Remarks of Under Secretary Eric L. Hirschhorn Update 2014 Conference

Details

U.S. Department of Commerce

Bureau of Industry and Security

Update 2014 Conference

Remarks of 

Eric L. Hirschhorn

 Under Secretary for Industry and Security

July 29, 2014

 

 

Thank you, Dan. Thanks to Karen Nies-Vogel, Rebecca Joyce, and our Outreach staff as well as the many BIS and U.S. Government colleagues who have contributed to this conference.

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, our new Chief Financial Officer and Director of Administration Kathryn Chantry, Director of Congressional and Public Affairs Charles Kinney, and our Acting Chief Information Officer Eddie Donnell.

I also want to thank Brian Nilsson of the National Security Council staff, our colleagues from the other departments and Capitol Hill who are involved in export controls, and the staff of BIS for their important work on Export Control Reform (ECR). It is an honor to work with you.

The success of ECR is not just about government, either. Our accomplishments to date would not have been possible without the cooperation that you, the exporting community, have provided. Almost every state is represented here today, along with 28 countries. I think that says something about the commitment we've made to one another to see this reform process through. We value your comments and the resources you have committed to training employees, vendors, and customers on the new regulations. Our partnership on ECR is the reason we have reached this moment and will carry the reform effort to its completion.

I'd also like to thank the Secretary of Commerce Penny Pritzker, for being a vigorous advocate for the reform effort. Be sure to join us at tomorrow's luncheon for a message from her, along with keynote remarks from our new Deputy Secretary of Commerce, Bruce Andrews.

I. Export Control Reform (ECR)

This marks the fifth Update Conference at which I have discussed the importance of ECR. In 2010, I explained why the U.S. export system required comprehensive reform and shared my vision of the "three Es" that the U.S. Government needed to accomplish to ensure the success of ECR. These are efficiency of regulations, including clarity about what they cover, education, and enforcement.

Today, four years later, we have converted many of our objectives into concrete regulations. With a few exceptions, the U.S. Munitions List (USML) is being made into a positive list that controls only items that provide the United States with a significant military or intelligence advantage. Militarily less sensitive items such as parts and components have been and continue to be transferred from the licensing jurisdiction of State to that of Commerce. License Exception Strategic Trade Authorization (STA) provides flexible and refined licensing arrangements for trade with and among close allies. Enhanced compliance and enforcement measures create effective safeguards to deter diversion and misuse of controlled items.

Although the government must make the final call on what is in our foreign policy and national security interests, our rules need to be transparent and predictable so that you—the manufacturing and exporting community—can be reliable, predictable, and successful exporters. 

II. Efficiency

As I stated at the 2010 Update Conference, the success of ECR rests on two fundamental principles: (1) the rules should be transparent and predictable; and (2) we must have streamlined processes and higher fences to control sensitive items appropriately while facilitating exports of less sensitive items to destinations and end users that do not pose substantial national security, proliferation, foreign policy, human rights, or similar concerns.

To review briefly, we began the United States Munitions List (USML) review process in 2010, and that process has resulted in the removal, as far as we could, of the basket categories that until now have accounted for about half of the 85,000 licenses issued annually by the Department of State. Military items that do not warrant continued control on the USML are becoming subject to the Export Administration Regulations (EAR) and the new "600 series" controls on the Commerce Control List (CCL).

At the risk of repeating myself, transferring items to the licensing jurisdiction of the CCL is not a decontrol. We made these changes because Commerce's regulations allow for country-based license exceptions as well as distinctions based on the technical parameters of an item. This is important because the EAR enable the government to "right-size" controls on less sensitive military items, such as parts and components for a military vehicle, that are destined for our country's allies and other multilateral control partners.

Commerce and State have published final rules covering controls on 15 categories of the CCL and USML. Commerce also published in April 2013 a transition rule describing how items previously controlled by the ITAR are dealt with under the EAR.

In January 2013, President Obama signed legislation restoring his authority to determine the appropriate export controls for satellites and related items. The May 2014 Commerce and State final satellite rules will transfer many items to the CCL, including commercial communications and lower performing remote sensing satellites, ground control systems, and radiation-hardened microelectronics formerly controlled in Category XV of the ITAR. The radiation-hardened microelectronics portions of the rules took effect June 27. The rest of the rules will take effect November 10.

Turning to military electronics, the July 1, 2014 Commerce and State rules add to the CCL certain military electronics equipment and related articles formerly controlled by USML Category XI, plus certain cryogenic and superconductive equipment that have been controlled by "catch-all" provisions of the ITAR. The addition of software and technology for certain wing folding systems to Commerce ECCNs took effect on the date of publication. The other provisions of Commerce rule will be effective on December 30, 2014.

Commerce also published on July 1st a notice requesting information about civil end uses of microwave monolithic integrated circuit, or MMIC, power amplifiers, as well as certain microwave transistors that will be controlled as "600-series" items.

The results of the massive list review exercise, including the satellite and electronics rules, provide exporters with a number of benefits, including:

• vastly improved interoperability with our closest friends and allies;

• availability of 25% de minimis treatment to non-embargoed destinations, which should go far toward accomplishing Defense Secretary Gates's instruction to reduce incentives for non-U.S. companies to design out or avoid U.S.-origin content and services;

• eligibility for various license exceptions, notably License Exceptions STA, GOV (for certain government end users), and RPL (for replacement parts);

• elimination, in many cases, of the requirement for Manufacturing License Arrangements and Technical Assistance Agreements—though we continue to control releases of technology through simpler BIS authorizations;

• ability to apply for a license before a purchase order has been received;

• elimination of registration requirements;

• elimination of defense service controls, though again, we continue to control releases of technology in other, simpler ways;

• elimination of brokering constraints for less sensitive military items, though we still control the transfer of the items themselves; and

• no registration or licensing fees.

Many satellite and electronics items that have been transferred to Commerce will be eligible for License Exception STA, which permits the export of certain items to 36 allied and friendly countries. STA in effect established a license-free zone to cover the first transaction while creating new safeguards to ensure that items are not diverted outside the designated country group and the designated end users within that group.

III. Education and compliance

A core principle for our export control system is ensuring an informed regulated community. Neither you nor we can reap the benefits of ECR without ensuring that the regulated community understands and complies with the rules.

The list review rules strengthen our national security. They also assist you—our manufacturing and exporting community—by making it easier to market to our closest friends and allies. There is no free lunch, however, and ECR increases your compliance responsibilities.

A more nuanced export control system means a more complex system. We could have a simpler system that maintains controls on virtually everything. But the price for removing some license requirements is greater nuance and greater reliance upon exporters to see to compliance.

We in BIS are few in number. We rely on industry as the front line in educating not only internally, but also externally—the supplier base, and where practicable, the customer base as well. The keys to successful compliance include internal coordination—How has your company developed and coordinated its internal ECR planning, ranging from the training of staff, to reclassifying products, to revamping your IT compliance tools? A second key is communication—How have you engaged and trained your supplier base and your customers? If you are a U.S. subsidiary of a foreign owned company, what compliance training and processes are you providing to your foreign parent? Finally, have you engaged in early collaboration with the U.S. Government to address complex cases or instances where you may have violated our rules?

Since 2010, we have been working hard to get the word out. BIS provides comprehensive outreach services to exporters, ranging from seminars, to online interactive tools, to weekly teleconferences, to one-on-one exporter counselling. Notwithstanding fiscal austerity, the Bureau conducted more than 200 ECR-related outreach activities during FY 2013, including weekly interactive teleconferences, open to all, that are conducted by Assistant Secretary Kevin Wolf.

As we continue to implement ECR, we will offer training materials, conduct webinars, and undertake related actions, including the possibility of conducting joint outreach to your foreign partners. It is imperative, though, that you play an important role in educating your employees, suppliers, and customer base.

We are continuing to expand our public education effort, including developing partnerships with non-profit educational groups representing defense exporters, many of which are small and medium-sized enterprises. Many of the items transferring from the USML to the CCL are manufactured by small businesses. The Bureau is committed to helping our nation's business, particularly small businesses, reach their commercial potential while respecting U.S. national security. On Thursday, representatives from the Small Business Administration and the Minority Business Development Agency will participate in the Roundtable sessions on exporting and small business. 

IV. Enforcement

The enhancement of our export compliance and enforcement capabilities is essential to the success of ECR. We are coordinating interagency efforts to conserve finite resources, increase our visibility into foreign parties of concern, provide more clarity to exporters on how to address red flags, and continue a layered approach to verifying compliance.

In response to current events and to concerns that you have voiced to us, we will present a cyber threat panel this morning comprising government leaders from various cyber disciplines. They are here to explain the evolving threat posed to the United States, as well as to discuss resources that are available to help defend against those threats.

Tomorrow afternoon Assistant Secretary David Mills will discuss in depth the evolution of the Office of Export Enforcement and the Office of Enforcement Analysis into a sophisticated law enforcement agency, with criminal investigators and enforcement analysts collaborating with our licensing officers to identify and act upon violations.

We have created the Export Enforcement Coordination Center (E2C2) and the Information Triage Unit (ITU). The E2C2 ensures that export enforcement agencies talk to one another and share relevant information, while the ITU facilitates the review of license applications by compiling, coordinating, and reporting intelligence about foreign parties.

Last December, BIS published a final rule that strengthens the Unverified List (UVL) by increasing U.S. Government visibility into transactions involving foreign parties whose bona fides BIS has been unable to verify. We amended the regulations to (1) require exporters to file an Automated Export System record for exports involving a party listed on the UVL, and (2) suspend the availability of license exceptions for parties listed on the UVL. In June, BIS added 29 persons to the UVL; BIS could not verify their bona fides because an end-use check could not be completed satisfactorily.

BIS is continuing the layered approach to verifying compliance with License Exception STA. The review of AES data, exporter, and consignee records, plus some on-site document reviews, has resulted in a high degree of compliance with the provisions of STA. We will continue to review STA transactions to guard against misuse.

Finally, it is important to repeat that in our enforcement, we are trying to focus on truly bad actors, not those who have a decent compliance program, make a mistake, and work with us to remedy the situation. 

V. The Export Control Reform Box Score

What have been the results of the ECR national security investment to date? Between October 15, 2013 and July 27th of this year, the number of Commerce-specific ECR exports related to "600 series" items has reached 29,000, with a value of $1 billion. BIS's Munitions Control Division has processed more than 5000 licenses with an average processing time of 15.3 days.

Exporters now can use STA and other license exceptions to facilitate exports to key allies. STA has been used for more than 3700 transactions. Exporters also have used other license exceptions such as RPL, GOV, and Temporary Exports for an additional 7800 transactions.

The benefits include: 

• timely exports to key defense allies;

• no unexpected license provisos or conditions;

• lower Defense Department acquisition and research costs;

• enhanced U.S. and partner affordability throughout the product life cycle; and

• reduction of the licensing burden for exporters.

The statistics I've cited will continue to grow as additional CCL categories become eligible for "600 series" licensing treatment and/or license exceptions, and as existing State Department licenses for these items are used up or expire.

VI. Other ECR Activities

We have made significant progress but more work remains to be done. In the past year, working closely with the Department of Defense, BIS has made significant progress in converting the interagency aspects of its export licensing from our thirty year-old ECASS I.T. system to the Department of Defense's USXPORTS system. As you may recall, the President directed that as part of the ECR initiative, all U.S. Government agencies involved in export licensing join USXPORTS. We have started the important late stage of this effort known as end-to-end testing, and I'm hopeful that all work will be completed within the next few months. 

VII. Conclusion

The success of paradigm-changing initiatives such as ECR does not occur overnight. Rather, it takes place in stages, much as a large building is constructed starting with the foundation. Together, we have built the foundation for a 21st Century export control system, establishing a ground floor of efficient regulations that allow you—the exporters—to make use of Commerce Department licenses and license exceptions with appropriate compliance safeguards. Now we must complete the higher floors by focusing on education and compliance to facilitate implementation of our rules.

We look forward to your insights and questions. Thank you for your continuing partnership and your participation in this conference.