Volume 23 No. 10 -- March 10, 2003

Posted Monday, March 10, 2003 12:00 am

In This Issue:

* Census Considering License Requirement For AES Filers
* Boeing, Hughes Settle Charges Related to Defense Services
* BIS to Issue Rules Clarifying Terrorism Licensing Policy
* Encryption Reviews Increasing Despite New Rules, Economy
* Briefs: Section 12(c), FTAs, Explosives, Red Flags, Viagra, Tariff Bill

CENSUS CONSIDERING LICENSE REQUIREMENT FOR AES FILERS

Firms and individuals who prepare and submit export documentation through the Census Auto-mated Export System (AES) may need to be licensed or certified in the future, according to Harvey Monk, director of Census' Foreign Trade Division. Although plans for imposing a licensing system are at the very early stages, they are likely to be implemented when Census imposes statutory requirements for mandatory AES filing of all Shipper's Export Declarations (SEDs).

Rules for mandatory AES filling for goods on the Commerce Control List (CCL) and Munitions List (ML) may be issued soon, but mandatory AES for all exports is being delayed by funding problems (see WTTL, Feb. 17, page 1). Census believes licensing or certification is needed for AES filers because of new civil and criminal penalties Congress authorized in 2002 for the failure to file through AES and for false or incomplete filings, Monk told the Bureau of Industry and Security (BIS) Regulations and Procedures Technical Advisory Committee (RAPTAC) March 4.

"One of our major concerns is that the penalties embodied in the Foreign Relations Authorization Act could be substantial, both civil and criminal," he said. "We are concerned that -- if we are going to require people to file and U.S. Principle Parties in Interest are seeking to find someone to file documentation on their behalf -- that they have some comfort that the person who is doing that work for them is knowledgeable about all the rules and regulations related to exporting," he added.

The current system of licensing for Customs Brokers is the model Census is looking at for certify-ing AES filers, Monk said. The requirement will not only be imposed on third-party filers, such as freight forwarders and brokers, but could also apply to USPPIs who do their own filing, he noted. The certification is likely to require some training, the passing of a test, a background check and up to 40 hours of continuing education over a defined period.

Monk said Census will set the standards for training and testing but may seek an outside contractor to provide this service. Individual consultants and law firms could also do the training. The difficulty of the test will depend on what other federal agencies may want to participate and have their export requirements included in any training and testing model. "It could be a very detailed test depending on how comprehensive the testing regime will be," Monk told the committee.

BOEING, HUGHES SETTLE CHARGES RELATED TO DEFENSE SERVICES

More important that the $32 million in fines that were part of the consent agreement State reached with Boeing and Hughes March 4 were the commitments the two firms made to improve their compliance with U.S. export control rules and to give State and Defense direct access for seven years to all internal documents coming under State approved licenses for space-related items sold in China, Hong Kong and all republics of the former Soviet Union. The conditions accepted by the firms are nearly identical to those imposed last January on Loral for its role in the release to Chinese technicians of data on the launch failure of a Chinese rocket (see WTTL, Jan. 6, page 1).

The fines imposed on the companies were less than a slap on the wrist given their size. Boeing will pay the government nothing and Hughes' fines will be stretched out over seven years. Of the $32 million fine, $12 million was suspended on the condition that Boeing spend $6 million and Hughes $2 million over five years to improve their export compliance systems. Both firms also were given $2 million each in credit for investments already made in their export compliance systems.

For the balance of the fine, Hughes, which retained legal responsibility for any fines as part of the sale of its satellite business to Boeing, within 10 days will pay State $1.5 million and Customs $1 million to reimburse the agency for its investigation costs. Over the next seven years, it will pay State and Customs the same amounts annually. Boeing had sales of $54 billion in 2002 and Hughes sales of $8.9 billion.

Although the December Charging Letter issued to the firms cited 123 alleged violations of law, Boeing and Hughes in the consent agreement merely acknowledge that State's authority to regulate the export of defense services is "well established and clearly understood" even "when no tech-nical data is involved" and "all the information relied upon in furnishing defense services to a foreign government or foreign person is in the public domain." They also acknowledged that providing unauthorized defense services or other actions related to Missile Technology Control Regime (MTCR) systems "are serious matters."

Both firms agreed to implement for seven years a compliance program that includes:

* Appointment of a Special Compliance Official (SCO) who will oversee their implementation of promised measures. For three years, the SCO will be someone from outside each company. For an additional two years, that person may be a company employee;

* Give written authority to the SCO to have access to all personnel, books, documents and facilities related to covered Munitions List exports;

* Strengthen export compliance training of employees;

* Institute comprehensive computerized document control system that will give State and Defense personnel direct remote access to documents related to licensed exports before they are released to any foreign nationals;

* Assign to each firm's general counsel the responsibility and authority to oversee and support implementation of promised compliance improvement measures;

* Establish "hot line" to allow company employees to report any believed violations of the Arms Export Control Act to the SCO and to each firm's ethics office and export compliance director without fear of recrimination or retaliation;

* Audit within 18 months all measures taken to implement compliance improvements and submit copy of audit to State with recommended steps to correct any deficiencies;

* Permit State to conduct on-site inspections of facilities with minimum advance notice.

Given the essential role both firms play in defense procurement programs, State chose not to use its biggest penalty against the firms, their debarment from doing business with the U.S. govern-ment. "The department has determined that prospective debarment of the respondents is not appropriate at this time in view of respondent's remorse for participating without authorization in the two launch failure investigations" and their acknowledgment of the seriousness of the alleged violations and their "desire to make amends," the agreement declares.

The companies neither admitted nor denied the allegations in State's charging letter, but they did eat some crow in a joint statement on the agreement. "The companies accept full responsibility and express regret for not having obtained licenses that should have been obtained, notwithstand-ing Hughes' prior public comments to the contrary," the statement said.

The charges against the firms stem from allegations that what was then Hughes Space and Communications in 1995 and 1996 provided the Chinese with the information on the results of two launch failure investigations conducted after the explosion of rockets carrying Hughes satellites. Hughes sold its satellite business to Boeing in 2000. [Editor's Note: A copy of the consent agreement, order, State's press release and the joint Boeing-Hughes statement will be sent free to WTTL subscribers on request.]

BIS TO ISSUE RULES CLARIFYING TERRORISM LICENSING POLICY

BIS plans soon to issue new rules that will clarify the licensing policy for exports to designated terrorists, while also avoiding the duplication of licensing requirements with Treasury's Office of Foreign Assets Control (OFAC), agency staff report. The coming regulation will expand export controls to non-U.S. persons and exports from abroad with a policy of denial for all licenses that are submitted, BIS regulations division staffer Sharron Cook told BIS' RAPTAC March 4.

The new rules, which could be published in a month or so, will cover exports to Specially Designated Global Terrorists (SDGTs), Specially Designated Terrorists (SDTs) and Foreign Terrorist Organizations (FTOs), as defined in OFAC rules. OFAC identifies these entities and publishes their names in the Federal Register.

The regulation will require a BIS license for exports from abroad or reexports of any U.S. items on the Commerce Control List (CCL) or classified as EAR99 by any non-U.S. person to an SDT or FTO. A foreign item is covered by the requirement, if it is made with U.S. technology.

OFAC already requires a license for exports by U.S. persons to SDGTs and FTOs. Under the new rules, to avoid duplication, any U.S. person authorized to export, reexport or export from abroad to an SDGT or FTO by OFAC will not need to obtain BIS approval as well, Cook explained. How-ever, if the proposed export by a U.S. person is going to an FTO that is not also an SDGT or SDT, the license application will still need to go through BIS.

ENCRYPTION REVIEWS INCREASING DESPITE NEW RULES AND ECONOMY

BIS staffers are seeing a sharp increase in the number and value of encryption product exports being submitted to the agency for one-time technical reviews or licenses, according to Norman LaCroix, head of the BIS encryption review staff. So far in fiscal year 2003, which began Oct. 1, 2002, the agency has seen a 25% increase in the value of products submitted for review and a 40% increase in license applications. The submissions cover both new products and new encryption functions added to old products, he explained.

Despite the increase in reviews, the five-person BIS encryption review staff has maintained an average review time of 57 days. Most reviews result in products being designated as eligible for License Exception ENC or for mass-market status, he told RAPTAC March 4. Encryption products account for nearly 40% of all commodity classifications conducted by BIS. In January and February, that share jumped to 49%.

In the past five months, BIS conducted 960 technical reviews. When items deemed No License Required or source code products are excluded, BIS classified 80% of the encryption products it reviewed as either retail or mass-market. Only 20% were identified as needing an export license, LaCroix reported. Of the license application reviews completed so far in fiscal 2003, 139 were approved, 22 were returned without action mainly because no license was required and two were denied.

An increasing number of encryption products used for network security management are getting retail classification, he noted. Reviews of these products have classified 18% as ENC, 68% as retail and 14% as mass-market. For encryption for maintaining the confidentiality of transmitted data, only 40% are getting retail classification and 60% nonretail, LaCroix noted.

* * * BRIEFS * * *

SECTION 12(c): Lawyer for Wisconsin Project told WTTL that before March 17 it will ask DC U.S. Appellate Court to conduct en banc review of three-judge panel decision, which ruled export license application information is exempt from FoIA disclosure despite lapse of EAA (see WTTL, Feb. 3, page 1).

FTAs: USTR March 7 released full 800-page text of proposed U.S.-Singapore FTA and summary of Chile FTA, which is still being translated. On Feb. 28 it released reports of 31 advisory committees that reviewed deals. Only major objections came from labor advisors.

EXPLOSIVES: BIS is closer to publication of new rules that will expand export licensing requirements for explosives detection equipment, including products to find residues and detonators, as well as software and technology for such items, BIS staffers report (see WTTL, Feb. 3, page 2). New rules will impose Regional Stability (RS) controls on these products and clarify existing terrorist controls.

RED FLAGS: Entities that are subject to any U.S. government sanction, including State debarment for ITAR violations, will require heightened screening to determine whether their participation in export transaction triggers need for submission of export license, BIS will say in planned change in Red Flag advice. Licenses submitted as result of such screening will face BIS policy of denial, agency staff report. Change will also recommend screening for entities on BIS' "unverified list."

VIAGRA: In response to petition by Pfizer, ITC March 3 initiated Section 337 investigation into allegedly patent-infringing imports of sidenafil citrate, better known as Viagra, from seven countries.

ALLURA RED: Sensient Technologies March 4 filed antidumping and countervailing duty complaints at ITC and ITA against allura red from India.

MISCELLANEOUS TARIFFS BILL: By 415-11 vote, House March 5 passed miscellaneous tariff bill (H.R. 1047), which is similar to bill it cleared in 2002 (see WTTL, March 3, page 4).

SILICON: Dumped imports of silicon metal from Russia are injuring U.S. industry, ITC ruled March 7.

NMEs: In addition to Bulgaria, ITA ruled Feb. 28 that Estonia and Lithuania will be considered market economies in antidumping cases effective Jan. 1 (see WTTL, March 3, page 4).

WASSENAAR: BIS in March 5 Federal Register issued final rules implementing changes made by Wassenaar Arrangement in May 2002.

ITC: Senate Finance Committee March 5 recommended confirmation of Charlotte Lane and Daniel Pearson to be ITC commissioners. Sen. Jay Rockefeller (D-W.Va.) was sole vote against Pearson, but Sen. Max Baucus (D-Mont.) said he would submit more questions for Pearson to answer before Senate vote.

CANADIAN WHEAT: USTR's office March 6 said U.S. will ask for WTO dispute-settlement panel to hear Washington's complaints against trading practices of Canadian Wheat Board. Announcement came two days after ITA made preliminary CVD ruling against imports of durum wheat and hard red spring wheat from Canada, imposing preliminary CVD of 3.94%