Remarks of
Eric L. Hirschhorn
Under Secretary for Industry and Security
U.S. Department of Commerce

Export Control Forum
Irvine, California

February 28, 2011

AS PREPARED FOR DELIVERY

 

Good morning and welcome to BIS' Export Control Forum. Let me first thank Mike Hoffman, his staff, and the many other BIS and U.S. government colleagues who have contributed to this conference.

In President Obama, we have as forceful a top-level advocate for export control reform (ECR) as I have seen in my 30 years working in the export control field. At the President's request, Defense Secretary Gates, Secretary of State Clinton, and my boss, Secretary Locke, have directed the effort to create an export control system that is responsive to the national security, technology and commercial imperatives of the 21st Century. The Bureau of Industry and Security's (BIS) day-to-day administration of the Export Administration Regulations (EAR) needs to be considered against the backdrop of President Obama's export control reform initiative.

Last spring, Defense Secretary Gates set out the Administration's conclusion that fundamental reform is needed. "If the application of controls on key items and technologies is to have any meaning,” he said, “we need a system that dispenses with 95 percent of ‘easy’ cases and lets us concentrate our resources on the remaining 5 percent. By doing so, we will be better able to monitor and enforce controls on technology transfers with real security implications while helping to speed the provision of equipment to allies and partners who fight alongside us in coalition operations.” Moreover, he added, the current system encourages multinational companies to move research, development, and production offshore, "eroding our defense industrial base" as well as "undermining our control regimes."

This past August, the President, Secretary Locke and others discussed how the end result of addressing these critical questions would be a single control list administered by a single licensing agency operating on a single information technology platform and enforced by a single primary export enforcement coordination agency. The structural reforms require congressional action. Today, I'd like to discuss our work towards a single control list and a single IT system.

This past December, the Departments of State and Commerce issued proposed regulations to achieve two fundamental reform objectives:

  • controlling items based on transparent technical parameters, which translates in export control parlance to "positive lists" that do not overlap; and
  • separating items by tier, to focus controls on the most sensitive items while allowing for more flexible authorizations for relatively mature technologies that are more widely available.

The U.S. Munitions List

The most important aspect of control list reform may be making the USML a "positive" list. Currently, the USML controls many defense articles based on "design intent," in part because at one time, the majority of items used by the military were produced specifically for the military. Today, however, many-if not most technologies used by the military are developed and manufactured by the commercial sector.

Moreover, the design-intent nature of the USML is inconsistent with a predictable and transparent regulatory process-one where industry and government alike readily and objectively can determine what is controlled. The existing setup has fueled an increase in commodity jurisdiction disputes. This has resulted in many commercial systems being ruled subject to ITAR control or jurisdictional decisions being delayed, thereby impeding the competitiveness of U.S. items or, even worse, resulting in their being "designed out" of foreign end products.

Under the leadership of the Defense and State Departments, the Administration is addressing this problem by converting the USML to a positive list. On December 10, the Department of State issued a proposed regulation that would revise Category VII of the USML-Tanks and Military Vehicles into a positive list. This would focus the category's controls on truly significant military items, while moving less significant items-particularly parts and components that do not serve an inherently military function-to the Commerce Control List. The process for such moves, and for control on the Commerce Control List, will be described in detail early next year.

Last August, at the "other" Update, Secretary Locke displayed two functionally equivalent pivot blocks that hold wheel axle assemblies together. One is for use in the axle of a fire truck and can be exported to China without a license. The other is designed for a military vehicle and almost imperceptibly different, but export that one to China and you'll end up in jail. Control for minor items whose function isn't inherently military results in needless burdens, particularly for small- and medium-sized businesses. Ameliorating such burdens, which divert the time, energy, and resources of the Government as well as of exporters, is an important aspect of the reform effort.

Concurrently with the proposed Category VII rewrite, State requested public comment on converting the remaining USML categories into positive lists. The Department of Defense has an ambitious plan for completing its work on this review in 2011. State and Defense are working diligently on this project, and the President's vision of a reformed export control system cannot be accomplished without it.

For many of the low level, widely available items that will be transferred from the USML to the CCL, Commerce jurisdiction will provide greater flexibility and a simpler structure of controls. First, ITAR registration would be eliminated for many small and medium-sized exporters if their sole ITAR items are minor elements of defense products. Second, the change in jurisdiction should eliminate many problems associated with the "see through" rule, which make certain items manufactured offshore subject to U.S. re-export control requirements if they incorporate U.S.-origin ITAR parts and components, regardless of value or importance. Third, there would be far fewer transactions requiring United States exporters to enter into and obtain complex Manufacturing Licensing Agreements or Technical Assistance Agreement to share data and services. Finally, there could be a significant reduction in the time required to determine the jurisdiction of parts and components.

The Commerce Control List

The USML is not the only focus of the Administration's attention. The existingCCL is largely a "positive" list that describes items using objective criteria but it's not wholly so. We seek to make it sufficiently "positive," clear, and precise, so that someone who isn't an expert on U.S. export controls but understands the technical characteristics and capabilities of an item,can accurately determine its jurisdictional status and classification.

Public input to establish clear and objective control lists is important. The U.S. Government lacks perfect knowledge on a number of the items likely to be affected by the ECR exercise. To this end, in December BIS sought public comment on CCL entries for the purpose of ensuring that such entries are clear and based on objective facts, parameters, characteristics, and technical thresholds that are recognized and employed worldwide. This work, including public input, is needed to achieve clarity, and to avoid items from being subject to both lists unless there are specific parameters that distinguish USML or CCL control. The notice also sought information on the foreign availability of CCL items to assist the U.S. Government in further differentiation of controls by tier.

The Parallel-Tiered Control Lists

The second element of the reform exercise involves converting the USML and CCL into parallel constructed, three-tiered lists that allow the U.S. Government to focus control on the most sensitive items while establishing cascading controls on more mature and widely available items.

To implement this tiered construct, the U.S. Government has developed control list criteria:

1) Tier I items are weapons of mass destruction or are almost exclusively available from the United States that provide a critical military or intelligence advantage. These are what Secretary Gates has termed our "crown jewels."

2) Tier 2 items are almost exclusively available from regime partners or adherents and provide a substantial military or intelligence advantage, or make a substantial contribution to the indigenous development, production, use, or enhancement of a Tier 1 or Tier 2 item. These are what the U.S. Government has termed "precious metals."

3) Tier 3 items are more broadly available and provide a significant military or intelligence advantage or make a significant contribution to the indigenous development, production, use, or enhancement of a Tier 1, 2, or 3 item, or are other items controlled for national security, foreign policy, or human rights reasons.

The Government would then apply licensing policies associated with the tiers.

Licensing Policy

On December 9, BIS published the proposed rule far License Exception Strategic Trade Authorization, or STA. STA would allow the export, reexport, and in-country transfer of specified items. It could be used only where Commerce Control List-specified license requirements would apply. There are two key elements of the proposal:

• For exports of most items on the Commerce Control List that do not require a license for statutory reasons, exports would be authorized to a group of 37 countries under the proposed license exception.

• For certain other countries, Wassenaar Arrangement "Basic List" items would be eligible for export under this exception.

The STA proposal represents the first step in implementing the President's goal of eliminating easy cases so that we can focus the Government's limited resources on items and on end users requiring greater scrutiny.

STA's reduced license requirements would be accompanied by safeguards in the form of higher walls to ensure that items are not re-exported outside eligible countries without U.S. authorization. As proposed, the safeguards would include requiring that exporters and re-exporters notify the purchaser of the safeguard requirement applicable to the license exception. Additionally, the foreign end user would have to certify its understanding and willingness to comply with such conditions. These conditions would establish a knowledge standard that is necessary to prevent potential misuse of the license exception. To ensure an understanding of STA, the Bureau has started reaching out to U.S. companies that may benefit from the license exception.

It is estimated that the proposed license exception STA has the potential to eliminate approximately 3000 individual licenses.

Related Export Control Issues

An important part of the higher wall is the new consolidated end-user screening list. The new list reduces drastically the time and cost burdens associated with having to review up to ten separate lists to screen transaction parties. The new consolidated electronic screening list includes more than 24,000 entities. Most important, exporters now can screen parties in a cost efficient manner from an up-to-date list. This should help prevent inadvertently exporting to an ITAR-debarred party, a specially designated national, a denied person, or an entity on our Entity List. The consolidated file can be downloaded from the Export Control Reform website at www.export.gov/ecr.

We are working on several other initiatives to produce a more streamlined, user-friendly system. This includes developing a single license application form that the Departments of Commerce, State, and Treasury will use and harmonizing definitions of key terms such as “technology" across the spectrum of export control and sanctions regulations.

As part of the ECR initiative, the U.S. Government hopes to clarify the meaning of the term "specially designed" as used in the CCLand the USML. We are working on harmonizing a number of definitions but "specially designed" is a priority given the frequency with which the term is used in the two control lists and the importance of adequately defining the term in order to develop two "positive" lists. The regulatory initiative to clarify the meaning of the term "specially designed" is progressing. Weintend to publish a proposed rule on this subject as one of the next regulatory initiatives to come out of the ECR.

Compliance and Enforcement

License efficiencies and outreach efforts are not the entire story. Enforcement activities have a high priority in the reform program in at least three important respects. First, in November, the President signed an executive order to enhance coordination among export control enforcement agencies. The order mandates an Export Enforcement Coordination Center comprising representatives from BIS, the FederalBureau of Investigation, Immigration and Customs Enforcement, the Intelligence Community, and military security agencies. Agencies will share information and leverage their resources to enhance compliance with export control laws and regulations.

Second, BIS will continue to make use of specific compliance tools to prevent the unauthorized export of technologies to end users of concern. We use the Entity List to target specific compliance concerns rather than apply a broader, less sharply focused set of tools. This allows BIS to use temporary denial orders, as well as additions to the Entity List, to focus attention on those who may violate our laws. The use of the Entity List has been particularly successful because the business impact of being singled out on this list will result in companies modifying their behavior or going out of business.

Third, BIS is adjusting how we penalize those who violate U.S. export controls. In the past, BIS typically has imposed penalties on companies involved in export violations. Going forward, where a violation is the deliberate action of an individual, we will consider seeking penalties against that individual-including heavy fines, imprisonment, and the denial of export privileges-as well as against the company. The same will be true for supervisors who are complicit in deliberate violations by their subordinates.

At the same time, we recognize that even companies that have good intentions can make mistakes. We promote the submission of voluntary self-disclosures (VSDs) in these and other instances. We view VSDs, along with robust internal compliance programs, as important mitigating factors. Given the volume of exports and re-exports that are subject to the EAR-BIS processed more than 20,000 license applications during 2010-we rely on industry for the bulk of compliance. Your knowledge of your products, their end uses, and your customers makes you the front line troops in this important effort.

Information Technology System

We have a plan in place to upgrade our IT systems to make them more user-friendly for exporters and to leverage the resources and information of agencies across the U.S. Government.

One of the first steps we have taken to improve customer service through expansion of IT capabilities is to establish online registration for the SNAP-R licensing system. This allows an exporter to go on line to file and quickly obtain a personal or corporate information number that allows the exporter to file licenses and other requests. This approach also transfers to the exporter the responsibility to manage its account and add or remove persons authorized to have access to the system. This move will eliminate the manual and sometimes untimely processing of more than 6500 annual requests for access to our system. Amanda Simpson, my senior technical and IT adviser, and Ken Whaley will be speaking with you tomorrow about IT developments including online registration.

Conclusion

When we have implemented these actions, the Administration will have achieved what I term the three "Es":

• Greater efficiencies in terms of focusing controls and investigations on those items that are the most significant in terms of providing the United States with a military or intelligence advantage, while facilitating exports to coalition partners in order to improve our interoperability.

• Increased education to ensure that everyone subject to our regulations knows of their existence and requirements. The effort also will help exporters understand how the changes will affect their compliance responsibilities. We are also emphasizing the adoption of internal export management and compliance programs.

• The final "E" is enhanced enforcement, to ensure that exporters, re-exporters, and end users comply with our regulations and use U.S.-origin items responsibly. BIS compliance personnel evaluate exports made under license or license exception to ensure they comply with the EAR. We review EAR99 transactions as well. Our enforcement agents are increasing their presence domestically and abroad. We have new export control officers in China and Singapore, and will leverage the resources of the FBI and ICE as participants in the Export Enforcement Coordination Center. Finally, we will continue to use all the law enforcement tools at our disposal, including the Entity List and temporary denial orders, to inhibit illicit trade in controlled items.

My remarks today underscore the unprecedented commitment of the Obama Administration to export control reform. Thank you again and I look forward to hearing your feedback and ideas.


###

Remarks of
Daniel O. Hill
Deputy Under Secretary for Industry and Security
U.S. Department of Commerce

C5 European Forum on Export Controls
Brussels, Belgium

February 7, 2011

 

I. Introduction

Good afternoon. 

It’s great to be back in Brussels.  I have a lot of terrific memories coming here and working very successfully with Directors from all over the EU.  So, being here today is a fantastic opportunity for me to speak with the EU export community, face-to-face. 

Export control and industrial base issues are what I know.  It’s what I’ve spent my career pursuing.  It hasn’t always been the most head-turning member of our national security apparatus.  It hasn’t always grabbed the most headlines. 

But we’re suddenly a hot topic for a lot of people both in and outside of government.  

Since President Obama took office, we now have as forceful an advocate for far-reaching export control reform as I’ve seen in a generation.

At the President’s request, Defense Secretary Gates, Secretary of State Clinton and Secretary Locke, my boss, are spearheading the drive to create a 21st Century export control system that strengthens our national security and ensures our businesses enjoy robust trade especially with close and trusted allies.

President Obama’s focus on export control reform is as timely as it is essential. 

The world we live in, and the world all of you do business in, is changing - rapidly.

International business is more sophisticated than ever.  Globalized research, product development, and supply chains are now the norm, not the exception.  Companies increasingly have presences in Boston and Brussels, but also in Bangalore and Beijing.

But, not everything in the world has changed.  Our adversaries may have changed …. but we still face serious threats.  There’s no shortage of people who want to harm us.  We face terrorists, weapons proliferators and rogue regimes who seek to turn our technologies against us, our allies, and the troops we have serving together on foreign soil, like in Iraq and Afghanistan. 

And so our new export control system must be geared to this new reality.  It must ensure our industries’ competitiveness, and yet maintain dynamic and precise controls. 

Getting this calibration right, between security and competitiveness will maximize our economy and our safety.

President Obama gets this dynamic.  Two weeks ago, at his State of the Union address he explained our need to adapt:

“Our success in this new and changing world will require reform, responsibility, and innovation,” the President said.

“Just as jobs and businesses can now race across borders, so can new threats and new challenges.  No single wall separates East and West.  No one rival superpower is aligned against us.” 

“And so.” the President continued, “We must defeat determined enemies, wherever they are, and build coalitions that cut across lines of region and race and religion.” 

(Pause)

II. Need for Change

This is what export control reform is about:  adapting and thriving in a world with new rules.  It’s about partnering with allies and enlisting industry to ensure sophisticated technology can be traded amongst friends, but kept away from our enemies.

The only way to move forward is to first take stock of where we are and how we arrived here. Our export control regime has not kept pace with geopolitical changes or innovations in industries.    

For instance, our current system operates under two different control lists with distinctly different approaches to identifying and controlling products. 

The Department of State administers the Munitions List, which generally includes items specifically designed for military applications, a concept as opaque as it is outdated.     

And the Commerce Department administers the Commerce Control List, or CCL, which is a far more specific list of mostly “dual use items” -- that is commercial items that could have military applications -- items like truck parts, electronic components and even computers. 

There are three primary U.S. licensing agencies – each with different procedures and different information technology systems – and scores of different regulatory definitions.

It would be hard for anyone to argue that this existing system is maximizing our security or is a model of efficiency. 

The Munitions List was created during the Cold War.  Most of the items used by the military were developed by, or solely for the military.  But times have changed.  The commercial sector alone now develops nearly two-thirds of the technologies our military uses. 

For exporters and companies with production lines spread across the globe, time they could be spending creating innovative, game-changing products to sell in different countries is instead spent navigating a confusing and time-consuming export control bureaucracy.

An equally disturbing phenomenon is that U.S. companies are sometimes being “engineered out” of collaborative foreign projects due to U.S. export control requirements.

We have heard of examples of sales contracts including provisions that explicitly bar the use of U.S.-manufactured articles because companies don’t want to have to deal with our export control system.

America puts our exporters in an untenable position when we forbid or delay them from selling a widely available item to an overseas market even when comparable foreign items face no similar restrictions from their home country.

III. Reforming the USML

And so, we’re making changes. 

Our ultimate goal is to create one list that will include every item or technology that requires control; have one agency that will administer these controls; have one enforcement coordination agency that handles every investigation of criminal violations; and run everything using one IT platform.

Achieving this goal will take time.  Nothing happens over night.  And some of these steps will require concurrence and legislation from Congress.

But make no mistake: changes are already underway.

We’re already in the midst of three far-reaching updates to how items are classified and controlled:

  • First, we’re harmonizing, as much as possible, the way the Munitions List and the Commerce Control List control items, software and technology.  Together with the Department of Defense, the Department of State is converting the Munitions List into a positive list, one not dissimilar to the CCL. 
  • Second, we’re creating a harmonized, three-tiered licensing system that will apply in the same manner to items on both the Munitions List and the CCL.
  • And third, we’re streamlining the licensing process for exporting controlled items to close allies and partners.  By doing this, our licensing agencies can spend more of their time scrutinizing exports of more sensitive items to more sensitive destinations.

These steps will make our export control system more transparent and predictable.  It will enable exporters to quickly know what can and cannot be exported, and where products can and cannot go.

And this reform is already underway.  The first step is the transformation of the State Department’s Munitions List.

In December, State published a proposed rule that turns Category VII of the Munitions List into a “positive list”.  This means that Tanks and Military Vehicles, and the parts that go into making these will no longer be classified by the traditional “design intent” standard. 

Instead, the State Department is proposing to control these items on a “positive list” that uses empirical measurements to classify an item, such as microns and horsepower, or wavelengths and hertz. 

By the end of this process we’ll have two distinct positive lists that will clearly articulate what is, and what is not controlled.  The State Department will administer one list, and Commerce will administer the other.  We will have created a so-called “bright line” separating the two lists.

In the final phase of export reform, we plan to merge the two lists into one – and we will continue to work with our colleagues on Capitol Hill to make this happen.

But even now, we’re well on our way to making this a reality. 

By early 2012, we expect the entire Munitions List will be turned into a positive list. 

Many items deemed to be militarily insignificant will move from the Munitions List to the CCL.  

Bolts, screws and blankets, for instance, which heretofore were listed on the Munitions List will now be distinguishable from items that truly have a “military utility”.  Technical specifications and functions, and not a so-called “design intent”, will soon determine which agency controls which item.

What we’ve found so far is that about 74 percent of the licensing activity for Category VII items is for parts and components which, going forward, will likely be moved to Commerce jurisdiction.

For small and medium-sized businesses, or SMEs, this change will mean big business. 

Moving military blankets and bolts onto the CCL will enable SMEs to be more competitive, and yet won’t jeopardize our national security or undermine our international commitments. 

Of course, there will be exceptions to these lists.  And where an item is found on both lists, performance parameters will distinguish between the two.   

For example, all weaponized armored vehicles will be controlled on the Munitions List.  But cameras that enable the vehicle to see in the dark may be controlled on both lists.  If the camera is cryogenically cooled, for instance, it may remain on the Munitions List, if it’s not cooled in this manner, it may end up on the CCL.

IV. Tiering

So what will happen once we have these two lists sorted out? ....when every item that might need an export license is placed on one of two lists?

The next step is to implement common criteria for classifying items on both lists. 

Representatives from across the US government are currently discussing the outline that will guide this unified licensing policy.

Here’s how it will work: 

Each of the two lists will be divided up into a three-tiered structure.  This tiering will distinguish tightly controlled items from those more permissively controlled.  And each tier will take into account the item’s availability:

Think of the tiers as shelves in a cabinet:

  • The top tier – or the highest shelf – will be reserved for the most sensitive items, ones available only in the U.S., and which provide a critical military or intelligence advantage.  These will include WMD and items that can be used to make WMD – items that Secretary Gates has called “the crown jewels” of US technology; 
  • The middle tier – or a more accessible shelf – will include items that provide a substantial military or intelligence advantage, and will be products that are available almost exclusively from the U.S. and our multilateral partners and allies;
  • The lowest tier will be reserved for items that provide a significant military or intelligence advantage, and which are more broadly available. These will include items that are controlled for National Security, Foreign Policy, or human rights reasons.

These tiers will improve our national security and our competitiveness by permitting the government to adjust controls in a timely manner over a product’s life cycle. 

So, as technology that was once cutting edge becomes more commonplace and widespread, it can be controlled at a lesser level.   

V. Licensing Policies

Once all of the items are placed into a tier, a corresponding licensing policy will be assigned to ensure appropriate agency review.

  • For the top tier, a license will generally be required for all destinations;

  • Many of the items in the middle tier will be eligible to be exported to allies and most multilateral partners under a license exception or general authorization;

  • And for items placed in the lowest tier, licenses for items not considered proliferation concerns will typically not be required.

Of course, we will continue to maintain robust and comprehensive sanctions against countries like Iran, North Korea and Cuba.

This new tiered licensing policy system is more than just talk among government officials – it’s about to become reality.

In December, the Commerce Department published a Proposed Rule that will make it easier for our close allies to receive many items on the Commerce Control List and for many other countries to receive certain items with limited military applications without a license.

This Strategic Trade Authorization License Exemption will authorize exports, re-exports and in-country transfers to destinations that are deemed to pose little risk of unauthorized uses.  At the same time, new safeguards will ensure that these items are not re-exported to unauthorized destinations without U.S. Government approval. 

Our EU and other European partners stand to benefit significantly from STA.  We expect more than 2,000 licenses will be eliminated to these destinations.

And, if all goes well, we hope to issue a Final Rule within weeks.

VI. Conclusion

I’d like to conclude by noting that the restructuring and harmonization of control lists and licensing policy that is already under way has been groundbreaking. 

Change is in the air.  More updates are going to happen very soon.

In the coming months, there will be many more notices in the Federal Register, and we will be conducting outreach visits to exporters in the US and end-users around the world. 

I want to again urge everyone here today to provide input so that we can make this initiative as successful as possible. 

This overhaul to our current export controls regime can only be successful if industry takes an active role in its development.

So please remember these dates:

  • The comment period for the STA License exception closes today.  So, please submit your comments as soon as possible.  If you give us comments in the next day or two, we’ll still try to consider them;
  • Comments on how to make the CCL into a more transparent and useful “positive list” are also due today;
  • And, comments on the Department of State transformation of the Munitions List into a “positive list” and on the proposed new Category VII are due tomorrow.  

We’re seeking your input.  We know we can benefit from your experience. 

Going forward, it’s critical for us to develop an export control framework that is strong enough to deter our enemies, yet flexible enough to let great minds around the globe share and develop groundbreaking innovations.

I hope all of you will help us accomplish this critical objective.

Thank you for your time, and for having me here today.  


###

Remarks of

Kevin Wolf

Assistant Secretary of Commerce for Export Administration

Exportkontrolltag 2011

Veranstaltet vom

Bundesamt für Wirtschaft und Ausfuhrkontrolle

und dem

Zentrum für Außenwirtschaftsrecht am Institut für öffentliches Wirtschaftsrecht der Westfälischen Wilhelms-Universität

Münster


Münster, Germany

February 25, 2011

 

Ich freue mich, dass ich die Gelegenheit habe, auf diesen Exportkontroll-Tagen zu Ihnen zu sprechen. Herzlichen Dank dem BAFA und Herrn Wallraff, Wolffgang, und Pietsch sowie der Westfälischen Wilhelms-Universität für die freundliche Einladung und Ihre Gastfreundschaft.  Den gestrigen Westfälischen Abend habe ich sehr genossen.  Von den bisherigen Rednern habe ich viel gelernt und ich freue mich darauf, mit möglichst vielen von Ihnen persönlich zu sprechen.  

Ich bin sehr dankbar für die Gelegenheit, über das US-Exportkontrollrecht und die Reformpläne der amerikanischen Regierung unter Präsident Obama referieren zu dürfen.  Die geplanten Reformen sind ehrgeizig und setzen voraus, dass wir die Anliegen und Bedenken unserer engsten Alliierten verstehen.  Dass ich meine Rede in Deutsch beginne soll auch zeigen, dass wir dies ernst meinen.  Es ist allerdings fast 20 Jahre her, seit ich meine Lieblingsfremdsprache in den Goethe-Instituten in Göttingen und Freiburg studiert habe.  Mein Deutsch reicht leider nicht mehr aus, um fachliche Themen zu diskutieren oder gar einen Witz zu erzählen.  Deswegen wechsele ich für den Rest meiner Rede jetzt besser ins Englische.

This is my third trip to Europe in five months to provide an update on and to get suggestions regarding President Obama’s Export Control Reform initiative.  We appreciate and are considering all the ideas we have received.  Indeed, the Administration is now reviewing over 150 public and other comments, including from European countries and firms, to the first proposed changes to our dual-use and munitions control lists that we published in December. 1

 

I.          Purpose of the Reform Effort – National Security

            Before I get into the details of some of these proposed and planned changes to the regulations, let me reiterate that the purpose of the reform effort is to enhance United States national security -- and indeed, that of our allies as well -- by leveraging the multilateral controls to combat proliferation, destabilizing potentially hostile military modernization activities and thwarting terrorism, while facilitating exports to our allies and partners.  Last April, Secretary of Defense Robert Gates set out the Administration’s conclusion that these goals could be only be completely accomplished through fundamental reform.  In August, the President, Secretary Locke, and others 2 further described how the end result of the reform effort would be a single control list administered by a single licensing agency that uses a single information technology platform and enforced by a single primary export enforcement coordination agency.  (The structural reforms will require legislation, but the other two major elements -- working toward a single, positive, “tiered” control list and a single information technology system – can be achieved without legislation.)

            Although the reform effort is not designed to alter any particular trade deficits or surpluses, national security is not limited to military security.  As General James Jones, then the President’s National Security Advisor, said last June, “The future of the United States’ national security in the 21st century is our competitiveness.” 

            And as Secretary of Defense Gates said in his speech setting out the purpose of the reform effort, our “system has the effect of discouraging exporters from approaching the process as intended.  Multinational companies can move production offshore, eroding our defense industrial base [and] undermining our control regimes in the process. . . .”  He went on to say that our current system “incentivize[s] more creative circumvention strategies – on the part of the foreign companies, as well as countries that do not have our best interests at heart.”

            Also key to our national security and, thus, the reform effort are the concerns and issues of our close allies.  Secretary Gates, for example, went on to state that the “U.S. Government reviews tens of thousands of license applications for export to EU and NATO countries.  In well over 95 percent of these cases, we say ‘yes’ to the export.  Additionally, many parts and components of a major piece of defense equipment – such as combat vehicles or aircraft – require their own export licenses.  It makes little sense to use the same lengthy process to control the export of every latch, wire, and lug nut for a piece of equipment like the F-16, when we have already approved the export of the whole aircraft.  In short, the time for change is long overdue if the application of controls on key items and technologies is to have any meaning, we need a system that dispenses with 95 percent of ‘easy’ cases and lets us concentrate our resources on the remaining 5 percent.  By doing so, we will be better able to monitor and enforce controls on technology transfers with real security implications while helping to speed the provision of equipment to allies and partners who fight alongside us in coalition operations.”

            The same principle applies to our effort to revise the U.S. Munitions List.  We want to facilitate inter-operability among our allies fighting shoulder to shoulder with us in Afghanistan and working with us elsewhere in the world.  This sentiment was expressed clearly by Under Secretary of Defense Ashton Carter just this month when he said, “Exports obviously strengthen our industry’s competitiveness, but they also enhance our security – and international security – when they build the capacities of international partners.” 

            The multilateral export control regimes are, of course, vital to our collective security.  They are a coordinated approach to ensuring that countries of concern do not gain unauthorized access to high technology items that can undermine our military and intelligence advantages.  These partnerships and the controls that we all administer, however, need to be flexible to address the threats and challenges of today and tomorrow.  This flexibility requires an updated set of principles on which to base our post-Cold War export control system. 

 

II.         Core Principles of the Reform Effort

            To these ends, President Obama’s reform initiative is built on the following seven principles:

1.         Controls should focus on a small core set of key items that can pose a serious national security or intelligence threat to the United States and its interests.  These include weapons of mass destruction, their delivery systems, advanced conventional weapons, and the critical equipment and technology required to develop or produce them.

2.         Our controls should be fully coordinated with the multilateral export control regimes to be effective.  The regimes’ multilateral controls need to focus on key items that are available almost exclusively from the United States and its regime partners, or that give our partners and us a significant military or intelligence advantage.

3.         For those items that are not controlled multilaterally, they must address an existing legal or foreign policy objective, such as preventing human rights abuses.

4.         Our control lists must clearly identify which items are controlled and be easily updated as technology emerges, matures, or becomes widely available.  Robust compliance with the regulations and aggressive enforcement of violations cannot occur if the lists of items controlled are not clear and understandable.  Indeed, two of the notices the Administration published in December asked the public to provide comments on how to describe more clearly many items on the control lists.  Much of the work on the reform effort in 2011 will be focused on making the lists more clear, relevant, and current.

5.         In addition to having clear regulations, our licensing processes must be predictable and timely, and our licensing policies must be flexible to address new threats.  The export control regulations and processes for licensing controlled items should not prevent United States companies from being reliable and predictable suppliers of approved end items to acceptable foreign buyers.

6.         Our enforcement capabilities must be enhanced to address non-compliance and increase our capacity to interdict unapproved transfers.

7.         Our controls must take into consideration counterterrorism policy and the need to export items that support homeland security priorities, such as enabling foreign countries’ access to modern screening technology for airports.

Taken together, these principles provide a basis for fundamental reform and are aimed at eliminating a core weakness of our current system, which encourages the design-out of U.S. technology, parts, and components and thus undermines our inter-operability with allies and partners. 

 

III.        The First Two Specific Amendments to the Dual-Use Regulations – Encryption and License Exception “STA”

            The first major change to the dual use regulations to further the goals I have described occurred last year when the Commerce Department amended its encryption regulations to permit the export of most mass market electronic products that contain encryption functions and other encryption products without the need for a license or government review.  (“Mass market” electronic products containing encryption include cell phones, laptops, and disk drives.)  Exporters and manufacturers of the encryption products are now allowed to self-classify the products and then export them without a license or government review if they register on-line with the Commerce Department and submit an annual self-classification report.  This rule is expected to decrease technical reviews by approximately 70 percent and semi-annual reporting by up to 85 percent, while continuing to ensure that the U.S. Government has the information it needs and that we are consistent with our Wassenaar partners.

            The second significant change in dual-use licensing policy to further the goals of export control reform would be the creation of a new license exception called “Strategic Trade Authorization.”  We currently are reviewing all the public comments we have received on the proposed version we published in December.  If, following this review, we decide to proceed along the lines of that proposal, the authorization would allow the license-free export, with conditions, of most dual-use items to two baskets of countries and items:

    1.         For exports to almost all European countries, Australia, Canada, New Zealand, Japan, South Korea, and Argentina, almost all items on the Commerce Control List that do not require a license for statutory reasons would be eligible for export under the exception.  This change is a first step in implementing Secretary Gates’ vision of dispensing with the easy cases to focus on items and end users which require more scrutiny. 

    2.         For certain other countries, Wassenaar Basic List items would be eligible for export under the exception.

            With these reduced licensing requirements would come new safeguards to ensure that eligible items are not reexported outside of these countries without U.S. Government authorization.  Exporters and reexporters would be required to notify the purchaser of the exception’s safeguard requirements, including the prohibition of re-transferring or reexporting without U.S. authorization, while the end user would have to certify its understanding and willingness to comply with such conditions.  Thus, we would have created a knowledge standard in order to enforce any misuse of the license exception.  At the same time, we have already started reaching out to companies in the United States that may benefit from the proposed new exception to discuss the requirements, and we plan to enhance our outreach and compliance activities to guard against misuse.  These safeguards are actually higher walls.  They remove a license requirement for exports to countries that do not pose a national security concern but eliminate the ability to reexport – without Commerce authorization – to countries about which we would want additional information.

 

IV.       The List Review Effort

            As described in several speeches last year and in the notices published in December, the Administration has developed a three-tiered set of control list criteria to screen all items on the two primary lists of controlled items – the dual-use list and the munitions list.  Once this list review effort is complete, there will be even more changes to the licensing policies for dual-use items in addition to License Exception STA and then also for munitions list items.

            The control list criteria are based on transparent rules, which will reduce the uncertainty faced by our allies, U.S. industry, and its foreign partners, and will allow the government to more effectively target enforcement activities.  Applying the criteria, the U.S. Munitions List and the Commerce Control List will each eventually be split into three tiers:

    1.         Items in Tier 1 will be those that provide a critical military or intelligence advantage to the United States and are available almost exclusively from the United States, or are items that are a weapon of mass destruction.

    2.         Items in Tier 2 will be those that provide a substantial military or intelligence advantage to the United States and are available almost exclusively from our multilateral partners and allies.

    3.         Items in Tier 3 will be those that provide a significant military or intelligence advantage but are available more broadly.

This flexible construct will improve the nation’s national security and permit the government to adjust controls in a timely manner over a product’s life cycle in order to keep lists targeted and up-to-date based on the maturity and sensitivity of an item.  Those items in the lowest tier will be ripe for review by multilateral regimes to ensure that the international control lists keep pace with technological change and availability outside the regimes. 

            Just as importantly, we will use the new criteria to identify unilaterally controlled items that warrant multilateral control.  This is especially true with emerging technologies.  We will therefore create “holding” export control classification numbers (ECCNs) on the Commerce Control List, similar to Category XXI of the U.S. Munitions List, to ensure we can impose quickly controls on new technologies that do not fit into an existing entry but that should be controlled prospectively.

            Before the lists can be tiered, however, they must be clear about what they control.  We are restructuring the munitions list and, where necessary, the Commerce Control List to create “positive lists” of controlled items.  A “positive list” describes controlled items using objective criteria such as horsepower, microns, wavelength, speed, accuracy, hertz or other precise descriptions rather than broad, open-ended, subjective, catch-all, or design intent-based criteria. 

            The Commerce Control List generally controls items based on technical parameters.  Items not meeting a specified threshold are not subject to control.  But we can do better.  Certain entries contain generic, open-ended wording or apply a “specially designed” criterion that is undefined.  Earlier this month, we received more than 100 public comments on how to make our control lists more positive, and we are combing through the suggestions as part of the effort to make the control lists more clear and precise.

            The revisions to the U.S. Munitions List are a much more difficult and time-consuming effort because many of the controls do not contain a technical or objective basis for determining when an item – particularly a part or a component – is subject to its controls.  Instead, the U.S. Munitions List relies heavily on a design intent structure, even where the function of an item may not be uniquely or inherently military.  We therefore have established a systematic process to turn the USML into a positive list.  The following is a brief description of the process.

    1.         The first step is to decide what items really require control under the International Traffic in Arms Regulations, which impose far less flexible controls than do the Export Administration Regulations administered by the Commerce Department.  In general terms, only those items that have exclusive or predominant government or military use and provide at least a significant military or intelligence advantage to the United States will be identified as items the Administration believes should remain on the list.  For example, there is no civilian use for depth charges or torpedoes; they accordingly will be retained on the U.S. Munitions List.  Alternatively, while some diesel engines clearly have a military utility, few are predominantly or exclusively used by governments or militaries.  As a result, many will move to the more flexible Commerce Control List.

    2.         Once these items are identified, experts will then establish objective, positive control lists consistent with the three-tiered criteria.  This includes specifying the specific parts and components that are subject to ITAR control.  The focus for parts and components will be on those that have significant, inherent military or intelligence applicability as opposed to essentially civilian items whose form or fit has been altered to fit into a military end item.  Indeed, when revising the lists of defense articles, the review teams must abide by various guidelines, one of which is that revised USML categories should not contain any (a) generic controls for generic “parts,” “components,” “accessories,” “attachments,” or “end items” or (b) other types of controls for specific types of defense articles because, for example, they were “specifically designed or modified” for a defense article.

    3.         Those items not meeting the munitions list standard will be transferred to the control of the Department of Commerce after appropriate congressional notification.  If items are controlled on both lists, a performance parameter will distinguish which set of regulations applies.

            The publication in December of proposed revisions to the U.S. Munitions List controls in Category VII for military vehicles is the first step in this direction.  It and other proposed munitions list revisions that we will be publishing during 2011 will propose eliminating the generic controls on “parts” and “components” and, instead, specifying which parts and components the list controls, such as turret rings and torsion bars.  This means that items like commercial pivot blocks, windshield wipers, and brake pads that are modified for military vehicles, but that provide no significant military advantage, will be transferred to the more flexible controls under the Commerce Department’s regulations.  In fact, we estimate that about 74% of items previously licensed in Category VII – mostly generic parts and components – may, subsequent to satisfaction of the congressional notification requirements, be transferred to the jurisdiction of the Commerce Department. 

            For U.S. exporters and foreign end users, such changes in jurisdictional status would be significant because it would:

    1.         eliminate ITAR registration requirements for many small and medium-sized commercial manufacturers that make only small tweaks to allow their core products to be used on a defense article;

    2.         resolve most issues arising from the “see-through” rule, which renders foreign-made civilian or military end items subject to U.S. reexport control requirements if they incorporate any such U.S.-origin parts or components, regardless of value or significance;

    3.         end the requirement to enter into and get approved the complex Manufacturing Licensing Agreements or Technical Assistance Agreements to share all data and services, no matter how insignificant, that are directly related to such items; and

    4.         reduce the amount of compliance time needed for determining the jurisdictional status of parts and components – i.e., whether they are governed by the rules of the International Traffic in Arms Regulations or the Export Administration Regulations. 

            Thus, the transfer of jurisdiction over less significant military parts and components would not de-control them because they will be controlled for export to some destinations, end uses, and end users under the Commerce Department’s Export Administration Regulations.  It would, however, make U.S. companies more competitive.  And it would make it easier for the U.S. and its allies to make their systems more inter-operable because U.S. suppliers can be more reliable, quick, and predictable with respect to less significant items for military use, which are the vast majority of controlled items exported to close allies.

            The Department of Defense, along with representatives from Commerce, State, and other relevant departments, is systematically rewriting the other 19 categories of the USML, based on public comments received on the Category VII rewrite and a request for comments on turning all other categories into positive lists.  Our goal is to publish proposed new “positive” categories on a rolling basis this year.  We will then identify corresponding CCL controls for those items no longer warranting USML control, notify congressional committees, and publish revised regulations.

            After completing the tiering and positive list processes, we will have two structurally aligned sets of control lists that ultimately can be combined into a single list that is administered by a single licensing agency.

            So to sum up, agencies are working to revise the USML and the CCL so that they:

    1.         Are “tiered” consistent with the three-tiered criteria the U.S. Government has established to distinguish the types of items that should be controlled at different levels for different types of destinations, end uses, and end users;

    2.         Create a “bright line” between the two lists to clarify jurisdictional determinations and reduce government and industry uncertainty about whether particular items are subject to the jurisdiction of the ITAR or the EAR; and

    3.         Are structurally “aligned” so that they later can be combined into a single list of controlled items when the single licensing agency is created.

            The task of translating subjective judgments into objective criteria is the key to the success of the entire tiered, positive list review and revision effort.  Once this process is complete, a corresponding licensing policy will be assigned to focus agency reviews on the most sensitive items. 

    1.         A license will generally be required to all destinations for items in the highest tier. 

    2.         Most of the items in the second tier will be authorized for export to multilateral partners and allies under license exemptions or a type of general authorization that we are still reviewing internally.

    3.         For less sensitive items designated as Tier 3 items, a license will not be required more broadly. 

 

V.        Other Export Control Issues

            A.        Controls That Will Not be Affected By Reform

The U.S. Government will continue its aggressive and comprehensive sanctions against Iran, Cuba, North Korea, Syria, and most of Sudan.  The U.S. Government also has no plans to change its prohibitions on the export of munitions list items to China or controlled dual-use items for military end use in China.

            B.        End-User Screening List

            Another higher wall that we have developed is a consolidated end-user screening list.  In the past, exporters and reexporters needed to navigate more than ten different U.S. Government lists in order to screen their transaction parties to ensure they were not in violation of a Commerce, State, or Treasury export and sanctions regulations.  Sometimes these lists were not timely updated on websites.  This created burdens for companies in terms of time and cost, and it may even be that some companies did not bother to check the lists at all because of these impediments, thereby creating avenues for the export of controlled items to parties of concern, including terrorist-supporting individuals. 

            Our new consolidated electronic screening list, comprising almost 24,000 entities, allows exporters to download one file into a database to electronically screen transaction parties.  The initiative ensures that exporters are screening up-to-date parties in a cost-conscious manner, thereby increasing vigilance against illicit transactions.  You can download this consolidated file from our export control reform website at www.export.gov/ecr.

            C.        Harmonizing Definitions and Single Application Form

            Other initiatives that will lead to a more streamlined system will include (a) harmonizing definitions across all the export control and sanctions regulations, and (b) developing a single license application form for the Departments of Commerce, State, and Treasury.

            D.        Outreach

            A core principle for higher fences is an informed regulated community, and outreach activities, including today’s event, play a vital role in creating such a community.  Our Bureau, for example, has a comprehensive outreach program, from publications to seminars to one-on-one counseling.  We have also expanded our footprint through on-line training and webinars.  We need to spread the word even farther, however, particularly to those who may not even realize they are subject to controls.

            Every exporter must classify its exports and should screen its customers against such lists as the Denied Persons List and the Entity List.  Commerce has a responsibility to assist exporters and reexporters.  To that end, we are mining Automated Export System data to identify exporters and foreign transaction parties of interest.  We are working with other bureaus and agencies, and with such private sector entities as freight forwarders, to educate exporters.  We are employing such outreach techniques as foreign language seminars.  In addition, U.S. companies that apply for visas to bring non-U.S. workers to the United States need to verify that they will not be releasing controlled technology to the worker without first securing any required U.S. government authorizations.

            We continue to work with the Census Bureau and with Customs and Border Protection on new electronic tools to help exporters make timely and accurate submissions to our Automated Export System, which is the electronic clearinghouse for all exports from the United States.  This will expedite the clearance of exports and facilitate our compliance reviews.

            E.        Enforcement

            Along with licensing efficiencies and education efforts, enforcement will become an even higher priority.  For example, the new Comprehensive Iran Sanctions, Accountability, and Divestment Act gave permanent law enforcement authorities to our export enforcement agents for the first time.  This enhances our ability to deter and prosecute violators of the Export Administration Regulations.

            To ensure coordination with other enforcement agencies, the President signed an Executive Order last November to mandate the participation of BIS, the Federal Bureau of Investigation, military security agencies, Immigration and Customs Enforcement, and the Intelligence Community in an Export Enforcement Coordination Center to share information and leverage resources.  Agencies are actively working out the standard operating procedures to operate the new EECC.

            We will also seek to use specific compliance tools, such as the Entity List and Temporary Denial Orders, to ensure U.S. items do not fall into unauthorized hands.  The Entity List is a great example of addressing compliance concerns by using a scalpel, rather than hammer.  We can pinpoint companies and individuals that are violating our rules and stop such behavior through the use of market forces.  The impact of being singled out will limit their business opportunities and either force them out of the business or force them to change their practices.

            At the same time, we recognize that even companies that have good intentions, domestic and abroad, can make mistakes.  We promote the submission of voluntary self-disclosures (VSDs) in these and other instances.  We view VSDs, along with internal compliance programs, as important mitigating factors.  Given the volume of exports and reexports that are subject to the EAR, we must rely upon industry for the bulk of compliance.  You are the front-line troops in that effort.  You and your co-workers know your products, their end uses, and your customer base.

            F.         Information Technology System

            We plan to upgrade our internal IT systems to make them more user-friendly for exporters and leverage the resources and information of agencies across the U.S. Government.

VI.       Conclusion

            President Obama is committed to export control reform.  We and our colleagues in the other agencies are committed, too.  These actions will increase our national security, enhance U.S. competitiveness, and facilitate multilateral cooperation and trade among allies and other partners.  We will accomplish these reforms through more efficient regulatory processes, enhanced outreach to exporters and reexporters, and better focused compliance and enforcement activities.  Thank you again for inviting me today and I look forward to hearing your feedback and ideas.


###

Remarks of

Kevin Wolf

Assistant Secretary of Commerce

for Export Administration

The Obama Administration’s

Export Control Reform Initiative

U.S.-Sweden Defense Industry Conference

Washington, DC

May 17, 2011

I.          Purpose of the Reform Effort – National Security

            Reform of our export control system, including the munitions, dual-use, and sanctions regulations, is a national security imperative.  Our current system is founded on Cold War statutes, policies, and control lists not nimble enough to address current and emerging threats or economic opportunities.

           In order to remain effective, our system must leverage multilateral controls to combat proliferation, destabilizing potentially hostile military modernization activities, and terrorism, while facilitating exports to our allies and partners.  Just a year ago, Secretary of Defense Robert Gates set out the Administration’s conclusion that we could not build an effective export control system unless we fundamentally reform it.  The end result of that effort, as outlined by the President, Secretary Locke, and others, is a single control list administered by a single licensing agency that operates on a single information technology platform and is enforced by a single primary export enforcement coordination agency.  (The structural reforms will require legislation, but the other two major elements -- working toward a single, positive, “tiered” control list and a single information technology system – can be achieved without legislation.)

            Although the reform effort is not designed to alter any particular trade deficits or surpluses, national security is not limited to military security.  As General James Jones, then the President’s National Security Advisor, said last June, “The future of the United States’ national security in the 21st century is our competitiveness.” 

            This competitiveness can be measured to some degree by the impact that controls have on our exports.  Three percent or $39 billion of $1.3 trillion in U.S. exports in 2010 required a license.  However, 17 percent of U.S. exports, or $217 billion, were impacted by licensing requirements, including exports subject to a license exemption, exception, or no license required.  Given the significant footprint that export controls has our economy, not to mention the compliance burden associated with such exports, which can be multiple times higher in terms of cost than the export itself regardless of whether a license is required, it is critical that our control policy is focused on the right items.

            And as Secretary of Defense Gates said in his speech setting out the purpose of the reform effort, our “system has the effect of discouraging exporters from approaching the process as intended.  Multinational companies can move production offshore, eroding our defense industrial base [and] undermining our control regimes in the process. . . .”  He went on to say that our current system “incentivize[s] more creative circumvention strategies – on the part of the foreign companies, as well as countries that do not have our best interests at heart.”

            Also key to our national security and, thus, the reform effort are the concerns and issues of our close allies.  Secretary Gates, for example, went on to state that the “U.S. Government reviews tens of thousands of license applications for export to EU and NATO countries.  In well over 95 percent of these cases, we say ‘yes’ to the export.  Additionally, many parts and components of a major piece of defense equipment – such as combat vehicles or aircraft – require their own export licenses.  It makes little sense to use the same lengthy process to control the export of every latch, wire, and lug nut for a piece of equipment like the F-16, when we have already approved the export of the whole aircraft.  In short, the time for change is long overdue if the application of controls on key items and technologies is to have any meaning, we need a system that dispenses with 95 percent of ‘easy’ cases and lets us concentrate our resources on the remaining 5 percent.  By doing so, we will be better able to monitor and enforce controls on technology transfers with real security implications while helping to speed the provision of equipment to allies and partners who fight alongside us in coalition operations.”

            The same principle applies to our effort to revise the U.S. Munitions List.  We want to facilitate inter-operability among our allies fighting shoulder to shoulder with us in Afghanistan and working with us elsewhere in the world.  This sentiment was expressed clearly by Under Secretary of Defense Ashton Carter in February when he said, “Exports obviously strengthen our industry’s competitiveness, but they also enhance our security – and international security – when they build the capacities of international partners.” 

            The multilateral export control regimes are, of course, vital to our collective security.  They are a coordinated approach to ensuring that countries of concern do not gain unauthorized access to high technology items that can undermine our military and intelligence advantages.  These partnerships and the controls that we all administer, however, need to be flexible to address the threats and challenges of today and tomorrow.  This flexibility requires an updated set of principles on which to base our post-Cold War export control system. 

 

II.         Core Principles of the Reform Effort

            To these ends, President Obama’s reform initiative is built on the following seven principles:

    1. Controls should focus on a small core set of key items that can pose a serious national security or intelligence threat to the United States and its interests.  These include weapons of mass destruction, their delivery systems, advanced conventional weapons, and the critical equipment and technology required to develop or produce them.

    2. Our controls should be fully coordinated with the multilateral export control regimes to be effective.  The regimes’ multilateral controls need to focus on key items that are available almost exclusively from the United States and its regime partners, or that give our partners and us a significant military or intelligence advantage.

    3. For those items that are not controlled multilaterally, they must address an existing legal or foreign policy objective, such as preventing human rights abuses.

    4. Our control lists must clearly identify which items are controlled and be easily updated as technology emerges, matures, or becomes widely available.  Robust compliance with the regulations and aggressive enforcement of violations cannot occur if the lists of items controlled are not clear and understandable.  Indeed, two of the notices the Administration published in December asked the public to provide comments on how to describe more clearly many items on the control lists.  Much of the work on the reform effort in 2011 will be focused on making the lists more clear, relevant, and current.

    5. In addition to having clear regulations, our licensing processes must be predictable and timely, and our licensing policies must be flexible to address new threats.  The export control regulations and processes for licensing controlled items should not prevent United States companies from being reliable and predictable suppliers of approved end items to acceptable foreign buyers.

    6. Our enforcement capabilities must be enhanced to address non-compliance and increase our capacity to interdict unapproved transfers.

    7. Our controls must take into consideration counterterrorism policy and the need to export items that support homeland security priorities, such as enabling foreign countries’ access to modern screening technology for airports.

Taken together, these principles provide a basis for fundamental reform and are aimed at eliminating a core weakness of our current system, which encourages the design-out of U.S. technology, parts, and components and thus undermines our inter-operability with allies and partners. 

 

III.        Amendments to the Dual-Use Regulations – Encryption, License Exception “STA,” and Wassenaar Updates

            The first major change to the dual use regulations to further the goals I have described occurred last year when the Commerce Department amended its encryption regulations to permit the export of most mass market electronic products that contain encryption functions and other encryption products without the need for a license or government review.  (“Mass market” electronic products containing encryption include cell phones, laptops, and disk drives.)  Exporters and manufacturers of the encryption products are now allowed to self-classify the products and then export them without a license or government review if they register on-line with the Commerce Department and submit an annual self-classification report.  This rule is expected to decrease technical reviews by approximately 70 percent and semi-annual reporting by up to 85 percent, while continuing to ensure that the U.S. Government has the information it needs and that we are consistent with our Wassenaar partners.

            The second significant change in dual-use licensing policy to further the goals of export control reform will be implementation of a new license exception called “Strategic Trade Authorization” (“STA”) by the end of this month.  After carefully considering public comments, we will publish an amended rule that will allow the license-free export, with conditions, of most dual-use items to two baskets of countries and items:

    1. For exports to almost all European countries, Australia, Canada, New Zealand, Japan, South Korea, and Argentina, almost all items on the Commerce Control List that do not require a license for statutory reasons would be eligible for export under the exception.  This change is a first step in implementing Secretary Gates’ vision of dispensing with the easy cases to focus on items and end users which require more scrutiny. 

    2. For certain other countries, Wassenaar Basic List items would be eligible for export under the exception.

            With these reduced licensing requirements will come new safeguards to ensure that eligible items are not reexported outside of these countries without U.S. Government authorization.  Exporters and reexporters will be required to notify the purchaser of the exception’s safeguard requirements, including the prohibition of re-transferring or reexporting without U.S. authorization, while the end user will have to certify its understanding and willingness to comply with such conditions.  Thus, we will create a knowledge standard in order to enforce any misuse of the license exception. 

           At the same time, we have been reaching out to companies in the United States and abroad that may benefit from the proposed new exception to discuss the requirements, and we plan to enhance our outreach and compliance activities to guard against misuse.  These safeguards are actually higher walls.  They remove a license requirement for exports to countries that do not pose a national security concern but eliminate the ability to reexport – without Commerce authorization – to countries about which we would want additional information.

            On May 20th, we will publish amendments to the CCL corresponding to the changes multilaterally agreed by the Wassenaar Arrangement last year.  Publishing this rule so quickly is a significant achievement given the number of ECCN changes that will positively affect both U.S. exporters and national security.  Given the President’s commitment to multilateral controls and the need to address the foreign availability of items, the rule will allow exporters to compete on a more even playing field with international competitors in technologies such integrated circuits, semiconductor manufacturing and test equipment, encryption, and gyroscopes.  At the same time, it strengthens national security by imposing multilateral controls on items that can be used to initiate improvised explosive devices, for undersea military reconnaissance, and mine detection.  Improved regulatory efficiency is a key element of the reform process, and we are delivering on it.

            This rule will revise 53 ECCNs spanning all the Categories of the Commerce Control List, except Category 0.  The biggest change for industry will be in Category 3, where there was a total rewrite of the controls for Analog to Digital Converter (ADC) and Digital to Analog Converter (DAC).  Other notable changes in Category 3 include the narrowing of controls for other types of integrated circuits: Microwave Monolithic Integrated Circuits (MMIC) power amplifiers, discrete microwave transistors, and microwave solid state amplifiers. This rule also narrowed the controls over electronic test equipment, e.g., signal analyzers, dynamic signal analyzers, frequency synthesized signal generators; and semiconductor manufacturing equipment. 

            In Category 5 part I, 5A001.h is moved from NS Column 2 controls to NS Column 1 controls because Radio Frequency (RF) transmitting equipment designed or modified for prematurely activating or preventing the initiation of Improvised Explosive Devices (IEDs) are now listed on the Wassenaar Arrangement’s Very Sensitive List (License Exceptions LVS, GBS, and CIV are no longer available for 5A001.h items or CIV and TSR for related software and technology in 5D001.a and 5E001.a).  In Category 5 part II, this rule adds a new paragraph .j to the decontrol notes in ECCN 5A002 for equipment where the encryption cannot be used or can only be made useable by means of “cryptographic activation,” as specified, as well as adding a new Nota Bene (N.B.) to reference 5A002.a for equipment that has undergone “cryptographic activation.” This new note is added to clarify the treatment of equipment with dormant cryptography.  Also, this rule adds a new control paragraph 5A002.b (as well as software in 5D002.d) to control systems, equipment, application specific electronic assemblies, modules and integrated circuits, designed or modified to enable an item to achieve or exceed the controlled performance levels for functionality specified by 5A002.a that would not otherwise be enabled.

            In Category 6, this rule adds a new control for acoustic seabed survey equipment in 6A001.a.1.a because of the usefulness of this equipment in military reconnaissance. In addition, this rule moves ECCN 6A001.c (diver deterrent acoustic systems) to ECCN 8A002.r, because the specified diver deterrent systems have no capability to detect divers and are only used to deter divers. Also, this rule adds a new paragraph 6A005.g to control laser acoustic detection equipment, as well as a new paragraph 6A006.e to control specified Underwater ElectroMagnetic Receivers (UEMR). The UEMR can be used in civil applications, such as oil and gas exploration, as well as for military purposes such as mine/vessel detection and alerting.

            In Category 7, this rule adds a new Note for 7A002.a.2.b to exclude ‘spinning mass gyros’ from 7A002 controls.  In Category 9, the control for adjustable flow path geometry technology is moved from 9E003.a.10 to 9E003.i, and it is revised to be more precise.

            This rule also adds definitions in Section 772.1 for “cryptographic activation,” “radiant sensitivity,” and “tip shroud,” and amends the existing definition for “information security” to include “cryptographic activation,” as well as revising the definitions for “frequency switching time” and “object code.”  Finally, this rule adds a Statement of Understanding related to Used Goods at the end of Supplement No. 3 to Part 774, which states, “The specifications in the Commerce Control List apply equally to new or used goods.  In the case of used goods, an evaluation by the Bureau of Industry and Security may be carried out in order to assess whether the goods are capable of meeting the relevant specifications.”

 

IV.       The List Review Effort

            As described in several speeches last year and in the notices published in December, the Administration has developed a three-tiered set of control list criteria to screen all items on the two primary lists of controlled items – the dual-use list and the munitions list.  Once this list review effort is complete, there will be even more changes to the licensing policies for dual-use items in addition to License Exception STA and then also for munitions list items.

            The control list criteria are based on transparent rules, which will reduce the uncertainty faced by our allies, U.S. industry, and its foreign partners, and will allow the government to more effectively target enforcement activities.  Applying the criteria, the U.S. Munitions List and the Commerce Control List will each eventually be split into three tiers:

    1. Items in Tier 1 will be those that provide a critical military or intelligence advantage to the United States and are available almost exclusively from the United States, or are items that are a weapon of mass destruction.

    2. Items in Tier 2 will be those that provide a substantial military or intelligence advantage to the United States and are available almost exclusively from our multilateral partners and allies.

    3. Items in Tier 3 will be those that provide a significant military or intelligence advantage but are available more broadly.

This flexible construct will improve the nation’s national security and permit the government to adjust controls in a timely manner over a product’s life cycle in order to keep lists targeted and up-to-date based on the maturity and sensitivity of an item.  Those items in the lowest tier will be ripe for review by multilateral regimes to ensure that the international control lists keep pace with technological change and availability outside the regimes. 

            We’ve started this process with License Exception STA.  All items eligible for STA will be considered Tier 2 items.  Certain items have been identified for potential carve-out because they meet the Tier 1 criteria.  Other items, such as special instruments of torture, will be carved-out for overriding foreign policy reasons, regardless of what tier they fall.  But such carve-outs for foreign policy reasons will be the exception rather than rule.  Our next task after STA is published is to finalize the tiering exercise, with a focus on what items should be considered Tier 3.

            Just as importantly, we will use the new criteria to identify unilaterally controlled items that warrant multilateral control.  This is especially true with emerging technologies.  We will therefore create a “holding” export control classification number (ECCN) on the Commerce Control List, similar to Category XXI of the U.S. Munitions List, to ensure we can impose quickly controls on new technologies that do not fit into an existing entry but that should be controlled prospectively.

            Before the lists can be tiered, however, they must be clear about what they control.  We are restructuring the munitions list and, where necessary, the Commerce Control List to create “positive lists” of controlled items.  A “positive list” describes controlled items using objective criteria such as horsepower, microns, wavelength, speed, accuracy, hertz or other precise descriptions rather than broad, open-ended, subjective, catch-all, or design intent-based criteria. 

            The Commerce Control List generally controls items based on technical parameters.  Items not meeting a specified threshold are not subject to control.  But we can do better.  Certain entries contain generic, open-ended wording or apply a “specially designed” criterion that is undefined.  Earlier this year, we received more than 100 public comments on how to make our control lists more positive, and we are combing through the suggestions as part of the effort to make the control lists more clear and precise.

            The revisions to the U.S. Munitions List are a much more difficult and time-consuming effort because many of the controls do not contain a technical or objective basis for determining when an item – particularly a part or a component – is subject to its controls.  Instead, the U.S. Munitions List relies heavily on a design intent structure, even where the function of an item may not be uniquely or inherently military.  We therefore have established a systematic process to turn the USML into a positive list.  The following is a brief description of the process.

    1. The first step is to decide what items really require control under the International Traffic in Arms Regulations, which impose far less flexible controls than do the Export Administration Regulations administered by the Commerce Department.  In general terms, only those items that have exclusive or predominant government or military use and provide at least a significant military or intelligence advantage to the United States will be identified as items the Administration believes should remain on the list.  For example, there is no civilian use for depth charges or torpedoes; they accordingly will be retained on the U.S. Munitions List.  Alternatively, while some diesel engines clearly have a military utility, few are predominantly or exclusively used by governments or militaries.  As a result, many will move to the more flexible Commerce Control List.

    2. Once these items are identified, experts will then establish objective, positive control lists consistent with the three-tiered criteria.  This includes specifying the specific parts and components that are subject to ITAR control.  The focus for parts and components will be on those that have significant, inherent military or intelligence applicability as opposed to essentially civilian items whose form or fit has been altered to fit into a military end item.  Indeed, when revising the lists of defense articles, the review teams must abide by various guidelines, one of which is that revised USML categories should not contain any (a) generic controls for generic “parts,” “components,” “accessories,” “attachments,” or “end items” or (b) other types of controls for specific types of defense articles because, for example, they were “specifically designed or modified” for a defense article.
                           
    3. Those items not meeting the munitions list standard will be transferred to the control of the Department of Commerce after appropriate congressional notification.  If items are controlled on both lists, a performance parameter will distinguish which set of regulations applies.

    4. Former defense articles transferred to the Department of Commerce will be controlled on a new Commerce Munitions List (CML) if the item does not meet the control parameter of an existing ECCN controlled for more than Anti-Terrorism reasons. 

            Let me emphasize that the transfer of jurisdiction over less significant military parts and components will not de-control them because they will be controlled for export to certain destinations, end uses, and end users under the Commerce Department’s Export Administration Regulations.  It would, however, make U.S. companies more competitive.  And it would make it easier for the U.S. and its allies to make their systems more inter-operable because U.S. suppliers can be more reliable, quick, and predictable with respect to less significant items for military use, which are the vast majority of controlled items exported to close allies.

           This is because of the flexibility that that CCL offers that the USML cannot.  These advantages include:

    1. eliminating ITAR registration requirements for many small and medium-sized commercial manufacturers that make only small tweaks to allow their core products to be used on a defense article;

    2. resolving most issues arising from the “see-through” rule, which renders foreign-made civilian or military end items subject to U.S. reexport control requirements if they incorporate any such U.S.-origin parts or components, regardless of value or significance, because a de minimis threshold will apply to CML items;

    3. ending the requirement to enter into and get approved the complex Manufacturing Licensing Agreements or Technical Assistance Agreements to share all data and services, no matter how insignificant, that are directly related to such items; and

    4. reducing the amount of compliance time needed for determining the jurisdictional status of parts and components – i.e., whether they are governed by the rules of the International Traffic in Arms Regulations or the Export Administration Regulations. 

           The publication in December of proposed revisions to the U.S. Munitions List controls in Category VII for military vehicles was the first step in this direction.  It and other proposed munitions list revisions that we will be publishing during 2011 will propose eliminating the generic controls on “parts” and “components” and, instead, specifying which parts and components the list controls, such as turret rings and torsion bars.  This means that items like commercial pivot blocks, windshield wipers, and brake pads that are modified for military vehicles, but that provide no significant military advantage, will be transferred to the more flexible controls under the Commerce Department’s regulations.  In fact, we estimate that about 74% of items previously licensed in Category VII – mostly generic “specially designed” parts and components – may, subsequent to satisfaction of the congressional notification requirements, be transferred to the jurisdiction of the Commerce Department.  When we are finished with all categories of the ITAR, perhaps, as many as 30,000 or more generic parts and components subject to a license requirement in 2010 may no longer require control on the USML, but will remain controlled under the EAR.

            The Department of Defense, along with representatives from Commerce, State, and other relevant departments, is systematically rewriting the other 19 categories of the USML, based on public comments received on the Category VII rewrite and a request for comments on turning all other categories into positive lists.  Our goal is to publish proposed new “positive” categories on a rolling basis this year, with Category 1 – Firearms – being the likely next proposed rule. 

           For our part, we are preparing a proposed regulation to create the Commerce Munitions List and licensing policies associated with defense articles moving to Commerce jurisdiction.  We are creating a new 600 series of ECCNs in the CCL that will embody the CML with a nomenclature that tracks the Wassenaar Arrangement’s International Munitions List (IML) in order to cross-walk with our international commitments.  As the first set of items to be populated into the CML will be tanks and military vehicles, it will number 606 with the “06” tracking IML category 6.  The 600 series will be classified into one of the 10 existing CCL categories (most likely Category 0, which corresponds to miscellaneous items) and use the A through E subparagraphs to designate whether the item is a commodity, software, or technology.  For example, parts and components will be designated as ECCN 0A606 while technology related thereto will be controlled in ECCN 0E606.

           End items will be specifically called out for control and subject to an initial license requirement.  Exporters may petition the U.S. Government on their license application for the end item to be made eligible for License Exception STA.

           Certain parts and components may also be specifically identified.  However, the majority of parts and components moving from the USML will be controlled on the CML because they are “specially designed” for an end item in that ECCN or its corresponding entry on the USML.  In order to avoid confusion, we are defining the term “specially designed” based on objective criteria in order to make clear for industry, licensing officers, enforcement agencies, and administrative law judges what we intend to control.  We anticipate that parts and components will be eligible for STA treatment immediately, which should result in significant relief for U.S. exporters.  Exporters will also be able to petition the U.S. Government to have a part or component reclassified into a 699 ECCN controlled for anti-terrorism reasons because of the insignificance of the part.

           Commerce intends to apply a de minimis rule of 10% to CML items because of their “specially designed” nature.  In addition and regardless of the classification within the 600 series, including 699 ECCNs, a licensing policy of presumptive denial will apply for CML exports to proscribed countries in section 126.1 of the ITAR.

           We hope to have the proposed CML rule published this summer.  In the interim we will be briefing congressional committees on our plan.  Once we address public comments, the Department of State will notify congressional committees on those items planned for transfer and we will publish revised USML and CCL entries. 

            After completing the tiering and positive list processes, we will have two structurally aligned sets of control lists that ultimately can be combined into a single list that is administered by a single licensing agency.

 

V.        “Specially Designed”

            As I just mentioned, generic “parts,” “components,” “accessories,” and “attachments” will be controlled in the 600 series’ “x” subparagraphs if they were “specially designed” for an end item in that 600 series ECCN or a defense article in a corresponding USML category.  “End items” not specifically enumerated will be controlled in the 600 series ECCN if they were “specially designed” for a particular function or purpose or to have a type of capability.  The term will also be used (sparingly) on the revised USML categories.

            Although a core element of the positive USML review exercise is to avoid using design-intent based control parameters for generic items, the U.S. Government cannot completely eliminate “specially designed” as a control standard for two primary reasons – (1) the term is used in the regimes’ control lists upon which most of the CCL is based and (2) a basket category for controlling less significant items “specially designed” for defense articles that move to the CCL is still necessary.  Creating a positive list of the tens of thousands of such parts, components, accessories, and attachments is not practicable.  Moreover, it is used 264 times in the current CCL.  Editing each entry, even if they do fall in various groups, and getting even informal regime comments – in addition to public comments – on such edits is not realistically possible in 2011.  Adopting the Missile Technology Control Regime’s definition of “specially designed” as the standard for the definition applicable to items controlled by the other regimes or that would move from the USML to the CCL is unacceptable to all the agencies for various reasons.

            The U.S. Government has the national authority and discretion to define “specially designed” so long as the same scope of control remains.  A single, clear definition is necessary for most of the key goals of the export control reform effort to be realized.  Specifically, this single definition must:

    a. preclude multiple or overlapping controls of similar items within and across the two control lists;

    b. be capable of being easily understood and applied by exporters, prosecutors, juries, and Hill staff through the use of objective and clear requirements that do not rely upon a need to investigate and parse the intentions of the original designer of a part or do market research regarding the predominate market applications for such items;

    c. not be inconsistent with definitions used by the international export control regimes;

    d. not include any item specifically enumerated on either the USML or the CCL and, in order to avoid a definitional loop, do not use “specially designed” as a control criteria;

    e. not be inconsistent with First Circuit’s definition in United States v. Lachman, 387 F.3rd 42 (1st Cir., 2004);

    f. be capable of excluding from control simple or multi-use parts such as springs, bolts, and rivets, and other types of items the U.S. Government determines do not warrant significant export controls;

    g. be applicable to both descriptions of end items that are “specially designed” to have particular characteristics and parts and components that were “specially designed” for particular end items;

    h. be applicable to materials and software because they are “specially designed” to have a particular characteristic or for a particular type of end item;

    i. not result in a roll back to 600 series control or other higher end controls of items, particularly current EAR99 items, that are now controlled at lower levels; and

    j. not, merely as a result of the definition, cause historically EAR controlled items to become ITAR controlled.

BIS will be publishing next month for public comment a draft definition that we believe meets all these objectives.  We encourage industry and others to review it closely and let us know whether they agree or have suggestions to accomplish the goals better.

VI.       Summary of List Review Effort and Goals

            So to sum up, agencies are working to revise the USML and the CCL so that they:

    1. Are “tiered” consistent with the three-tiered criteria the U.S. Government has established to distinguish the types of items that should be controlled at different levels for different types of destinations, end uses, and end users;

    2. Create a “bright line” between the two lists to clarify jurisdictional determinations and reduce government and industry uncertainty about whether particular items are subject to the jurisdiction of the ITAR or the EAR; and

    3. Are structurally “aligned” so that they later can be combined into a single list of controlled items when the single licensing agency is created.

            The task of translating subjective judgments into objective criteria is the key to the success of the entire tiered, positive list review and revision effort.  Once this process is complete, a corresponding dual-use licensing policy will be assigned to focus agency reviews on the most sensitive items. 

    1. A license will generally be required to all destinations for items in the highest tier. 

    2. Most of the items in the second tier will be authorized for export to multilateral partners and allies, such as STA.

    3. For less sensitive items designated as Tier 3 items, a license will not be required more broadly, although the Administration has not finalized the extent of this control policy. 

VII.      Other Export Control Issues

            A.        Controls That Will Not be Affected By Reform

The U.S. Government will continue its aggressive and comprehensive sanctions against Iran, Cuba, North Korea, Syria, and most of Sudan.  The U.S. Government also has no plans to change its prohibitions on the export of munitions list items to China or controlled dual-use items for military end use in China.

            B.        Harmonizing Definitions and Single Application Form

            Other initiatives that will lead to a more streamlined system will include (a) harmonizing definitions across all the export control and sanctions regulations, and (b) developing a single license application form for the Departments of Commerce, State, and Treasury.  Once developed, the Administration will seek to implement the form through a single portal for public submission of license applications.

            C.        Outreach

            A core principle for higher fences is an informed regulated community, and outreach activities, including today’s event, play a vital role in creating such a community.  Our Bureau, for example, has a comprehensive outreach program, from publications to seminars to one-on-one counseling.  We have also expanded our footprint through on-line training and webinars.  We need to spread the word even farther, however, particularly to those who may not even realize they are subject to controls.

            Every exporter must classify its exports and should screen its customers against such lists as the Denied Persons List and the Entity List.  Commerce has a responsibility to assist exporters and reexporters.  To that end, we are mining Automated Export System data to identify exporters and foreign transaction parties of interest.  We are working with other bureaus and agencies, and with such private sector entities as freight forwarders, to educate exporters.  We are employing such outreach techniques as foreign language seminars.  In addition, U.S. companies that apply for visas to bring non-U.S. workers to the United States need to verify that they will not be releasing controlled technology to the worker without first securing any required U.S. government authorizations.

           To assist exporters screen its customers, we have developed a U.S. Government-wide consolidated end-user screening list.  In the past, exporters and reexporters needed to navigate more than ten different U.S. Government lists in order to screen their transaction parties to ensure they were not in violation of a Commerce, State, or Treasury export and sanctions regulations.  Sometimes these lists were not timely updated on websites.  This created burdens for companies in terms of time and cost, and it may even be that some companies did not bother to check the lists at all because of these impediments, thereby creating avenues for the export of controlled items to parties of concern, including terrorist-supporting individuals. 

            Our new consolidated electronic screening list, comprising almost 24,000 entities, allows exporters to download one file into a database to electronically screen transaction parties.  The initiative ensures that exporters are screening up-to-date parties in a cost-conscious manner, thereby increasing vigilance against illicit transactions.  You can download this consolidated file from our export control reform website at www.export.gov/ecr.

            D.        Compliance

            Along with licensing efficiencies and education efforts, compliance will become an even higher priority.  We continue to work with the Census Bureau and with Customs and Border Protection on new electronic tools to help exporters make timely and accurate submissions to the Automated Export System.  This will expedite the clearance of exports and facilitate our compliance reviews. 

           We are about to supplement our export management and compliance program with new best practices for exporting through transshipment hubs. We will also seek to use the Entity List and Temporary Denial Orders, to ensure U.S. items do not fall into unauthorized hands.  The Entity List is a great example of addressing compliance concerns by using a scalpel, rather than hammer.  We can pinpoint companies and individuals that are violating our rules and stop such behavior through the use of market forces.  The impact of being singled out will limit their business opportunities and either force them out of the business or force them to change their practices.

            E.        Enforcement

            On the enforcement front, the new Comprehensive Iran Sanctions, Accountability, and Divestment Act gave permanent law enforcement authorities to our export enforcement agents for the first time.  This enhances our ability to deter and prosecute violators of the Export Administration Regulations.

            To ensure coordination with other enforcement agencies, the President signed an Executive Order last November to mandate the participation of BIS, the Federal Bureau of Investigation, military security agencies, Immigration and Customs Enforcement, and the Intelligence Community in an Export Enforcement Coordination Center to share information and leverage resources.  Agencies are actively working out the standard operating procedures to operate the new EECC.

            At the same time, we recognize that even companies that have good intentions, domestic and abroad, can make mistakes.  We promote the submission of voluntary self-disclosures (VSDs) in these and other instances.  We view VSDs, along with internal compliance programs, as important mitigating factors.  Given the volume of exports and reexports that are subject to the EAR, we must rely upon industry for the bulk of compliance.  You are the front-line troops in that effort.  You and your co-workers know your products, their end uses, and your customer base.

            F.         Information Technology System

            We plan to upgrade our internal IT systems to make them more user-friendly for exporters and leverage the resources and information of agencies across the U.S. Government. Our hope is that Commerce licensing officers will be linked to the Department of Defense’s USXPORTS system by Spring 2012.  This activity, along with work on a consolidated portal for submission of a single licensing form and connectivity to intelligence and AES systems will result in the long-term in a more efficient process for reviewing transactions and providing responses back to the public in a more timely manner.

VIII.     Conclusion

            President Obama is committed to export control reform.  My colleagues in the other agencies and I are committed, too.  In the coming months, we will issue numerous dual-use and munitions list regulations that will fundamentally reshape our export control system.  These actions will increase our national security, enhance U.S. competitiveness, and facilitate multilateral cooperation and trade among allies and other partners. 

IX.       Additional Information

            The speeches of President Obama and other senior Administration officials that set out the reasons for and the goals of the reform effort in more detail can be found at:

a.         http://www.bis.doc.gov/news/2011/wolf_exportkontrolltag.htm

b.         http://www.defense.gov/speeches/speech.aspx?speechid=1453

c.         http://www.whitehouse.gov/the-press-office/fact-sheet-presidents-export-control-reform-initiative

d.         http://www.aia-aerospace.org/assets/speech_jones_06302010.pdf

e.         http://www.whitehouse.gov/the-press-office/2010/08/30/video-remarks-president-department-commerce-annual-export-controls-updat

f.          http://www.bis.doc.gov/news/2010/white_house_fact_sheet.htm

g.         http://www.bis.doc.gov/news/2010/seclocke_bis_update_remarks.htm

h.         http://www.bis.doc.gov/news/2010/hirschhorn_coping_us_export_controls.htm

i.          http://www.bis.doc.gov/news/2010/obama_implementation_ecr.htm


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

Update 2011 Conference

Remarks of
David W. Mills
Assistant Secretary for
Export Enforcement

July 20, 2011

 

Good afternoon, and thank you for coming today.  I always appreciate the chance to say a few words on compliance and enforcement to a group of industry practitioners, and especially so when there are so many colleagues and friends in the audience.  

We at BIS know you have a tough job as compliance managers, but your expertise and professionalism are invaluable not only to your companies, but are key to achieving our shared objective of an effective and efficient export control system.

As I mentioned at last year’s Update, I started my career here at the Bureau of Export Administration, BIS’s predecessor, in the early 1980’s.  That was a time of change and growth in export control regulation, but certainly nothing in comparison to what we are trying to achieve today. 

Now, the President is personally interested in our discipline, and it was that interest that really started the ball rolling on Export Control Reform.  Since my confirmation as Assistant Secretary, I have been particularly impressed by the energy and creativity of our team, led by Under Secretary Hirschhorn and Assistant Secretary Wolf, in driving some of the key elements of the reform effort, as well as by our dedicated BIS staff and the attorneys in our Chief Counsel’s Office.

Having observed the evolution of the export control system over the years, the challenge of changing attitudes and institutions that have evolved over decades is no small job.  But it is a job that needs to be done, and Export Enforcement is no exception.

You’ll notice that I used the word “discipline” to refer to export controls.  That is no accident.  What we do is based on certain clear and shared principles, which have been reinforced by precedent and practice.  Understanding that can help us to set priorities, improve our performance, and meet our goals without being a captive of what has gone before.

I have given much thought to this in the Enforcement dimension of BIS, and have motivated my staff to look at our processes in a new and original light. 

We place a great deal of emphasis on the quality of our work, but also on efficiency and level of service, and are continually reviewing the range of enforcement activities in our three offices - Export Enforcement, Enforcement Analysis, and Anti-boycott Compliance - with an eye toward eliminating inefficient processes and providing more visibility and predictability in executing our mandate.

We in the enforcement role in BIS also understand the need to reach out to industry practitioners in order to adjust our processes and initiatives to a quickly evolving international business environment.

Supporting our national security mission has always been the first priority, but how effective we are in executing this mission depends on our knowledge of how international commerce works, as well as on cooperation with U.S. exporters.

I am also a strong supporter of outreach and information aimed at small to medium sized business.  Export control requirements can be complicated and demanding.  While our Administration is making great efforts to simplify and streamline the process, understanding all the elements remains a challenge.

However, solid compliance should not need large, dedicated staffs and frequent recourse to costly outside counsel.

Striking the right balance between compliance, enforcement and the competitiveness of our exporting community is critical, and as a result, we seek to broaden a two-way dialogue on key control and enforcement issues.

One important area of our responsibilities in which we have made progress is the review of voluntary self-disclosures or VSD’s. VSD’s are a pivotal element of compliance.  We recognize that internal compliance procedures and processes can occasionally fail, even in well managed enterprises. 

This is especially true when business models are swiftly evolving in a highly competitive global environment.  As a result, we continue to afford great weight mitigation to VSD’s, as we have in the past, and most are resolved with warning letters or no action.

A review of lead times for VSD resolution showed that the review cycle for VSD’s was not only lengthy, but varied according to the OEE field office responsible for processing them.  In order to address this, we have centralized the review process for VSD’s in headquarters, which has resulted in more consistent and speedier resolution.

While the complexity of VSD’s vary considerably, the review times for the less egregious cases, which make up the great majority of them, have been reduced by half since this policy was introduced.

In the last fiscal year (that is, FY 10), 226 VSD’s were closed.  Of these, 19% were found not to involve any actual violation, and 67% resulted in warning letters only.  Only 6% resulted in administrative sanctions.   In the first three quarters of this fiscal year, we received 193 VSD’s; so the rate of disclosures is roughly the same.  

I think this demonstrates our commitment to granting substantial mitigation to VSD’s, in particular those that involve technical violations and where an effective control program is in place.

The Office of Anti-boycott Compliance plays a vital role in protecting American business from foreign boycotts.   U.S. firms may not participate in foreign economic boycotts that are counter to U.S. foreign policy; these typically involve the Arab League boycott of Israel.

OAC, like the rest of BIS, has been looking at its own procedures to find ways of improving speed and efficiency.  Under the EAR, U.S. companies are obliged to report any boycott-related language encountered in customer documentation to OAC.  These boycott report forms are now downloadable from the BIS website, but must be printed, filled in manually, and returned to OAC by mail.

In our effort to improve our processes, OAC has been working with the Office of the Chief Information Officer to include these reports as fillable reports on the BIS website.  When this project is complete, companies will be able to submit the required information electronically, saving significant time and resources.

In recent years, Enforcement at BIS has focused considerable effort on the on disruption of overseas procurement networks.  A major tool to do this has been the BIS Entity List.  As an example, the Mayrow and related investigations, which involved components for improvised explosive devices, resulted in the addition of over 190 new foreign entities to the list.

We maintain a high level of analytical and investigative effort focused on IED component procurement networks.  In fact, today we are adding two companies in Hong Kong and four companies in Lebanon to the Entity List based on evidence that they purchased electronic components from foreign subsidiaries of U.S. firms and then resold the components to persons in Iran and Iraq.  These same components were later found in Iraq in unexploded IED’s and related materials.

This is a dramatic example of how BIS’s enforcement effort can have a direct impact on the lives on our troops, and also shows the sophistication of our investigative work and how it can succeed in closing down illicit procurement networks overseas.

Use of the Entity List highlights our focus on the prevention of violations, and the public naming of individuals and entities that are involved in or pose a significant risk of engaging in illicit export activity.  This widely used proscribed parties list takes advantage of the automated name screening infrastructure that exists in banks, trading companies and manufacturing enterprises worldwide, which I’m sure you are all familiar with.

This approach can effectively shut down these networks, and prevents resellers and other parties in the Unites States and overseas from inadvertently doing business with them. 

However, for this to work, proscribed parties screening must be part of company due-diligence.  This means effective procedures that ensure that electronic or manual screening is executed at any point in the order management and delivery process where one of these parties may become involved in an export transaction.  It also means that a complete list must be used – including Entities, Denied Parties, and Specially Designated Nationals.

To make this easier, we have made a consolidated, up-to-date proscribed parties list available from a government source for the first time; it contains over 24,000 entities and can be downloaded from www.export.gov/ecr

In terms of penalties, we continue to support and apply the principles that were outlined in the Penalty Guidance issued by BIS in 2003.  However, we will be looking at ways to make the assignment of penalties more predictable, and will be considering different analytical approaches such as those found in the 2009 Guidelines of the Office of Foreign Assets Control.

We have prosecuted a number of precedent-setting cases recently, and I would like to mention a few this afternoon.

As Under Secretary Hirschhorn has noted, BIS will take a harder line when it comes to willful misconduct.  Historically, we have sought penalties more so against companies rather than individual employees.

Now, when a violation is a deliberate action of an individual, we are making an extra effort to determine whether it would be appropriate to seek penalties against the individual or against a supervisor who is complicit in deliberate violations by subordinates.

Since the Under Secretary announced this policy focus last year, we have directed our agents and analysts to factor in this approach as they track down and assemble information for both administrative and criminal cases.  We fully expect this policy to bear fruit in multiple cases in the near future, and we are already seeing results in a few situations.

For example, an important case that was settled last December involved the Chinese subsidiary of the U.S-based PPG Industries.  PPG pled guilty to actions that caused the illegal export, reexport and transshipment of high-performance coatings from the U.S. to the Chasma 2 Nuclear Power Plant in Pakistan via China, a shipment to an Entity List party that required a U.S. export license.

The case dramatized the critical role that parent companies play in monitoring the activities of their subsidiaries in dealing in U.S.-origin items that are subject to U.S. export controls.  The case’s $3.75 million in criminal and civil fines represent one of BIS’s larger monetary penalties.

This is a significant prosecution, but the story does not end there.   In this case, a regional sales manager for PPG conspired with others to bring about this unlawful export.  As a result, the sales manager was charged separately, required to receive compliance training, and made subject to a 15-year suspended denial order.  Earlier this month, Xun Wang, a former Managing Director of PPG Paints Trading (Shanghai) was also arrested in the same case.

These are clear examples of the policy of pursuing both the company and culpable individual employees.  Going forward, we will see more prosecutions and administrative sanctions along these lines.

Another significant recent case involved Anvik Technologies of Malaysia and Hong Kong.  Anvik used a worldwide network of “virtual offices” to procure items for ultimate shipment to Iran.  “Virtual Offices,” for those of you who have not heard the term, are organizations that provide a variety of services to clients which create the image or impression that an entity is operating from a particular facility when it fact it is somewhere else. 

In this case, one of the “virtual offices” was in Chicago, which provided the impression to U.S. vendors that they were shipping to a U.S. entity, when in fact the items would be forwarded outside the company, and ultimately to Iran.

This case demonstrates an important phenomenon in international trade: the development of a global order management, payment and delivery infrastructure that can easily be accessed and used for a very wide range of items. 

The problem is that it can be exploited by bad actors to divert items in violation of the law, as the Anvik case demonstrates.  We are looking at creative ways to attack this sort of illicit activity, including investigation of how responsible service providers may be for creating basic due diligence steps to prevent such abuse. 

The majority of our criminal investigations now involve Iran as the ultimate end-user.  While the United Arab Emirates was historically the point of diversion for many commodities, in recent years it has been eclipsed by Malaysia, Hong Kong and China.  Many of these cases involve aircraft components.

The Office of Export Enforcement has also aggressively pursued illicit procurement activities of other countries.  China is now the second most common country of end use in our criminal investigations, many of which involve electronic components diverted through Hong Kong.

As a result, the export of dual-use goods or technology for unauthorized use in China is one of OEE’s top priorities.   OEE has had a number of successful criminal and administrative cases related to items that could aid the Chinese military.

The most notable recent case involved the manager of a Massachusetts electronics company who was sentenced in January of this year to 36 months imprisonment for conspiring over a period of 10 years to export military electronics components and sensitive electronics used in military systems to the PRC. The Waltham, Mass., company she managed, Chitron Electonics, was fined $15.5 million stemming from their convictions last year. Several Chinese military entities were among those receiving the equipment.

A final case I would like to review briefly is that of the Balli Group, which I also mentioned at last year’s Update.  Balli is a British-based company that illegally transferred U.S.-made Boeing 747’s to Mahan Air of Iran.  BIS issued a Temporary Denial Order to stop the transfer of additional planes, and to ground those that were already there.  In February of 2010, Balli agreed to one of the largest civil penalties in the history of BIS- $15 million, with $2 million suspended. 

Even though BIS suspended $2 million of the penalty, and provided an installment schedule to make payment more practical, Balli violated the terms of the settlement and order by failing to make its payments in a timely fashion.  In response, BIS in June revoked the suspension, and demanded the remainder be paid immediately, which payment in its entirety was subsequently made.

This demonstrates that the United States has both the means and the willingness to enforce settlement agreements in administrative cases involving violators outside the United States, and to make sure that whatever fines are levied are paid, and paid on time.

Now I would like to turn to the wider issue of Export Control Reform, and how BIS’s export enforcement team participates in the process.  In November, President Obama signed an Executive Order creating a central element of reform as it applies to Export Enforcement, the Export Enforcement Coordination Center.

The EECC will be a permanent committee with dedicated staff intended to ensure that BIS, State, the FBI, the U.S. Immigration and Customs Service, and the intelligence community coordinate their activities. 

The EECC will enable U.S. agencies to better leverage their resources without duplicating or undermining each other’s efforts in the field, and will allow all relevant agencies to approach investigations as full partners.

OEE will more closely coordinate its investigative efforts via the EECC.  For example, when OEE initiates an investigation, it will send the names of suspects to the EECC for deconfliction.  The EECC will then identify any other law enforcement agency identified in the deconfliction process that is investigating the same suspects.  While many of these cases will be worked jointly, when this is not the case, agents will be put in touch with each other so investigations can be coordinated.

The EECC is still in the very early stages of organizational development.  A secure facility is being built in Northern Virginia to house the EECC, and individuals from participating agencies are being selected to staff it.   We are now working with participating agencies on standard operating procedures for the EECC.

While we fully support appropriate liberalization of licensing requirements, both U.S. exporters and customers and resellers outside the United States dealing with sensitive U.S.-origin products need to know that U.S. controls apply, and that U.S. enforcement authorities can and will make sure that the rules are followed, despite the fact that no export license may be needed for the initial transaction.

In our review of regulatory initiatives such as the new License Exception STA, we have kept this firmly in view.   The notification and certification requirement of STA, for example, not only guarantees that data on the control status of U.S.-origin items is passed along to resellers and customers, but that an auditable chain of custody is established. 

This helps all of us, as it not only makes enforcement easier and more transparent, but places compliant U.S. companies on a more equal footing with resellers and customers overseas, who may not be as diligent in complying with U.S. controls after the initial export transaction.

A word about outreach.  An important job of our 9 U.S. field offices and Export Control Officers in 6 overseas locations is outreach- providing information on compliance practice and enforcement issues to U.S. and overseas companies.  

Our offices regularly conduct outreach visits to companies and universities; last year we conducted over 800 such visits.  Of course, we also participate with BIS Export Administration and other agencies such as the FBI in outreach events such as this one for this very purpose.

To conclude, we in Export Enforcement are dedicated to our national security mission in this very challenging global environment.   We want to make it crystal clear to bad actors, whether they contemplate diverting U.S. products, getting access to controlled U.S. technology, or circumventing U.S. embargoes, that we can and will catch up with them, and impose penalties to the fullest extent of the law. 

With the support of our dedicated Agents in the field, our outstanding analysts in headquarters, and the quality legal support we receive from the Office of Chief Counsel, we will continue to strive to improve our work, and make President Obama’s goal of export control reform a reality.

While we have had many successes in the past, there is much work that needs to be done, and we need your help to do it. I look forward to working with you on this important mission.

Thank You.

 

   
© BIS 2016