Remarks of Eric L. Hirschhorn
Under Secretary for Industry and Security
United States Department of Commerce

Export Control Forum
April 20th, 2016

Good morning and welcome to BIS’s 11th Export Control Forum.  I would like to thank our regional office staff for organizing this important event.  I would also like to thank the speakers from across the government for taking time to support this important effort.

Thank you as well to the board and the staff of PAEI, the Professional Association of Exporters and Importers, our long time co-sponsor for BIS seminars in the Bay Area.  Specific thanks go to Wanda Gilmore, who worked tirelessly on this event and Gisele Perez, who is PAEI’s president, and PAEI’s board.

This region is of particular importance to the Bureau.  It is home to many of the leading edge firms that have dominated the high technology field for decades.  It is also home to numerous tech startups that will blaze new trails in the years to come.  Since 1990, we have maintained a field office in Silicon Valley (augmenting our Western Regional Office in Southern California) dedicated to supporting the needs of this vibrant trade and technology community.  We believe that our local presence can be particularly helpful to the small- and medium-sized firms that can benefit from an “insider’s” knowledge of export regulations just down the road.  I’m pleased to note that we have Ms. Lani Tito based here now to ensure you have timely access to the regulatory expertise you may need.  I expect that you will find her to be a valuable resource.

    Before I begin my report on the Export Control Reform initiative and other topics of interest, I’d like to highlight another Administration priority – passing the Trans Pacific Partnership, or TPP.  As you may know, TPP is a trade agreement among the U.S. and twelve other Pacific Rim countries that sets new, high-standard global trade rules, updating 20 year old World Trade Organization rules for the modern economy.  When adopted, TPP tariff eliminations and reductions will decrease prices, which in turn will result in U.S. products being more attractive to TPP consumers.  It will ensure that the global economy reflects our interests and values by requiring other countries to play by fair wage, safe workplace, and strong environmental rules that we help set.  TPP will open markets and level the playing field for American workers and American businesses, leading to more Made-in-America exports and good-paying American jobs here at home.

It’s important to note the importance of TPP countries to U.S. exporters.  Currently, 44% of U.S. goods exports go to TPP markets and support 3.1 million jobs.  Services exports to TPP countries support an additional 1.1 million jobs.  

The U.S. market is one of the most open in the world.  Trade agreements such as the TPP level the playing field because they get other countries to open their markets to us in the way that our market already is open to them.  When the rules are fair, American companies and American workers can out-compete anyone in the world.

ECR Update
Now, on to the Export Control reform initiative and the progress we’ve made over the past year.  When I spoke to you last year, Commerce and State had published final rules on 15 out of the 21 categories of the Commerce Control List (CCL) and the US Munitions List (USML) with all of those fifteen categories effective.  On February 19th, BIS and the State Department’s Directorate of Defense Trade Controls (DDTC) published a second set of proposed rules for USML Category XII, which includes fire control, laser, imaging, and guidance and control equipment.  We believe these new proposed rules address many of the concerns expressed in public comments, including avoiding capturing USML items that are in normal commercial use.  Public comments were due by April 4th but I encourage you to review the second set of proposed rules.  

We are also reviewing with our interagency colleagues the public comments on the proposed rules for USML Category XIV, which covers toxins, biological organisms, and Category XVIII, which covers directed energy weapons.  These rules will proceed directly to final rules.

A key benefit of the reform process has been the recognition by all that regulatory reform does not have a finish line, that technology doesn’t stand still, and that development and production aren’t the exclusive province of the United States.  For this reason, in addition to our work completing the remaining categories, BIS continues to work with our interagency colleagues to review finalized USML categories and corresponding 600 series entries on the CCL to update for technological changes and to clarify.

As a result of public comments from a March 2015 Notice of Inquiry, on February 9th of this year, BIS and State published proposed revisions to USML Categories VIII (military aircraft) and XIX (military engines).  This is the first of a series of proposals revisiting categories that were revised in the early phases of the Export Control Reform initiative.  The revisions are intended to (1) take account of changes in technology; and (2) refine, in the light of two years’ experience, our original decisions on what should be transferred from State to Commerce jurisdiction.  We are reviewing the comments, which were due by March 25th.

On October 19, 2015, BIS and State published Notices of Inquiry requesting comments regarding controls on the revised categories for military vehicles, vessels of war, submersible vessels, oceanographic equipment, and auxiliary and miscellaneous military equipment.  We are currently reviewing those comments.  BIS and State anticipate issuing similar notices of inquiry for the other revised categories once they’ve been in effect for approximately eighteen months.

Another important element of ECR is the proposed definitions rule. In June of last year, BIS and the State Department published proposed rules to harmonize definitions of key export control terms, which also have implications for cloud computing.  These definitions rules include proposed changes that would result in a "carve-out" from EAR controls for data encrypted as specified in the proposals.  While not expressly referencing cloud applications, these changes, if ultimately adopted, will have an important effect on the management and use of many cloud services.  "End-to-end" encryption is required to qualify for the carve-out.

We have carefully reviewed public comments and have made some technical adjustments based on the comments that will provide additional flexibility to cloud computing users.  We expect the final BIS version of the definitions rule to be published in the next several months, but at this point we expect the State rule containing this provision will be published later, and in proposed form.

Scorecard for ECR-Related Transactions

•    Under ECR, along with enhanced security, we have seen tangible benefits to exporters.

•    The average number of State Department license applications for items in the 15 categories of the U.S. Munitions List (USML) that have moved to the CCL showed an overall average of 57% decline since the ECR transition rules became effective on October 15, 2013.  

•    BIS’s Munitions Control Division, which licenses “600 series” items, has processed approximately 28,300 licenses with an average processing time of 17 days (as of 2/29/16).  

•    Between October 15, 2013 and February 29, 2016, the number of export transactions related to “600 series” and “9x515” satellite items totaled over 171,000 valued more than  $10 billion.  Exporters have used License Exception STA to export “600 series” and “9x515” satellite valued at more than $1.2 billion.  Exporters have also made use of other license exceptions, which include Government End User (GOV), Servicing and Replacement of Parts and Equipment (RPL), and Temporary Exports (TMP) for exports valued at over $1.5 billion.

Of course, these data demonstrate only part of the return on investment.  The critical national security benefits include:  timely exports to key defense allies; no unexpected license provisos; lower Defense Department acquisition and research costs; enhanced U.S. partner affordability throughout the product life cycle; a stronger defense industrial base; and the reduction of the licensing burden for the exporting community.

I would now like to turn to other areas of note in the world of export controls, including Wassenaar network intrusion controls, the proposed changes to our administrative enforcement guidelines, and recent country policy changes.

Wassenaar Network Intrusion Controls
    In 2013, the United States and our Wassenaar Arrangement partners agreed to control the export of certain purpose-built tools and related technologies designed to remotely penetrate the defenses of networked devices and covertly extract information.  The reasons for control were related to national security and human rights concerns.

    In May 2015 BIS sought comments on that proposal, which delivery systems, development of “intrusion software,” and network surveillance systems.  During the public comment period, we received many comments on the proposed rule.  In response to concerns raised by Congress, the private sector, academia, civil society, and others, and as a result of extensive outreach efforts and further U.S. Government review, the United States has proposed to the Wassenaar Arrangement to eliminate the controls on technology required for the development of “intrusion software."

    Our discussions of the remaining controls on software and hardware tools for the command and delivery of intrusion software continue domestically and at the Wassenaar Arrangement.  These discussions will seek to resolve issues raised by stakeholders and will include significant consultations with the other Wassenaar participants as well as the U.S. Government, private sector, civil society, and academic cybersecurity communities.  The discussions will give the Administration a chance to share with our counterparts in other countries the U.S. cybersecurity communities' concerns regarding the unintended consequences such controls could have.

    Because changes in Wassenaar controls must be approved by all 41 Participating States, we cannot predict the outcome of these discussions and negotiations.  The Administration, however, will continue to consult with the cybersecurity communities during the negotiations will not implement domestically any regulations on these specific controls without first giving the public an opportunity to participate through the notice and comment process of a future proposed rule.

    Further, the Administration commits will be guided by whether the benefits of controlling the export of the purpose-built tools at issue outweigh the harms to effective U.S. cybersecurity operations and research.  The Administration also continues to analyze the role appropriate export controls could play within the larger strategy of countering the growing capability of malicious actors to cause harm through cyberspace.

Enforcement Guidelines

    On the enforcement side, BIS published a proposed rule on December 28, 2015 that would rewrite our administrative enforcement guidelines, which appear in Supplement No. 1 to Part 766 of the EAR.  BIS proposed these new guidelines to make civil penalty determinations more transparent and predictable, and to align them more closely with those used by the Treasury Department’s Office of Foreign Assets Control (OFAC).  

    BIS implements the EAR under the same statutory authority by which OFAC administers the bulk of its sanctions programs, namely the International Emergency Economic Powers Act (IEEPA).  The proposed guidelines formally take account of the substantial increase in 2007 in the maximum penalties for violations of IEEPA.  The proposed guidelines provide a clearer description of how the base penalty amount is likely to be determined.  The base penalty would depend on whether the violation is egregious or non-egregious and whether the case resulted from a voluntary self-disclosure (VSD).  Although the proposed Guidelines generally provide for significantly higher civil penalties for egregious cases, we anticipate that the majority of violations identified in OEE investigations will fall in the non-egregious category.

    The guidelines also reinforce the fact that BIS strongly encourages the submission of VSDs by parties who believe they may have violated our regulations.  The vast majority of cases brought to our attention through VSDs result in the issuance of warning letters.  The number of overall VSDs increased over 20% from FY14 to FY 15.  Our Office of Export Enforcement (OEE) anticipates that VSDs submitted for non-egregious violations under the 600 Series will also generally result in warning letters.  With respect to VSDs generally, OEE will issue warning letters in cases involving inadvertent violations and cases involving minor or isolated compliance deficiencies, absent the presence of aggravating factors.  

    OEE will continue to pursue criminal and administrative penalties not only against companies that fail to comply with the EAR, but also individuals who flout the rules.  Strong enforcement ensures that companies that act in good faith and invest money in their compliance programs will not be put at a competitive disadvantage vis-a-vis those who fail to comply with our export control laws.

So you can expect to see a continuing robust and comprehensive enforcement program at BIS involving cases where aggravating factors are present, particularly cases involving knowledge, willful conduct, or harm to U.S. national security or foreign policy interests.

    Fundamentally, our job is to deprive our adversaries and potential adversaries of the technological advantage we possess, to ensure that our own advances are not employed against us in the battlefield.  Export Enforcement works in close cooperation with our interagency colleagues and industry to maintain our military superiority.  You will hear more tomorrow from Assistant Secretary for Export Enforcement David Mills and his team on a range of enforcement activities in which BIS is currently engaged.

Recently, there have been a number of country-specific policy changes.   In December 2014, President Obama announced a new course in our relations with Cuba, a course that would engage and empower the Cuban people.  These steps build upon actions taken since 2009 that have been aimed at supporting the ability of the Cuban people to gain greater control over their own lives and determine their country’s future.

In January 2015, the Commerce and Treasury Departments took coordinated actions that included changes to licensing policy and license exceptions in the EAR that are consistent with U.S. support for the Cuban people.  On July 22nd, BIS published a second rule, implementing the Secretary of State’s rescission of Cuba’s State Sponsor of Terrorism designation.  This was followed by a third rule on September 21st that amended the terms of existing license exceptions that are available for Cuba, increased the number of license exceptions available for Cuba, and created a new licensing policy in the EAR.  

On January 27th of this year, BIS published a fourth rule changing the general policy of denial for licenses to export to Cuba.  It put in place a general policy of approval for five types of transactions and a policy of case-by-case review for items to meet the needs of the Cuban people, even in instances where the Cuban government is the consignee.  

Most recently, on March 16th, BIS published a fifth rule allowing vessels on temporary sojourn to Cuba with cargo for other destinations to travel to Cuba under a license exception rather than having to obtain a license for the cargo bound for destinations other than Cuba. This rule also authorizes exports of certain items to persons authorized by the Department of the Treasury to maintain a physical or business presence in Cuba.  Further, this rule adopts a licensing policy of a case-by-case review for exports of items that would facilitate the export of items from the private sector in Cuba, subject to certain limitations.

BIS and the Treasury Department’s Office of Foreign Assets Control have implemented a number of sanctions to deter Russian conduct that violates international norms.  Specifically, we seek to convince Russia to desist from its territorial claims against Crimea, stop its interference in Ukraine, and—importantly—refrain from misconduct elsewhere.  BIS’s sanctions cover certain exports to the defense and energy sectors, as well as certain transactions with named foreign parties.  BIS is coordinating with our international partners to identify items of strategic concern, and is working hard to minimize damage to allies and friends.  The future of sanctions is dependent on President Putin’s compliance with the Minsk II package to alleviate the ongoing war in the Donbas region of Ukraine, and to respect the territorial integrity of Ukraine.  We are prepared to impose additional sanctions if circumstances so require.  

On July 14, 2015, the P5+1 countries and Iran agreed upon a Joint Comprehensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program will be exclusively peaceful.  Building on the key parameters announced in April 2015, the JCPOA provides Iran with phased sanctions relief upon verification that Iran has implemented key nuclear commitments.  OFAC licenses the export or reexport of items subject to both BIS’s EAR and OFAC’s Iranian Transactions and Sanctions Regulations (ITSR).  

When Implementation Day was reached on January 16th of this year, most U.S. sanctions remained in place.  This is because they are directed not at Iran’s nuclear activities but at its continued sponsorship of terrorism, violation of human rights, and ballistic missile development.  The JCPOA allows non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran.  The only other significant change in U.S. licensing policy is to permit exports of commercial aircraft for civilian end use.  Other than that, however, the prohibition on facilitation by U.S. persons, as well as broad export and reexport controls on U.S.-origin goods and technology, remains in effect.
Deputy Assistant Secretary for Export Administration Matt Borman and his panel will discuss these topics in more detail later today.  

Enhanced Outreach Efforts
    As you can see there is never—okay, hardly ever— a dull moment in the world of export controls.  An important part of our job is to help you stay current.  I would like to describe the enhanced efforts we are undertaking to educate the exporting community, not only on ECR related changes, but also the range of issues you undertake as export control administrators and compliance specialists.  I’m sure you will agree that Michael Hoffman and his staff do an excellent job of outreach on the West Coast.  In fiscal year 2015, the Western Regional Office (WRO) organized 10 seminars and participated as speakers in an additional 12 programs reaching approximately 2,800 people.  They also did  much of the work in answering the 33,000 e-mails and telephone calls that BIS received.  

    The Western Regional Office’s efforts complement the work that the Office of Exporter Services (OExS) is doing in other areas of outreach, including the development of additional decision tree electronic tools,  a new series of webinars on topics including sanctions, encryption, and soon to come, the “Specially Designed” definition, an increasing number of compliance-related outreach visits to companies, and the continuation of our popular weekly teleconferences, which are usually chaired by Assistant Secretary Kevin Wolf.  OExS is working hard to convey more information on export controls to more people through greater use of electronic resources and increased partnerships with trade associations, industry groups, and other U.S. Government agencies.   The Office is also working to broaden BIS’s outreach to small and medium-sized companies, including start-ups.  As more and more U.S. companies look to do business abroad, it is vital that they be aware of export control requirements.

    Within BIS, OExS is administering projects to improve the efficiency of the licensing process while maintaining the current high quality of work done by BIS’s licensing officers, and to expand the use of SNAP-R, BIS’s on-line application system, to such other uses as the submission of advisory opinion requests and amendments to licenses.   In coordination with the PECSEA and BIS’s Technical Advisory Committees, OExS is also working on changes to enhance exporters’ use of SNAP-R, including a revised version of the SNAP-R handbook.

    Last October, the Departments of Defense, Commerce, State, and Energy began reviewing Commerce license applications on a single IT platform, a Defense Department system known as USXPORTS.  We have turned our attention to the next important step, which is to create a single portal with a single license application form, and we’ll be seeking input from industry as we develop requirements for this step.  Although this effort might not be finished before the end of the Obama Administration, we will work hard to move it along.


My remarks today underscore not only the deep commitment and demonstrated follow-through of the Obama Administration on Export Control Reform but also our activities across a broad spectrum of country policy issues.  Over the next day and a half, my colleagues will provide you with a wealth of information on the range of export control issues.  I encourage you to take advantage of their knowledge, expertise, and unique insights.  Our commitment to you, the business community, is to ensure that we maintain a strong and open dialogue.  We welcome your thoughtful questions and constructive feedback.

Thank you for your participation and enjoy the conference.



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