Page 24: of Maritime Reporter Magazine (May 2011)

24 Maritime Reporter & Engineering News

COLUMN LEGAL BEAT

By Barbara D. Linney and Kevin J. Miller,

Blank Rome LLP

In August 2009, President Obama launched a broad inter-agency process for reviewing U.S. export controls, including both the dual-use and defense trade sys- tems, with the stated objective of updat- ing controls to address current threats to

U.S. foreign policy and national and eco- nomic security by “building high walls around a smaller yard” and focusing en- forcement efforts on the “crown jewels.”

The reform process has as its goal trans- formation to a single control list, a single primary enforcement coordination agency, a single IT system and a single licensing agency. These goals were in- tended to be implemented in three phases. Although ambitious target dates for completion of the three phases have come and gone, considerable progress has been made, including on several pre- viously stalled initiatives that have been placed on a faster track due to the reform initiative, and recently published pro- posed rules have laid the groundwork for detailed regulatory reform.

PHASES OF REFORM

As originally contemplated, the first phase involves reform that can be initi- ated immediately without legislation, such as policy and procedural changes and amendments to Regulations. Phase

I also encompasses creation of the frame- work necessary for a new system, in- cluding preparation for any legislative proposals and implementation of specific reform actions already underway.

Phase II was billed as involving cre- ation of a “fundamentally new U.S. ex- port control system” based upon the current system by restructuring the exist- ing two control lists (U.S. Munitions List (“USML”) and the Commerce Control

List (“CCL”)) into identical tiered struc- tures, as well as paring down the USML by transferring items from the USML to the CCL as appropriate. Congressional notification would be required to elimi- nate controls on USML items or to trans- fer USML items to the CCL. This phase also contemplates further consolidation of export licensing including the transi- tion towards a single electronic licensing system and a revamp of export enforce- ment – both of which will require addi- tional funding.

The final phase would complete the transition to the new U.S. export control system, provided that the necessary leg- islation is approved by Congress. Ulti- mately, the goal is to merge the two control lists into a single list and to im- plement new processes and procedures to ensure the list remains current. Similarly, in the longer-term, the goal is to consoli- date multiple agencies charged with li- censing and enforcement into a single export licensing agency and a primary export enforcement coordination agency.

Implementation of a single, enterprise- wide IT system which will be used both for export licensing and enforcement also is planned. While on paper the reform initiative was to have been a phased process, in practice the three phases have proceeded somewhat concurrently rather than consecutively, with the result that, while no phase is fully complete, signif- icant progress has been made towards the goals of all three phases.

PROGRESS TO DATE

On November 9, 2010 the President is- sued an Executive Order establishing an

Export Coordination Enforcement Cen- ter. The Center falls under the Depart- ment of Homeland Security for administrative purposes and will serve as a central point of contact for executive departments and agencies to coordinate and enhance their export control enforce- ment efforts. The Center also will serve as a primary point of contact between en- forcement authorities and agencies en- gaged in export licensing and will coordinate public outreach activities re- lated to export controls. Finally, the Cen- ter will serve as a conduit between

Federal law enforcement agencies and the U.S. intelligence community for the exchange of information related to sus- pected violations of U.S. export controls.

Progress on another key reform pro- posal, creation of a single IT system to receive, process and screen new license applications and end-users, also is well underway. The agencies reportedly have decided on the single platform to be used and plans for migrating all agencies to the single platform are under discussion.

Likewise, at the direction of the Presi- dent, in March of this year, the Office of

Management and Budget began to plan for streamlining of the various agencies currently overseeing trade and export.

On the licensing front, several specific reforms have been implemented, includ- ing movement on several long pending regulatory reforms. Developments in- clude: • Elimination of duplicate USML li- censing requirements for foreign em- ployees (DSP-5 is now the sole licensing vehicle) • Proposed rules designed to eliminate unnecessary obstacles to exporting prod- ucts to companies with dual-national and third-country national employees • Clarification of hand-carried USML technical data exemption • Removal of requirement for prior ap- proval for certain proposals to foreign persons for Significant Military Equip- ment (“SME”) • Elimination of paper filing for agree- ments and commodity jurisdiction re- quests and proposed rule regarding electronic payment of registration fees • Proposed rules updating FMS ex- emption, permitting temporary export of chemical agent protective gear for per- sonal use, and eliminating license re- quirements for USML replacement parts and components previously authorized for export • Senate ratification of long pending defense trade treaties with Australia and the United Kingdom

As can be seen from a review of progress to date, fundamental structural changes remain in the planning stages, while licensing reforms to date have con- sisted primarily of bringing various pre- viously pending initiatives to fruition.

CHANGES ON THE HORIZON

Considerable work has, however, been done to lay the groundwork for more fun- damental regulatory reforms, as can be seen from significant proposed rules is- sued in late 2010.

On December 9, 2010, the Department of Commerce published a proposed

Strategic Trade Authorization (“STA”)

License Exception, which, if imple- mented as planned, would authorize broad-based exports, re-exports and in- country transfers of many CCL items to destinations that are not a threat to U.S. foreign policy or foreign policy goals without an export license. Use of the

STA license exception would be optional; exporters could still choose to apply for a license or rely on a different license ex- ception as appropriate. However, the purpose of the planned exception is to further focus export controls on the most critical national security priorities, con- sistent with one of the primary goals of the reform initiative.

Also on December 9, the Department of Commerce sought public comments on how to make the CCL more clear and positive and “tiered” in a manner consis- tent with the control criteria developed as part of the reform effort. The Department of State published a similar request on

December 10 with respect to the USML.

A three tiered control system is contem- plated for both lists, depending upon whether the item controlled provides a critical (Tier I), substantial (Tier II) or significant (Tier III) military or intelli- gence advantage, and the extent to which the item is available outside of the United

States or from its close allies and multi- lateral regime partners, with Tier I items (the “crown jewels”) being subject to the highest level of controls. The ultimate objective is to make the lists clearer and more positive thereby enabling exporters to easily identify where specific com- modities fall based upon set criteria and to align the two lists so that they can later be combined into a single control list.

Among other things, the notices signal an intention to revise the USML format to more closely mirror the CCL, in that each

USML category would be subdivided into the same subcategories as the CCL (“A” for Equipment, Assemblies, and

Components; “B” for Test, Inspection and Production Equipment; “C” for Ma- terials; “D” for Software; and “E” for

Technology), with additional subcate- gories “F” and “G” for Defense Services and Manufacturing and Production Au- thorizations respectively. The proposed revisions for Category VII of the USML, also issued for comment on December 10, illustrate the contemplated approach.

IMPACT ON EXPORT CONTROLS

IN THE SHIPYARD

While few of the concrete reforms ac- complished to date have had much im- pact on the burden of export compliance by U.S. shipyards and their contractors and subcontractors, the recent proposed rules foreshadow considerable progress toward substantial regulatory reform. Al- though culmination of the migration to a single list, single agency system is un- likely to be achieved in the short term, the current reform initiative appears to have gained sufficient traction to give cause for cautious optimism that the goal of fewer controls focused on the most critical items can in fact be realized. *This article reflects developments through

April 8, 2011. The views expressed herein are those of the authors, do not necessarily reflect the opinion of the firm or other members of the firm, and should not be construed as legal advice or opinion or a substitute for the ad- vice of counsel.

Contact Barbara Linney

Email: [email protected]

Tel: 202-772-5935

U.S. Export Control Reform

What It Means for Shipyards