Commodity jurisdiction was discussed in the first article in a 5-part series on US Export Control Compliance, and export licenses discussed in the second. In this third article we focus on License Exemptions & Exceptions.
Export Control Reform (ECR) has seen a pleasing rebalance in US priorities to promote strategic trade and reduce the export control compliance burden, but the only way Australian industry will be able to exploit these benefits is through awareness and assurance in their use. The third article in this series explores the process for identifying applicable export license exemptions and exceptions.
Not surprisingly, the first step in ascertaining if an exemption/exception applies is to determine its commodity jurisdiction; that is whether it is controlled under the International Traffic in Arms Regulations (ITAR) or Export Administration Regulations (EAR). ECR saw the transfer of less sensitive items from the ITAR’s United States Munitions List (USML) to the EAR’s more flexible Commerce Control List (CCL) (reflected in the average processing time for Australian EAR export licenses in CY 2020 of 15 days).
Further good news is that there are over 50 ITAR exemptions ranging from hardware (generally found in ITAR section §123), defence services (§124) and Technical Data (§125) as well as additional exemptions pursuant to Foreign Military Sales (FMS) and the Australia-US Defense Trade Cooperation Treaty. The drafting process is underway to consolidate all exemptions at §125 to make this section a ‘one stop shop’.
Exports subject to EAR may also have applicable license exceptions. The difference in terminology emphasises that there is an absolute requirement for licenses for USML items, unless an exemption is permitted, while the requirement is more nuanced for EAR items and relies on the nature of the export (the item, destination, end-use, end-users etc).
You may recall from the second article that items subject to EAR are identified by an Export Control Classification Number (ECCN) and it is the ECCN in the CCL which will provide the licensing requirement, reason for the control and any available exceptions.
Having analysed the transaction and determined that an exception/exemption may apply, it is critical to ensure you meet all the criteria (such as scope, exclusions, reporting requirements etc), as you are effectively acting as a licensing officer in relying on its use. Not surprisingly, some companies conservatively choose to seek a license even in circumstances (such as FMS exports) where the conditions for exemption appear to be clearly stated; however, this should not be considered best practice.
Some common ITAR license exemptions include §123.4(a)(1) which permits temporary import to the US and subsequent re-export of US-origin unclassified items for repair and overhaul; however, it does not cover modification and upgrade which will require a new DSP-5 unless the upgraded end item has already been approved for permanent transfer (§123.4(a)(2)).
Another exemption which is likely to have utility for Australia (particularly Defence Cooperative programs) is §126.4, a relatively recent update which expands the scope of US Government transfers to include permanent export of defence articles (previously limited to temporary import/export).
There are a number of EAR license exceptions which provide similar provisions to the exemptions above. For example, Servicing and Replacement of Parts and Equipment (RPL) provides similar conditions to §123 while Government (GOV) Transfers are covered in §740.11 of the CCL. Importantly, ECR has also introduced the Strategic Trade Authorisation (STA) license exemption which permits license free export, reexport and retransfer for certain ECCNs to facilitate trade between the US and its allies.
A final word of caution. When choosing to rely on exceptions/exemptions, you should ensure you have a deep understanding of the criteria for their use and a robust record keeping system. While the ability to self-assess and ship without license can expedite business, it may also attract greater scrutiny – such as the reported audit of over 30 per cent of early STA users!