International Law Advisory - Congress Imposes New Export Control Requirements for Defense Contractors

Section 890 of the recently enacted FY 2008 National Defense Authorization Act, Pub. L. No. 110-181, will require defense contractors to take additional steps to ensure compliance with export control statutes and regulations.

Section 890(a), Prevention of Export Control Violations, requires the Department of Defense (DoD) to prescribe regulations requiring DoD contractors that have contracts for “goods or technology” that are subject to either the Arms Export Control Act or the Export Administration Act (now lapsed, but maintained in effect) to comply with those laws and their implementing regulations with respect to such goods or technology.  This section also requires DoD to promulgate a new contract clause to implement this requirement.  The new regulations, and presumably the new contract clause, are to be issued within 180 days from enactment, or by July 26, 2008.

The Arms Export Control Act is implemented through the International Traffic in Arms Regulations (“ITAR”), 22 C.F.R. §§ 120-130, which are promulgated and administered by the Department of State.  The ITAR apply to military items such as combat aircraft, warships, armored vehicles, all types of weapons systems and munitions, but also to items that one might view as commercial (e.g. satellites, or commercial items that are somewhat modified for a military end-use).  Moreover, they can apply to a vast number of components, assemblies, and parts that are incorporated into the military “end-item”.  The Export Administration Act of 1979 (as sustained through the International Emergency Economic Power Act) is implemented through the Export Administration  Regulations (“EAR”), 15 C.F.R §§ 730-774, which are promulgated and administered by the Department of Commerce.  The EAR apply to dual use items such as machine tools, navigation and acoustic equipment, specialty materials, computers and electronics, telecommunication equipment, commercial nuclear-related equipment, and information security items.  Each of these export control regimes has significant scope in terms of the items that are controlled (including equipment, components, software, and technical data/technology).  There are also licensing requirements (quite extensive under the ITAR), as well as license exceptions (that need to be properly invoked if used) and record-keeping requirements.  And like most US regulatory regimes, there are significant penalties for errors.

Section 890(b), Training on Export Controls, also requires DoD to ensure that covered  contractors have access to resources made available by the Department of State and the Department of Commerce “to assist in compliance with the requirements established by subsection (a) and the need for a corporate compliance plan and periodic internal audits under such plan.”  The new law does not require contractors to report to DoD on their compliance efforts. 

However, § 890(c) does require DoD to submit a report to Congress within 180 days  “assessing the utility of” (i) requiring defense contractors and subcontractors to “periodically report on measures taken to ensure compliance with the [ITAR and EAR];” (ii) requiring periodic compliance audits of defense contractors and subcontractors; (iii) requiring defense contractors to train pertinent personnel on export control requirements; and (iv) requiring contractors to designate a “corporate liaison” who would be available for government provided training and responsible for the contractor’s export control compliance.

Issues that will likely need to be addressed in implementing and complying with the new law include:

• Defining or providing guidance on what contracts actually trigger the requirements, since a great deal of U.S. origin information or technology is subject to export controls as long as it is not “publicly available“; likewise, many tangible items are subject to US export controls (although from the EAR perspective, most items are exported “license free” due to the nature of the control regime in place).

• What type of export control compliance requirements will be triggered for those contractors (or subcontractors) that only deal domestically with items that are subject to US export controls (in other words, those who do not export, but rather manufacture or domestically distribute items subject to US export controls).

• Who will make and what criteria will be used to make the determination as to whether the contract (DFARS) clause requirement is triggered.
  

• Whether the new contract clause will be applicable only to new contracts or whether DoD will also seek to apply it existing contracts, which will presumably have to be accomplished by contract modifications, and whether DoD will require that the new clause be flowed down to subcontractors.  (DoD may well seek to have the clause flowed down to subcontractors if it interprets the law as seeking to  promote export control compliance across the supply chain).

• What is intended in terms of developing and implementing an adequate corporate export control compliance plan.  While there are best practices available, these compliance plans can vary dramatically based on the control regime that is applicable, the types of items being produced or sold, and various aspects of the company’s business profile, structure, and mode of operation.  Such compliance policies typically include a careful explanation of the export control regimes, identification of the key requirements, an internal structure and personnel to implement and administer the requirements, periodic training, and internal audit.
  

• There presumably will be a need for interagency coordination between DoD and the Departments of State and Commerce, including for purposes of identifying and disseminating Government information on the ITAR and EAR compliance, providing training to industry, resolving possible disagreements between DoD and State and Commerce as to whether a particular item or technology is itself controlled and by which agency.

As indicated above, the Secretary of Defense is required to report to the Congress within 180 days on the “utility” of imposing several new and potentially difficult export compliance requirements on certain defense contractors.  Affected contractors may want to consider providing input to DoD or to the relevant oversight committees in Congress on the impact, utility, and method of imposing these additional requirements before that report is released.

We will continue to keep you apprised of developments related to export control requirements for defense contractors and other Congressional and Administration actions in the export control arena.  If you have any questions or for further information, please feel free to contact Ed Krauland at 202.429.8083, Tom Barletta at 202.429.8058 or Rich Verma at 202.429.3907. 

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