Keynote Address by Eric L. Hirschhorn

Under Secretary for Industry and Security

United States Department of Commerce

 

Israel Defense Export Control Agency Conference

Ministry of Defense

Tel Aviv, Israel

 

September 5, 2016

(as prepared for delivery)

 

Introduction

 

Thank you to the Defense Export Control Agency for the opportunity to speak at this important conference. In particular, I would like to thank the Ministry of Defense for inviting me here today and its staff for their hard work in organizing an event of this size. The range of attendees at this conference—from small startups to the large, established companies from the defense industry—is quite impressive and reflects the importance that the Israeli government and its industry place on strategic trade controls.

 

Close Cooperation

 

The U.S. Government’s participation in this and past DECA conferences demonstrates the value we place on the close cooperation and collaboration between our two governments on strategic trade controls. Both countries place a high priority on educating industry on export control compliance, as well as detecting, disrupting, and punishing violators to prevent diversion of sensitive goods to those who would seek to harm our two nations’ security. BIS is committed to continued robust enforcement of export controls to prevent the unauthorized export or reexport of U.S.-origin goods or technology.

 

Approximately one-third of active investigations conducted by BIS’s Office of Export Enforcement involve cases of unlawful diversion to Iran. BIS aggressively pursues criminal penalties against violators who willfully circumvent export control and sanctions measures. For example:

 

  • ·         In March, in cooperation with the Federal Bureau of Investigation (FBI), BIS brought a criminal complaint against Erdal Kuyumcu, a New York man who sold specialized nickel-cobalt powder with missile and nuclear applications to Iran. A key piece of evidence in the case came from an end-use check conducted by a BIS Export Control Officer (ECO). On June 14, 2016, Kuyumcu pleaded guilty to exporting the metal powder to Iran through an intermediate country without an export license. He faces up to 20 years in jail and a $1 million fine.


  • ·         In January, Ali Reza Parsa, a Canadian resident, pleaded guilty in New York to conspiring to transship electronic components used in missile systems to Iran. On May 20, 2016, Parsa was sentenced to three years in jail. The conviction resulted from a joint investigation by BIS and the FBI.

 

Another enforcement priority for BIS is to disrupt the flow of equipment that the Islamic State might use for oil production, a key revenue source, as well as IED components, by giving U.S. companies an up-to-date overview of Iraqi territories and facilities under Islamic State control and imposing a license requirement for exports to these destinations.

 

  • On July 21, 2016, the U.S. Department of the Treasury designated UAE-based Yona Star under its Syria sanctions program. End-use checks conducted by BIS revealed that Yona Star had diverted U.S.-origin items, including light sensitive cameras, to Syria.


  • ·         In November 2015, UK citizen Ahmad Feras Diri was arraigned in Pennsylvania on charges that he conspired to export laboratory equipment, including chemical warfare agent detection equipment, to Syria. Diri was extradited from the UK to stand trial in the U.S. on charges brought as the result of a joint BIS investigation with the Department of Homeland Security's Homeland Security Investigations (HSI).

 

In addition, BIS employs a wide range of administrative authorities to address unlawful exports to sanctioned countries even when criminal convictions cannot be secured. One powerful enforcement tool BIS uses to prevent acquisition of U.S.-origin commodities and technologies for purposes contrary to national security and foreign policy is the Entity List, which generally imposes a comprehensive licensing requirement with a presumption of denial.

 

  • ·         On March 21, 2016, BIS added Electronic Engineering Zone, “EEZ,” and related entities in Malaysia to the Entity List. An interagency investigation and end-use checks conducted by a BIS ECO revealed that EEZ had sourced Wassenaar-controlled integrated circuits and other controlled items for military end users in Iran.

 

In some cases, BIS cannot confirm that suspect entities are engaged in unlawful diversion to sanctioned countries, because those entities evade BIS compliance verification measures or prevent BIS from conducting end-use checks. BIS may add these entities to the Unverified List, which alerts the public that these entities may present a diversion risk and imposes strict conditions on exports, including obtaining detailed end-use statements. BIS has added a number of companies suspected of trading U.S.-origin items with Iran to the Unverified List.

 

The Reform Effort

 

I would like to take a few minutes to highlight the success the United States has achieved over the past seven years in revising the regulations and processes to create a control system that is responsive to today’s strategic framework and facilitates defense exports to allies, such as Israel.

 

Just over seven years ago, in August 2009, President Obama made updating the United States’ Cold War-era export control system to one that addresses today’s national security threats and economic opportunities a priority. The success of this Export Control Reform (ECR) initiative reflects significant effort, commitment, and cooperation from the highest levels of the U.S. government to the working level staff. The level of cooperation among the agencies is unprecedented in my nearly 40 years of experience in this field. That includes DTSA, whose Director, Beth McCormick, is well known to you and is speaking here today.

 

My bureau has made significant improvements to our Export Administration Regulations (EAR) in recent years, but the review of the U.S. Munitions List (USML), part of the State Department’s International Traffic in Arms Regulations (ITAR), and corresponding changes to the Commerce Control List (CCL), represent the keystone of the reform effort. We have changed the USML from a list based upon open-ended, subjective standards to a more positive list – one based almost entirely on objective technical criteria or other parameters. This means that an item will be on the revised USML only if it is determined by technical experts to provide a critical military or intelligence capability.

 

If an item is not listed on the USML, it is not controlled by the State Department. The USML review has removed “catch-all” controls for many thousands of unspecified parts and components. We have transferred many militarily less sensitive items to the licensing jurisdiction of BIS. In doing this, we created new “600” and “9x515 series” export control categories to license the former USML military and commercial spacecraft items that have moved to Commerce. They remain controlled, but under a far more flexible and nuanced framework.

 

ECR is fundamentally a national security effort, intended to achieve greater regulatory efficiency and rationality, and to focus controls on the most significant items and destinations—higher fences around the most sensitive items.

 

Where ECR Stands Today

 

When Assistant Secretary Kevin Wolf spoke to you in June 2015, 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. We have continued to make significant progress over the past year.

 

On July 28, BIS and the State Department’s Directorate of Defense Trade Controls (DDTC) published final rules on two more categories: USML Category XIV, which covers toxins and biological organisms, and USML Category XVIII, which covers directed energy weapons. The effective date of these rules is December 31, 2016.

 

On June 6, we published the long awaited Definitions rule - another important element of ECR – which provides clearer, harmonized definitions of some of the most significant terms also found in the State Department’s International Traffic in Arms Regulations. Enhancing clarity and consistency in Commerce and State definitions allows you to reach quicker, more reliable conclusions about your export control obligations when dealing with items subject to U.S. export controls. DDTC concurrently published comparable amendments to the ITAR’s definitions of ‘‘export,’’ ‘‘reexport,’’ ‘‘release,’’ and ‘‘retransfer’’ and anticipates publishing its comparable provisions pertaining to other important ITAR terms, including ‘‘technical data,’’ ‘‘directly related,’’ ‘‘public domain,’’ and the results of ‘‘fundamental research’’ in a separate proposed rule.

 

On February 19th, BIS and DDTC published a second set of proposed rules for USML Category XII, which includes fire control, laser, imaging, and guidance equipment. We believe these new proposed rules address many of the concerns expressed in public comments, including avoiding capturing on the USML items that are in normal commercial use. These rules are being reviewed, but we expect to publish final rules for Category XII this fall.

 

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 have reviewed the comments to the proposed rule and have drafted final rules that we expect to publish later this year.

 

On October 19, 2015, BIS and DDTC published Notices of Inquiry requesting comments regarding controls on the revised categories for military vehicles, vessels of war, submersible vessels, and other items. We are also reviewing those comments. BIS and DDTC anticipate issuing similar notices of inquiry for the other revised categories once they’ve been in effect for approximately eighteen to twenty-four months.

 

How ECR Supports Defense Trade between the U.S. and Israel

 

Earlier I mentioned that the Department of Commerce’s Export Administration Regulations offers a more flexible framework for export control implementation. Movement of items from State to Commerce control is by no means insignificant. Under Commerce regulations, there are no registration requirements, no defense service licensing issues, unless controlled technology is being transferred, and no authorizations as burdensome as Technical Assistance Agreements (TAAs) or Manufacturing License Agreements (MLAs).

 

De Minimis and “See Through” Rule

 

A significant benefit of ECR is that the defense articles moving from the State Department to the Commerce Department’s jurisdiction are no longer subject to the ITAR, which have no de minimis exclusion, resulting in a “see-through” rule. The absence of a de minimis exclusion means that any amount of U.S.-origin USML content incorporated into your Israeli product will subject the entire end product to U.S. reexport controls.

 

The ITAR’s strict “see-through” rule led many non-U.S. manufacturers to design their products to be “ITAR Free”. Now, under ECR, non-U.S.-made items incorporating U.S.-origin 600 series content will not be subject to the EAR so long as the value of the controlled U.S. content represents 25% or less of the total value of the non-U.S. item and the non-U.S.-made item is not destined to U.S. arms-embargoed countries (Country Group D:5). This is a significant change for Israeli defense manufacturers that incorporate U.S. origin content into their products.

 

Additionally, Israeli companies that manufacture military components containing more than 25% U.S.-origin 600 series content may be able to use License Exception STA (Strategic Trade Authorization) to reexport their components to the 36 eligible countries, which includes NATO member countries. To use STA for 600-series items, the items must be (1) for the ultimate end use by the government of one of those 36 countries or the U.S. Government; or (2) for development, production, or servicing of an item in one of those 36 countries or the U.S. that will ultimately be used by the government of one of those 36 countries or the U.S. Government, or for eventual return to the United States; or (3) in connection with an existing license or other approval issued by the U.S. Government.

 

For those times when License Exception STA or another license exception is not a good fit, reexporters may seek a license from Commerce to reexport a 600-series item. Reexporters may also ask the U.S. exporter to obtain authority to reexport to various destinations.

 

Although 600 series items are not eligible for export or reexport to Israel under license exception STA, the licensing framework of the EAR allows for greater planning and more efficient shipments than would be possible under the ITAR. This is because a purchase order is not required when a license application is submitted to BIS, which allows applicants to estimate the customer's needs over the four-year life of the BIS license.

 

Another benefit of ECR is that certain items that previously required a license from the State Department, but now are under BIS’s 600 series control, may be exported to Israel without a license or under certain license exceptions. Specifically, those items identified under paragraph .y of a 600 series entry may now be exported to most countries, including Israel, without a license. In fact, over $28 million in ".y" items has been shipped to Israel without a license since the beginning of ECR. These items would formerly have required authorization from the Department of State. Additionally, 600 series items may be eligible for export to Israel under license exceptions for temporary export (TMP), repair and replacement (RPL), and limited value shipments (LVS). Since ECR implementation began (10/2013), almost $29 million in exports of 600 series items have been made under TMP and over $35 million under RPL.

 

Reforms Affecting More than Just Defense Trade between the U.S. and Israel

 

We have also made changes to our regulations that affect more than just defense trade between the U.S. and Israel. Just a few years ago, we included Israel as one of a group of eight countries that are eligible to receive certain dual-use items on our Commerce Control List under License Exception STA.

 

You will also find that “deemed reexport” requirements as they relate to third country nationals are now far simpler. During the initial implementation of the reform effort, we found that the release of controlled technology or source code to a third-country national in a country outside of the U.S. – i.e., “deemed reexports” – could require a license under the EAR but not under the ITAR. Thus, with the change in jurisdiction for 600 series items, the EAR would impose a licensing obligation that did not exist - for the same items in the same circumstances - when they were subject to the ITAR. To address this, in 2013 BIS clarified the scope of a technology license approved for an entity and its employees and described scenarios in which controlled technology may be released to bona fide regular and permanent employees without a license. These revisions largely borrowed concepts from the ITAR, including provisions in old § 124.16 and current § 126.18. BIS subsequently codified this guidance in the definitions rule, which became effective last Thursday, September 1. As a result, the EAR now narrow the scope of activities that are considered deemed reexports and provide greater clarity on the scope of a technology license. All these changes reduce the likelihood of the EAR imposing more burdensome deemed reexport licensing requirements than the ITAR.

 

Statistics

 

Since the first ECR rules became effective in October 2013, there have been over 8000 shipments to Israel, valued at $400 million, for items that have transferred from the U.S. Munitions List to the Commerce Control List – both 600-series and 9x515 satellite items.

 

The top U.S. exports to Israel of 600-series and 9x515 items by value since the ECR rules went into effect include:

 

  • ·         9A610 – Military Aircraft and related commodities ($148.8 million, 38.1%)

  • ·         9A619 – Military Gas Turbine Engines and related commodities ($118.3 million, 30.3%);

  • ·         0A616 – Ground Vehicles and related commodities ($82.6 million, 21.1%);

  • ·         3A611 – Military Electronics ($21.5 million, 5.5%); and

  • ·         9A604 – Commodities related to Launch Vehicles, Missiles, and Rockets ($5.2 million, 1.3%)

 

BIS Culture/Outreach

 

At BIS, we are proud of our reputation for being transparent, open, flexible, and customer focused. Each year, our Office of Exporter Services counselors provide regulatory, policy, and process guidance to thousands of exporters, freight forwarders, universities, and individuals, helping them to meet their regulatory obligations under the EAR. Our flexible licensing framework allows our counseling and licensing staff to assist exporters and reexporters in crafting license applications that take into account unusual fact patterns.

 

To help exporters and reexporters stay current and compliant, BIS has a range of new outreach platforms, including decision tree electronic tools on the BIS website, a new series of webinars on topics ranging from license exceptions and sanctions to encryption and the definition of “Specially Designed,” compliance guidelines and tools, including a consolidated screening list (on www.export.gov), audit modules and red flag guidance, and the continuation of our popular weekly teleconferences, which are usually chaired by Assistant Secretary Kevin Wolf. We offer an email list serve that sends out the latest regulatory updates. We also regularly tweet updates to our more than 1200 followers.

 

BIS 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 existing licenses. Last October, the Departments of Defense, Commerce, State, and Energy began reviewing Commerce license applications on a single IT platform, a Defense Department platform 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. Although this effort might not be finished before the end of the Obama Administration, we will work hard to move it along.

 

Iran/OFAC

 

On a final note, the Joint Comprehensive Plan of Action (JCPOA) negotiated among Iran, the five permanent members of the Security Council, Germany and the European Commission did not require any change to BIS license requirements. A license continues to be required to export or reexport all items on the Commerce Control List to Iran. The Department of the Treasury’s Iranian Transactions and Sanctions Regulations also require a license for such exports, as well as impose a broader range of restrictions on trade with Iran. To avoid duplication, Treasury authorization is considered Commerce authorization as well. As I noted at the beginning of my remarks, BIS continues to pursue violations of our regulations relating to Iran as vigorously now as we did prior to JCPOA implementation.

 

Conclusion

 

Never before has an effort to modernize and revamp U.S. export controls come so far and had this level of consensus among the various U.S. government agencies. Over the past seven years the Obama Administration has sought, through export control reform, to achieve greater regulatory efficiency and rationality, focus controls on the most significant items and destinations, increase education to sensitize exporters to their compliance responsibilities, and strengthen enforcement. Israeli companies are beneficiaries of this reform effort, which is designed to facilitate secure exports to our allies and partners. It has been a pleasure and honor to be a part of this important effort.

 

   
© BIS 2016