Industry News

Department of State Proposes Eliminating Certain Requirements for Intra-Company Transfers of Defense Articles

August 13, 2010


The Department of State has published a proposed rule in the Federal Register to amend the International Traffic in Arms Regulations (ITAR) exempt from approval requirements intra-company transfers of defense articles to employees who are dual nationals or third-country nationals. According to the proposal, the current requirement for the provision of additional information within a license to cover dual national and third-country national foreign employees has created a tremendous administrative burden and evolved into a human rights issue with U.S. allies without a commensurate gain in national security.

The proposal also states that most diversions of items controlled by the U.S. Munitions List (USML) appear to occur outside the scope of approved licenses, not within foreign companies or organizations providing access to properly screened dual nationals or third-country national employees. This amendment will place the affirmative responsibility upon the foreign company, government, or international organization, with the understanding that by accepting the USML defense article, they must comply with the relevant U.S. laws and regulations to prevent diversion.

To accomplish this, State is proposing the following amendments to the ITAR:

  • State Department proposes a major new regulation, 22 CFR 126.18, that would eliminate the requirement that approved end-users of defense articles (including technical data) provide additional information with respect to their dual nationals and third-country national foreign employees. Under proposed section 126.18:
    • No approval would be needed from the Directorate of Defense Trade Controls (DDTC) for the transfer of defense articles, including technical data, within a foreign business entity, foreign governmental entity, or international organization that is an approved end-user or consignee for those defense articles (including technical data), including the transfer to dual nationals or third country nationals who are bona fide, regular employees, directly employed by the foreign business entity, foreign governmental entity or international organization.
    • The transfer of defense articles must take place completely within the physical territories of the country where the end-user is located or the consignee operates, and must be within the scope of an approved export license, other export authorization, or license exemption.
    • Any person who is granted a license or other approval under this provision is responsible for the acts of employees, agents, and all authorized persons to whom possession of the licensed defense article or technical data has been entrusted regarding the operation, use, possession, transportation, and handling of such defense article or technical data abroad.
    • Any foreign business entity, foreign governmental entity or international organization, as a “foreign person” within the meaning of the ITAR, that receives a defense article, including technical data, is responsible for implementing effective procedures to prevent diversion to destinations, entities or for purposes other than those authorized by the applicable license or other authorization and must comply with U.S. laws and regulations, including the ITAR.
    • End-users or consignees can meet the above conditions, prior to access to defense articles, by 1) requiring security clearance approval by the host government for its employees or 2) having in place a process to screen its employees and having those employees execute a Non-Disclosure Agreement that provides assurances that the employee will not transfer any information to persons or entities unless specifically authorized by the consignee or end-user.
    • The end-user or consignee also must screen its employees for substantive contacts with restricted or prohibited countries listed in section 126.1, namely Belarus, Cuba, Eritrea, Iran, North Korea, Syria, Venezuela, Burma, China, Liberia, Sudan, Cote d’Ivoire, Democratic Republic of Congo, Iraq, Lebanon, Sierra Leone, Somalia, Sudan, Libya, Afghanistan, Vietnam, and Haiti.
    • The end-user or consignee also must maintain a technology security/clearance plan that details procedures for screening employees for such substantive contacts and maintain records of such screening, make them available to DDTC upon request.
  • State Department proposes to remove 22 CFR 124.16, which provides approval for dual national and third-country employees of countries that are members of NATO or the European Union, as well as Australia, Japan, New Zealand and Switzerland. Based on proposed 22 CFR 126.18, the need for section 124.16 would be eliminated.
  • 22 CFR 124.8(5), which limits transfers of technical data or defense service to persons “in a third country or a national of a third country,” would be revised to refer instead to “foreign persons.”

For more information on the proposed changes, please contact a Barnes/Richardson attorney. Comments are due by September 10, 2010.