Microwave Journal

U.S. Export Control Reform: Getting It Right This Time

August 10, 2011

Overhaul of U.S. Export Control

The Obama Administration has launched a very comprehensive and well thought-out game plan to modernize the complex and often confusing United States Export Control System's set of Rules and Regulations. The administration's plan for Export Control Reform (ECR) — to make the system work for us as part of our national security strategy, not against us – is indeed a visionary approach for those of us who have been involved in this bureaucratic nightmare for many years. The administration's effort is to create an export control system that is responsive to the national security, technology and commercial imperatives of the 21st century. The goal is also to be better able to monitor and enforce controls on technology transfers with real security implications while helping to speed the provision of equipment to allies and partners who fight alongside us in coalition operations.

The Game Has Changed

The Cold War is over and so are most of the assumptions that led us to this point in the evolution of Export Control Laws and Regulations. We now have to look at Export Controls in the context of a new reality and recast them to support how we globally engage our enemies and our friends. Today, we fight in "cyberspace domains at the speed of light." And our Export Control Systems must be brought up to new standards and be re-evaluated in that context. It should reflect how we deal with our closest allies internationally, both as close friends and as military coalition partners. We must protect the critical technology in the U.S. in the proper fashion from all the "bad guys." But our Export Control laws must reflect the world we live in today. The context for this discussion is clear – our laws need to keep pace with advancing technology in a globally connected world economy. U.S. military supremacy depends on our warfighters having a clear technological advantage. Technology is the critical factor that determines support for our national military strategy, and most importantly, is the key underpinning used to protect and support our warfighters on the battlefield.

The Administration's Export Control Reform (ECR)

Let's explore some of the critical issues surrounding Export Control Reform, focus on some of the real problems companies face every day and take a closer look at what's being proposed to fix Export Control by our government leaders. What are President Obama, the Administration, Secretary of Defense Gates and others doing to attack this problem? The good news is that they have been at this task for more than a year. The better news is I think they are making significant progress and are on the right track. The not so good news is the toughest part of the work still lies ahead. This whole discussion is really all about one thing – "a big reset" that is coming – on how we will come together and implement Export Control Reform. And this issue is very serious for all of us in the microwave industry, and we need to understand what is happening. Make no mistake about it, dismissing this issue as "not your problem and somebody else's to worry about" is not good. This is a critical business issue that has direct implzications on our business plans.

The Players, Playgrounds and Problems

Responsibility for U.S. Technology Export Controls are scattered across four major agencies and several lesser ones. The Department of Commerce's Bureau of Industry and Security (BIS) is responsible for implementing and enforcing Export Administration regulations, which pertain to the export and re-export of "dual use" commercial items. There are also several lists associated with this effort. The U.S. Munitions List (USML) and the Commerce Control/Critical Commodities List (CCL) are the most prominent ones. The Department of State is technically responsible for approving military sales. It enforces the ITAR sales, which are governed by the Arms Export Control Act (22 U.S.C. 2778). Items governed by ITAR relate to the USML. These two agencies (and how these two lists are used) are the main players involved with regulating American technology and military exports. And the DoD, along with Department of Homeland Security (DHS), the U.S. Treasury and other departments, are involved in most of these activities. As you see and may surmise, there are "way too many cooks" in this Export Control kitchen.

How the System Is Supposed to Work and Does

The idea behind the existing organizational approach to Export Controls was that various agencies with their different agendas and perspectives would create a system of "checks and balances" that would be more difficult to defeat by those trying to game the system. However, it has not worked out that way, and the associated costs of all these redundant activities are very high and are becoming administratively prohibitive. There were several obvious problems with these arrangements and some that are not so obvious. The most obvious one involves overlapping jurisdictions. It is not always clear for example where a specific item falls on one of these "lists" or to which agencies that should possibly be involved in an Export License application.

For example, a company that wants to act ethically may not be clear about where to submit its export license application, or may end up going to one agency to be subsequently told they must now go to a different agency. Yet, no agency has the legal authority (nor will they formally or informally) to actually interpret the Export Control laws and regulations. You are responsible for any action taken, and are criminally liable if you proceed in an illegal fashion. You can see the "Catch 22" situation.

It has been reported that some export license applications can be approved by one agency and denied by another. The flip side is that savvy companies can "shop their applications" by picking the regulator they believe is most likely to say yes. The problem of multiple forms to multiple agencies is made worse by long processing times. These departments have limited funds from which to support staff to review applications, and the State Department is reportedly still mostly paper based. Commerce is only slightly ahead with an IT system that needs to be updated. The net effect for industry is potentially long processing times – four to six months is not unusual for an application. In that time frame it is very possible for the American company to find that the foreign bid competition that it was trying to enter is now closed and the order placed with a competitor.

Having a System Export License Does Not Equal Having a License for the Sum of its Parts

The next difficulty builds on the others, and is a vexing problem for the microwave industry. The U.S. Export Control system makes more work for itself by requiring approval at the level of individual components. Think about how many parts are in a Fighter with all its avionics and associated equipment. In addition, it has Radar Guided Missiles, Electronic Warfare Suites, and RF Communication Systems, among many other systems. It is absurd to control things at that low a component level.

For example, a foreign country was approved to buy an F-16 Fighter Aircraft from Lockheed Martin without having any apparent difficulty in obtaining the license through appropriately filling out all the required export paperwork. Now, according to U.S. Export Control Policy, that does not mean that suppliers to that weapons platform or system are approved to export anything that they supply to it. In addition, suppliers are not authorized under US Export Control Laws to respond even when asked to bid parts to that foreign country to help maintain that F-16 Fighter Aircraft. And as a supplier, one must apply for a Marketing License before they can even talk with a foreign company representative or they are in violation of the law. For the microwave industry, it is a non-starter to do any business with a foreign F-16 operator that may ask them to bid for a spare radar power amplifier or that EW beamforming network. Or for that matter, even any questions on an RF power transistor requires approval. It is controlled at that level, right down to the performance characteristics of the transistor. We are now letting government regulators into controlling access via the S-parameter data. And, it gets worse. Suppliers are not allowed to transfer parts to another U.S. ally whose F-16s are operating from the same base to support an American-led operation. This makes the problem more complex. Bottom line – component suppliers are not covered by the platform's OEM export license.

Protectionism and Politics

Export control regulations are even affecting weapons development programs around the world, which is of great concern to many American defense firms. The ITAR processes make it difficult for firms like Raytheon, Northrop Grumman, General Dynamics, Boeing and many others to share information around the world with their own international subsidiaries. This inhibits the inclusion of American technology into bids for foreign contracts in foreign countries or to even explore collaboration with foreign firms in allied nations. And, they cannot talk to their own company employees outside the U.S. without first getting a Marketing or Technical License for the U.S. government to approve the contact. This can shut American firms out of foreign weapons programs at the earliest stages, which is not good. What is even more troubling is that many people outside the U.S. have a perception that the U.S. export policy and regulations are a very high "self-imposed hurdle" to overcome, fueling speculation on motives about the U.S. government hiding behind "the rules," and acting very protectionist and partisan in defense of U.S. technology and product dealings. In some instances, foreign governments and countries have accused the U.S. of trying to stop foreign business competitors, and this activity has actually encouraged these negative perceptions. The current system encourages multinational companies to move research, development and production offshore, "eroding our defense industrial base" as well as "undermining our control regimes."

The Export Control/ITAR Conundrum on the Indian Fighter Competition

It was no surprise to some of us that all U.S. Fighter entries in the ongoing Indian Fighter competition were down-selected out of the Tender to supply advanced fighter aircraft to India. It had been reported in the press that the love affair with the Indian Air Force and the Russian Fighter community was becoming a strained relationship at best. And the Indians were requiring that industry in their country participate fully as partners in all technology and hardware manufacture. This implied direct manufacture of critical electronic subsystems, including Advanced Electronic Warfare Self-Protection suites, Electronically Scanned Active Arrays (including all transmit receive modules) and covert RF communications systems. It has been reported in the Defense press that the U.S. government would not approve the license to allow that to happen. So while the U.S. political and Administrative levels of government said they would support the sale, the cold hard facts when it got to the regulators of ITAR/Export Controls was they said absolutely not. There would not be any export on the "jewels of defense electronics" on board these advanced Indian fighters. So the two remaining contenders still in the competition are the Eurofighter and the Rafelle, who have reported "full and complete cooperation" with Indian industry on the local manufacture of their fighter aircraft with the U.S. losing out on a chance to win these large contracts.

The Basics of Reform

Fundamental reform needs to be carried out in a half dozen government agencies and the final set of updated Export Control rules will need to 1) achieve consistency of purpose and direction, 2) have a well thought-out strategy on the various technologies and approaches to controls that are realistic and 3) put in place specific regulations that will have clear and unambiguous objectives. The government needs to fix all the conflicts and put in place crisp guidance to be followed by everyone. The government's intent on what technology needs to be protected must be crystal clear. And the Export Control Regulations should support those findings. Export Control rules need to be an enabler for national security, not used as a gatekeeper to hold back on everything. And once they have vetted these new rules and effectively challenged themselves that they have done it correctly, they will then need to roll it out and plan to implement it. It now has to stand on its own as an effective U.S. government policy directive, specifically designed for protecting critical technology for the warfighter. The government must transform this process into a unified business-like methodology. And it has to communicate it clearly to the stakeholders – our citizens, the business and government community and our global allies. Make no bones about this task, it will be arduous, painful and time consuming to upgrade and make common sense of all these disparate agency rules and regulations. Mistakes will be made and lessons will be learned in this effort. But the old system is broken, and needs to be upgraded to today's standards of coalition warfare and global alliances.

Getting to the ECR Final Outcome — Is it Even Possible?

To achieve this goal will be a monumental task given how many different entrenched government bureaucracies play in the game of Export Controls, ITAR and the licensing process. Government organizations have a unique ability to "wrap themselves in a warm and fuzzy blanket" of agency and procedural "do's and don'ts" that are derived solely from their own agency's perspective. When operating in this fashion, a specific agency's procedural approach is somehow called upon and used ceremoniously to justify their specific regulatory or decision process. But this logic confounds the average business person who has to deal with the many agencies involved – each seeming to have their own rules, laws and regulations. And business folks have to also fill out application forms and, as such, need to be accountable to their shareholders – who expect lawful behavior tied to good business practices. To deal with a group of government agencies that each have their own point of view, which sometimes are contradictory, at best, and indeed not even understandable, at worst, is not good. The business person is caught in the middle of this, with the added burden that they are legally bound to comply with all regulations under the penalty of law.

Highlights of the Administration's Plans for ECR

Last spring, Defense Secretary Gates set out the Administration's conclusion that fundamental reform is needed. "If the application of controls on key items and technologies is to have any meaning," he said, "we need a system that dispenses with 95 percent of 'easy' cases and lets us concentrate our resources on the remaining five percent. By doing so, we will be better able to monitor and enforce controls on technology transfers with real security implications while helping to speed the provision of equipment to allies and partners who fight alongside us in coalition operations." The President, Secretary of Commerce Locke and others discussed how the end result of addressing these critical questions would be a single control list administered by a single licensing agency operating on a single information technology platform and enforced by a single primary export enforcement coordination agency. The structural reforms require congressional action for a single control list and a single IT system. This past December, the Departments of State and Commerce issued proposed regulations to achieve two fundamental reform objectives: controlling items based on transparent technical parameters, which translates in export control parlance to "positive lists" that do not overlap; and separating items by tier, to focus controls on the most sensitive items while allowing for more flexible authorizations for relatively mature technologies that are more widely available.

The U.S. Munitions List (USML) and The Commerce Control List (CCL)

The most important aspect of control list reform may be making the USML a "positive" list. Currently, the USML controls many defense articles based on "design intent," in part because, at one time, the majority of items used by the military were produced specifically for the military. Today, however, many technologies used by the military are developed and manufactured by the commercial sector. Moreover, the design-intent nature of the USML is inconsistent with a predictable and transparent regulatory process – one where industry and government alike readily and objectively can determine what is controlled. The existing setup has fueled an increase in commodity jurisdiction disputes. This has resulted in many commercial systems being ruled subject to ITAR control or jurisdictional decisions being delayed, thereby impeding the competitiveness of U.S. items or, even worse, resulting in their being "designed out" of foreign end products.

This "design intent" approach would focus the category's controls on truly significant military items, while moving less significant items – particularly parts and components that do not serve an inherently military function to the Commerce Control List. For many of the low level parts, widely available items will be transferred from the USML to the CCL; Commerce jurisdiction will provide greater flexibility and a simpler structure of controls. First, ITAR registration would be eliminated for many small and medium-sized exporters if their sole ITAR items are minor elements of Defense products. Second, the change in jurisdiction should eliminate many problems associated with the "see through" rule, which make certain items manufactured offshore subject to U.S. re-export control requirements if they incorporate U.S. origin ITAR parts and components, regardless of value or importance. Third, there would be far fewer transactions requiring U.S. exporters to enter into and obtain complex Manufacturing Licensing Agreements or Technical Assistance Agreement to share data and services. Finally, there could be a significant reduction in the time required to determine the jurisdiction of parts and components.

The USML is not the only focus of the Administration's attention. The existing CCL is largely a "positive" list that describes items using objective criteria, but it is not wholly so. The Administration will seek to make it sufficiently positive, clear and precise so that someone who is not an expert on U.S. export controls, but understands the technical characteristics and capabilities of an item, can accurately determine its jurisdictional status and classification.

The Parallel-Tiered Control Lists

The government's plan involves converting the USML and CCL into parallel constructed, three-tiered lists that allow the U.S. government to focus control on the most sensitive items while establishing cascading controls on more mature and widely available items. The government would then apply licensing policies associated with the tiers. To implement this tiered construct, the U.S. government has developed control list criteria:

1) Tier 1 items are weapons of mass destruction or are almost exclusively available from the U.S. that provide a critical military or intelligence advantage. These are what Secretary Gates has termed our "crown jewels."
2) Tier 2 items are almost exclusively available from regime partners or adherents and provide a substantial military or intelligence advantage, or make a substantial contribution to the indigenous development, production, use, or enhancement of a Tier 1 or Tier 2 item. These are what the U.S. government has termed "precious metals."
3) Tier 3 items are more broadly available and provide a significant military or intelligence advantage or make a significant contribution to the indigenous development, production, use, or enhancement of a Tier 1, 2, or 3 item, or are other items controlled for national security, foreign policy, or human rights reasons.

Compliance and Enforcement

Enforcement activities have a high priority in the Administrations reform program in at least three important respects. The government will establish an Export Enforcement Coordination Center comprising representatives from Department of Commerce/BIS, the Federal Bureau of Investigation, Immigration and Customs Enforcement, the Intelligence Community, and military security agencies. Agencies will share information and leverage their resources to enhance compliance with export control laws and regulations. To enhance coordination among export control enforcement agencies, Commerce/BIS will continue to make use of specific compliance tools to prevent the unauthorized export of technologies to end users of concern. Third, BIS is adjusting how we penalize those who violate U.S. export controls. In the past, BIS typically has imposed penalties on companies involved in export violations. Going forward, where a violation is the deliberate action of an individual, the Administration will consider seeking penalties against that individual including heavy fines, imprisonment and the denial of export privileges – as well as against the company. The same will be true for supervisors who are complicit in deliberate violations by their subordinates.

At the same time, the Administration will recognize that even companies that have good intentions can make mistakes. The Administration promotes the submission of voluntary self-disclosures (VSD) in these and other instances. And the Administration views VSDs, along with robust internal compliance programs, as important mitigating factors. Given the volume of exports and re-exports that are subject to the EAR-BIS (more than 20,000 license applications during 2010), we rely on industry for the bulk of compliance as their knowledge of the products, their end users, and their customers makes them the front line troops in this important effort.

Information Technology Systems for ECR

The government has a plan in place to upgrade its IT systems to make them more user-friendly for exporters and to leverage the resources and information of agencies across the U.S. government. One of the first steps it will take to improve customer service through expansion of IT capabilities is to establish online registration for the export licensing system. This allows an exporter to go online to file and quickly obtain a personal or corporate information number that allows the exporter to file licenses and other requests. This approach also transfers to the exporter the responsibility to manage its account and add or remove persons authorized to have access to the system. This move will eliminate the manual and sometimes untimely processing of more than 6500 annual requests for access to the licensing system.

The Outcome: Getting it Right This Time

  • When the Administration has implemented these actions, its goal will be what they call the three greater efficiencies. It will control and investigate those items that are the most significant in terms of providing the United States with a military or intelligence advantage, while facilitating exports to coalition partners in order to improve our interoperability.
  • Increased education to ensure that everyone subject to our regulations knows of their existence and requirements. The effort also will help exporters understand how the changes will affect their compliance responsibilities. The Administration will also be emphasizing the adoption of internal export management and compliance programs.
  • Enhanced enforcement to ensure that exporters, re-exporters and end users comply with our regulations and use U.S.-origin items responsibly. Administration compliance personnel will evaluate exports made under license or license exception to ensure they comply with the Export Regulations. Government agents are increasing their presence domestically and abroad. They will have new export control officers in China and Singapore, and will leverage the resources of the FBI and Immigration, Customs Enforcement (ICE) as participants in the Export Enforcement Coordination Center.

Jim Fallon is President and CEO of Fallon and Associates LLC, a management and consulting firm that focuses on corporate strategy, marketing and business development, capture planning and proposal leadership. A 38-year veteran of the microwave industry, Fallon has held senior executive positions in numerous organizations, focused on defense electronics subsystems in electronic warfare, missiles and munitions, radar, and military communications markets. He has lobbied in Washington and represented many companies' interests in the defense budget deliberations on Capitol Hill. He has been a speaker at many national technology conferences and symposia, ran the Electronic Industries Association's (EIA) Microwave Division as Chairman representing the Industry, and authored many technical articles in professional journals. He has run a national technical conference on electronic warfare and been involved in many professional organizations, such as AFCEA, AUSA, AOC, Navy League and AFA. He has won numerous industry awards recognizing his contributions to protecting the Warfighters, including a Lifetime Achievement Award (LAA) from the Association of Old Crows (AOC), the Electronic Warfare Professionals Association for a career of achievements in protecting the Warfighter and winner of the Business Development Award from AOC.