Reminder on Proposed ITAR Exemption for Intra-Co. Transfers to Dual or 3rd-Country Nationals

This rulemaking is part of the Administration’s Export Control Reform plan that was announced in April 2010. Comments are due by September 10, 2010.

Affirmative Responsibility Would be on Foreign Persons to Prevent Diversion

According to the State Department, the amendment of ITAR as proposed would place an affirmative responsibility on foreign business entities, foreign governmental entities and international organizations to comply with U.S. laws and regulations to prevent possible diversion of U.S. defense articles.

The State Department notes that parties to manufacturing license agreements (MLAs) and technical assistance agreements (TAAs) are currently expected to exercise due diligence and have effective screening procedures as a condition for access to ITAR-controlled defense articles and technology. None of the proposed changes would reduce the due diligence requirements of these parties (including U.S. applicants) to ensure that the end-use and end-user are consistent with the approved authorization.

Proposed Rule Would Create Exemption and Make Two Conforming Changes

First, the State Department proposes a major new regulation, 22 CFR 126.18, that would eliminate the requirement that approved end-users of defense articles (including technical data) provide additional information with respect to their dual nationals and third-country national foreign employees. Under proposed section 126.18:

• No approval would be needed from the Directorate of Defense Trade Controls (DDTC) for the transfer of defense articles, including technical data, within a foreign business entity, foreign governmental entity, or international organization that is an approved end-user or consignee for those defense articles (including technical data), including the transfer to dual nationals or third country nationals who are bona fide, regular employees, directly employed by the foreign business entity, foreign governmental entity or international organization.

• The transfer of defense articles must take place completely within the physical territories of the country where the end-user is located or the consignee operates, and must be within the scope of an approved export license, other export authorization, or license exemption.

• Any person who is granted a license or other approval under this provision is responsible for the acts of employees, agents, and all authorized persons to whom possession of the licensed defense article or technical data has been entrusted regarding the operation, use, possession, transportation, and handling of such defense article or technical data abroad.

• Any foreign business entity, foreign governmental entity or international organization, as a “foreign person” within the meaning of the ITAR, that receives a defense article, including technical data, is responsible for implementing effective procedures to prevent diversion to destinations, entities or for purposes other than those authorized by the applicable license or other authorization and must comply with U.S. laws and regulations, including the ITAR.

• End-users or consignees can meet the above conditions, prior to access to defense articles, by 1) requiring security clearance approval by the host government for its employees or 2) having in place a process to screen its employees and having those employees execute a Non-Disclosure Agreement that provides assurances that the employee will not transfer any information to persons or entities unless specifically authorized by the consignee or end-user.

• The end-user or consignee also must screen its employees for substantive contacts with restricted or prohibited countries listed in section 126.1, namely Belarus, Cuba, Eritrea, Iran, North Korea, Syria, Venezuela, Burma, China, Liberia, Sudan, Cote d’Ivoire, Democratic Republic of Congo, Iraq, Lebanon, Sierra Leone, Somalia, Sudan, Libya, Afghanistan, Vietnam, and Haiti. Substantive contacts include but are not limited to recent or regular travel to such countries, recent or continuing contact with agents and nationals of such countries, continued allegiance to such countries, or acts otherwise indicating a risk of diversion. An employee with such contacts will be presumed to raise a risk of diversion unless DDTC determines otherwise. (See above for information on the affirmative responsibilities to prevent diversion.)

• The end-user or consignee also must maintain a technology security/clearance plan that details procedures for screening employees for such substantive contacts and maintain records of such screening, make them available to DDTC upon request.

Second, the State Department proposes to remove 22 CFR 124.16, which provides approval for dual national and third-country employees of countries that are members of NATO or the European Union, as well as Australia, Japan, New Zealand and Switzerland.

Based on proposed 22 CFR 126.18, the need for section 124.16 would be eliminated. Section 124.16 gives the State Department the authority to approve access to unclassified defense articles exported in furtherance of or produced as a result of a TAA/MLA, and retransfer of technical data and defense services to individuals who are third- country/dual national employees of the foreign signatory or its approved sub-licensees, provided they are nationals exclusively of the above-listed countries and their employer is a signatory to the TAA/MLA or has executed a Non-Disclosure Agreement. Like proposed 22 CFR 126.18, this rule requires that any retransfer take place completely within the physical territories of these countries or the United States.

Third, 22 CFR 124.8(5), which limits transfers of technical data or defense service to persons “in a third country or a national of a third country,” would be revised to refer instead to “foreign persons.”

Proposed section 124.8(5), describing one of the clauses that must be included in any MLA or TAA, would state: “The technical data or defense service exported from the United States in furtherance of this agreement and any defense article which may be produced or manufactured from such technical data or defense service may not be transferred to a foreign person except pursuant to Section 126.18 or as specifically authorized in this agreement unless the prior written approval of the Department of State has been obtained.”

(See ITT’s Online Archives or 08/11/10 news, 10081120, for initial BP summary of proposed rule. See ITT's Online Archives or 04/21/10 news, 10042125, for BP summary on Administration's announcement on its reform plans for U.S. export controls. See ITT's Online Archives or 07/02/10 news, 10070215, for BP summary of the National Security Advisor's outline of progress to date.

See ITT's Online Archives or 03/10/08 news, 08031015, for BP summary of DDTC updated procedures for licensing amendments for third party/dual nationals.)

State Dept contact -- Charles Shotwell (202) 663-2792