••• EXPORT CONTROLS UPDATE •••
U.S. GOVERNMENT PROPOSES TRANSITIONING CERTAIN FIREARMS AND AMMUNITION FROM ITAR TO EAR
(This is the second of a two-part series.)

In my previous article, I reviewed the U.S. Government’s proposed rules to transition most firearms and ammunition away from the controls of the U.S. Department of State to those of the Department of Commerce. In this installment, I will examine the potential impact the proposed transition rules will have on the firearms and ammunition industries and review the objections raised by certain politicians, the anti-gun community and international human rights groups.

I. Impact on Firearms and Ammunition Industries

Of course, the proposed transition rules will have a dramatic impact on the way U.S. businesses conduct their export operations. It will be tempting, especially for companies who have known nothing but the seemingly unyielding restrictions of the State Department’s International Traffic in Arms Regulations (ITAR), to think the Commerce controls over exports are easier, friendlier or will mean fewer restrictions on how U.S. companies interact with their foreign partners and vendors. While in the long run many benefits may emerge from the transition, industry must exercise extreme care in how it adjusts its operations under the new rules, once they become final, so as to avoid the potential compliance pitfalls, some of which I address here.

Specially Designed

A critical concept in the proposed transition rules is the term, “Specially Designed.” Both the State Department’s ITAR and Commerce Department’s Export Administration Regulations (EAR) use this term to remove the catch-all controls currently present in the U.S. Munitions List (USML) Categories I, II and III and to designate what parts, components, accessories and attachments are subject to either the ITAR or the EAR. As the revisions to USML Cats. I, II and III are intended to make each category a positive list that includes only those articles warranting control under the ITAR, “specially designed” is an important qualifier that helps establish a bright line between those articles subject to the ITAR and those subject to the EAR.

In preparing for the transition to EAR controls, industry should be forewarned not to underestimate the time intensive process of classifying the parts, components, attachments and accessories for firearms under the proposed rules. A crucial element of this process is the specially designed analysis, which itself is complex and difficult to understand immediately. It would be foolish to skip over classification, as license requirements, applicability of license exceptions and restrictions are dependent on the classification, down to the specific ECCN paragraph or subparagraph. Further, export license applications will require identification of the specific subparagraph of control as well. The days of grouping minor parts and components under one entry (i.e., USML Cat. I(h)) are quickly coming to an end.

Brokering

No doubt many of you are wondering what effect the proposed transition rules will have on the State Department’s controls over brokering of firearms and ammunition. For years the brokering provisions of the ITAR (see generally 22 C.F.R. Pt. 129) have been a sore spot for many in the industry because of the broad scope of coverage. The ITAR defines the term “brokering activities” to mean any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport or retransfer of a U.S. or foreign defense article or defense service, regardless of origin (22 C.F.R. § 129.2(b)). Consequently, many U.S. parties have found themselves having to deal with ITAR registration and licensing even though they may not play a direct role in the export transaction (in the case of soliciting or promoting activities), or the transaction is completely offshore with the articles never coming within the boundaries of the United States.

So, a burning question for many is whether the ITAR brokering provisions will cease to apply for firearms and ammunition that transition to the Commerce Control List (CCL). Unfortunately, the proposed transition rules are not very clear on this.

Included within the Department of State’s proposed transition rules are several so-called “conforming changes” in other parts of the ITAR to remove references to firearms that will be controlled on the CCL. One such revision is to section 129.1 to clarify that regulations on brokering activities apply to defense articles and defense services designated on the USML as well as items described on the U.S. Munitions Import List (USMIL) for permanent import controls. The USMIL is promulgated by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) pursuant to the permanent import provisions of the Arms Export Control Act. ATF’s regulations are in 27 C.F.R. Pt. 447, and the USMIL is in 27 C.F.R. § 447.21. ATF has made it very clear that the USMIL is delinked from the USML, so that any revisions made to the USML do not automatically apply also to the USMIL. Instead, ATF must issue its own separate rulemaking to revise the USMIL. And ATF has not, and indeed has no plans, immediate or otherwise, to remove firearms and ammunition off the USMIL.

But did I just say that the proposed transition rules state that the brokering regulations will continue to apply items remaining on the USML as well as items on the USMIL? Yes.

According to DDTC, “The items that will move to the CCL for export control purposes, yet are on the USMIL for permanent import purposes, remain subject to the brokering requirements of [ITAR] part 129 with respect to all brokering activities, including facilitation in their manufacture, export, permanent import, transfer, reexport, or retransfer.” 83 Fed. Reg. at 24199 (May 24, 2018).

However, the proposed revision in section 129.2 adds release language. In a new paragraph (vii) in 129.2(b), activities that are NOT considered brokering activities would include: “Activities by persons to facilitate the export, reexport, or transfer of an item subject to the EAR that has been approved pursuant to a license or license exception under the EAR or a license or other approval under this subchapter.” (Emphasis added).

Arguably, this release language is very broad as written because the clause, “that has been approved,” does not limit said past approvals to the person engaging in the activities. Further, the broad language could very well mean the past approvals may be from either an EAR or an ITAR authorization.

Of course, the proposed rules are not yet final, so it remains to be seen how the language may change, if at all, and what kind of guidance the State Department may provide on the applicability of the brokering regulations to firearms and ammunition that transition to CCL.

Electronic Export Information Filings to Automated Export System

A critical change in the proposed rules lies within the Department of Commerce proposed rule relating to the Electronic Export Information (EEI) filings to Automated Export System (AES). According to the proposed rule, AES filings would be required for exports of all firearms transitioned to the CCL from the USML, regardless of value or destination. This requirement would also extend to temporary exports under the EAR license exceptions.

In addition, the rule proposes to expand the required data elements of AES filings to include serial numbers, make, model and caliber for such firearms. If this carries over into the final rule, this will have an enormous negative impact on industry.

Temporary Imports

The proposed Commerce rules set out a new process in 15 C.F.R. § 758.10 for temporary imports of items subject to both the EAR and the USMIL. The process would impose entry clearance requirements for firearms temporarily imported into the United States for a period not to exceed 1 year and then would require the use of the TMP license exception for the return export. This 1-year period is significantly shorter than the 4-year period currently enjoyed under an ITAR license or use of an ITAR exemption.

For the inbound transaction, U.S. Customs and Border Protection would be charged with collecting identifying information necessary to track the items temporarily imported, such as the list of firearms with serial numbers, model, make, quantity and value, as well as other import and supporting documents. For the export, a license would not be required, but CBP would match the export to the information received upon entry. Firearms may not be imported from or ultimately destined to certain proscribed or restricted countries, and the proposed rule includes language that would instruct importers to contact CBP at the port of import or export for the proper procedures to provide any data or documentation required by BIS.

II. Objections to the Proposed Transition Rules

It should come as no surprise that the proposed transition rules are vehemently opposed by gun control advocates, such as Americans against Gun Violence, Amnesty International, Global Exchange, the Brady Center and Brady Campaign to Prevent Gun Violence and Giffords Law Center to Prevent Gun Violence, to name just a few. Their arguments, focused primarily on the myth that the transition will result in a decontrol of firearms and ammunition, include the following (taken from public comments submitted to the U.S. Department of State, Directorate of Defense Trade Controls, in response to the proposed amendments to USML Cats. I-III, posted to the DDTC website on July 25, 2018, and available at pmddtc.state.gov/?id=ddtc_public_portal_news_and_events (last visited Aug. 15, 2018)):

• A supposed deregulation of firearms and ammunition, especially so-called “semi-automatic assault rifles,” because of their reclassification as non-military firearms;
• Elimination of Congressional oversight over firearm deals;
• Elimination of end-use controls and weakening existing controls on transfers; and
• Enabling unchecked gun production in the United States.

Several democratic Senators have also weighed in opposing the proposed rules. In comments submitted on July 9, 2018, Senator Menendez, Ranking Member on the Committee on Foreign Relations, along with Senators Cardin and Feinstein charge the transition will “result in less rigorous oversight of the export of these deadly weapons.” The Senators are also concerned over any threat to Congressional oversight over proposed foreign arms sales.

The media has contributed significantly to stirring up opposition, with headlines such as, “Trump Opens Door for U.S. Gun Industry to Sell More Firearms Abroad” (Huffington Post, May 24, 2018), “Trump Favors Arms Industry in Efforts to Loosen Export Controls” (Arms Control Association, June 7, 2018), “U.S. Easing of Gun Export Controls Could Send New Wave of Arms to LatAm” (Insight Crime, May 15, 2018).

In response to the opposition, it is important to emphasize the proposed transition rules would not result in a decontrol or deregulation of any firearm or ammunition. As the U.S. Department of State makes very clear in its fact sheet, dated May 24, 2018, and available at state.gov/t/pm/rls/fs/2018/282485.htm (last visited Aug. 16, 2018), firearms and ammunition moved to the EAR controls will continue to require U.S. Government authorizations for exports. In short, the proposed changes are to processing, not policy.

Indeed, the proposed transition rules are a right-sizing of U.S. export controls and will allow for more tailored oversight. End-use monitoring will continue, including vetting of potential end-users, and the Department of State will remain very involved in the review of export license applications for national security and foreign policy reasons.

In addition, the Office of Export Enforcement (OEE) within the Commerce Department’s Bureau of Industry and Security (BIS) has sworn federal law enforcement officers who have the authority to make arrests, execute search warrants, serve subpoenas and detain and seize goods that are about to be illegally exported. Contrary to the myth that the Commerce Department does not have the resources to enforce export controls, OEE special agents work with BIS licensing officials and policy staff to deter exports of any items that would damage the national security or foreign policy interests of the United States.

III. Closing Thoughts

When the revised USML Categories are finalized (expected sometime in the first quarter of 2019), industry will need to undergo a thorough review and reclassification of all inventory, including software and technical data, and will need to update internal processes, procedures and systems to implement the changes. Training of both employees and customers (both foreign and domestic) should occur to ensure the new requirements are understood and followed.

While the Department of Commerce may have more flexible licensing requirements, industry must understand the constraints of those requirements to take advantage of the new licensing structure and must be mindful of the restrictions that will continue to apply to certain activities. ATF’s permanent import controls under the Arms Export Control Act will continue to restrict imports of defense articles from certain countries in accordance with U.S. foreign policy. So, even though the new rules may make it possible to have firearm or ammunition parts or components made in China under the EAR, said parts or components will not be importable if they fall on the USMIL because of the arms embargo in place under the AECA. It remains to be seen whether the changes to U.S. export controls over firearms and ammunition will be a blessing or a curse, or more likely, somewhere in between.

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The information contained in this article is for general informational and educational purposes only and is not intended to be construed or used as legal advice or as legal opinion. You should not rely or act on any information contained in this article without first seeking the advice of an attorney. Receipt of this article does not establish an attorney-client relationship.

About the Author Johanna Reeves is the founding partner of the Washington, D.C. law firm Reeves & Dola, LLP (reevesdola.com). For 15 years she has dedicated her law practice to advising and representing U.S. companies on compliance matters arising under the federal firearms laws and U.S. export controls. Since 2011, Johanna also has served as Executive Director for the F.A.I.R. Trade Group (the Firearms and Ammunition Import/Export Roundtable) (fairtradegroup.org). Since 2016, Johanna has served on the Defense Trade Advisory Group (DTAG). Johanna can be reached at 202-683-4200 or at jreeves@reevesdola.com.

This article first appeared in Small Arms Review V22N9 (November 2018)

••• EXPORT CONTROLS UPDATE •••

U.S. Government Proposes Transitioning Certain Firearms and Ammunition from ITAR to EAR
(This is the first of a two-part series.)

On May 24, 2018, the U.S. Government announced its intent to transition most firearms and ammunition away from the export controls of the Department of State to those of the Department of Commerce. The cited reason for the change is to revise the scope of the Department of State’s jurisdiction to cover only those weapons or articles that are inherently for military use or that provide the United States with a critical military or intelligence advantage. All other items will transition to the Department of Commerce’s control.

As expected, the proposed rules have prompted a considerable amount of objection. Political adversaries to President Trump have accused the Administration of catering to the gun lobby with callous insensitivity to the brutal crimes inflicted on American society. Similarly, anti-gun groups such as the Giffords Law Center and others have spun the proposed transition as making it easier for weapons to flow because there will be little or no oversight into the activities of arms manufacturers and brokers of semi-automatic assault weapons.

Contrary to those opinions, the fact is the proposed transition rules are not a decontrol over the manufacture, transfer or export of firearms and ammunition. Indeed, the proposed changes are a shifting of oversight responsibility that is long overdue and will help strengthen the national security of the United States by ensuring that export licensing authorities can focus on reviewing proposed exports of items warranting stringent controls rather than waste resources on export licensing for springs and bolts or for items that are abundant throughout the world.

Indeed there will be many positive things that come out of the proposed transition for the firearms and ammunition industries. However, the changeover to a largely unfamiliar regulatory scheme will not be easy, as we have seen with the other defense sector industries that already have dealt with the “Export Control Reform” efforts of the Obama Administration.

This article is the first in a two-part series that will examine the proposed transition rules, the potential impact on the firearms and ammunition industries and responses to the predominant objections to the proposed rules.

I. The Export Control Lists

Under current U.S. export controls, two primary federal agencies with licensing jurisdiction are the Department of State and the Department of Commerce. (The Department of the Treasury’s Office of Foreign Assets Control (OFAC) also issues licenses under U.S. economic and trade sanctions. However, this article does not address OFAC licensing, as the focus is on the State and Commerce proposed transition rules.) The Department of State, pursuant to the Arms Export Control Act, controls the exports and temporary imports of “defense articles” and “defense services” through its regulations known as the International Traffic in Arms Regulations (ITAR). Articles and information subject to the ITAR are listed on the U.S. Munitions List (USML).

The Department of Commerce controls through its regulations, known as the Export Administration Regulations (EAR), the exports and re-exports of items not listed on the USML, which may have civilian-, military-, terrorism- or weapons-of-mass-destruction-related applications. Items subject to the EAR are listed on the Commerce Control List (CCL).

Currently, most small arms and ammunition are listed on the USML and therefore subject to the license requirements and restrictions of the ITAR. The only firearms not controlled under the ITAR are certain types of non-combat shotguns and associated ammunition, both of which are listed on the CCL, and as an important aside, currently require licensing to most countries in the world.

Both the ITAR and the EAR prescribe export license requirements and restrictions in furtherance of the national security and foreign policy interests of the United States. However, there are some significant differences between the two regulatory regimes. Below are some illustration of key differences.

1. Controls over Technical Data

ITAR controls apply to exports, re-exports and temporary imports of not just hardware but also technical data (including software) and assistance related to defense articles. ITAR controls over so-called “Defense Services” are broad and extend to use and operation, not just design, development and production.

By comparison, the EAR controls only transmission of certain technology, and there is no corresponding concept of defense service controls. EAR controls over “technology” are more narrowly focused than the ITAR controls over technical data and apply in limited contexts. Consequently, there are many activities involving training, presentations and demonstrations to foreign persons that may not trigger a license requirement under the EAR as they do under ITAR.

In addition, the EAR do not control published technology or software “when it has been made available to the public without restrictions upon its further dissemination … .” For example, subscriptions available without restriction, libraries or other public collections open to the public and from which the public can obtain tangible or intangible documents, unlimited distributions at a conference, seminar, trade show or exhibition generally accessible to the public, public/unlimited distribution in any form, including posting on the Internet on sites available to the public. Many may rejoice over this, as the ITAR still do not recognize the Internet as being in the “public domain.”

As further illustration of technology not controlled under the EAR, the BIS proposed rule cites the example of a gun manufacturer posting a firearm’s operation and maintenance manual on the Internet, making it publicly available to anyone interested in accessing it and without restrictions on further dissemination. According to the proposed rule explanation, such operation and maintenance information included in that published manual would no longer be “subject to the EAR” as placing it on the Internet would put it in the “public domain.” Nonproprietary system descriptions, including for firearms and related items, are another example of information that would not be subject to the EAR.

2. Controls over Brokering

The ITAR control “brokering activities,” which is defined as any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, re-export, or retransfer of U.S. or foreign defense articles or defense services, regardless of origin. However, there are no similar controls on the EAR side. I will address the impact of the proposed rules on brokering in more detail below.

3. Registration

The ITAR require registration of all U.S. manufacturers, exporters and brokers of defense articles and defense services. The annual fee for this registration ranges from the minimum $2,250 to $2,750 plus $250 for each license/approval obtained during the preceding 12-month period. Conversely, the EAR do not require registration, and there are no fees associated with license applications.

4. Re-exports of Parts and Components

Under the ITAR, any change in end-user or end-use as described in the original export license requires, with very few exceptions, prior authorization from the Department of State. This re-export or retransfer approval requirement extends to all USML-listed articles, even parts and components that are incorporated into a finished item overseas, and follows the articles for life, regardless of the number of times the article changes hands. This causes foreign customers great consternation and is what many have termed the “ITAR taint.” Currently, all parts and components for firearms listed in USML Cat. I are also defense articles, down to springs and bolts, and therefore subject to the ITAR licensing requirements and restrictions for re-exports.

The EAR re-exports controls over parts and components are very different. Foreign-made commodities that incorporate EAR-controlled U.S.-origin commodities may be subject to the EAR only if they have de minimis level of U.S. content. What constitutes the de minimis level depends on the commodity and the destination country for the re-exports and may range from no de minimis levels (for items subject to higher controls) to 10% or 25% de minimis.

II. Efforts to Reform U.S. Export Controls

In 2009, the Obama Administration announced its intention to reform the U.S. export control system, which it saw as overly complicated with too many redundancies to effectively support the national security and foreign policy interests of the United States. Through this “Export Control Reform” (ECR) initiative, the U.S. Government would bring U.S. export controls in line with current global threats by focusing on critical technologies and strengthening the competitiveness of key U.S. manufacturing and technology sectors. ECR was to consist of three stages: Phases I and II would focus on reconciling the various definitions, regulations and policies for export controls, while building toward Phase III, which would create a single control list, single licensing agency, unified information technology system and enforcement coordination center.

By the time President Trump took office in 2017, significant strides had been made under ECR, but clearly it was still a work in process. Phases I and II were largely complete, but not all USML categories had been revised to transition items no longer warranting control as “defense articles” to the CCL. Those untouched by ECR? Categories I, II and III, which control firearms and ammunition.

III. Proposed Rules to Transition Firearms and Ammunition from USML to CCL

After much anticipation and false starts, the Departments of Commerce and State finally published on May 24, 2018, their respective proposed rules to transition most firearms and ammunitions from the USML over to the CCL. Although no longer branded “ECR,” this is a continuation of the U.S. Government’s effort to modernize U.S. export controls and better focus ITAR controls over only those weapons or articles that are inherently for military use or that provide the United States with a critical military or intelligence advantage.

Contrary to many of the objections voiced by politicians and anti-gun groups, the transition from USML to CCL will NOT result in a decontrol of firearms or ammunition. Firearms transitioning from the USML to CCL will be subject to controls under National Security (NS), Regional Stability (RS), Crime Control and Detection (CC), Firearms Convention (FC), United Nations Sanctions (UN) and Anti-Terrorism (AT). Indeed, the proposed rules make it abundantly clear that BIS will require licenses to export or re-export to ANY country firearms or other weapons that transition from the USML to the CCL. Yes, this includes Canada.

The chart summarizes the firearms and ammunition slated to transition from the USML to the CCL once the rules are finalized.

Not all firearms and ammunition are slated to transition over to the EAR. Indeed, there are several types of firearms and ammunition that will remain subject to the ITAR. For example, some of the firearms that will remain in USML Cat. I include fully automatic firearms to and including .50, fully automatic shotguns, regardless of gauge, silencers, mufflers and sound suppressors and specially designed parts and components therefore and magazines and drums with a capacity greater than 50 rounds.

In addition, it should be noted that the words “combat shotguns” (currently in the text of USML Cat. I(d)) do not appear in the proposed Department of State rule. However, the companion Commerce proposed rule states that “combat shotguns” and fully automatic shotguns are subject to the ITAR. Nowhere is the term “combat shotgun” defined, so it is unclear at this point whether the USML Cat. I will include a specific entry for “combat shotguns” in addition to fully automatic shotguns.

The types of ammunition that will remain in USML Cat. III include ammunition preassembled into links or belts and projectiles that contain a core or solid projectile produced from one or a combination of the following: tungsten, steel or beryllium copper alloys.

For a complete list of the articles targeted to remain on the USML and subject to the ITAR, please consult the Department of State proposed rule, available on the Federal Register website at federalregister.gov/documents/2018/05/24/2018-10366/international-traffic-in-arms-regulations-us-munitions-list-categories-i-ii-and-iii.

IV. Conclusion

On May 24, 2018, the U.S. Government announced its intent to change forever the way firearms and ammunition are exported. In addition to examining the potential impact the transition will have on the firearms and ammunition industries, the next “Legally Armed” column will review and respond to the objections raised by certain politicians, the anti-gun community and international non-governmental organizations. Please stay tuned.

•••

The information contained in this article is for general informational and educational purposes only and is not intended to be construed or used as legal advice or as legal opinion. You should not rely or act on any information contained in this article without first seeking the advice of an attorney. Receipt of this article does not establish an attorney-client relationship.

NOTE: The “Legally Armed” column in SAR Vol. 22, No. 7 on “The Impact of Mass Violence on Gun Control in the United States” contained erroneous dates. Please note the following:

1. The section related to the Brady Act contained a section header that read “1991.” The heading should read “1993.”

2. The Fix NICS Act of 2017 was enacted as part of the consolidated Appropriations Act, 2018 (signed by the President on March 23, 2018). This occurred after the column was drafted, but before the column was published in SAR.

About the Author

Johanna Reeves is the founding partner of the Washington, D.C. law firm Reeves & Dola, LLP (reevesdola.com). For 15 years she has dedicated her law practice to advising and representing U.S. companies on compliance matters arising under the federal firearms laws and U.S. export controls. Since 2011, Johanna also has served as Executive Director for the F.A.I.R. Trade Group (the Firearms and Ammunition Import/Export Roundtable) (fairtradegroup.org). Since 2016, Johanna has served on the Defense Trade Advisory Group (DTAG). Johanna can be reached at 202-683-4200 or at jreeves@reevesdola.com.