parts and components to regular, known customers in one of the 36 countries, for ultimate end use by the government of an "STA 36" country or the United States, these changes will have a significant, positive impact on your business – and on our national security objectives of strengthening the U.S. defense industrial base and increasing interoperability with our allies. If you can satisfy the conditions of License Exception STA, these types of sales and joint development and production activities will be significantly more efficient for you.

If, on the other hand, you want to trade, directly or indirectly, 600 series or satellite-related items with countries subject to arms embargoes, you will be disappointed. For transferred items, we are maintaining the same embargoes that exist in the ITAR with respect to those countries. Indeed, one objective of the reform effort is to focus more of our resources on investigating and enforcing exports and reexports to these countries and to other end uses and end users of concern.

If you are engaged in trade with the rest of the world, individual licenses will still generally be required, but there are efficiencies that come with being EAR controlled. In particular, the EAR allow for a de minimis amount of U.S.-origin content to be incorporated into foreign-made end items without causing them to become subject to U.S. reexport licensing obligations -- except if destined to countries subject to U.S. arms embargoes. This will reduce the current incentives for foreign manufacturers to design out or avoid U.S.-origin content. That is one objective of the reform effort and, we believe, will help the defense industrial base. You won’t have to deal with registration, fees, Manufacturing License Agreements, Technical Assistance Agreements, temporary import authorizations, defense service analyses, or brokering issues. There are, of course, still authorizations required under the EAR to export controlled commodities, technology, and software, but we believe that the Commerce system, for these types of items, will eventually be less burdensome and further the national security objectives of the effort.

V. The Export Control System Today

While BIS and its interagency partners work on the reform effort, we also continue to ably handle the daily business of running the export control system. BIS, for example, processed 23,000 licenses last year. Since October 1st, we have processed nearly 19,000 additional license applications. We have issued this year 22 notices in the Federal Register, including 17 final and 5 proposed rules. Since 2008, we have issued 34 rules expanding the Entity List of foreign parties, adding 498 entities to the Entity List and removing 57. Since 2007, we have qualified fifteen companies in China and India as validated end-users (VEUs). These companies have received approximately $163 million in controlled high technology items and software under controlled circumstances. We have continued to update the EAR to reflect changes agreed upon by the multilateral export control regimes. On June 5, we published a rule implementing understandings reached at the 2012 plenary meeting of the Australia Group. On June 20, we published a rule implementing the changes agreed to at the Wassenaar Arrangement’s 2012 plenary meeting. On July 16, we published a rule implementing changes to the Missile Technology Control Regime Annex. Later this summer, we anticipate publishing a rule implementing changes the Nuclear Suppliers Group has made this year.

Defense Industrial Base: BIS’s Defense Industrial Base activities help ensure that our military has access to the cutting-edge technologies they require. The Bureau conducts three core activities in support of this base: priorities and allocations, foreign acquisition reviews, and industrial capability studies. We will be issuing a proposed Defense Production and Allocations System rule this year that implements recent amendments to the Defense Production Act.

With respect to defense industrial base assessments, the Bureau's Office of Technology Evaluation Defense Industrial Base Survey Division plays a leading role in: (i) mapping the intricate industrial supply chains for key defense sectors such as space, strategic and critical materials and aircraft; (ii) assessing the overall health of companies that support these sectors, and (iii) identifying equipment, labor, and technology shortfalls in sectors that could jeopardize the ability of our Defense Department to successfully accomplish missions. In particular, the space industry assessment was a good example of BIS’s working closely with defense and civilian agencies, such as the Air Force, NASA, and the National Reconnaissance Office, and leveraging its unique authorities and analytical capabilities to accomplish its mission of maintaining and enhancing the U.S. defense industrial base. BIS, in conjunction with these agencies, surveyed approximately 4,000 companies that directly or indirectly supply products and services to the U.S government for space-related purposes. The results of this survey give the U.S. Government visibility (that it has historically lacked) into the issues and challenges that affect companies’ long-term viability in the space sector. We plan to initiate a major U.S. military aircraft, helicopter, and unmanned aerial vehicle industrial base assessment this fall.

CFIUS: The Bureau participates in the Committee on Foreign Investment in the United States (CFIUS), which reviews the national security implications of foreign acquisitions of United States businesses. We support CFIUS by drawing on our export control and industrial base knowledge.

Treaty Compliance: An equally important responsibility for BIS is its international treaty compliance implementation responsibilities. BIS administers the industry compliance aspects of the Chemical Weapons Convention (CWC) and participates in activities to enhance implementation of the Biological Weapons Convention (BWC).

BIS is responsible for collecting and transmitting annual data declarations and reports from the U.S. chemical industry to the Organization for the Prohibition of Chemical Weapons (OPCW). In FY2012, BIS processed 850 declarations and reports covering activities of 561 U.S. chemical facilities. BIS also hosted 19 inspections of U.S. chemical facilities by OPCW.

BIS has the linchpin role of establishing and managing the U.S. Additional Protocol Reporting System, which receives declarations on the nuclear and nuclear-related activities from U.S. industry, the Nuclear Regulatory Commission (NRC), and the Department of Energy (DoE). BIS assembles those declarations into a draft declaration for interagency review and then a consolidated U.S. declaration for congressional review and subsequent transmittal to the IAEA. BIS has taken the first steps toward developing an Additional Protocol Reporting System to allow industry to submit reports electronically instead of the current paper process.

VI. The Conference and the Thanks

On Thursday, my staff and I will be available to answer detailed questions about the final and the proposed rules. This session will be open to the public via conference call. My deputy, Matt Borman, will lead an interagency panel tomorrow to describe the agencies’ roles under the current, new, and contemplated rules. They, too, will answer questions. BIS staff will conduct individual panel sessions on key elements of the reform effort such as transition licensing, "specially designed," and license exceptions. On Thursday, we have organized 40 roundtables where you can meet subject matter experts from the Munitions Control Division as well as other BIS groups.

So, with that, I’d like to thank you all for attending. And I’d like to close by thanking all those who have made all this work possible. Under Secretary Hirschhorn for his terrific leadership of BIS. My staff in Export Administration, who make all the things I just described happen. You are all professionals and excellent public servants. Those in our Regulatory Policy Division who are doing the heavy lifting on the drafting of the regulations. The Licensing Officers who keep the day-to-day licensing and classification work of EA flowing smoothly. My Deputy, Office Directors, and front office staff for everything. Rebecca Joyce, Toni Jackson, and the Outreach and Educational Services team for putting together yet another exceptional Update conference.

I’d also like to thank my colleagues in the other agencies who are vital to the reform effort and the day-to-day work of BIS.

Thank you for listening. Enjoy the conference.

 

 

 

Remarks of Under Secretary Eric L. Hirschhorn as Prepared for Delivery at the BIS Update Conference July 23, 2013

U.S. Department of Commerce
Bureau of Industry and Security

Update 2013 Conference

Remarks of 
 Eric L. Hirschhorn
 Under Secretary for Industry and Security

July 23, 2013

 

Thank you, Dan. Thanks to Bernie Kritzer, Rebecca Joyce, Toni Jackson and our terrific Outreach staff as well as the many BIS and U.S. Government colleagues who have contributed to this conference. Bernie is retiring soon, so this will be the last Update conference for which he’s responsible. Please give him a big hand.

To the staff of BIS, thank you again for your diligence, professionalism, and dedication. I’d also like to thank my colleagues from the other departments involved in export controls. As evidenced by our amazing progress in the reform effort, great things happen when we can see ourselves as part of an Executive branch with a single vision. It is an honor to work with all of you to advance our country’s national security, foreign policy, and economic security.

I would like to introduce our BIS management team. Please stand when I call your name. Please hold your applause until I have read everyone’s name. We have Assistant Secretaries David Mills and Kevin Wolf, Deputy Under Secretary Dan Hill, Chief of Staff Sharon Yanagi, Deputy Assistant Secretaries Matt Borman and Rich Majauskas—Rich will come aboard next week—Director of Administration and CFO Gay Shrum, Director of Congressional and Public Affairs Charles Kinney, and Chief Information Officer Eddie Donnell. And thanks to OEE Director Doug Hassebrock for serving as Acting Deputy Assistant Secretary for Export Enforcement for the past few months.

I. Export Control Reform (ECR) Generally

We have been describing for nearly four years why our national security requires fundamental reform of our export control system – to increase interoperability with our NATO and other close allies, to strengthen the defense industrial base by reducing the incentives of foreign companies to design out or avoid U.S.-origin content, and to focus our resources on the transactions that matter most.

To implement these objectives, the regulations must change considerably. Over the next three days, we will be describing the fundamental changes that have been completed and those that are yet to come. We are yours for these three days. Ask questions, so that you leave here as informed as possible—not only about what is changing but also what is not. If you think of a question after the conference, that’s okay, too. Keep asking. Our accessibility to the public and our ability to explain the changes to those affected is essential to our success.

We know that change is hard. But we believe that once you understand and implement these changes, the system will be more efficient for you. It will also achieve our national security, foreign policy, and economic security objectives.

Another reason to keep asking questions is to help us spot things that we may have missed. With any regulatory reform effort as large as this, small mistakes and unintended consequences are inevitable. You can help by pointing out any seemingly odd results from your application of the regulations in the day-to-day business of exporting. They may be deliberate, or not.

We have strived to make the reform effort transparent. The government, of course, makes the final calls on what is in our national security and foreign policy interests, but we have been doing so with significant input from industry. We want our rules to be as reliable and predictable as possible so that you can be reliable and predictable exporters. This is good for our national security and foreign policy objectives, and for your ability to comply with the rules and to profit from secure, efficient, and lawful trade.

A central part of the reform initiative is the Defense Department-led effort, in which State and Commerce also played important roles, to revise the U.S. Munitions List so that its categories are more specific and list only those defense articles that are critical to maintaining a military or intelligence advantage or that otherwise warrant the types of controls in the ITAR. Military items that do not warrant ITAR controls will become subject to the EAR and its new "600 series" controls.

We will go into more detail on these new rules during the conference, but one way of thinking about them is that we have divided the world into three main groups –the 36 NATO and other close allies that will become eligible to receive military items subject to the EAR under License Exception Strategic Trade Authorization, or STA, the countries subject to arms embargoes, and all other countries. The greatest benefit will accrue for exports to and among the first group but there also will be significant benefits for the third group. The rules for the embargoed group will not change, even for items being transferred to the CCL.

II. Status of the ECR Effort

Export controls are serious, with serious implications that warrant careful action. Ours are ambitious ideas. Unlike previous Update conferences, however, they are now more than just ideas because we are issuing them as actual, final regulations.

In particular, on April 16th, State and Commerce published final rules revising the controls on military aircraft and engines, and related items. The most significant changes are with respect to most parts and components for military aircraft and engines.

The rule also includes many new or revised definitions and exceptions in order to begin the process of harmonizing the EAR and the ITAR. One such definition is "specially designed," which will result in increased clarity, reliability, and predictability for exporters without over-controlling—or under-controlling—items that meet the regulatory criteria. At the request of industry, the April 16th regulations include a 180-day delay in the effective date (until October 15) to allow companies to adjust their internal order processing and compliance programs.

On July 8th, State and Commerce published their second set of final rules, which included significant changes to the controls on the parts and components for military vehicles, ships, and items in the ITAR’s miscellaneous and materials category. These rules will become effective on January 6, 2014.

This Thursday—July 25—State and Commerce will publish a second proposed revision to the controls on military electronics. The document will be on public display at the Office of the Federal Register tomorrow and the deadline for comments will be September 9th. We are publishing a second proposed rule because many of the comments to the first proposed rule provided hard evidence supporting changes—and the changes are significant. We wanted to give industry a chance to see and comment on the changes before they became final. This is an excellent example of what I meant by the transparency of the effort and our goal of involving industry in ensuring that the control text is understandable and consistent with the goals of the reform initiative.

In early January, President Obama signed this year’s National Defense Authorization Act, which restored his authority to determine the appropriate export controls for satellites and related items. We owe thanks to those in the Congress—from both parties—who made this possible. On May 24th, Commerce and State published proposed rules regarding the transfer of communications and other non-military satellites and related items back to the EAR. Thank you also to those who sent in comments by the July 8th deadline. We’ve begun reviewing them and hope to have a draft final rule ready soon so that we can begin the required congressional notification process.

We expect to begin this fall the notification process on the categories pertaining to missiles, explosives, training equipment, and personal protective equipment. We also plan to have out for public comment this fall proposed rules on the fire control and biologics categories.

III. Compliance and Enforcement

Another aspect of the reform effort is the enhancement of the export control compliance and enforcement capabilities of BIS in particular and the government in general. We have, for example, established the Information Triage Unit (ITU) and Export Enforcement Coordination Center (E2C2). The ITU compiles, coordinates and reports intelligence and other information about foreign parties, which facilitates our review of license applications. The E2C2 improves interagency export enforcement coordination by ensuring the various agencies are talking to one another and sharing relevant information.

We are also strengthening our end-use check program. For example, BIS and State are working to coordinate end-use checks where U.S. Munitions List and CCL items are co-located, so that we can expand the total number of end-use checks while minimizing burdens on your foreign customers from multiple checks.

BIS is employing a layered approach to verify compliance with license exception STA. We review data reported in the Automated Export System to track STA shipments and identify users of STA. Exporters and consignees are required to provide, upon request, copies of their export activity pertaining to STA. We have conducted a number of on-site document reviews to verify compliance. To date, compliance with the provisions of STA is approaching ninety percent. We will continue to review STA transactions to guard against misuse.

We are working on a rule that would strengthen the Unverified List to increase U.S. Government visibility into potential transactions when BIS has been unable to verify the suitability of the potential recipients. This will give you more clarity on how to address "red flags" in transactions with foreign parties for which BIS has been unable to complete an end-use check. When coupled with our other unique administrative authorities, including the Entity List, BIS’s compliance tools provide exporters with information about the reliability of foreign parties to safeguard transactions from illicit diversion.

IV. Next Steps

So what do we hope to accomplish by the time of next year’s Update conference? First, we need to complete our work on the USML-CCL revisions. As the new categories start to come on line, we need to ensure that the new licensing system and personnel are functioning smoothly.

Our new Munitions Control Division will be handling the license applications, classification requests, and other matters that will become BIS’s responsibility. It is staffed and trained, and I have every confidence that it will manage the new system successfully. If not, I’m sure you will let us know. By the way, a majority of the new hires have Department of Defense backgrounds, with almost one-third being combat veterans of Iraq or Afghanistan. They have direct, hands-on experience with military equipment and DOD programs.

Beyond the USML-CCL list review efforts, we need to keep working on making the EAR and the rest of the CCL clearer and easier to use. A control list comprising the details of multilateral regime commitments and various unilateral controls necessarily is complex. We nevertheless will do what we can to make it internally consistent and easier to apply. We also will continue the work of harmonizing the definitions of key ITAR and EAR terms.

Working through the regime process, we will continue evaluating the strategic rationales for the controls on specific dual-use items. The multilateral regimes can only handle a limited number of proposals each year but we will move as quickly as we can.

We want to revise and simplify encryption controls by making them more concise and clear, and not increasing the regulatory burden unduly. I do not yet have a solution but we are working on the issue.

We are drafting a proposed rule that would update existing support document requirements and clarify routed transaction issues. We plan to seek public input on how to revise the current recordkeeping requirements to be consistent with modern IT and document retention systems.

This is not a complete list of the EAR changes we’re contemplating but it offers a feel for the types of developments we’d like to be discussing at this time next year.

V. Education

Since joining BIS, I have stressed the need for education and outreach, particularly for small- and medium-sized companies. The benefits of our improvements will be lost unless the regulated community can understand and comply with them. We are working hard to get the word out. We have, for example, developed partnerships with non-profit educational groups representing defense exporters, particularly small and medium-sized firms. Notwithstanding fiscal austerity, BIS has conducted this year more than 140 reform-related activities that have reached about 11,000 people. These include weekly teleconferences, which provide an important venue for industry to submit questions on what has been proposed and how the new system will work.

If you are a regular visitor to the BIS website, and I hope that you are, you’ll notice that we’ve completed the transition to our redesigned website. Our goal was to provide quick and easy access to the information you need to stay current with bureau activities and tools to make your compliance responsibilities easier. We welcome your comments on our new format.

We have deployed on the BIS website two interactive tools to assist exporters in understanding and complying with the new rules: the Commerce Control List Order of Review Decision Tool and the "Specially Designed" Decision Tool. We will be updating the on-line interactive STA tool to assist companies in determining whether they are eligible for and compliant with STA to take into account the "600 series." Additionally, we are in the beta testing phase for a fourth interactive tool that will assist the private sector, academic, and research communities in determining whether a deemed export license is required.

We conduct seminars, webinars, and teleconferences on the new rules. These webinars are recorded and made available without charge on the BIS website.

BIS does not limit its outreach and education to the private sector. We’re also helping other government agencies with the transition.

Over the next few months, BIS will be working closely with the Outbound Branch of U.S. Customs and Border Protection to implement a port training program, and with the FBI and DHS’s Homeland Security Investigations. We don’t want our law enforcement partners to be surprised when they see a defense part or component exported under a BIS license or license exception instead of an ITAR license.

We also are working with the Small Business Administration and Commerce’s Minority Business Development Administration to get the word to the companies with which they deal.

VI. Conclusion

Another important aspect of our training and outreach efforts is this conference. Please take advantage of it. Ask questions. Challenge us. Learn. Enjoy yourself. Thank you for attending.

* * *

Let me now take just a few more moments of your time to introduce the next speaker. The centerpiece of this conference, as its theme implies, is President Obama’s export control reform initiative. Many people, in BIS and a host of other agencies, have played a role in bringing ECR about. Kevin Wolf, our Assistant Secretary for Export Administration, has been in every sense the mainstay of the BIS team in this effort. Without his energy, commitment, knowledge of the ITAR and the EAR, ability to "play well with others," and sense of humor, ECR could not have gotten to first base, let alone be rounding third and heading for home.

Kevin is a native of the Show-Me State, Missouri, and received his bachelor’s degree from its state university. He then made his way and earned his law degree and a masters in International Affairs from the University of Minnesota. Then, on to Washington, where he spent seventeen years with the Bryan Cave law firm, much of it working on export control and other international issues, before yielding to the siren call of government service in early 2010.

It’s a privilege to have him at BIS and to hear from him this morning. Please welcome Assistant Secretary Kevin Wolf.