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November 01, 2007 

BIS Update 2007, Day 1, Breakout Session: Defense Industrial Base Programs

Daniel Hill, Director of the Office of Strategic Industries and Economic Security (SIES) chaired the breakout session and introduced the program with a slide showing his office at the intersection of national security and industry partnership. Mr. Hill noted that BIS does more than export licensing and that his office is at the center of that "other" activity. He indicated that SIES has two divisions, the Defense Programs Division and the Strategic Analysis Division, which administer a number of programs, including offsets in defense trade and the NATO Security Investment Program.

Next, Karen Nies-Vogel, Director of the Strategic Analysis Division, discussed BIS and SIES’s role in the Committee on Foreign Investment in the United States (CFIUS). She noted that CFIUS is the inter-agency group that reviews the proposed acquisition of U.S. companies by foreign companies and CFIUS was thrust into the spotlight as a result of the Dubai Ports World transaction.

She noted there has been a dramatic recent increase in the number of CFIUS filings. For example, in 2006 CFIUS reviewed 113 cases, a 50% increase from 2005. In calendar year 2007, CFIUS has already reviewed 126 cases. The most common cases involve acquisitions by companies lcoated in the U.K., Japan, France, Canada and Germany. The most common industries now being reviewed by CFIUS include computer hardware and software, energy and communications.

The CFIUS process entails a 30-day review, followed by a 45-day investigation, if necessary. BIS reviews the transaction to determine export compliance and licensing record of the buyer and target company.

Ms. Nies-Vogel noted that the new CFIUS law, the Foreign Investment and National Security Act of 2007 (FINSA), was implemented by Executive Order on October 24, 2007. She noted that the regulations implementing FINSA should be issued in May 2008. Guidance on transactions will also be issued in May 2008. She noted that one of the major changes of FINSA is the change in the standard for conducting an investigation.

Next up was Michael Vaccaro, Director of SAIS’s Defense Programs Division. Mr. Vaccaro oversees the Defense Priorities and Allocations System Update (DPAS), a little known, but important program. DPAS is intended to assure the timely availability of industrial resources to meet current national defense and emergency preparedness requirements.

Mr. Vaccaro noted that BIS delegates the authority to place priority ratings on contracts/orders (called "rated orders") necessary to promote the national defense. The DPAS regulations are set forth in 15 CFR Part 700 and applied to contacts issued by the DoD, DoE, DHS and GSA.

BIS may authorize other persons (government agencies, foreign governments or companies) to place rate orders on a case-by-case basis. In order to be considered a "rated order", the contract or purchase order must contain the following elements:

1. a priority rating symbol (DX or DO + Program ID).

2. Required delivery date or dates

3. Authorized written or digital signature

4. The Certification statement set forth in 15 CFR Part 700.

Any company in the U.S. must accept and fill a rated order for items that the company normally supplies. A company may not discriminate against rated orders in any manner, such as by charging higher prices or by imposing different terms and conditions than for comparable rated orders. He noted that a company must reschedule unrated orders if they conflict with performance against a rated order and must reschedule "DO" rated orders if they conflict with performance against a higher rated "DX" rated order.
Companies who receive rated orders must in turn place rated orders with their suppliers for the rated with their suppliers for the items they need to fill to fill the rated orders. Mr. Vaccaro also indicated that the DPAS regulations contain a defense of claims provision that can protect the supplier from claims made by other customers.

Mr. Vaccaro provided information on the new Mine Resistant Ambush Protected (MRAP) vehicles program, which is rated "DX", the highest DPAS rating.

He mentioned that a new "DX" approved program list was issued in August 2007 and that U.S. companies should review this list to verify whether the programs they are currently working on are still rated DX.

The panelists took a number of questions from the audience. Here are some of answers:

  • There is no published or public list of CFIUS filings or cases. The best source of such information is the press. It was also noted that there are significant penalties for release of CFIUS-related information.
  • As far as the size of transactions to be reviewed by CFIUS, specific information on that issue will be included in the new CFIUS regulations in 2008.
  • Mr. Vaccaro noted that DPAS rated orders do not trump licensing requirements. Rated orders still require export licenses, if necessary. In addition, DPAS does not trump the Berry amendment for specialty metals.
  • DPAS ratings only apply to U.S. companies and does not flow down to foreign manufacturers. However, there are bilateral arrangements with Canada and other countries to get a priority rating for certain items.
  • In response to a question regarding the Market Impact Committee, Mr. Vaccaro noted that there are certain products that have been designated by Congress to be sold.
  • In response to a question regarding license applications for rated orders, it was noted that certain rated orders can be given expedited treatment.
  • Finally, Mr. Vaccaro mentioned that companies subject to rated orders can request special priority assistance with respect to delivery dates and scheduling.

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