DATE: October 19, 2007 SUBJECT: NCITD Meeting of October 11, 2007

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1 DATE: October 19, 2007 SUBJECT: NCITD Meeting of October 11, 2007 This memorandum summarizes the presentations and discussion at the National Council on International Trade Development (NCITD) Trade Compliance Committee Meeting held in Washington, D.C. on October 11, Comments are in [square brackets]. The principal author within MK Technology was Kay Morrell, Esq. and Terence Murphy was the reviewer under standard procedure. I. Off-the-Record Comments by Mr. Ned Weant, Acting Director, Office of Anti-Boycott Compliance, Bureau of Industry and Security, U.S. Department of Commerce Mr. Weant began his comments with a discussion of recent and pending regulatory and statutory developments. Legislation currently moving through Congress to reform the Committee on Foreign Investment in the United States (CFIUS) has an anti-boycott provision. Congress will probably delay further action on this bill until after the Department of the Treasury releases a report on foreign investment in the United States. That report is expected to be released on November 26. On July 17, 2007, the Office of Anti-Boycott Compliance (OAC) published their new Penalty Guidelines. These guidelines outline how penalties are established in settlements of anti-boycott cases. They list the aggravating and mitigating factors that are reviewed in establishing penalties. One of the significant sections involves Voluntary Self Disclosures. One of the key issues in such cases is the timing of the disclosure. Mr. Weant announced that the President would shortly sign the International Emergency Economic Powers Enhancement Act which will significantly increase penalties for export violations from $50,000 per incident to the greater of $250,000 or two times the value of the commodities. [The President subsequently signed this bill into law on October 16, 2007.] The penalties section of this new Act will affect pending investigations. The Bureau of Industry and Security (BIS) and the enforcement agencies are still evaluating the impact of this new law.

2 Page 2 Following his comments, Mr. Weant turned to the attendees for questions. In response to a question regarding the CFIUS review process of foreign investors, Mr. Weant noted that while there are several U.S. databases with records of foreign trade violations, there has been no effort to cross-reference those materials during CFIUS reviews. Congress is reviewing proposals to make this information, including records involving boycott activity, available to the CFIUS review panel. Mr. Weant was next asked to list those countries that exporters should be particularly concerned about in terms of boycott activity. He noted that the country of largest concern is the United Arab Emirates. Their Ministry of Economy has pledged to review letters of credit to help fight boycott activity, but problematic boycott language typically appears in contract language which is not available for the Ministry s review. There is also a large amount of boycott activity in Syria. U.S. companies should be particularly careful in patent and trademark registrations. Other countries of concern include Oman, Qatar, Kuwait, Libya, Iraq, Pakistan, and Bahrain, even though Bahrain has been officially removed from the Department of the Treasury list. When the Libyan trade sanctions were first removed, many U.S. companies starting to do business in Libya received a questionnaire asking about Israeli involvement in the enterprise. Libya has now backed away from this request, but boycott language is still appearing in contracts. With respect to Iraq, it is hard to tell how much boycott activity is taking place, but it appears to be on the decline. The primary area of focus with Pakistan is with shipping vessel eligibility requests. While the anti-boycott regulations are still primarily focused on the Arab League boycott of Israel, Mr. Weant said that U.S. companies are being urged to apply their guidelines in situations involving unsanctioned boycotts. There have not been any boycott enforcement cases outside of the Arab League boycott. Mr. Weant was then asked to comment on the effect of the new higher penalties on the OAC process for issuing notices and warning letters and on boycott investigations. The OAC notice and warning letter process uses a formula based on the number of boycott activities in which a company has been involved. It is not clear what impact the higher penalties will have on this process or how the $250,000 fine per incident should be applied. He does not foresee that this amount would be applied as a penalty for a company whose only violation was a failure to report a boycott request, but this is still not clear. In 1988, during the height of boycott enforcement activity, there were 58 settlements resulting in $5,400,000 in fines. Today, those numbers are substantially smaller. The negative publicity that results from a press release by the Government that a company has participated in boycott-related activity is more of a sanction. Most companies in the United States have gotten the message on boycott violations. One of the attendees noted that under the penalty guidelines and the lower penalties, when OAC received a Voluntary Self Disclosure, it cut the potential maximum fine in half and then weighed the mitigating and aggravating factors to make further adjustments to the final penalty. Mr. Weant was asked if this same process would apply

3 Page 3 under the new higher penalties. He stated that he could not comment on this matter at this time, but that a decision should be reached and announced at the BIS Up-Date in November. In response to a final question about possible boycott activities in countries that had not been listed by Mr. Weant in his earlier comments, he noted that U.S. companies should always be watchful for boycott language or requests, even in countries that are no longer of concern to the OAC. II. Off-the-Record Comments by Ms. Ann Ganzer, Director, Office of Defense Trade Controls Policy, Bureau of Political-Military Affairs, U.S. Department of State Ms. Ganzer began her comments by discussing the proposed Defense Trade Cooperation Treaties with the United Kingdom and Australia. The purpose of these treaties is to eliminate the requirement for an export license for certain defense-related exports and activities. The Treaty with the United Kingdom and its implementing language have already been sent to the U.S. Senate for consideration. A copy of the U.K. Treaty is now available for review on the DDTC website at the following address: Her Office is still meeting with the Australians to work out the implementation language for that Treaty. The Directorate of Defense Trade Controls (DDTC) has begun preliminary work on a regulatory framework to be promulgated after the Treaties have been ratified. The contemplated structure would require an exporting party to consult three lists to determine if an export without a license is authorized under the Treaty. If the transaction does not meet the requirements of all three lists, then the export is not authorized and the exporting party must seek an export license under the International Traffic in Arms Regulations (ITAR). The three lists for consideration under the Treaty are as follows: 1. Approved Community List The U.K. party must be on a list of approved parties that will be compiled by the U.K. Government. 2. Approved Projects List The Treaty is only intended to authorize exports for: Combined military or counter-terrorism operations; Cooperative security and defense research, development, production, and support programs; Mutually agreed specific security and defense projects where the U.K. Government is the end-user; and Transactions for U.S. Government end-use. The Treaty is not intended to cover all defense-related projects.

4 Page 4 3. Excluded Technology List The Treaty is not intended to cover all defense articles. In addition to some very high level defense articles and technologies, there will also be some lower level defense articles and technologies that will not be eligible for export under the Treaty. If a third country is involved in the transaction, the export will not qualify for export under the Treaty. Because these regulations are to implement the Treaty, which will be a law separate from the Arms Export Control Act, it is likely that they will not be part of the ITAR. DDTC hopes that they will be located in the Code of Federal Regulations either immediately before or right after the ITAR in order to reduce confusion. Ms. Ganzer then briefly mentioned a few other issues involving her Office and DDTC. There has been a substantial increase in consideration time for some export transactions that require Congressional Notification. This delay is primarily due to the nature of the transactions being proposed and not a systemic problem. DDTC also expects to implement within the next few weeks the next upgrade to the electronic licensing system. These changes are for internal handling of applications and will not be visible to the public. DDTC also hopes to complete action on new Brokering Guidelines in the near future. Changes to the Brokering regulations are also being considered. Ms. Ganzer was then asked to discuss the Commodity Jurisdiction (CJ) process for determining whether a commodity and its related technology is subject to the ITAR or the Department of Commerce Export Administration Regulations (EAR). Ms. Ganzer is directly responsible for the CJ process. Last year, her Office completed action on 434 CJ requests. The goal for completing the review of these applications is 60 days, but the average last year was 128 days. Over the last year, the majority of the CJ requests were for commercial aircraft parts. The decision on the aircraft parts is clearly directed by the existing regulations and these are easy cases, but aircraft manufacturers are apparently demanding a signed decision by DDTC before they will rely on a classification provided by a parts manufacturer. Ms. Ganzer emphasized that a CJ application should carefully follow the requirements in the regulations and the guidelines published on the DDTC website. This includes an accurate technical description of the commodity, a discussion of why and for whom the product was developed, the source of funding for its development, and a brief sales history (military vs. commercial). The application should not be an essay on why the product should be classified under the EAR Commodity Classification List. A particularly important piece of information is the nature of competing products. If a company s commodity was developed for the military, but competitors are producing the same product for commercial use, DDTC may be willing to re-classify the military product under the Commerce list. Some other factors that are important during a CJ determination include:

5 Page 5 If a company was not the original designer of a product that they have acquired through a merger or other acquisition, and the information on its origin is not available, the company should provide as much information as is available and explain the situation. If a product was produced for the military but a commercial market is developing, the company should provide an estimate of what the commercial market will be. DDTC does not want to restrain companies from exploring a developing commercial market. If the product that is being reviewed has been the subject of a seizure by the U.S. Customs Service, that fact should be made clear in the CJ request. If the product has previously been the subject of a CJ request, the company should explain why the situation is now different. Previous CJ determinations do not expire, but they can be revoked. For example, commercial satellites had been determined under a CJ request to be subject to the EAR. That decision was later revoked when some U.S. companies failed to obtain ITAR authorization for certain launch failure activities in China. The CJ request should indicate if the product has previously be licensed for export by the Commerce Department. Applicants should not combine a CJ request with a Voluntary Self Disclosure. These documents should be submitted separately to DDTC. Once a CJ request has been submitted to DDTC, the product should only be exported under the ITAR until DDTC has reached a classification decision. While this is not required by the law or the regulations, it is strongly advised. Exporters should be aware that some products will not be licensed for export while a CJ request is pending. Finally, Ms. Ganzer noted that DDTC hopes to move the CJ process onto its electronic filing system. Once that process is underway, DDTC will explore the possibility of making redacted CJ determinations available to the public. Under current plans, the manufacturer would be given the option of prohibiting the public disclosure of the CJ results. III. Off-the-Record Comments by Mr. Bernard Kritzer, Director, Office of National Security and Technology Transfer Controls, Bureau of Industry and Security, U.S. Department of Commerce Mr. Kritzer provided an update on current areas of activity within his Office. The most important is the implementation of the new China Rule. The most important part of this Rule is the Validated End-User (VEU). Several dozen companies in China have historically been good customers with respect to export compliance and controls. The

6 Page 6 creation of the VEU designation should significantly reduce what Mr. Kritzer referred to as wasted licensing time. He noted that the first list of VEU designated companies should be published in the Federal Register within the next two weeks. [The first list of five companies was published today, October 19.] The addition of India to the VEU program is also a positive step. The 31 Export Classification Control Numbers that were set out in the China Rule as being prohibited for exports to the Chinese military basically cover 20 commodities and related software. So far, there have not been any significant complaints about this final list. There have not been any military end-use license applications under this rule, but there have been a few advisory requests. Mr. Kritzer also noted that the Chinese Government has been reasonably restrained in its comments about this new Rule. The U.S. relationship with China is moving in the right direction, albeit slowly. Mr. Kritzer next noted that the Deemed Exports Advisory Committee is expected to finish its work on the Deemed Exports issue sometime before the holiday season in December. The report on its recommendations will be submitted to the Commerce Department and should be released to the public shortly thereafter. Under the current Deemed Exports process approximately 1 to 1.5% of the applications are denied. BIS is still encouraging comments and recommendations for revision of the Commerce Control List, some parts of which have not been altered since the end of COCOM. Recommendations to remove commodities from the list should be accompanied by sufficient documentation to show foreign availability. One area of the list that is receiving serious consideration for reform is encryption. Encryption review currently accounts for 45 to 50% of the BIS classification caseload. BIS is considering adjustments to the treatment of mass-market products and hopes to have a proposed rule ready for publication early in Another area under regulatory review involves easy the requirements for intra-company licensing. Reforms will likely focus on companies that can demonstrate a strong export compliance program. This should significantly reduce the deemed export licensing caseload, where three companies currently account for 55% of all deemed export licenses. Finally, Mr. Kritzer noted that regulatory changes resulting from the 2006 Wassenaar plenary should be ready for publication before the end of October.

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