Amendment to the International Traffic in Arms Regulations

DEPARTMENT OF STATE

Bureau of Political-Military Affairs

[Public Notice 2058]

22 CFR Parts 123 and 124

Amendment to the International Traffic in Arms Regulations

AGENCY: Bureau of Political-Military Affairs, Department of State.

ACTION: Final rule.

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SUMMARY: This rule amends the regulations implementing section 38 of

the Arms Export Control Act (AECA). The rule establishes in the

International Traffic in Arms Regulations (ITAR) a new licensing

procedure to permit U.S. encryption manufacturers to make multiple

shipments of items covered by Category XIII(b)(1) of the United States

Munitions List (USML) directly to end users in an approved country

without obtaining individual licenses.

EFFECTIVE DATE: September 2, 1994.

FOR FURTHER INFORMATION CONTACT:

Rose Marie Biancaniello, Deputy Director for Licensing or Karen

Hopkinson, Licensing Officer, Office of Defense Trade Controls,

Department of State 703 875-6643 or FAX 703 875-6647.

SUPPLEMENTARY INFORMATION: In April 1993, the President ordered a

review of U.S. policy regarding the domestic use of, and export

controls on, encryption technology. That review resulted in a

determination that vital U.S. interests--national security, economic,

and law enforcement--compel maintaining appropriate control of

encryption. It also revealed that there are measures which can be taken

to reform the existing export controls to ensure that controls are not

unduly burdensome to U.S. exporters. On February 4, 1994, the

Department of State announced reforms to the export control procedures

applicable to products incorporating encryption technology.

This final rule implements one of these reforms. Previously, almost

every encryption export required an individual license. Only those

exports covered by a distribution arrangement could be shipped without

an individual license. This final rule, which adds a Sec. 124.15 to the

ITAR, provides for a licensing procedure which permits direct

distribution from the U.S. manufacturer, thus reducing the regulatory

burden on exporters without a foreign distributor. The number of

individual license applications required will also be reduced.

Under this new licensing arrangement, U.S. encryption manufacturers

may ship their products covered in Category XIII(b)(1) from the United

States directly to customers within approved countries without

obtaining individual licenses for each end user. The procedures are

similar to existing distribution agreement procedures. Exporters are

required to submit a proposed arrangement identifying, among other

things, specific items to be shipped, proposed end users and end use

and countries to which the items are destined. Upon approval of the

arrangement, exporters will be permitted to ship the specified products

directly to end users in the approved countries based on a single

license. Therefore, manufacturers of products covered in Category

XIII(b)(1) will now have the option to export to foreign distributors

under a distribution agreement or directly from the U.S. under the new

arrangement.

Section 123.16(b)(1) is revised in conformity with the addition of

Sec. 124.15, and to substitute the more precise term ``defense

hardware'' for ``defense article''.

The Department of State views this reform as beneficial to U.S.

persons and industry and has decided to implement it immediately by

publication of a final rule. Notwithstanding this final rule, public

comment is welcomed.

This amendment involves a foreign affairs function of the United

States. It is exempt from review under E.O. 12866 and has been reviewed

internally by the Department to ensure consistency with the purposes

thereof. It is also excluded from the procedures of 5 U.S.C. 553 and

554.

List of Subjects

22 CFR Part 123

Arms and munitions, Exports.

22 CFR Part 124

Arms and munitions, Exports, Technical assistance.

Accordingly, for the reasons set forth in the preamble, 22 CFR

Subchapter M, Parts 123 and 124 are amended as follows:

PART 123--LICENSES FOR THE EXPORT OF DEFENSE ARTICLES

1. The authority citation for 22 CFR Part 123 continues to read as

follows:

Authority: Secs. 2 and 38, Pub. L. 90-629, 90 Stat. 744 (22

U.S.C. 2752, 2778); E.O. 11958, 42 FR 4311, 3 CFR 1977 Comp. 79; 22

U.S.C. 2658.

2. Section 123.16(b)(1) is revised to read as follows:

Sec. 123.16 Exemptions of general applicability.

* * * * *

(b) * * *

(1) District Directors of Customs shall permit the export without a

license of defense hardware being exported in furtherance of a

manufacturing license agreement, technical assistance agreement,

distribution agreement or an arrangement for distribution of items

identified in Category XIII(b)(1), approved in accordance with Part

124, provided that:

(i) The defense hardware to be exported supports the activity and

is identified by item, quantity and value in the agreement or

arrangement; and

(ii) Any provisos or limitations placed on the authorized agreement

or arrangement are adhered to; and

(iii) The exporter certifies on the Shipper's Export Declaration

that the export is exempt from the licensing requirements of this

subchapter. This is done by writing, ``22 CFR 123.16(b)(1) and the

agreement or arrangement (identify/state number) applicable''; and

(iv) The total value of all shipments does not exceed the value

authorized in the agreement or arrangement.

(v) In the case of a distribution agreement, export must be made

directly to the approved foreign distributor.

* * * * *

PART 124--AGREEMENTS, OFF-SHORE PROCUREMENT AND OTHER DEFENSE

SERVICES

3. The authority citation for 22 CFR Part 124 continues to read as

follows:

Authority: Secs. 2, 38, and 71, Pub. L. 90-629, 90 Stat. 744 (22

U.S.C. 2752, 2778, 2797); E.O. 11958, 42 FR 4311, 3 CFR 1977 Comp.

p. 79; 22 U.S.C. 2658.

4. Section 124.15 is added to read as follows:

Sec. 124.15 Arrangements for U.S. encryption (Category XIII(b)(1))

distribution by manufacturers.

(a) Arrangements for the export of unclassified defense articles

identified in Category XIII(b)(1) must be approved by the Office of

Defense Trade Controls before they enter into force. Such arrangements

will be limited to unclassified defense articles identified in Category

XIII(b)(1) and must contain conditions for special distribution, end-

use and reporting. Licenses for export pursuant to such arrangements

must be obtained prior to export of the defense article unless an

exemption under Sec. 123.16(b)(1) of this subchapter is applicable.

(b) Required information. Proposed arrangements shall be submitted

to the Office of Defense Trade Controls for review and approval. The

following information must be included in all such proposed

arrangements:

(1) A description of the U.S. Munitions List articles involved.

This shall include when applicable the Federal Stock Number, nameplate

data, and any control numbers under which the articles were developed

or procured by the U.S. Government;

(2) A detailed statement of the terms and conditions under which

the articles will be exported and distributed;

(3) The duration of the proposed arrangement; and

(4) Specific identification of the country or countries that

comprise the distribution territory. A Nontransfer and Use Certificate

(DSP-83) will be required in accordance with Sec. 123.10.

(c) Required Statements. The following statements must be included

in all arrangements:

(1) This arrangement shall not enter into force, and shall not be

amended or extended, without the prior written approval of the

Department of State of the U.S. Government.

(2) This arrangement is subject to all United States laws and

regulations relating to exports and to all administrative acts of the

U.S. Government pursuant to such laws and regulations.

(3) The arrangement shall not affect the performance of any

obligations created by prior contracts or subcontracts which the

applicant may have individually or collectively with the U.S.

Government.

(4) No liability will be incurred by or attributed to the U.S.

Government in connection with any possible infringement of privately

owned patent or proprietary rights, either domestic or foreign, by

reason of the U.S. Government's approval of this arrangement.

(5) No export, sale, transfer, or other disposition of the U.S.

Munitions List articles covered by this arrangement is authorized to

any country outside the distribution territory without the prior

written approval of the Office of Defense Trade Controls of the U.S.

Department of State.

(6) The applicant agrees that a semi-annual report of sales or

other transfers pursuant to this arrangement of the licensed articles,

by quantity, type, U.S. dollar value, and purchaser or recipient shall

be provided by (applicant) to the Department of State. Such reports may

cover calendar or fiscal years. Reporting shall continue until such

time as all articles authorized under the arrangement or a permanent

unclassified license (DSP-5) authorized in support of the arrangement

have been reported. Reports shall be deemed proprietary information by

the Department of State and will not be disclosed to unauthorized

persons. (See Sec. 126.10(b) of this subchapter.)

(7) The applicant agrees to notify (identify foreign end-user) of

any end use or retransfer restrictions and (identify foreign end user)

agrees to incorporate the following statement as an integral provision

of a contract, invoice or other appropriate document when the articles

covered by this arrangement are sold or otherwise transferred:

``These commodities are authorized for export by the U.S.

Government only to (identify country of ultimate destination). They may

not be resold, diverted, transferred, transshipped, or otherwise be

disposed of in any other country, either in their original form or

after being incorporated through an intermediate process into other

end-items, without the prior written approval of the U.S. Department of

State.''

(8) All provisions in this arrangement which refer to the United

States Government and the Department of State will remain binding on

the applicant after the termination of the arrangement.

(d) The license will be valid for four years and quantities and

values should reflect those for this time period. No application will

be accepted for any export for which Congressional notification is

required.

The application shall be filled out in accordance with the

instructions; however, in this instance, foreign end-user, foreign

consignee, and foreign intermediate consignees need not be identified.

In each block state: ``The foreign person in this block will be

reported in accordance with Sec. 124.15 of the ITAR.'' The provisions

of Sec. 126.13(b) with regards to foreign consignee and foreign

intermediate consignee need not be complied with at the time the

application is transmitted but will be reported semi-annually.

(e) Transmittal letter. Requests for approval of the arrangement

must be made by letter. The original letter and seven copies of the

proposed arrangement shall be submitted to the Office of Defense Trade

Controls. The letter shall contain the following:

(1) A statement giving the applicant's Defense Trade Controls

registration number.

(2) A statement identifying the country or countries to comprise

the distribution territory.

(3) A statement identifying the defense articles to be distributed

under the arrangement.

(4) A statement identifying any U.S. Government contract under

which the equipment may have been generated, improved, developed or

supplied to the U.S. Government, and whether the equipment was derived

from any bid or other proposal to the U.S. Government.

(5) A statement that no classified defense articles or classified

technical data are involved.

(6) A statement identifying any patent application which discloses

any of the subject matter of the equipment or related technical data

covered by an invention secrecy order issued by the U.S. Patent and

Trademark Office.

(7) A statement that the applicant will not permit any exports to

take place until the arrangement and the export license have been

approved by the Department of State.

Dated: August 1, 1994.

Lynn E. Davis,

Under Secretary for Arms Control and International Security Affairs,

Department of State.

[FR Doc. 94-21419 Filed 9-1-94; 8:45 am]

BILLING CODE 4710-25-M