I. First, the Thank You’s – and There are Many…
Thank you, Andrew. Thank you also for your leadership of PM and your commitment to advancing the President’s reform effort. It is a pleasure working with you and your team in the Directorate of Defense Trade Controls. Special thanks also to your Deputy Assistant Secretary, Beth McCormick who will be joining us tomorrow.
Eric: Thank you again for your able and intelligent leadership of BIS. You are a terrific boss, partner, public servant, and amateur humorist.
To my staff in Export Administration, thank you again for your hard work, professionalism, and dedication. Public service is exactly that. It has been my pleasure to have had an opportunity to serve with you. Special thanks go to Bernie Kritzer, Toni Jackson, and your Exporter Services team for putting together another exceptional Update conference. Special thanks also to my other office directors, Eileen Albanese, Alex Lopes, Michael Vaccaro, and Gerry Horner for keeping EA running smoothly and efficiently.
As you may know, the export control system is an interagency effort and the reform initiative is an equally interagency effort, as led by the White House. So, I, too, want to thank Michael Froman and Brian Nilsson and my colleagues at the Departments of Defense, Homeland Security, Justice, Energy, the Treasury, and the Office of the Director of National Intelligence for their hard work on the day-to-day business of running the system -- in addition to all the efforts to reform it. Special thanks go to Jim Hursch, Tim Hoffman, and Mike Laychak at DTSA who have been shepherding the work of the Defense Department in this effort.
II. Topics I will Cover
Eric and Andrew set out well the general national security and foreign policy justifications for the reform effort. Acting Secretary Blank will also do so later today. So, I won’t repeat those points, other than to say that with every decision in the reform effort we still ask ourselves how well we are doing to implement the President’s instructions and to realize the vision of a better system that then-Secretary of Defense Gates described in April 2010. Are we strengthening national security by enhancing interoperability with our close allies? Are we reducing the incentives the regulations create to design out or avoid US-origin content, thus helping the U.S. industrial base? Are we modifying the rules and the practices so that we can focus our limited government resources on the transactions that matter the most?
So, I’ll move down from the cloud and treetop level and get in to the tall grass of the effort’s status. I’ll get in to the weeds and even the roots of the proposed changes during two two-hour sessions I’ll be conducting on Thursday where I’ll answer whatever questions are posed in writing to me about the proposed regulations. I’ll also continue to answer whatever questions are submitted in writing each Wednesday during our usual open conference call with the public. The invaluable and unflappable Deputy Assistant Secretary, Matt Borman, will lead tomorrow an interagency panel, and others on my staff will lead over the course of the next two days separate individual sessions to set all this out in even more detail.
Last, but not least, I’ll give you a status report on many of the other things BIS does on a daily basis unrelated to the reform effort. This is an “Update” conference, so we’re naturally giving you an update on proposed and implemented changes. You shouldn’t forget, though, that most of our time is spent on the day-to-day of running and enforcing the current system, which involves a lot more than just export control regulatory or reform issues.
III. Status of the Reform Effort
Export control reform is a lot like the story of the turtle that got mugged by a gang of snails. When the policeman asked the turtle what happened, he said, “I don’t know. It all happened so fast.” The point of this joke is that speed is relative. We’ve been talking about reforming the system for three years now and you, thus, may think we’re moving at a snail’s pace. Considering all the tasks that need to be completed and the massive amount of time and thought many dedicated public servants are putting into each effort to make even one change, we are, however, moving at breakneck speed.
First, leadership at each of the Departments and the White House had to agree on and commit their departments to the general plan to fundamentally reform the system. That was, relatively speaking, the easy part. Then, hundreds of experts with varied backgrounds in multiple bureaus and military services had to review thousands of controls that are decades old involving hundreds of thousands of articles involving just about every area of technology that are now mostly caught up in non-specific “catch-all” controls that had never been analyzed before and that result each year in tens of thousands of license applications and hundreds of thousands of classification, jurisdictional, licensing, and other compliance determinations that affect billions of dollars of trade with most of the world.
All these reviews then need to be filtered through a determination of what controls are and are not in our national security, foreign policy, and other interests -- topics that have multiple and different variables for the tens of thousands of items and dozens of different destinations, end uses, and end users at issue.
As described in the preambles to each of our notices, section 38(f) of the Arms Export Control Act requires the President to periodically review the U.S. Munitions List and determine which, if any, items continue to warrant the controls of the ITAR. Thus, we ask ourselves, for each item on the revised categories, questions like – Is it inherently military? Is it something almost exclusively available from the United States and its close allies? Does it provide the United States with a critical military or intelligence advantage or otherwise warrant USML control? Is it the type of item that we routinely approve for export for ultimate end use by our NATO and other multi-regime allies without concern? Have we described the revised controls in a way that will not lead to unintended consequences, such as either over-controlling or under-controlling something?
These determinations then need to be reduced to regulatory text in ways that Muggles can understand in two different sets of regulations with varied histories and requirements that have accreted over the decades in their structural and organizational complexity. (Special thanks to Hillary Hess and her staff in the Regulatory Policy Division for doing in weeks and months what would normally take years and forever to complete.)
The process does not end at that stage because every proposed change then needs to be reviewed and cleared by multiple layers of policy, regulatory, and legal experts in at least five different departments, primarily Commerce, State, Defense, Homeland Security, and Justice. Each change, correction, or second thought then needs to be sent around the horn again for additional reviews and clearances, including on all the various seemingly boilerplate topics set out in the preambles to our notices that I suspect most of you skip over. (Special thanks here to the management and staff at OMB and Commerce counsel for ably coordinating the entire interagency review effort of an unusually large number of regulations and issues.)
All these proposed changes then need to be published in the Federal Register for public comment, which is not always an easy or quick feat to accomplish given that many other government agencies are publishing rules to improve their regulatory structures as well. After receiving these comments – and thank you for the time and thought put in to your corrections and observations – the departments then need to review them, decide which ones we will accept and why, write up summaries, edit the proposed regulatory text as needed, and then repeat the entire process set forth above. All the while, we layer on top of all decisions the ultimate objectives of the reform effort that Secretary Gates laid out in April 2010, the relevant statutory limitations or requirements, enforcement considerations, congressional notification requirements and related issues, and our international commitments. The whole process is a four-dimensional multivariate analysis far more complex than any calculus problem any of us ever had to solve. (I threw in that last bit for my Ph.D. mathematician wife, who regularly reminds me that my law and public policy degrees are “not real doctorates.”)
Even with all these steps and hoops, the progress has been impressive. The work has been done, and the departments have agreed to Commerce’s and State’s publishing of nearly 30 notices, including on some of the historically most difficult categories to work through, such as controls on military aircraft, engines, and all the related parts and components. The others include explosives and propellants, vessels of war, tanks and military vehicles, military training equipment, personal protective equipment, auxiliary military equipment, and submersibles. All the remaining categories are in their final OMB review or interagency clearance or final drafting processes, including the electronics category, which has the second-largest regulatory impact on trade after the aircraft and engines category. We hope to have it out for public comment this month.
How is all this going to work together? As I described last year, we’ve proposed the creation of a new “600 series” set of Export Control Classification Numbers (ECCNs) to control the items that no longer warrant control as ITAR items. This approach would maintain the basic structure of the EAR and the CCL – and in a way that is as consistent as possible with the numbering structure of the Wassenaar Arrangement’s Munitions List and the organizational structure of the current USML Categories.
By the way, with this change, we all really need to stop referring to the Commerce Control List (CCL) as the “dual-use” list. Yes, it has and will continue to control those items of concern that have dual uses – both a civilian and a military or proliferation-related use. But the CCL has always included things warranting control that were not “dual-use” items. Indeed, the whole current reform effort is just an expanded version of what was done in the early 1990s when less significant military items, such as combat support vehicles, were transferred from the munitions list to the CCL. These are now the “018” controls, which will all be moved in to the “600 series” for the sake of consistency.
In addition, this approach will set up the structure for one day creating a single control list that will be administered by a single licensing agency. It also allows for the description of what items would be moved to the CCL and how they would be controlled under the EAR, which is a necessary part of satisfying the section 38(f) congressional notification requirements.
We’ve reviewed all the public comments on this proposed rule from last July, as slightly tweaked in November, and are now drafting that part of what would be a final implementation rule. We will then add on top of that whatever we decide to do to the State and Commerce transition rules and “specially designed” definitions. We will then attach to that rule the final versions of the new ECCNs that would control military aircraft, engines, and parts and components specially designed therefor that no longer warrant control on the USML. This package will then form a significant part of the first section 38(f) notice the State Department plans to file with Congress. It’s that simple.
IV. Specially Designed
Commerce and State published last month an essentially common definition of the term “specially designed” for use in the EAR and the ITAR. A common definition that is as clear and as objective as possible is critical to regulatory transparency, compliance, and our remaining consistent with our international commitments. The term is used over 600 times in the EAR. It applies to almost all Wassenaar Arrangement Munitions List controls and is used throughout most of the other multilateral lists. In addition, it is critical to the Administration’s goal of moving most of the “catch-all” controls now in the USML to the 600 series in the CCL. Defining the term clearly will be vital to reducing jurisdictional ambiguities between what will be in the few catch-all controls that will remain on the USML and the controls on the CCL. It will also be vital to having a clear dividing line between former USML items that will be controlled in the 600 series and other items described in the rest of the CCL or that are EAR99.
One of the reasons it has been so difficult to get to a good, common definition is that the term is used in many different ways. It is used as a control parameter, but also as a de-control parameter. It applies to parts and components with particular characteristics and parts and components that are designed for another item regardless of their performance characteristics. It applies to end items, raw materials, systems, and software (but generally not technology, which usually uses the term “required”). It is used in the control lists of four different multilateral regimes written by different people over the decades from dozens of different countries. Given its history and significance to the regulations, there is also a lot of emotion and lore tied up in its application.
The revised approach is similar to the one we proposed last July, but it is simpler, shorter, and addresses the logical and other gaps the public comments highlighted for us. (Thank you.) To help people work through the definition, it now has a two-part “catch and release” structure. That is, paragraph (a) contains broad bases for an item to be “specially designed” – the “catch” – and paragraph (b) contains various exceptions to an item’s being “specially designed” – the “release.” We chose this approach because we found that it was easier to describe what the term did not include rather than trying to completely describe what it did include under a single paragraph structure. This structure allows for a more orderly and efficient “yes-no” decision tree analysis. This then supports our ultimate goal of having a definition that doesn’t rely exclusively on what was in the mind of a particular engineer or designer. We want a definition that not only achieves the national security and foreign policy objectives of such a catch-all control, but that also will result in the same conclusion by different people who are presented with the same facts.
We’ve worked through dozens of approaches, and we think we’ve come up with a definition that achieves that delicate balance between (i) one that has the virtue of being short, but without the vice of leaving room for differing interpretations, and (ii) one that has the virtue of being detailed, but without the vice of being so complex that it is not understandable. We, however, need you to test the definition against your products. Does it result in items being controlled that otherwise wouldn’t or shouldn’t be? Does it result in items being de-controlled that wouldn’t or shouldn’t be under a reasonable application of the term? If so, then why? Tim Mooney and I will walk through the elements of the proposed definition in our panels tomorrow and the next day, so I’ll leave the detailed commentary until then.
Notwithstanding our conclusion that we’ve come up with a definition that is as good as possible, all things considered, we acknowledge that the concept is inherently difficult to apply in reality. The use of “specially designed” is also not in keeping with our ultimate goal of creating truly positive, objective lists of controlled items. We want to control items of concern, not intentions. Thus, BIS has published an advanced notice of proposed rulemaking on the feasibility of enumerating “specially designed” components on the CCL. This is a longer term initiative. If we agree with your comments, we would consider submitting the findings to the appropriate multilateral export control regime as part of the normal course of proposing list changes. Not until after there would be international consensus on such changes would we remove the term from the regulations.
V. Transition Issues
Another crucial proposed rule published in June was the Transition Rule. It reflects our commitment to easing the USML-to-CCL transition for exporters. First, the rule proposes to add a General Order to cover holders of State licenses for items that transition to Commerce jurisdiction. Exporters will have a grace period to minimize disruption to current State authorizations. Those exporters wishing to use BIS authorizations may do so as early as the effective date of the rule that transfers jurisdiction of their items to Commerce by returning their State licenses. An exporter can continue using its State license two years after the effective date of the transition, unless the license expires first, is required to be amended, or is returned to State.
The proposed rule also recognizes that the EAR’s controls on military, dual-use, and most other items should not be more restrictive than the corresponding ITAR controls. To harmonize the EAR with the ITAR, the rule proposes to extend the validity of all BIS licenses from two years to four years. The rule also proposes to allow exporters to request an extended validity period greater than four years and to allow direct shipments to multiple end users, as is the case now with ITAR authorizations.
Further, BIS has identified aspects of the EAR that are inadvertently more restrictive than the ITAR. We’ve thus proposed changes that would harmonize the EAR’s license exceptions with the relevant ITAR exemptions.
For example, the rule proposes revising License Exception Servicing and Replacement of Parts and Equipment (RPL) by removing the requirement to return serviced items only to the original exporter. It would also allow the export and reexport of 24 shipments per year of spares up to a total value of $500 per shipment.
The proposed revision to License Exception Temporary Imports, Exports, and Reexports (TMP) would add authority for in-country transfers and allow temporary export to a broader group of countries of test equipment to a U.S. subsidiary, affiliate, or facility abroad to match the scope of the ITAR exemption.
The rule proposes revising License Exception Government, International Organizations, International Inspections under the Chemical Weapons Convention, and the International Space Station (GOV) to authorize items consigned to non-governmental end users, such as U.S. Government contractors acting on behalf of the U.S. Government, in certain situations. The rule also proposes expanding the scope of countries eligible to receive Wassenaar Arrangement Sensitive List items under the revised exception to include the governments of the 36 eligible STA countries.
Finally, the rule proposes harmonizing certain parts of License Exception Technology and Software Unrestricted (TSU) to the comparable provisions of the ITAR by allowing TSU to include training information in operation technology authorized for export. The rule also would add authorization for the release of most controlled source code and technology in the United States by U.S. universities to their bona fide and full-time regular employees.
As part of the Transition Rule, BIS has proposed a revision to the draft “600 series” de minimis rule to (a) exclude from eligibility “600 series” items destined to U.S. arms embargoed countries and (b) increase to the standard 25% the de minimis rule for all other destinations. This approach advances the national security objectives of reform by eliminating the negative impact of the ITAR’s “see through rule” on trade with most of the world, but preserves the ITAR’s zero percent de minimis rule for countries subject to U.S. arms embargoes.
While the Transition Rule proposes many benefits for exporters, it also contributes to our policy of erecting higher fences around the export control perimeter. The use of License Exception STA for “600 series” items would be limited to foreign parties that have received U.S. items under a license issued by either Commerce or State. The rule also proposes that the prior consignee statement include confirmation that “600 series” items are for ultimate government end use and that the consignee has agreed to a U.S. Government end-use check. Finally, an AES filing will be required for all STA items regardless of value or destination.
VI. Outreach and Staffing
Adjusting to the new export control paradigm developing under the ECR Initiative will require time and training. The Office of Exporter Services, working in cooperation with the Office of Technology Evaluation and the Office of Strategic Industries and Economic Security, has expanded the volume and scope of BIS’s education and proactive compliance programs. We conduct close to 200 outreach events annually ranging from Update to our weekly ECR teleconferences to participation in trade shows and many outside speaking engagements with exporters.
Outreach and education services will continue to grow to meet the needs of exporters. We are partnering with non-profit educational groups to provide training to defense exporters, particularly small- and medium-sized exporters.
The education effort will extend to developing more interactive tools, like the STA interactive tool, to assist exporters in understanding the rules and making more informed judgments on their eligibility for certain activities. We have also been conducting activities to verify compliance with License Exception STA usage. Automated Export System (AES) records have been used to identify STA transactions. Based on this information, we have sent letters to users requesting documentation showing compliance with the safeguards. We also have conducted a number of on-site visits to review STA documents. The results have been positive and have resulted in productive dialogue, which has enhanced the understanding of exporters and regulators. Tomorrow morning, Assistant Secretary David Mills will discuss how enhanced ECR compliance provides multiple layers of defense against the unauthorized reexport or transfer of items.
We take the processing of “600 series” items seriously from both a licensing and compliance perspective. To this end, we have created a Munitions Control Division in the Office of Strategic Industries and Economic Security staffed by technical and compliance specialists to process licenses and classifications for these items once the rules start become final. The division includes many trained technical specialists with long experience working with defense security items and exporters.
VII. Other Topics Regarding the Rest of EA’s Activities
A. Day-to-Day Administration of the EAR
BIS processed in 2011 approximately 25,000 license applications. Adding in classification determinations, work on commodity jurisdiction determinations, enforcement-related licensing determinations, and the drafting of advisory opinions, the workload includes more than 33,000 licensing-related activities. In addition, BIS personnel spend a significant amount of time working on proposed revisions to multilateral regime control lists; a variety of industry outreach activities; bilateral engagements with a variety of foreign governments; responding to congressional, industry, and media inquiries; and working with the other agencies to resolve disputes or questions about particular licensing issues.
In all these activities, we try to make the EAR as easy as possible to use, understand, and comply with consistently. This is not only for your benefit, but also furthers our mission of EAR compliance. I know that Eric listed out a whole series of EAR-specific topics that we would like to address in a second term, but the biggest among them is the structural re-organization and re-drafting of the EAR to make it more user friendly, particularly the encryption controls and the license exception provisions. Many things have accreted on to the EAR since this was last done in 1996.
B. Entity List
One of the most significant changes we have made to our export control system to address the 21st century challenges has been the expansion of the Entity List. Requiring licenses for items that otherwise would not require a license to foreign parties engaged in activities contrary to our national security and foreign policy interests provides a targeted way to better ensure low-level items subject to the EAR, such as ubiquitous electronic components found in improvised explosive devices, are not used against us and our allies. The alternatives would either be to drastically increase unilateral controls on the CCL or continue to let suspect foreign parties to obtain such items. One indication of the effectiveness of the list is that a number of foreign parties have taken the steps necessary to be removed from the list. There is a breakout session that will cover this topic in more detail.
C. Defense Industrial Base
Our Defense Industrial Base activities help ensure that our military has access to the cutting-edge technologies they require. The Bureau conducts four core activities in support of this base: priorities and allocations, foreign acquisition reviews, industrial capability studies, and advocacy in support of U.S. exporters. We will be issuing a proposed rule this year that implements recent amendments to the Defense Production Act.
With respect to defense industrial base assessments, the Bureau is playing a leading role in: mapping the intricate industrial supply chains for such key defense sectors as Space and Naval Underwater Acoustics; assessing the overall health of companies that support human space flight activities; and identifying sectoral equipment, labor, and technology shortfalls that could jeopardize the ability of the warfighter to successfully accomplish missions. The Space Industry assessment is a good example of BIS working closely with defense and civilian agencies, such as the Air Force, NASA, and the National Reconnaissance Office, and leveraging unique authorities and analytical capabilities to support the U.S. defense industrial base. BIS, in conjunction with these agencies, is surveying more than 9,000 companies that supply products or services to the U.S Government for space-related purposes. The results of this survey are expected to give the U.S. Government visibility (that it has historically lacked) into the intricate supply chain network supporting the provision of products and services across the defense, intelligence, and commercial space sectors.
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.
E. Treaty Compliance
BIS also handles important treaty compliance work. We are responsible for U.S. industry compliance with the Chemical Weapons Convention (CWC) and the Additional Protocol to the U.S.-International Atomic Energy Agency (IAEA) Safeguards Agreement. We also work on measures to enhance the Biological Weapons Convention (BWC).
BIS collects annual data declarations from the U.S. chemical industry for transmission to the Organization for the Prohibition of Chemical Weapons. The more than 600 declarations cover the activities of U.S. chemical facilities. In recent years, BIS has hosted an annual average of twenty inspections, by international inspectors, of U.S. facilities.
BIS’s treaty compliance responsibilities also extend to nuclear and biological activities. We host inspections and collect annual data declarations and related reports from U.S. industry on the nuclear and nuclear-related activities specified in the Additional Protocol of the International Atomic Energy Agency.
I’ve come to the end of the 30-minute version of my talk. The three-hour and three-day versions will be later. So, thank you for coming. Thank you for the time and effort you put in to doing that which is necessary to comply with the regulations. They are not just burdens for the sake of a burden. They do have a critical purpose to our national security and foreign policy objectives. Thank you for giving us advice – either through the public comment process or the Technical Advisory Committees – on all that we do. All these efforts are enhancing U.S. national and economic security and are, thus, all for the greater good.