V&E Export Controls and Economic Sanctions E-communication, August 15, 2011
By Suzanne Reifman
Effective August 15, 2011, the International Traffic in Arms Regulations (ITAR) was amended to modify requirements for providing access to defense articles and technical data to “dual nationals” and “third-country nationals.” The ITAR revisions, which include a new exemption at ITAR § 126.18, were implemented to address concerns that previous requirements conflicted with certain foreign human rights laws and created a compliance burden.
The U.S. Department of State’s Directorate of Defense Trade Controls (DDTC), which administers the ITAR, has long considered an export to a foreign person to be an export to that person’s country of nationality. DDTC traditionally has considered all nationalities that a foreign person may possess, including country of birth and other countries in which a person has obtained citizenship or permanent residency. As a result, in cases where an export to a foreign party was permissible through an approved authorization or exemption, an export to the foreign party’s employee generally was not permissible if the employee was a dual national (citizen or national of another non-U.S. country, in addition to that of the employer) or a third-country national (citizen or national of a non-U.S. country that is not the country of the employer). A limited retransfer authorization has been available pursuant to ITAR § 124.16.
The new exemption at ITAR § 126.18 provides a mechanism by which foreign companies, foreign government entities, and foreign international organizations (including approved sublicensees) that are authorized to receive unclassified defense articles and technical data may provide such articles and data to their dual national and third-country national employees who otherwise would be unable to have access. The new exemption attempts to consider the risks presented by nationality in a more nuanced fashion. However, risk management primarily is the responsibility of the foreign recipient of defense articles and technical data. Notably, in cases when foreign employees do not have security clearances, the foreign employer must implement a technology security/clearance plan, which must include screening for “substantive contacts” with restricted ITAR § 126.1 countries. In posted guidance DDTC has indicated that contacts with individuals from other countries with a pattern of diversion must also be screened. In addition, screening and recordkeeping requirements imposed by ITAR § 126.18 may still conflict with certain foreign laws. As a result, U.S. and foreign companies that plan to make use of the new exemption will need to carefully consider its requirements in order to navigate potential compliance challenges.
The addition of the § 126.18 exemption and related provisions to the ITAR is part of the U.S. government’s ongoing effort to reform the U.S. export control system. Before the new exemption was effective, U.S. companies seeking to export defense articles or technical data to a foreign party pursuant to a DDTC authorization or exemption generally were required to obtain specific approval to allow the foreign party’s dual or third-country national employees to access such materials. Complying with this requirement meant that the foreign party had to obtain nationality and place-of-birth information from its employees, which often conflicted with local anti-discrimination, human rights, and privacy laws. The only real relaxation of this requirement was a special retransfer authorization at ITAR § 124.16, which applies to dual nationals and third-country nationals from the member states of NATO and the European Union, Australia, Japan, New Zealand, and Switzerland, and is limited to access provided under a Technical Assistance Agreement or Manufacturing License Agreement.
Provisions of ITAR § 126.18
Under ITAR § 126.18, U.S. exporters no longer need to obtain approval from DDTC for authorized foreign parties to transfer unclassified defense articles, including technical data, to their dual and third-country national employees, as long as “effective procedures” are in place to prevent diversion. The foreign party can satisfy the effective procedures requirement in two ways: (i) require a security clearance approved by the host nation government for the foreign party’s employees or (ii) implement a technology security/clearance plan that includes a process for screening employees for “substantive contacts” with prohibited countries listed in § 126.1. Although the language of § 126.18 focuses on § 126.1 countries, July 26, 2011 guidance posted by DDTC on its website indicates that “contacts with individuals from other countries with a pattern of diverting defense articles” also need to be disclosed. The exemption provides that substantive contacts include regular travel to § 126.1 countries; recent or continuing contacts with agents, brokers, and nationals of § 126.1 countries; continued demonstrated allegiance to such countries; business relationships with individuals from such countries; continuing to maintain residences in such countries; receiving salary or monetary compensation from such countries; or “acts otherwise indicating a risk of diversion.” DDTC's July 26 guidance also provides a questionnaire that foreign employers may use to assess an employee's possible substantive contacts. Screening records must be maintained by the foreign employer for five years and be made available to DDTC upon request. These employers must also ensure that their dual national and third-country national employees execute a Non-Disclosure Agreement (DDTC has provided a template for industry on its website).
Limitations on Use of ITAR § 126.18
The new exemption at ITAR § 126.18 only applies to intra-company, intra-organization, and intra-governmental transfers of unclassified defense articles and technical data (DDTC did not include the term “defense services”) to employees who are dual nationals or third-country nationals. It does not apply to transfers involving academic institutions or transfers of classified equipment or data. Use of the exemption is also limited to situations where the dual or third-country national is a “regular employee” of the foreign party. Under another new section, ITAR § 120.39, a “regular employee” includes permanent direct employees and long-term contract employees who meet certain specified criteria. The exemption further requires that the transfer of the defense articles or technical data 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, and be within the scope of an approved export license, other export authorization, or license exemption. In other words, the use of the exemption is limited to what is authorized under the underlying export authorization and is limited to the particular dual national or third-country national employee. Retransfer to the employee’s home country(ies) is not authorized.
It should be noted that the addition of ITAR § 126.18 does not affect an exporter’s ability to use the existing retransfer authorization at § 124.16, which is not subject to the same requirements as ITAR § 126.18 and, therefore, will be a more advantageous option for exporters, to the extent it applies. Additionally, exporters remain free to request DDTC approval for particular dual nationals and third-country nationals working under an agreement under ITAR § 124.8(5). As part of posted guidance relating to the new ITAR amendment, DDTC has identified new verbiage relating to dual nationals and third-country nationals that should be included in licenses and agreements.
ITAR § 126.18 reduces certain burdens on U.S. exporters associated with dual and third-county national employees of foreign licensees and sublicensees, but this is primarily because the burden has shifted to the foreign employers who receive the defense articles and technical data. In cases where the employees of the foreign party do not have security clearances, devising and implementing effective screening procedures to detect substantial contacts may prove challenging. Although DDTC has indicated in posted guidance that “as a last resort” foreign companies can submit a General Correspondence to determine whether a particular activity would be considered a substantive contact, it is unlikely that most foreign parties will avail themselves of this option. Furthermore, since DDTC has not relaxed its standard for how foreign nationality should be considered (e.g., country of birth and all other nationalities still need to be evaluated), foreign parties will still have to investigate/screen their employees in order to identify substantive contacts, which may still conflict with foreign laws. Finally, just as foreign parties will need to develop appropriate procedures to prevent diversion, U.S. exporters will need to determine the type of compliance assurances from the foreign recipients of their defense articles and technical data that may be appropriate to ensure the requirements of § 126.18 are being met.
Although ITAR § 126.18 clearly relaxes certain licensing requirements relating to dual national and third-country national employees, the compliance challenges associated with the exemption need to be carefully considered by both U.S. and foreign parties.
Vinson & Elkins is available to assist clients in implementing the compliance requirements associated with this new exemption. Please contact Vinson & Elkins lawyers Kathleen Little or David Johnson for more information. Visit our website to learn more about V&E’s Export Controls and Economic Sanctions practice, or e-mail one of the practice contacts.