Defence Business: Preparing for US export control reforms | ADM December 2012/January 2013
By Eva Galfi | 11 February 2013
Since the US
export reform initiative was announced by President Obama in 2009, the US has been
moving quickly to ‘build a higher fence around a smaller yard’ and institute
reforms that will make it easier for its allies, including Australia, to access
US military technology.
The outcome of US
export control reform will directly affect how Australian defence companies
trading US military and dual use articles conduct their operations. US reforms will
likely have a positive impact for Australian industry, however the changes to
US export controls will require Australian companies to prepare for the coming changes
in 2013 and ensure that their compliance programs are keeping pace with legislative
and commercial requirements.
What is changing
One of the most significant changes is the easing of licensing restrictions on
parts and accessories currently controlled by the US ITAR. Certain articles not
performing an inherently military function will move from the US ITAR’s US
Munitions List (USML) to the US Commerce Department’s Commerce Control List
(CCL), with the aim of making it easier to export these articles. Many of the moved
articles will form part of a newly created ‘600 series’ category in the CCL,
commonly referred to as the ‘Commerce Munitions List’. It is expected that
exports of 600 series items will be closely monitored by the US Government and
that there will be an increase in enforcement action related to noncompliance.
Other important
changes include improvements to the way in which license applications are
processed, new opportunities to export some articles without a license provided
certain conditions are met, and changes to important definitions in US
regulations, including the definition of ‘specially designed’.
Pros and cons for Australian
industry
Perhaps the most significant positive impact of the reforms will be the
reduction ‘ITAR taint’ in Australian products incorporating US content as items
are moved from the USML to the CCL. Consequently, the US will exert less
control over Australian made defence and dual use articles.
Currently, if an
Australian-produced defence article contains just one item that is ITAR
controlled, even if it is as insignificant as a bracket, the entire end item is
subject to the ITAR and requires US State Department licensing for any export
from Australia or for any retransfer.
The ITAR affords no
de minimis allowance, and this will not change, but there is a de minimis
allowance for articles controlled by the US Department of Commerce’s Export Administration
Regulations (EAR). Under proposed reforms to the EAR, an Australian made
article must contain at least 25 per cent of US origin content controlled by
the CCL before it becomes subject to US export controls. This proposed reform
will ease the compliance burden on Australian companies incorporating US
components.
Another positive
for Australian industry is that once articles are moved from the USML to the
CCL, they can ship under a license from the US Commerce Department. They may
also be eligible for one of several license exceptions under which they can ship
to Australia without any license. While these reforms are generally welcomed,
they may result in a new compliance burden for Australian companies that are
unfamiliar with the EAR’s requirements. Where no license is required, accurate
recordkeeping will become vital in order to prove how it was determined that a
license was not required or that an EAR exception could be utilized.
Preparation
With respect to
potential negative impact, US export reforms may require investment by
Australian industry in the form of additional human financial resources.
Compliance, risk management, and supply chain security programs will need to be
updated to reflect changes to the way in which certain articles are controlled,
stored and shipped.
New record keeping
processes may also need to be instituted and employees will need to be trained
on new legislative requirements and on updated company processes and procedures.
In addition, the US government has repeatedly stated that it intends to
increase overseas enforcement action, with a special focus on the 600 series items.
In order to prepare
for the coming regulatory changes, it is important to understand how the US
reforms will affect your commercial operations and contracts. For example, you
should determine whether the US products you import and export remain ITAR
controlled or if control will transfer to the EAR. Australian companies should communicate
with their US suppliers about whether there are any anticipated changes to the
business relationship, how licenses for goods transitioning from the USML to the
CCL will be managed, whether there will be any new commercial requirements or
changes to contracts, and whether any Agreements will need to be amended or
rebaselined.
Your company may be
eligible to receive and ship certain
articles no longer regulated by the ITAR under a
Commerce license or license exception. If this
is the case, it will be important to
understand the EAR’s requirements and your US
supplier’s expectations. Estimating the
resources required in terms of human capital
and dollars for required changes to your
business processes and ERP system will allow
your company to prepare for the coming changes.
Conclusion
The US export
control reforms have been moving at an impressive pace and are seen as a
priority by both major US political parties. Important changes to the ITAR and EAR
are expected to be implemented in 2013 under a transition plan that addresses product
classification changes, export license validity, and existing ITAR Agreements. By
understanding how your business will change as a result of US export control
reform, you can adequately prioritize operational, commercial and
administrative changes and prepare for the revised legislation’s impending
impact.
Eva Galfi is
Principal at International Trade Advisors, a boutique consulting firm based in
Sydney, Australia. She specializes in Australian and US export controls by advising
multinationals and SMEs on international trade matters.