Oct. 27 2009 02:08 PM

Have you ever thought of turning down a sale due to the complexity of having to comply with US government regulations? Most likely the thought has crossed your mind when negotiating a sales opportunity with a non-US entity due to the vast array of government regulations surrounding the sale of military items and/or technology. These regulations are contained in the International Traffic in Arms Regulations, or as trade professionals refer to it, the ITAR.

ITAR is an acronym that strikes fear in the heart of many seasoned international trade professionals — individuals with years of experience navigating US regulations in order to legally conduct cross-border trade between individuals, businesses and/or governments. The ITAR is the 22nd title of the Code of Federal Regulations Subchapter M (as amended from the Federal Register notated as "22 CFR §") and details the regulations required for the lawful export of goods and technology that fall under the purview of the US Department of State. This includes obvious items such as munitions and weaponry, and not so obvious items such as commercial mirrors, cables and circuits that can be used in a military capacity (i.e., building a power plant or creating a military-operated computer system). In addition, it is also possible to have an item created that can be used in both a military and commercial application (known as "dual use") which can further complicate the matter. Distinguishing between purely commercial items and those with potentially military use is a challenge faced by trade professionals on a daily basis.

Step 1: Commodity Jurisdiction
A business needs to first determine which export regulations to use before diving into the ITAR in order to fill out the required cross-border paperwork for a good with potential militant use. Different regulations are put forth by a variety of US Government agencies such as the Department of State, Department of Commerce, Bureau of Industry & Security, Department of Energy, Nuclear Regulatory Commission and Food & Drug Administration. To determine the correct agency, the business may need to submit a "Commodity Jurisdiction Determination Request, 22CFR §120.4" (CJ) to the US Department of State. This is the process where the exporter must consider if the item may be designated or determined in the future to be a defense article (see 22 CFR §120.6) or defense service (see 22 CFR § 120.9) if it: 
• Is specifically designed, developed, configured, adapted, or modified for a military application, and 
o Does not have predominant civil applications, and 
o Does not have performance equivalent (defined by form, fit and function) to those of an article or service used for civil applications; 
• Is specifically designed, developed, configured, adapted, or modified for a military application, and has significant military or intelligence applicability such that control under this subchapter is necessary; and 
• The intended use of the item after its export (e.g., for a military or civilian purpose) is not relevant in determining whether the article or service is subject to the controls of this subchapter. "Any item covered by the US Munitions List must be within the categories of the US Munitions List (USML). The scope of the US Munitions List shall be changed only by amendments made pursuant to section 38 of the Arms Export Control Act (22 USC. 2778)."

Researching and filling out a CJ can be a difficult and time-consuming task. Those businesses not able to comfortably make the determination can submit a CJ request to the US Department of State, specifically the Directorate of Defense Trade Controls (DDTC). Preparing and filing a CJ Determination Request to the DDTC should be a last effort businesses take to properly navigate the ITAR after using used internal or third-party resources. DDTC should only be involved in situations where the determination is difficult. DDTC's responses can vary in time but are usually within 45 days; however, they will provide a preliminary response within 10 days and provide a case number. If after 45 days, DDTC has not provided a final commodity jurisdiction, the requestor can submit a request for expedited processing. Failure to include all of the necessary information on the product / proposed product and address all the issues provided in the DDTC guidelines for CJ preparation will result in delay in processing or possibly returned without action (RWA). This will result in the need for resubmission of the case to address the reasons for the RWA.

If the item meets the criteria listed above, then it is subject to the ITAR. If it doesn't meet the criteria, then the item is most likely subject to other government regulations, including but not limited to: The Department of Commerce's Export Administration Regulations (DoC EAR), The US Nuclear Regulatory Commission (NRC), The Bureau of Alcohol, Tobacco, Firearms and Explosives (BATF) and more. Before passing any specifications to another company or involving a non-US person (as defined in the ITAR § 120.15), a business needs an authorization from DDTC in the form of a license or agreement approval, and before that can be done, the business needs to be registered (if not already) with the DDTC. However, it is important to note that registration is not required to request a CJ as specified under 22 CFR § 120.4(b).

Step 2: Classification
Congratulations! Once it has been determined that an item is "controlled" and is therefore subject to the ITAR, the next step is to determine the classification and any further requirements and restrictions. Classification refers to the process for determining exactly what the regulations interpret the item to be according to the US government. To classify an item or technology, compare or match the specifications of the item to the items listed on the US Munitions List (USML) contained in 22 CFR 121. 

Step 3: Registration with Directorate of Defense Trade Controls 
In addition a business must register with the Directorate of Defense Trade Controls per 22 CFR 122 which states "Purpose. Registration is primarily a means to provide the US Government with necessary information on who is involved in certain manufacturing and exporting activities. Registration does not confer any export rights or privileges. It is generally a precondition to the issuance of any license or other approval under this subchapter, (22 CFR 122.1(c)). 

Step 4: Determining Intent — How will Item be Used?
After classification is complete, the next step is determining the original intent for the export of this item or technology. Specifically, will it be sold? Will it be sent to another country and returned, as in a repair and return scenario? Will the item be exported and used as a component to build another item, as in a circuit board in a computer? Or will the item aid in a service performed by a "foreign person" (as defined in 22 CFR 120.15), either domestically or abroad, as in design plans used to build or repair something? The answer to these questions will aid in determining which license or agreement is needed or possibly which exemption will apply. This is the challenge of military sales. Depending on the classification or answer to these questions, a Congressional Notification may also need to be made. Or maybe the item is classified as Significant Military Equipment and, therefore, requires a Non-Transfer and End Use Certificate, known as a DSP-83. 

Step 5: Review of Exemptions or Application for a License or Agreement
A business should also determine if an exemption is available, meaning that this specific item may not require a license or it may be allowed to be brought into the United States for repairs and re-exported without applying for a new license. The exemptions in the ITAR may prove to be helpful, but usually require interpretation by a seasoned trade professional to ensure your company is eligible. If an exemption is not applicable then you need to determine what type of license is appropriate to your specific transaction. A license or agreement application should include: description of the item, Commodity Jurisdiction, classification, parties to the transaction, item value and dates [of expected export or re-export]. Missing or vague information will cause the Department of State to reject the application with a RWA notice, Returned Without Action.
Ready to Export

Once the item has the correct jurisdiction, classification, and necessary license or correct exemption, it is ready for export. However, the business's responsibilities do not stop there — the business is still liable for the management of the actual export and all associated documents which grant the export authority (e.g., license(s) or agreement(s)). An ITAR exemption, license or agreement management is a tedious task. It requires exporters to be diligent in their document preparation, summary of items shipped and overall record retention procedures. 

Even though the ITAR is very detailed, picking up a copy of it off the shelf and complying with these regulations can be a task in itself. To the untrained trade professional's eye, many of the detailed regulations can be construed as vague. 

However, having a seasoned trade professional help out in all aspects, from Commodity Jurisdiction in a preplanning phase all the way through detailed recordkeeping procedures, can help smooth the way when navigating the International Traffic in Arms Regulations. A trained professional can quickly and seamlessly guide a business through the processes and help diminish the odds of receiving the dreaded RWA. 

Military Sales — Getting it Right
In this brief article a high-level overview of the ITAR has been provided and only the tip of the iceberg has been covered. The ITAR regulations are thorough, yet vague; detailed, but tedious; easy, but challenging; however, in no way should they deter a business from selling military items. There are a number of challenging regulations that must be followed, but it's not an impossible task. Are you up to the challenge? 

Christian Dickerson is an Assistant Vice President within the Trade Management Consulting practice in the Global Trade Services business at J.P.Morgan. Joining the organization in 2001, Christian supported the day-to-day trade compliance requirements for our Managed Services clients before transferring to the consulting practice. With a focus on ITAR and export classification, Christian has extensive experience conducting trade compliance audits and developing the audit methodologies. Christian also designed, developed, tested and implemented tools, processes and procedures to drive cross-border efficiencies and trade compliance for clients in the telecom, automotive and defense contracting industries. In addition, Christian was also the Business Systems Analyst for one of J.P. Morgan's major trade compliance applications, Classifier. He earned a Masters in Business Administration (MBA) from the University of Denver's Daniels College of Business and a Bachelor of Arts (BA) in Economics from Colorado State University.