Defense Trade Controls: State and Commerce Departments Begin 2023 with Regulatory Focus on Defense Services and Other Updates

The U.S. Department of State (State Department) and U.S. Department of Commerce (Commerce Department), have recently previewed, proposed or finalized changes to relevant trade controls. These new regulatory updates include amendments to the defense trade controls, updated guidance on the provision of defense services by U.S. persons abroad (USPAB), increases to the State Department’s civil monetary penalties, and legislative amendments that expand the Commerce Department’s authority to issue military end use controls under the Export Administration Regulations (EAR).

State Department 2023 Agenda Previews Amendments to Defense Trade Controls and a Finalized Telework Rule

The State Department recently published its Fall 2022 Unified Agenda of Regulatory and Deregulatory Actions, which previews the agency’s regulatory agenda and expected new rulemaking. The State Department’s Directorate of Defense Trade Controls (DDTC) administers the International Traffic in Arms Regulations (ITAR), which controls defense articles and services identified on the U.S. Munitions List (USML). Within the agenda, the State Department previewed several planned amendments and revisions to the USML, including:

• Addition of controls on critical and emerging technologies that are not yet subject to regulation as defense articles, as well as removal of items that no longer warrant control
• Amendment to controls on “circuit boards and semiconductors considered to be military electronics (USML Category XI, paragraphs (c)(1) through (4)); launch vehicles, ballistic missiles and other items (USML Category IV); night vision equipment (USML Category XII); spacecraft and related items (USML Category XV); and nuclear weapons related articles (found in USML Category XVI), to better harmonize with the Department of Energy’s Part 810 regulations concerning nuclear technology and services
• Expansion of the types of defense articles and services that can be exported to certain close U.S. allies (Australia, Canada and the United Kingdom)

The State Department will propose an amendment to the ITAR that would update the definition of “regular employee” currently defined under ITAR Section 120.64. The revised definition would allow subject persons to work remotely and clarify the contractual relationships that meet the definition of regular employee.

The current definition of regular employee includes an individual who is (i) permanently and directly employed by the company, or (ii) a long-term contractor subject to the control of a company and who works full-time and exclusively at a company facility. This change follows the DDTC’s proposed rule published in May 2021 that would permanently allow employees involved in certain ITAR activity to work remotely and still be considered regular employees, which received industry support. However, public comments reflected disappointment that the definition did not sufficiently address short-term contractual employees.

The adjusted definition is a response to the remote work environment resulting from the COVID-19 pandemic, which has shaped new work conditions and flexibility of physical location of employees for many companies that operate in the defense space. The regulatory revision would allow certain personnel operating under technical assistance agreements (TAAs), license agreements or other exemptions to continue those services while working remotely. However, companies could face compliance challenges as they update compliance procedures to ensure adequate controls on remote employees’ access to and handling of ITAR technical data.

As this is just the announcement of the regulatory agenda, none of the specific details have yet been released. For the new items on the docket, a proposed rule, or an interim final rule, is expected to be published in the Federal Register to provide industry with the opportunity for public comment during an allotted period. For items already in progress, such as the telework rule that has already gone through the proposed rule and comment process, a final rule is expected for publication in the Federal Register.

DDTC Updated Guidance on US Persons Abroad Providing Defense Services

On January 5, 2023, DDTC published updated website guidance on the authorization of defense services by USPAB. Updates include:

• Detailed directions for submission of USPAB authorization requests, which outline how the agency defines USPABs, limitations of USPAB authorizations, logistics on how USPABs can apply to DDTC for authorization and application content requirements
• A new sample certification letter for USPAB authorization requests
• A new submission letter template for USPAB authorizations
• An updated set of frequently asked questions (FAQs), providing expanded detail on the scope of regulated activity and the processes for applying for, qualifying for and working under an authorization

Notably, the updated DDTC FAQs reinforced that:

• Authorization applications for USPABs cannot cover multiple potential employees at one time, as the authorization is unique to the employee (the authorized party) and is not issued to the foreign employer.
• If a U.S. person is furnishing defense services without authorization, that U.S. person should submit a voluntary self-disclosure, but they may apply for an authorization while the submitted voluntary disclosure is under review.
• There is a distinction in treatment of authorization of individuals who meet the criteria of a U.S. person working abroad versus those who are conducting remote work for a foreign entity while traveling or residing in the U.S. Individuals in the U.S. require ITAR registration and traditional licensing, while individuals abroad require DDTC authorization in the form of a General Correspondence (GC) letter but without registration, to furnish limited defense services in connection with their employment.
• If a USPAB’s job description changes, a new authorization is required.

DDTC also clarified that USPAB authorizations do not always provide authorization for the USPAB in question to telework, and that those case-by-case assessments depend on the residency status and physical location of the person while teleworking. Additionally, authorizations do not cover scenarios where a USPAB travels to the U.S. for “a technical meeting or a trade show” and provides defense service to a foreign person while physically in the U.S., which DDTC noted as a scenario that would require a separate authorization.

State Department Increases 2023 Civil Monetary Penalties

On January 11, 2023, the State Department published a final rule that increases the civil monetary penalties within Section 127.10 of the ITAR.

Section 9708 of the National Defense Authorization Act for Fiscal Year (NDAA) for Fiscal Year 2023 (Pub. L. 117-263) amended Section 38 of the Arms Export Control Act (AECA), which is the statutory authority for the ITAR. The new maximum civil penalty for ITAR violations is now the greater of $1.2 million or twice the value of the transaction that is the basis of the violation with respect to which the penalty is imposed. The new statutory amounts only apply to penalties assessed for violations occurring on or after December 27, 2022. Criminal penalties remain the same, and an individual can be fined for each violation not more than $1 million, imprisoned not more than 20 years or both (22 U.S.C. § 2778(c)).

The amendment is in line with the trend of increased penalties across agencies to keep up with inflation under the Federal Civil Penalties Inflation Adjustment Act of 1990 (Pub. L. 101-410), as amended by the Debt Collection Improvement Act of 1996 (Pub. L. 104-134). On January 3, 2023, the Commerce Department increased its civil monetary penalty under the Export Control Reform Act of 2018 (ECRA) for inflation, making the new maximum penalty $353,534. On January 13, 2023, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) increased its civil monetary penalty for inflation under the International Emergency Economic Powers Act (IEEAP) (50 U.S.C. 1701-1706, at 1705) for 2023 to $356,579.

Commerce Department Gains Greater Authority to Regulate US Person Support of Foreign Miliary Activities Under ECRA

Section 5589 of the NDAA (Pub. L. 117-263) amended Section 4812 of ECRA to expand the authority of the Commerce Department’s Bureau of Industry and Security (BIS) to regulate U.S. person activities related to foreign military, security or intelligence services. Previously, ECRA provided BIS with authority to regulate activities related to foreign military intelligence services, but not those related to military or security services more broadly.

Importantly, controls adopted by BIS pursuant to this authority apply regardless of where U.S. persons are located and even when commodities, software or technology subject to the EAR are not involved. This authority is currently implemented in Section 744.6 of the EAR, which restricts U.S. persons’ activities with respect to nuclear proliferation; military intelligence in Belarus, Burma, Cambodia, the People's Republic of China, Russia, Venezuela, or a country listed in Country Groups E:1 or E:2; and, most recently, certain advanced chip production activities in China.

The amendment allows the U.S. government to further regulate the provision of defense-related services by U.S. persons, even where those services do not involve defense articles or other tactical training or support, which are currently captured by the ITAR. However, it remains to be seen how BIS will choose to implement this new authority: targeting just the arms embargoed countries in Group D:5 or subject to the Military End User Rule (15 CFR § 744.21); focusing on issues related to 600-series items and other more sensitive controlled items; or something broader.

Conclusion and Key Takeaways

• These recent defense trade controls updates may require companies to reevaluate existing compliance policies and procedures to adapt to the newly proposed changes.
  
• Companies engaged in activities subject to the ITAR should pay close attention to how the new regulations could impact their workforce and any existing authorizations related to defense services.
  
• Maximum penalties are increasing for violations of all trade control regulations and should be considered in business risk analyses.

If you have any questions about any of the highlighted changes or implications for your business, or on any general international trade and compliance matters, please contact the authors of this alert.