Overview
On March 9, 2020, a new US federal firearms export control rule (the Rule) that has been in the works for many years went into effect, changing the way the United States regulates international trade in firearms, guns, ammunition and related articles. Essentially, the Rule makes the US Commerce Department responsible for the regulation of most commercially available firearms exports and enforcement of those regulations, rather than the US State Department. While the Rule should come as a welcome relief to firearms manufacturers and dealers, as it will reduce the procedural burdens and costs of export compliance, it does not deregulate the items transferred to Commerce. In fact, Commerce is expected to be just as exacting in its civil/administrative regulation of the firearms trade, and just as tough in criminal enforcement.
Background
Dating back to the Obama Administration and carrying through to the Trump Administration, the new Rule follows an earlier determination made by several US Government agencies that strict controls previously applied to many civilian firearms under the State Department’s United States Munitions List (USML) were no longer warranted. Instead, these types of products would be more appropriately regulated by the Department of Commerce’s Bureau of Industry and Security (BIS) on the Commerce Control List (CCL), under the Export Administration Regulations (EAR).
The EAR rule is available here. A companion rule amending the International Traffic in Arms Regulations (ITAR) to move these items off of the USML (and describing more precisely the articles warranting continued control on that list) is available here.
The transferred items generally include: firearms, close assault weapons and combat shotguns (formerly under USML Category I); guns and armament (formerly under USML Category II); and ammunition/ordnance (formerly USML Category III). The Rule moved from the USML to the CCL such items that are not inherently military and do not otherwise warrant control on the USML because they provide a critical military or intelligence advantage to the United States.
The civilian firearms industry has generally applauded this change, which will result in a more flexible licensing system and ease certain aspects of the regulatory burden on civilian firearms manufacturers and dealers, who, by and large, engage in the export of commercial items available in retail outlets and less sensitive military items. Listing these product types on the USML, administered by the State Department’s Directorate of Defense Trade Controls (DDTC), has been historically viewed by the industry as confusing and overly complex, with a burdensome licensing system. Additionally, registration fees of at least $2,250 per year imposed unnecessary costs, particularly for small-to-medium-sized companies. With Commerce/BIS, no registration is required, eliminating registration fees and associated burdens such as requirements to inform the agency of each material change to a company’s registration information.
Enforcement by Commerce
BIS has a long history of implementing and enforcing export controls on most commercial items and many military items, particularly items that have both a commercial and military use (so-called “dual use” items) including goods/hardware, software, and technology. BIS will require licenses to export or reexport to any country firearms or other weapons previously listed on the USML and now added by the Rule to the CCL (although some parts and components will not require licenses in certain instances). While no licensing fees will be assessed by BIS, its licensing process requires the exporter to specify the particular items, quantity, customer, end-user and other details for each transaction. Moreover, DDTC will continue to regulate “brokering” activity relating to these items on the CCL if they are also subject to the import regulations of the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF).
Lead criminal enforcement of the Rule will move from the investigations unit (the HSI) of the US Department of Homeland Security (DHS) (within the Immigration and Customs Enforcement (ICE) agency) to Commerce’s Office of Export Enforcement (OEE) under BIS. Unlike Commerce, State does not have its own enforcement arm to investigate criminal cases, so ICE’s HSI is the primary investigative agency for violations of the ITAR, whereas Commerce can handle most investigations of EAR violations in-house.
OEE has extensive experience in export enforcement and is a robust investigatory agency. OEE has strong partnerships in the export business community and the shipping industry and coordinates and works effectively with other law enforcement agencies such as the Federal Bureau of Investigation (FBI), and DHS’s Customs & Border Protection agency (CBP). OEE has a significant budget and a large number of specialized agents committed to preventing export control violations, and pursuing civil (or administrative) and criminal enforcement actions, utilizing all of the investigative techniques available to other federal law enforcement agencies. In fact, OEE recently gained new enforcement authorities needed to conduct effective undercover operations, such as setting up wiretaps, leasing space, establishing business entities, and other steps.
Given the long history of the new Rule, BIS may be particularly sensitive to criticisms of the change by those expressing concern that moving these firearms and related items from the USML to the CCL would result in lax enforcement of export control violations for firearms. On the contrary, OEE has investigated extraordinarily complex and serious cases, focusing on violations posing the most significant threats to US national and homeland security, foreign policy and economic interests, primarily those involving unauthorized dual-use exports for military purposes. OEE agents work hand-in-hand with US Attorney’s Offices to pursue criminal prosecutions. Over the years OEE has become adept at developing leads gleaned from industry and confidential sources. While many OEE investigations have involved heavily restricted and sensitive jurisdictions—e.g., Iran, North Korea, and Sudan— OEE has also brought many cases involving major US trading partners. The office’s resume includes investigations of attempts to export items controlled for nuclear non-proliferation reasons, including instances of nuclear-related dual-use equipment that could have been used to enrich uranium or as triggering devices in nuclear weapons, as well as numerous cases involving the illegal transfer of computer components, sophisticated electronics, and aerospace products, including restricted thermal imaging technology and technical data for unmanned aerial vehicles to China and other countries. Some of the OEE’s most recognized cases have involved the shipment of components for improvised explosive devices (IEDs) to Iran and Iraq. OEE agents are known for their skills in forensic analysis, including computer analysis, and in-depth review of voluminous business and shipping records. Vigorous enforcement under the new Rule by OEE should be expected.
The penalties under the EAR remain severe: criminal penalties can include up to 20 years of imprisonment for individuals and up to $1 million in fines per violation, or both; civil monetary penalties can reach up to $307,992 per violation or twice the value of the transaction, whichever is greater. (The maximum civil penalty per violation is adjusted annually for inflation.) BIS may also limit a company’s ability to export goods from the United States through orders denying export privileges. Finally, a company may be required to extensively remediate its export control compliance program and face ongoing audits as part of any settlement agreement entered into with Commerce to resolve violations of the EAR.
Companies impacted by the Rule are strongly urged to evaluate their export control compliance programs sooner rather than later, incorporating new processes and procedures required under Commerce regulations, and to seek counsel when encountering an OEE administrative or criminal inquiry or investigation. Finally, companies should familiarize themselves with Commerce’s voluntary self-disclosure rules and guidelines for potential violations, as well as those of the US Department of Justice (DOJ) for potential criminal violations. For more detail on DOJ disclosures, see our previous Advisory.
