Remarks of Eric L. Hirschhorn American Bar Association Conference on FCPA, Economic Sanctions and Export Controls October 1, 2014

American Bar Association Conference on FCPA, Economic Sanctions and Export Controls

Remarks of

Eric L. Hirschhorn

Under Secretary for Industry and Security

U.S. Department of Commerce

October 1, 2014

(As prepared for delivery)

Thank you Andrew, and thanks to the National Institute on International Regulation and Compliance for the invitation to address this group. I also would like to thank the Criminal Justice Section, the Criminal Justice Section's Global Anti-Corruption Committee, the Business Law Section, and the Section on International Law for hosting this conference.

The legal community plays an important role in the ongoing dialogue on Export Control Reform (ECR). Your review of proposed rules as well as your counseling of clients transitioning from State to Commerce licensing jurisdiction is instrumental to developing and effecting sound public policy that enhances U.S. national security. We appreciate the support you have provided Commerce and other national security agencies in getting the ECR rules right.

I Export Control Reform (ECR)

Since 2010, I have been discussing the importance of ECR to the U.S. exporting community and sharing my vision of what the U.S. Government needs to accomplish to ensure the success of ECR. Although the government must make the final call on what is in our foreign policy and national security interests, our rules must be transparent and predictable so that the manufacturing and exporting community can be reliable, predictable, and successful exporters.

Why did the U.S. Government recognize the need in 2009 to undertake comprehensive reform of the export control system? The end of the Cold War changed the geopolitical landscape. The development of a multipolar world included state sponsors of terrorism as well as the rise of non-state terrorist groups and individuals.

At the same time, the commercial environment changed rapidly, with a country or group of countries no longer maintaining exclusive control over leading edge technologies, the growth of manufacturing and markets in emerging countries that could provide foreign availability of export controlled items, and the globalization of the international technology work force, which now operates on a "24/7" basis.

The focus of research and development (R&D) shifted from the military to the commercial sector. The days when the defense sector developed advanced computing and electronics such as Global Positioning Systems and spun these products off to the private sector largely came to an end. The bulk of R&D spending shifted to the private sector as the military increasingly began purchasing "commercial-off-the shelf" items, such as electronics, for integration into weapons systems. More recently, this process has been accelerated by the decline in expenditures for defense R&D. At the same time, we increasingly have found ourselves acting in coalitions that include our closest allies—countries with whom we need interoperability when it comes to defense items.

As former Secretary of Defense Robert Gates stated in his April 2010 speech about the need for reform, the post-Cold War export control system was constraining interoperability of weapons with allies and friends. Numerous and time-consuming commodity jurisdiction exercises and licensing requirements were resulting in foreign manufacturers "designing out" U.S. parts and components from major defense projects, and the U.S. defense industrial base began to decline. The export control regime was not achieving the U.S. defense policy goal of getting parts and components to our allies on a timely basis.

Four and one half years later, the U.S. Government has converted many of our export control reform objectives into concrete regulations. With few exceptions, the USML is becoming a positive list that controls only those items that provide the United States with a significant military or intelligence advantage. Militarily less sensitive items, such as parts and components, have been and continue to be transferred from the licensing jurisdiction of State to that of Commerce. We have established and implemented License Exception Strategic Trade Authorization—STA—to provide flexible and refined arrangements for trade with and among close allies. At the same time, enhanced compliance and enforcement measures create effective safeguards to deter the diversion and misuse of controlled items. We have achieved these goals by issuing transparent and predictable rules that state clearly what they cover.

The Department of State's International Traffic in Arms Regulations (ITAR) tend toward a one-size-fits-all model—one in which an F-16 aircraft and a bolt for an F-16 are subject to the same stringent licensing requirements. By contrast, the Export Administration Regulations (EAR) allow for nuanced licensing of sensitive items based on country, technology, end use, and end user.

II Export Control Reform Accomplishments

The success of ECR is based on two fundamental principles: 1) the rules should be transparent and predictable; and 2) there must be streamlined processes and higher fences to control sensitive items appropriately while facilitating exports of less sensitive items to destinations and end users that do not pose substantial national security, proliferation, foreign policy, human rights, or similar concerns.

The U.S. Government began the USML review process in 2010. That process has resulted in the removal, as far as we could, of the basket categories that have until now accounted for about half the 85,000 licenses issued annually by the Department of State. If the U.S. Government determines that a military item does not warrant continued control on the USML, it becomes subject to the EAR and the new "600 series" controls on the Commerce Control List (CCL).

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

In 2014, Commerce and State have published two major ECR rules: Satellites and Military Electronics. The May 2014 Commerce and State satellite rules transfer many items to the CCL, including commercial communications and lower performing remote sensing satellites, ground control systems, and radiation-hardened microelectronics formerly controlled in Category XV of the ITAR. Turning to military electronics, the July 2014 rules add to the CCL many electronics and related materials that previously had been controlled by Category XI of the USML.

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

STA provides greater flexibility and predictability, while still providing necessary safeguards. Here, as elsewhere in life, there is no such thing as free lunch. Exporters using STA, and their customers, are responsible for compliance with that license exception's requirements to ensure that the items are not reexported outside STA-eligible countries or employed for unapproved end uses within such countries.

The publication of rules covering 15 categories of the U.S. Munitions List represents milestones for ECR. We have made significant progress but our efforts are not yet complete.

The Departments of Commerce, Defense, and State are reviewing two of the more difficult categories: Category XII, which includes sensors and night vision items, and Category XIV, which includes biological toxins and related items. We need to publish these categories in proposed form, work through public comments, notify Congress of each category change, and make the changes in the revised USML and "600 series" export control classification numbers together with other necessary edits to the EAR and the ITAR.

The changes I have discussed provide exporters with a number of benefits, including:

• Vastly improved defense interoperability with coalitions, including our closest allies.

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

• Eligibility for certain license exceptions, notably License Exceptions STA, GOV (for certain government end users), and RPL (for replacement parts). This allows the U.S. Government to focus its scarce resources on the more sensitive licensing transactions.

III Ensuring the successful implementation of ECR

You—the legal community—have an important role to play in ensuring that the regulated community understands and complies with our rules, including the list changes. This is significant because a more nuanced export control system means a more complex system. The price for removing certain controls is increased nuance and greater reliance upon exporters to see to compliance.

Whether you serve as in-house or outside counsel, you need to ensure that your clients understand the rules; maintain effective internal compliance programs; communicate the rules throughout their companies; and stay current with rule changes. For your part, there are several questions I recommend you ask yourselves. First, have you worked with your clients to ensure that they have developed and coordinated their internal ECR corporate planning, ranging from the training of staff, to reclassifying products? Second, have you worked with the compliance and marketing teams to encourage them—strongly—to train their supplier base and customers? If you are a U.S. subsidiary of a foreign-owned company, what regulatory training is counsel providing to its foreign parent? Finally—Trust but Verify. Have you worked with your clients to ensure that they put in place a system to monitor for errors and to take corrective action if errors occur?

For our part, the Bureau of Industry and Security (BIS) will continue issuing rules that make it easier for exporters, including small and medium-sized enterprises, to navigate the export control bureaucracy.

We also will continue providing comprehensive services to exporters, ranging from seminars, to online interactive tools, to weekly teleconferences, to one-on-one exporter counselling. During FY 2013, we conducted more than 200 ECR-related outreach activities, including weekly teleconferences that are conducted by Assistant Secretary Kevin Wolf and open to all.

As we continue to implement ECR, we will offer training materials, conduct webinars, and undertake related activities. We are open to continue working with ABA committees as well as other legal groups to discuss the rules. However, it is important that you continue to play a leading role in educating exporters.

BIS continues to expand its public education effort, including developing partnerships with non-profit educational groups representing defense exporters, many of which are small and medium-sized. We are committed to helping the nation's small businesses reach their commercial potential, while protecting national security.

IV Enforcement

The enhancement of our export compliance and enforcement capabilities is critical to the success of ECR. We are coordinating interagency efforts to: maximize finite resources; train interagency enforcement colleagues on ECR; increase our visibility into foreign parties of concern; continue our layered approach to compliance; and provide more clarity to exporters on how to address red flags.

Tomorrow afternoon Kevin Kurland, Director of the BIS Office of Enforcement Analysis, will discuss in depth the evolution of Export Enforcement into a sophisticated law enforcement agency, with criminal investigators and enforcement analysts collaborating with other licensing officials to identify and act upon violations.

Briefly, as part of the ECR process over the past four years, we have created the Export Enforcement Coordination Center (E2C2) and the Information Triage Unit (ITU). The E2C2 ensures that export enforcement agencies talk to one another and share relevant information, while the ITU facilitates the review of license applications by compiling, coordinating, and reporting intelligence about foreign parties to license transactions.

License Exception STA is a prime example of the successful layered verification culture and practice that ECR has spawned. Our review of Automated Export System data, exporter and consignee records, including some on-site document reviews, shows a high degree of compliance with STA. We are continuing to review STA transactions to guard against misuse.

Export Enforcement is also working with our interagency colleagues to guard against the evolving cyber threat posed to the United States. At our July Update Conference, we hosted an interagency panel to discuss the U.S. Government's effort to help mitigate cyber risks and receive reports on exfiltrations. On August 1, we took the unprecedented step of designating a Chinese national and associated companies involved with exfiltrating export controlled technology from U.S. defense contractors. This demonstrates our commitment to protecting U.S. intellectual property as well as national security.

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

V ECR and the Evolving Export Control World

At the outset of my remarks I described the importance of reform as the United States moved from the Cold War bipolar world to the multipolar world of today. Today, ECR is resulting in a tripartite export control world with significant benefits for two important groups of countries.

First, if you export defense parts and components or satellite items to U.S. allies and friends, the movement of items from the USML to the CCL will allow you to ship these items via license exception or the more flexible licensing mechanisms of the CCL. This will increase the efficiency, timeliness, and security of the supply chain for sales of such parts and components to the "STA 36" countries.

Second, if you expected that ECR would allow the sale of satellite items and former defense articles to countries at the other end of the spectrum—those subject to arms embargoes or controlled for anti-terrorist reasons—you will be disappointed.

Third, for trade with the rest of the world, licenses generally will be required but you will obtain the benefits and efficiencies associated with the Commerce licensing regime. Moving beyond the one-size-fits-all controls of the ITAR, your foreign customers can use the EAR for de minimis amounts of U.S. content incorporated into foreign produced end items without subjecting those items to U.S. export or reexport controls—that is, for sales to countries that are not subject to an arms embargo. This will help avoid having your defense-related items "designed out" of foreign products.

VI Export Control Reform Box Score

A useful way to measure the return on the national security investment in ECR is to examine the evolving scorecard. Between October 15, 2013 and August 31st of this year, the number of Commerce-specific ECR exports related to "600 series" items exceeded 36,000 with a value of $1.2 billion. BIS's Munitions Control Division has processed more than 6,000 licenses with an average processing time of approximately 15 days.

Exporters can now use STA and other license exceptions to facilitate exports to key allies. STA has been used for more than 4,000 transactions. Exporters have also used other license exceptions, such as RPL, GOV and Temporary Exports, for an additional 10,000 transactions.

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

Conclusion

With your support, we have navigated the USML List Review and regulatory policy process, and we now have a strong foundation of efficient and—I hope—clear regulations. It's important that you continue to provide your clients with education and compliance support to ensure the successful implementation of the ECR initiative. Your work will go a long way towards enabling them to reap the benefits of these changes.

Thank you. I look forward to your insights and questions.