ITAR Amended to Exempt Intra-Company Transfers to Dual/3rd-Country Nationals

(The rule is part of the Administration’s Export Control Reform Initiative to review the overall U.S. export controls system to enhance the national security, foreign policy, and economic security of the U.S. The final rule is very similar to the August 2010 proposed rule, with a few changes. See ITT’s Online Archives or 08/11/10 and 08/24/10 news, 10081120 and 10082402, for BP summaries of the proposed rule.)

Rule Intended to Address Restrictions on Dual & 3rd Country Nationals

DOS states that this rule is intended to reduce the restrictions on dual national and third-country national employees of licensed end-users and consignees who, within the scope of their employment, would have access to defense articles, including technical data. The rule is also intended to recognize vested interests within companies, international organizations, and foreign governmental entities to carefully screen employees for purposes of trustworthiness.

Highlights of the Final Rule

The following are highlights of regulatory changes in the final rule:

No DDTC Approval Needed for Dual/3rd-Country National Employees, If Regs Met

The final rule adds new section 22 CFR 126.18 to provide exemptions to dual or third-country national employees. Paragraph (a) of this section states that, subject to certain conditions, no approval is needed from the Directorate of Defense Trade Controls (DDTC) for the transfer of unclassified defense articles, which includes technical data (see 22 CFR 120.6¹), to or within a foreign business entity, foreign governmental entity, or international organization that is an authorized end-user or consignee (including approved sub-licensees) for those defense articles, including the transfer to dual nationals or third-country nationals who are bona fide regular employees, directly employed by the foreign consignee or end-user.

Transfer Must be in Physical Territory of End-User Country in Scope of License

Paragraph (a) of new 22 CFR 126.18 also states that the transfer of defense articles must take place completely within the physical territory of the country where the end-user is located, where the governmental entity or international organization conducts official business, or where the consignee operates. Additionally, the transfer of defense articles must be within the scope of an approved export license, other export authorization, or license exemption.

End-User Must Have Procedures to Prevent Diversion of Defense Articles

Paragraph (b) of new 22 CFR 126.18 states that as a condition for any foreign business entity, foreign governmental entity, or international organization to transfer any defense article to foreign employees, there must be effective procedures to prevent diversion to destinations, entities, or for purposes other than those authorized by the applicable export license or other authorization (e.g., written approval or exemption) in order to comply with the applicable provisions of the Arms Export Control Act and the ITAR.

The end-user or consignee may satisfy this condition, prior to transferring defense articles, by requiring the following:

• Approved security clearance. A security clearance approved by the host nation government for its employees.
• Process to screen employees. Have in place a process to screen its employees. The end-user or consignee must screen its employees for substantive contacts with restricted or prohibited countries listed in 22 CFR 126.1². Substantive contacts include regular travel to such countries, recent or continuing contact with agents, brokers, and nationals of such countries, etc. Although nationality does not, in and of itself, prohibit access to defense articles, an employee who has substantive contacts with persons from countries listed in 22 CFR 126.1(a) shall be presumed to raise a risk of diversion, unless DDTC determines otherwise.
• Maintain tech security/clearance plan. End-users and consignees must maintain a technology security/clearance plan that includes procedures for screening employees for such substantive contacts and maintain records of such screening for five years. The technology security/clearance plan and screening records shall be made available to DDTC or its agents for civil and criminal law enforcement purposes upon request.
• Non-disclosure agreement. Have executed a Non-Disclosure Agreement that provides assurances that the employee will not transfer any defense articles to persons or entities unless specifically authorized by the consignee or end-user.

Any Person Granted Approval is Responsible for Acts of Employees, Etc.

Paragraph (b) of new 22 CFR 126.18 references 22 CFR 127.1(b) on violations, to state that any person who is granted a license or other approval 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.

New Definition of "Regular Employee" to Include Long-Term Contract Workers

The final rule adds a new definition of "regular employee" in new section 22 CFR 120.39 to expand the ITAR exemption to workers who have long term employment relationships with licensed end-users. (See final rule for definition.)

Exception for Exports in TAA/MLA for Signatories & Sub-Licenses Retained

In the proposed rule, DOS proposed to remove section 22 CFR 124.16, which allows for a limited exception for access to unclassified defense articles exported in furtherance of or produced as a result of a Technical Assistance Agreement/Manufacturing License Agreement (TAA/MLA), retransfer of technical data and defense services to dual and third-country national employees of licensed signatories that are nationals exclusively of NATO member states, the European Union, Australia, Japan, New Zealand, and Switzerland.

DOS states that a major concern among commenters was that with the removal of this section, this rule would not include approved sub-licenses. DOS agreed and has accordingly retained 22 CFR 124.16 in the final rule, and amended the section to include to the exception, dual or third-country nationals who are regular employees of the foreign signatory or approved sub-licensees.

(See final rule for conforming revisions to 22 CFR 124.8 on clauses required in TAA and MLAs.)

Highlights of State Responses to Comments

Thirty-two parties filed comments recommending changes to the proposed rule. The following are highlights of DOS' responses to comments:

Exemptions don't apply to classified data. New section 22 CFR 126.18(a) clearly states that, in the absence of explicit inclusion, this rule will not apply to classified data. DOS notes that the release of classified data to foreign persons is governed by separate National Disclosure directives and policies, and this rule is not a grant of a separate authority for the transfer of classified information.

Current rules are burdensome. The overwhelming majority of commenting parties expressed dissatisfaction with the current rule regarding dual and third-country nationals. Commenters also stated that current rules impose a large administrative burden, such as separate accounting and licensing of foreign nationals.

Defense services not included. Commenting parties recommended that the exemption provided in 22 CFR 126.18 be expanded to include "defense services". DOS states that because defense services are rendered to specific end-users in licenses or other authorizations, if the contemplated defense service involves defense articles already licensed to a company, the exemption would generally cover dual and third-country national employees receiving the defense service. Therefore, DOS deems it unnecessary to specifically add defense services to this rule.

Additional license required. Because licenses for international organization end-users will specify the locations and countries where an end-item will be utilized, DDTC believes that transfers to locations (and end-users) within the scope of the license poses no problems. However, any contemplated transfers beyond the authorized and licensed locations will require an additional license (or an amendment to an existing license). This rule is not intended to authorize unlimited transfers around the world for end-users with nominal connections throughout the globe.

Travel disclosures required. The intent of the rule is not to automatically disqualify a person to access a defense article on the basis of personal or business travel to a proscribed country listed in 22 CFR 126.1, where the travel does not involve contacts with foreign agents or proxies likely to lead diversion of controlled data or articles. Instead, full disclosure about travel is required, which would be the basis of an assessment of diversion risk on a case-by-case basis.

¹Defense article means any item or technical data designated in the U.S. Munitions List (22 CFR 121.1). The term "defense articles" includes technical data recorded or stored in any physical form, models, mockups or other items that reveal technical data directly relating to items designated in the USML but does not include basic marketing information on function or purpose or general system descriptions.

²The U.S. denies licenses and other approvals for exports or imports of defense articles and defense services, destined for or originating in Belarus, Cuba, Eritrea, Iran, North Korea, Syria, Venezuela, Burma, China, Liberia, Sudan, Cote d'Ivoire, Democratic Republic of Congo, Iraq, Lebanon, Sierra Leone, Somalia, Afghanistan, Haiti, Vietnam, and Sri Lanka.

(See ITT's Online Archives or 10/08/10 news, 10100817, for BP summary of a former DDTC Director criticizing this exemption.

See ITT's Online Archives or 08/11/10 news, 10081120, for BP summary of the proposed rule.)

DDTC Contact -- Charles Shotwell (202) 663-2792

(PN 7428, FR Pub 05/16/11)