Deemed Exports and Reexports under the Harmonization Rules

By: Andrea Fraser-Reid
Date: 07/27/2016

One objective of the Export Control Reform Initiative is to harmonize the definitions of terms or concepts that appear in both the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR).  To that end, on June 3, 2016, the U.S. State Department’s Directorate of Defense Trade Controls (DDTC) published an ITAR Interim Final Rule and the Commerce Department’s Bureau of Industry and Security (BIS) published an EAR Final Rule that include revisions to the definitions of certain such terms.   The Interim Final Rule and Final Rule build upon and address comments submitted in response to DDTC’s Proposed Rule and to BIS’s Proposed Rule, issued on June 3, 2015. The treatment of technology shared with foreign nationals inside and outside the United States is among the items set forth in both the EAR and ITAR.

In the increasingly global environment where business opportunities and research efforts require the sharing of technology among persons from different countries, developing a regulatory system that controls the sharing of technology as needed for security reasons while minimizing interference with legitimate trade and business activities remains an ongoing challenge.  Under the U.S. regulatory regime as set forth in the ITAR and EAR, when information is released to a foreign national in the United States, it is “deemed” exported to the country of the foreign national.  Similarly, a deemed reexport occurs when U.S. information in a foreign country is released to a party that is a national of a country other than the country in which the releasing party is located. 

The Final Rule, issued on June 3, 2016, generally maintains the EAR’s treatment of deemed exports and deemed reexports.   Section 734.20 codifies BIS's Deemed Reexport Guidance that was posted on the BIS website dated October 31, 2013, setting forth activities that do not constitute deemed reexports.    One of the activities that is not a deemed reexport—that is, falls within the section 734.20 exclusion-- is defined, in part, based on the degree of confidence on the part of the entity outside the United States as to the recipient foreign national’s most recent country of citizenship or permanent residency.  In response to comments from the public, BIS reduced the requirement set forth in its Proposed Rule that the company be “certain” of the foreign person’s most recent country of citizenship or permanent residency to having “knowledge.”

Comments issued in response to the Proposed Rule highlighted concerns with the concept of “permanent residency.”  BIS acknowledged the difficulty of determining the residency status of a person in a foreign country.  BIS also noted a recommendation to change “permanent residency” to “legal residency” as well as a suggestion that BIS establish criteria in the EAR for evaluating residency.  Another commenter suggested BIS create a separate definition for deemed exports.   BIS acknowledged the merit of the comments, but concluded that the issues were beyond the scope of the Final Rule.  Accordingly, BIS will utilize FAQs where policy exists and develop proposed revisions for comment where issues fall outside the scope of BIS policy. 

The ITAR’s treatment of deemed exports is codified in the definition of “export” in section 120.17 and parallels the language in EAR section 734.13.  Similarly, ITAR section 120.19 parallels EAR section 734.14 in defining deemed reexports.  Accordingly, “releasing or otherwise transferring technical data to a foreign person in the United States” constitutes a deemed export, and “releasing or otherwise transferring technical data to a foreign person who is a citizen or permanent resident of a country other than the foreign country where the release or transfer takes place” is a deemed reexport.

An important difference remains between the EAR and the ITAR with respect to determining the recipient country of the deemed export or reexport.  Under the EAR, the foreign person’s last country of citizenship or permanent residency is considered in evaluating the licensing requirements for the deemed export or reexport.    Under the ITAR, however, the release is deemed to be an export or reexport to all the countries for which the foreign person holds permanent residency or has held or holds citizenship.

The Final Rule and Interim Final Rule are effective on September 1, 2016.  Companies implementing the new regulations should be on the lookout for real world challenges that may emerge during that process.  Although the window to comment on DDTC’s Interim Final Rule has closed, BIS has left open the comment period for its Final Rule.   Accordingly, interested parties still have an opportunity to weigh in on these latest developments.