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May 16, 2011 

DDTC Publishes Final Rule Adding ITAR Exemption for Certain Transfers to Dual Nationals and Third-Country Nationals Employed by End-Users

Today the State Department's  Directorate of Defense Trade Controls (DDTC) published a final rule in the Federal Register modifying the policy on providing access to ITAR-controlled defense articles and technical data to dual national and third-country nationals that are employed by authorized end-users that are not otherwise eligible to receive controlled items or information under an existing ITAR exemption.

This final rule, which will not take effect until August 15, 2011, culminates a process that began when the proposed rule was published by DDTC on August 11, 2010 (75 Fed. Reg. 48,625) as part of the Obama Administration's export control reform process. Because of the impact of the proposed rule and the interest and sensitivity of this issue outside of the U.S. DDTC received 32 comments, including comments submitted by foreign governments, the American Bar Association, manufacturers and exporters of defense articles, and other interested trade associations. 

While the public comments submitted were unfortunately not been released to the public, DDTC noted that "the overwhelming majority of commenting parties expressed dissatisfaction with the current rule regarding dual and third-country nationals, citing conflicts with foreign human rights laws as well as the burden of compliance, and welcomed the Directorate of Defense Trade Controls' (DDTC) efforts to reform current practice."

It is important to note that this final rule does not completely address President Obama's goal announced in his speech to the Ex-Im Bank on March 10, 2010 where he pledged to harmonize the EAR and ITAR's conflicting standards on dual and third country nationals, to eliminate the double standard between how the United States treats its own dual nationals and what it demands of other countries; and resolve the inherent conflict between U.S. policy and other countries’ privacy, employment discrimination, and human rights laws.

What today's final rule does do is is to amend Parts 120, 124, and 126 of the ITAR to allow dual national and third-country nationals that are employees by approved end-users once specific procedures have been implemented. Specifically, the final rule adds a new exemption in section 126.18 that allows for intra-company, intra-organization, and intra-government transfers of unclassified defense articles and technical data to dual national and third-country nationals who are bona fide regular employees of the foreign consignee or end-user as long as the transferor has "effective procedures" to prevent diversion to destinations, entities, or for unauthorized purposes. With respect to the scope of effective procedures, section 126.18(c) provides that a security clearance approved by the host nation government for its employees or  a Non-Disclosure Agreement will be sufficient. However, the end-user or consignee must also screen its employees for substantive contacts with restricted or prohibited countries listed in Section 126.1 of the ITAR (which includes China, Venezuela, among others). While the "substantive contacts" screening process was widely criticized, DDTC responded by stating that "It is not DDTC's intent to deny access based solely upon relationships or contacts with family members in a context posing no risk of diversion." However, DDTC also stated that "contacts with government officials and agents of governments of Sec. 126.1(a) countries, be they family or not, would require higher scrutiny."

In response to overwhelming criticism, DDTC left in place the "special retransfer authorizations" in section 124.16 of the ITAR when a Technical Assistance Agreement or Manufacturing License Agreement is in place and the foreign nationals are citizens of NATO and certain other countries. However, DDTC amended section 124.16 section to include workers who have long term employment relationships with licensed end-users, in accordance with the new definition of "regular employee'" added in part 120.

To give readers of International Trade Law News an idea of the international reaction to today's final rule, below is an analysis of DDTC's final rule by two experienced export controls practitioners in the Toronto office of McCarthy Tétrault, a leading Canadian law firm.

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