Defense Trade Advisory Group USML to CCL FRN Review

1. Defense Trade Advisory GroupUSML to CCL FRN Review Plenary Session November 9, 2011

2. Task 1 Working Group Members Peter Jordan Larry Keane Dale Rill Jay Rodriguez Greg Hill Brenda Nicacio Kim Depew Krista Larsen Bryon Angvall Dave Bowman Ginger Carney Tim Hein

3. Discussion Agenda • Super Quick Overview of the USML -> CCL FRN • Summary of Assignment • Results of Assigned Task • Questions

4. USML ->CCL FRN (Vol. 76, No. 136 / July 15, 2011) • Proposes a construct to transfer items that no longer warrant control on the USML to the CCL • Consistent with regime commitments, foreign policy, and national security • Broad Areas of Proposal • Adds “600 Series” ECCNs • Creates ECCN 0Y521 • Changes/adds EAR definitions to enable transfer of items • Updates other areas of the EAR to support the transfer of items

5. Overview of Assigned Questions • Does the DTAG believe the procedures and limitations provide adequate national security and foreign policy protection? • Do the procedures accomplish the national and economic security objectives of the export control reform initiative by, for example: • Allowing for more interoperability with NATO and other regime partners while maintaining robust export and re-export controls of 600 series items to all other destinations?; and • Reducing the incentives of foreign companies to avoid or design out US origin content? • Is the definition of “specially designed” understandable and implementable? If not what changes would DTAG propose and why?

6. Overview of Assigned Questions • 4. Given the draft of 0A606, in light of the previously published re-write of USML Category VII, does DTAG see any underlap or overlap between the two rules? If so, what changes are recommended? • Are the record keeping requirements less onerous than current record keeping requirements? • Are there any other issues that the proposed rule raises that the Government should take into account when preparing the final version?

7. Questions 1 and 2 • Does the DTAG believe the procedures and limitations provide adequate national security and foreign policy protection? • Do the procedures accomplish the national and economic security objectives of the export control reform initiative by, for example: • Allowing for more interoperability with NATO and other regime partners while maintaining robust export and re-export controls of 600 series items to all other destinations?; and • Reducing the incentives of foreign companies to avoid or design out US origin content?

8. Answer Question 1 and 2 Continued • The methodology is described in two parts which are designed to protect National Security and Foreign Policy objectives: • Part I - Process • Interagency review and consensus to recommend which items • Warrant ITAR control (positive list) • No longer warrant ITAR control (transition to CCL) • Part II - Construct • New 600 series employs the EAR “reasons for control” (NS, MT…) • Procedures and limitations are tightly aligned with U.S. foreign policy and multilateral export control regimes  • Limited use of license exceptions for tightly controlled 600 series • No 600 series to “US arms embargo” countries (for example, PR China, Venezuela)

9. Answer—Question 1 and 2 Continued • The new lists and associated restrictions will advance the national and economic security objectives of the export reform initiative by: • Maintaining strict control of items that warrant ITAR control, including many end items • These items are normally only exported after close cooperation with the US government and therefore maintaining the controls and associated licensing is not unduly burdensome • Transitioning items that warrant EAR control to the 600 series of the CCL, allowing the STA license exception to export end items to ally governments after interagency approval • Note: Supporting items are automatically eligible to be exported under the STA exception to such governments

10. Answer—Question 1 and 2 Continued • The new lists and associated restrictions will (continued…): • Provide licensing parity for items that are enumerated elsewhere on the CCL and therefore have been previously vetted by interagency and/or multi-lateral regime agreement; • Reduce controls on versatile parts, components accessories and attachments, thereby eliminating the non-value-add effort of protecting them; • Lower the risk of finding ITAR items in a commercial product at inopportune times. The risk will be lowered by removal of utility items from the ITAR and by the addition of a deminimis allowance for 600 series items. The lowered risk should give companies the confidence to use US-origin items.

11. Answer—Question 1 and 2 Continued • Interoperability with our allies could be further improved by : • Expanding the scope of the STA exception for 600 series items to allow development and production technology to be provided to intermediary suppliers. Often these suppliers participate in the development and production of the item ultimately destined for STA governments even though the STA government may not actually receive such technology. This revision would better support the majority of business arrangements.

12. Answer—Question 1 and 2 • The proposed framework provides adequate national security and foreign policy protections while advancing the national and economic security objectives of the export reform initiative. • Requires interagency consensus to move items to CCL • Maintains control by moving certain items to the CCL consistent with current national security and foreign policy interests • Enhances licensing process (fewer individual authorizations required, exception availability) • Improves interoperability with key allies while maintaining controls to other countries • Reduces foreign company incentive to “design-out” U.S. content • Allows USG licensing entities to concentrate on more substantive licensing issues and companies to focus internal controls on material items • Interoperability with partners could be further enhanced by expanding the scope of the STA exception for 600 series items to allow technology to be provided to intermediaries.

13. Question 3 Is the definition of “specially designed” understandable and implementable? If not what changes would DTAG propose and why?

14. Answer—Question 3 • Definition is key for moving items from the USML to CCL • Listing every item being transitioned would not be possible • No definition exists (except MTCR & case law) • Establishing the definition would also resolve some uncertainty faced by industry and USG • Clarifies that items designated as “specially designed” are those that pertain to a particular capability and use, not original design intent • The definition largely achieves that goal, but could be more precise in some cases

15. Answer—Question 3 Continued • Some positive aspects of the proposed definition: • Eliminates need to know original design intent • To avoid controlling items in multiple entries, specifies that those items that have been interagency vetted and are explicitly listed are not “specially designed” • Specifies that only items “peculiarly responsible” to the referenced item’s capability are “specially designed”…except parts and components • Specifies which parts and components are not “specially designed” • Simple utility parts • Those already used in an EAR99 item in serial production • Those which can be replaced by AT-only controlled parts and components without modification AND where function is identical

16. Answer—Question 3 Continued • Opportunities to improve the preciseness of the definition include: • Clarifying that the definition also applies to the USML. • (a) A “specially designed” item, other than a “part” or “component,” is an item that is enumerated on the CCL and, as a result of “development,” has properties peculiarly responsible for achieving or exceeding the controlled performance levels,characteristics, or functions of the referenced item identified in the CCL or USML. • (b) A “specially designed” “part” or “component” is a “part” or “component” of an item ‘enumerated’ in a category of the CCL or USML.

17. Answer—Question 3 Continued • Opportunities to improve the preciseness of the definition include: • Address precedent CJs and CCATs • Precedent CJ(s) or CCAT(s) can apply….do not harm • Clarifying that simple utility parts are excluded even if the EXACT part is only used in the one item • (d) Items that are not so separately ‘enumerated’ for purposes of this definition, are also not considered “specially designed” in any category of the CCL if they are: • (1) A single, unassembled part similar to parts used in multiple types of civil items, such as threaded fasteners (e.g., screws, bolts, nuts, nut plates, studs, inserts), other fasteners (e.g., clips, rivets, pins), common hardware (e.g., washers, spacers, insulators, grommets, bushings), springs and wire; or

18. Answer—Question 3 Continued • Opportunities to improve the preciseness of the definition include: • Adding an exclusion for common components that may unintentionally be controlled because the “peculiarly responsible” criteria and the parts multi-use exclusion do not apply. • (d) Items that are not so separately ‘enumerated’ for purposes of this definition, are also not considered “specially designed” in any category of the CCL if they are: • A “part” or “component” that does not, as a result of “development,” have properties peculiarly responsible for achieving or exceeding the controlled performance levels,characteristics, or functions of the referenced item identified in the CCL or USML; and its function is identical to an EAR99 or AT-only controlled part or component. • Note – A function is considered identical if it is designed for the exact same purpose with no additional performance criteria. An example of identical parts would be two 12V DC battery with slightly different dimensions. Examples of batteries with additional performance criteria would be 12 V DC battery with a requirement to operate in a high temperature environment or a 12 V DC battery that must last twice as long as AT-controlled batteries.

19. Answer—Question 3 Continued • Opportunities to improve the preciseness of the definition include: • Adding an exclusion for part or component designed with no specific end use in mind. • (d) Items that are not so separately ‘enumerated’ for purposes of this definition, are also not considered “specially designed” in any category of the CCL if they are: • A part or component that can be shown to have been developed for applications other than the enumerated item is not considered to be "specially designed".  • *Evidence of intended use can be demonstrated using advertisements or other marketing material, proposals or sales to customers, and declarations of other uses as part of a patent application.  Direct funding of part or component by programs developing an enumerated controlled item makes the part or component ineligible for this exception.

20. Answer—Question 3 Continued • Opportunities to improve the preciseness of the definition include: • Replacing the example used in the Note to Exclusion Paragraph Number 1 with an example that does not indicate that the exclusion is very limited. Would a spindle housingnot be excluded because they are only used in machines? • Note to Exclusion Paragraph Number 1: • “Threaded fasteners (e.g., screws, bolts,… A section of inlet cowling that is used in an aircraft engine inlet pivot block that is used to hold an axle assembly to a vehicle is, although a single unassembled item, only used in aircraft engine inlets on vehicles. Items such as sections of inlet cowlingspivot blocks are thus not excluded from “specially designed” by virtue of exclusion paragraph number 1, although they are not precluded from being excluded by another paragraph in the definition.

21. Answer—Question 3 Continued • Opportunities to improve the preciseness of the definition include: • Updating the definition for serial production to address an issue where development parts and components might temporarily be over classified • “Serial production” is defined in section 772.1 as a type of production where…Items in “serial production” that are subsequently subject to “development” activities, such as those pertaining to new models or versions, quality improvements, cost reductions, or feature enhancements, remain items in “serial production.” Any new models or versions of such items developed from such efforts are in “development” until and unless they enter into “serial production.”

22. Answer—Question 3 Continued • Final thoughts on specially designed: • Variation across companies on how “specially designed” is interpreted today. Communication and training will be key to the successful use of the term. • An item could be “specially designed” in more than one entry. If that is the case, it may be difficult to classify the item. • The actual list entries will have to go hand-in-hand with the proposed definition. The lists will have to be carefully crafted to avoid over and under controls.

23. Question 4 Are the recordkeeping requirements less onerous on industry than the current licensing recordkeeping requirements?

24. Answer—Question 4 • Proposed §743.4 – Will add cross-reference to Conventional Arms Reporting requirement (adds 600 series under WA and UN reporting requirement) • Exception Reporting requirements would apply to 600 series exporters using LVS, TMP, RPL, STA and GOV • New semi-annual (Wassanaar) and annual (UN) reporting requirements for 600 series products exported (not including re-exports or transfers), except as authorized by a BIS export license • Also adds new recordkeeping requirements for above

25. Answer—Question 4 Continued • Current Reporting Requirements for ITAR Products • Hardware and ITAR Exemptions: use Automated Export System (AES) • Technical Data and Defense Services: • First export on TAAs • Recordkeeping with future electronic submissions for other technical data exports • Proposed reporting guidelines for “600 Series” • Two separate reports submitted electronically to BIS (In addition to AES submissions, when required) • Semi-annual (for Wassenaar) • Annually (for UN)

26. Answer—Question 4 Continued • Onerous Requirement? • Change alone is onerous to a degree; new requirement will require new processes/procedures/training/time. • Use of Excel may be onerous for highly automated companies. • The bottom line…Reporting is somewhat more onerous, but the extra effort is well spent to reduce license burden!

27. Answer—Question 4 Continued • DTAG Recommendations on Reporting • When an export is documented in AES, suggest using AES data for reporting requirements to avoid duplication and inconsistencies. • Unsure of ability to predict which exact ECCNs will require reporting until the ECCN 743.4(c1 and 2) list is actually published…make sure industry is involved and has time to digest and implement. • Companies who have multiple divisions may find 30 day timeline challenging. 60 days might be more appropriate.

28. Question 5 Given the draft of 0A606, in light of the previously published re-write of USML Category VII, does DTAG see any underlap or overlap between the two rules? If so, what changes are recommended?

29. Answer—Question 5 • Comments on Cat VII (Dec 2010 version) vs. 0Y6zz • “First do no harm”—Vital that the public review proposals once Category VII finalized. • “Specially Designed”—critical as discussed in earlier presentations. • Vital that the positive list is definitive because items could be caught in two “specially designed” entries • Additionally, consider providing examples of what is or is not considered “specially designed” in each ECCN category (A, B, C, D & E) and in the specific USML Category

30. Answer—Question 5 • Comments on Cat VII vs. 0Y6zz • Possible rollback examples • “Production equipment, tooling, and test equipment” is a rollback as written—existing USML Cat VII does not control as proposed--USML VII.b.: ”Production equipment, tooling, and test equipment “specially designed” for armored vehicles designated…in this category.” • DTAG recommends…USML enumerated production equipment, tooling and test equipment must have technology embedded that is unique for the enumerated end item and peculiarly responsible for the controlled performance parameters. (A crane that drops an engine into a tank should not be controlled vs. the unique technology embedded into the device to achieve performance parameter X should be controlled).

31. Answer—Question 5 • Comments on Cat VII vs. 0Y6zz • 0A606.c.—”Air cooled diesel engines and engine blocks for armored combat vehicles over 40 tons”—Could be a rollback if such a diesel engine is used on a large truck and controlled by 9A990 today. • “Technology” for software does not appear to be enumerated in USML Category VII…was this intentional?

32. Answer—Question 5 Continued • The “Good Stuff”…. • 600 series built-in controls help contain undesirable proliferation • Exception Use limited • Reporting requirements • No “US Arms Embargoed” countries • ….But the devil is in the details…

33. Are there any other issues that the proposed rule raises that the Government should take into account when preparing the final version? Question 6

34. Answer—Question 6 • 600 Series Global Considerations--Rollbacks, Overlap, Process • Rollbacks—”First do no harm”—commitment by all agencies • Overlap--When adding positive lists to USML and 600 series, need to make sure no overlap with existing CCL entries. Industry review of proposed lists is critical—we need to see proposed USML Categories and proposed 600 series at the same time to review and avoid overlap and rollbacks. • Process—to get items added to .y should be simple, efficient and transparent and it must be compared to WA ML16 (Semi-finished components).

35. Answer—Question 6 Continued • 600 Series Exception Considerations • MT controlled products are not eligible for exception use. ECCN’s with MT controls must be derived from the MTCR annex. • RPL-- • RPL one-for-one replacement appears to be more restrictive than the “proposed” ITAR spares exemption. Recommend removal restrictions not present on the “proposed” ITAR spares exemption and make consistent. • Is the term “worn out equipment” an unintended rollback in controls? • STA—the United States is missing from the STA exception—it should be updated for situations where the equipment is coming back to the United States.

36. Answer—Question 6 Continued • Exemption Considerations Continued • TMP—not changed in this FRN, however: • One year restriction for TMP use could be an unintended rollback—consider extending the maximum time. • Example--Unintended consequence would be loss of 123.16 b9 (temp export parts, component, mfg tooling, test equipment to an affiliate) which has no time restriction—just can’t be sold while abroad.--1 year restriction on TMP unattractive for same purpose • For continuity and consistency, DTAG also recommends creation of exceptions similar to • 22 CFR §125.4.b.7 - returning technology to the original source • 22 CFR §125.4.b.5 - Basic Operations and Use Information exemption

37. Answer—Question 6 Continued • 600 Series De-minimis Considerations • 10% is an improvement over no de-minimis—Thank you! • However… • Two thresholds adds complexity for foreign parties • Allied partners will control the re-export of the 600 series content • DTAG recommendation to make thresholds consistent with existing EAR de minimis standards. • 10% for “Terrorist Supporting Countries” and 25% for the rest

38. Answer—Question 6 Continued • 0Y521 Considerations • 3 years is too long for an item to be controlled in this holding entry • 0Y521 has extremely limited number of license exceptions eligible for use • Unilateral controls set an unlevel playing field for US companies • Must work quickly with the regimes for similar controls to level the playing field • DTAG recommends 3 six-month periods • Published items--If an entry is added that is specific to a model number, there should be coordination with the OEM

39. Summary of DTAG Thoughts… Incredible effort so far! Keep up the good work! Please keep us informed and involved! Please consider our input. Please give us adequate time to implement changes. Thank you for allowing us to review this critical proposal!

40. Questions?

41. Backup

42. Back Up Slide--Wassenaar Reporting Requirements • Semi-annual reports • Quantity (initial export of technology = 1) • ECCN • Name of recipient state, • Electronic copy (Use of Excel is required) • Covers exports authorized under LVS, TMP, RPL, STA, GOV, VEU, and SCL procedure • Exports to WA member countries are excepted • Specific ECCNs said to be consistent with WA reporting list

43. Back Up Slide--UN reporting requirements • Annual reports: • Quantity (initial export of technology = 1) • ECCN • Name of recipient state/ultimate destination • Electronic copy (Use of Excel is required) • Covers exports authorized under LVS, TMP, RPL, STA, GOV, VEU, and SCL procedure • Specific ECCNs said to be consistent with UN reporting list