BIS Update 2007, Day 1, Breakout Session: Reexport Regulations
In a breakout session on Reexport Regulations, Sharron Cook from BIS's Regulatory Policy Division provided the audience a crash course on reexport regulations. During the breakout session, Ms. Cook identified the scope o reexports subject to the EAR and discussed license requirements and exporter responsibilities. She closed with an overview of reexport license exceptions and compliance recommendations.
Ms. Cook provided the audience with several definitions of terms as an introduction to the break-out session:
A deemed reexport is any release of technology or source code subject to the EAR that occurs within another country to person who is not a citizen of that country (i.e. a foreign national). Such a transaction is a deemed reexport to the home country of the foreign national. A reexport may be distinguished from an export in that
A reexport, -- i.e., a shipment or transmission of an EAR-controlled item from one foreign country to another -- may occur via email, facsimile, reading from a book, or by uploading or downloading data. The item being exported may be a commodity, software or technology.
There are three ways to release technology under reexport regulations: visual, orally or by providing technical assistance (such as applying knowledge abroad).
U.S. items wherever located are subject to the EAR, unless they are subject to another U.S. government agency or are publicly available. For example, materials freely given away on the Internet, or certain available patents, would not be subject to the EAR, because such items cannot be controlled. As discussed below, the reexport provisions apply to all U.S. persons, items with U.S. origin and in some cases, foreign produced items. The application of the EAR to reexports of foreign produced items are limited, however, to items with sufficient U.S. content.
According to the EAR, the reexports licensing requirements apply under three possible conditions: (1) the U.S. technology is controlled for national security reasons, (2) a foreign product is controlled for national security reasons, and (3) a foreign product is destined for Cuba, or to a country appearing on country group D:1. BIS jurisdiction extends to any U.S. person, which includes a person in the U.S., as well as U.S. citizens, permanent resident aliens, or protected individuals wherever located. It also includes U.S. based firms and their foreign branches. The “de minimis” rule indicates, however, that a foreign made product is subject to the license requirement only if it contains at least 10% of U.S. content value, for goods shipped to Cuba, North Korea, Sudan, Syria and Iran, or 25% for all other destinations.
Ms. Cook also emphasized a few areas for exporters to bear in mind. First, several items classified as EAR99 are controlled for national security reasons if destined for certain countries. Second, even freight forwarders may be liable for unlawful exports, if sufficient evidence suggests that they aided in the export transaction.
Exporters are required to calculate the value of the U.S. sourced component and the finished foreign made article, in order to invoke the de minimis rule. The value should be based on the arms length value for the goods. The fair market value should be used both for the U.S. component, and for the finished foreign made article or technology. Importers are not permitted to calculate the value of goods based on discounted rates.
Certain foreign manufactured items do not require a license for export, where the U.S. component is manufactured into a foreign made item, and that product gets incorporated into another article. According to the “second incorporation rule,” the initial U.S. component loses its initial value. Thus, under such circumstances, a de minimis calculation is not required.
Ms. Cook warned that certain items are not eligible for the de minimis exception. This includes U.S. origin components of high performance computers, encryption and QRS 11 if included in a commercial standby instrument system or a commercial aircraft with such a system.
On the practical side, the Ms. Cook provided the following tips in submitting applications to the agency:
- Provide descriptions of the de minimis calculations
- Provide export price of U.S. content
- For software, estimate of future sales
- Provide fair market value of the foreign technology
- Avoid details involving product specifications, and how the software programs will be used.
- Do not provide detail regarding end-use.
The agency advices exporters that this is not a license process, but rather a content jurisdiction issue.
In the event that the U.S. content is above the de minimis limit, the next step is to classify the foreign product, that is the finished article that includes the U.S. component. From that point, the exporter can determine the license requirements, and exceptions.
Licensing Requirements, Responsibilities & Exceptions
In certain instances where a U.S. agent acts on behalf of a foreign principal and licensee, both the agent and the foreign principal are responsible for the use of the license. The following recommendations were made with response to a compliance strategy for licensees:
- Communicate license conditions
- Obtain written acknowledgement of receipts of the conditions.
The reexport breakout session provided several helpful hints for compliance. These include:
- Know-your customer
- Get required end-use and end-user assurances
- Inform your customer about license conditions
- Understand your EAR responsibilities
- Educate your customers, subsidiaries, distributors.
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