Encryption Items

DEPARTMENT OF COMMERCE

Bureau of Export Administration

15 CFR Parts 732, 734, 740, 742, 743, 748, 750, 752, 770, 772, and

774

[Docket No. 980911233-8233-01]

RIN 0694-AB80

Encryption Items

AGENCY: Bureau of Export Administration, Commerce.

ACTION: Interim rule.

-----------------------------------------------------------------------

SUMMARY: This interim rule amends the Export Administration Regulations

(EAR) by clarifying controls on the export and reexport of encryption

items (EI) controlled for ``EI'' reasons on the Commerce Control List.

This rule incorporates public comments on an interim rule published in

the Federal Register on December 30, 1996, and implements new licensing

policies for general purpose non-recoverable non-voice encryption

commodities or software of any key length for distribution to banks and

financial institutions in specified countries.

DATES: Effective Date: This rule is effective September 22, 1998.

Comments: Comments on this rule must be received on or before November

6, 1998.

ADDRESSES: Written comments on this rule should be sent to Nancy Crowe,

Regulatory Policy Division, Bureau of Export Administration, Department

of Commerce, P.O. Box 273, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: James Lewis, Office of Strategic Trade

and Foreign Policy Controls, Bureau of Export Administration,

Telephone: (202) 482-0092.

SUPPLEMENTARY INFORMATION:

Background

On December 30, 1996, the Bureau of Export Administration (BXA)

published in the Federal Register (61 FR 68572) an interim rule that

exercises jurisdiction over, and imposes new combined national security

and foreign policy controls on, certain encryption items that were on

the United States Munitions List, consistent with Executive Order

(E.O.) 13026 and pursuant to the Presidential Memorandum of that date,

both issued by President Clinton on November 15, 1996.

BXA received comments from 45 commenters, and the comments fall

into three broad categories: general concerns and objections to the

policy embodied in the regulations; recommendations for specific

changes or clarifications to the regulations that are consistent with

the broad encryption policy implemented in the December 30 rule; and

recommendations for additional changes to encryption policy.

Suggestions for Changes to Clarify Existing Policy

A number of commenters provided specific suggestions for changes or

clarifications which are consistent with the intent of the policy and

which would streamline or improve the regulations. Many of these

suggestions are implemented in this rule, such as clarifying that the

tools of trade provisions of License Exception TMP and License

Exception BAG apply globally and clarifying that anti-virus software

does not require a license for export.

Several commenters asked the Department of Commerce to adopt

exemptions to license requirements which were available for encryption

exporters under Sec. 123.16(b)(2) and (b)(9) of the International

Traffic and Arms Regulations (ITAR), such as those which allowed the

export of components to a U.S. subsidiary or which allowed the export

of spare parts and components without a license for an already approved

sale. This rule adds these new provisions under License Exception TMP,

making them applicable to encryption controlled items as well as other

items eligible for TMP treatment.

Two commenters asked that the regulations clarify that the ITAR

licensing policy for equipment specially made for and limited to the

encryption of interbanking transactions had not changed with the

transfer of jurisdiction of encryption products to the Department of

Commerce. This interim rule clarifies that this equipment is not

subject to EI controls.

Several commenters recommended a number of changes to the Key

Escrow Product and Agent criteria found in Supplement Nos. 4 and 5 part

to 742 of the EAR. These recommendations were to simplify the criteria,

and to modify some of the specific prescriptions to allow for greater

flexibility and variation on the part of exporters. Many commenters

found the criteria too bureaucratic and legalistic to help advance U.S.

encryption policy goals, while others noted that the criteria were

still overly focused on key escrow and not consistent with the broader

approach to key recovery found elsewhere in the regulation. Several

commenters also encouraged the administration to make clear that it had

moved beyond key escrow to key recovery in its policy. One commenter

[[Page 50517]]

focused on weaknesses and omissions found in the key escrow product and

agent criteria found in Supplement Nos. 4 and 5 to part 742 of the EAR,

and provided suggested additions to the criteria to make them more

consistent with emerging business practices. The criteria specified in

Supplement Nos. 4 and 5 were discussed extensively with industry prior

to publication of the December 30 interim rule, and the rule reflects

these discussions. However, BXA continues to look for ways to

streamline the criteria, and will address revisions in a future

regulation.

Several commenters expressed concerns over the longer processing

time required for licenses at the Department of Commerce. Some

commenters noted that the involvement of Departments of Energy and

State, the Arms Control and Disarmament Agency and other agencies which

did not review license applications for encryption products submitted

to the Department of State added unnecessary levels of review and

caused unwarranted delays. BXA is continuing to work with other

reviewing Departments and Agencies to ensure expeditious review of

encryption license applications. Many commenters noted that the

requirements for a Department of Commerce license were substantially

greater than what was required at the Department of State. The

Department of Commerce, for example, requires an end-use certificate to

be obtained for some destinations before approving an export; the

Department of State did not and exporters question the need for this

change. Other commenters noted that the Department of State licensing

system was more flexible and faster for approvals of distribution and

manufacturing arrangements. The Department of Commerce has no

equivalent licenses, but is reviewing the possibility of such licenses.

Many oral comments received since the close of the comment period note

that unlike the Department of State, the Department of Commerce does

not allow licenses to be amended, so that if an exporter has, for

example, a license which allows him to ship to thirty countries and

wishes to add one more, the Department of Commerce requires submission

of an entire new license while the Department of State was content with

a simple letter noting the requested change. This rule will now allow

the addition of countries to an Encryption Licensing Arrangement by

letter. BXA understands industry concerns about the license process

under the EAR, and continues to look for ways to streamline the

process.

Additional Recommendations for Changes to Encryption Policy

A number of commenters asked that the Administration revisit a

number of decisions made in the course of the development of the

encryption policy as reflected in the December 30 interim rule. Several

asked that we reconsider and liberalize the treatment of Cryptographic

Application Program Interface. Others questioned the addition of

``defense services'' controls similar to that contained in the ITAR

(which prohibits U.S. persons from assisting foreign entities from

developing their own indigenous encryption products). Several

commenters objected to the structure of License Exception KMI for non-

recoverable 56 bit products, with its requirement for a review every

six months. Other commenters also called for a reversal of the decision

to exempt transferred encryption items from normal Department of

Commerce regulatory practices. Finally, several commenters recommended

that the licensing criteria and License Exceptions applicable to other

dual-use items be fully applicable to encryption products, such as

considerations of foreign availability, the de minimis content

exclusion, public domain treatment and the use of License Exceptions.

This rule focuses on clarifications to existing encryption policy.

Based on public comments to the December 30 interim rule, this

interim rule specifically makes the following changes:

--In Secs. 732.2(d) and 732.3(e)(2), makes editorial corrections to

clarify that encryption items controlled for ``EI'' reasons under ECCNs

5A002, 5D002 and 5E002 are not eligible for De Minimis treatment.

--In Sec. 734.2, clarifies that downloading or causing the downloading

of encryption source code and object code in Canada is not controlled

and does not require a license.

--In Sec. 740.6, clarifies that letters of assurance required for

exports under License Exception TSR may be accepted in the form of a

letter or any other written communication from the importer, including

communications via facsimile.

--Sec. 740.8 is also amended by adding a new paragraph to authorize,

after a one-time technical review, exports and reexports under License

Exception KMI of non-recoverable financial-specific encryption software

(which is not eligible under the provisions of License Exception TSU

for mass market software, such as SET or similar protocols) and

commodities of any key length that are restricted by design (e.g.,

highly field-formatted with validation procedures, and not easily

diverted to other end-uses) for financial applications to secure

financial transactions, for end-uses such as financial transfers or

electronic commerce. No business and marketing plan to develop,

produce, or market encryption items with recoverable features is

required. Such exports and reexports are eligible to all destinations

except Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria.

Conforming changes are also made in Sec. 742.15.

--Sec. 740.8 is also amended to authorize, after a one time review,

exports and reexports under License Exception KMI of general purpose

non-recoverable non-voice encryption commodities or software of any key

length for distribution to banks and financial institutions (as defined

in part 772 of the EAR) in destinations listed in new Supplement No. 3

to part 740, provided the end-use is limited to secure business

financial communications or transactions or financial communications/

transactions between the bank or financial institution and its

customers. No customer to customer communications or transactions are

permitted. Software and commodities that have already received a one-

time technical review through a classification request or have been

licensed for export under an Encryption Licensing Arrangement or a

license are eligible for export to banks and financial institutions

under License Exception KMI without an additional one-time technical

review. Note that no business or marketing plan is required. Conforming

changes are also made in Sec. 742.15. Software and commodities that

have already been approved under an Encryption Licensing Arrangement to

banks in specified countries may now be exported or reexported to other

banks and financial institutions in those countries under the same

Encryption Licensing Arrangement.

--In Sec. 740.9, removes the reference to Country Group D:1. With this

change, commodities and software are eligible for export under the

tools of trade provisions of License Exception TMP to all destinations

except countries listed in country group E:2 or Sudan. This also

clarifies that encryption software controlled for EI reasons under ECCN

5D002 may be pre-loaded on a laptop and temporarily exported under the

tools of trade provisions of License Exception TMP

[[Page 50518]]

to most countries, including those listed in Country Group D:1.

--Also in Sec. 740.9, adds a new paragraph (a)(2)(ix) to authorize

under License Exception TMP the export of components, parts, tools or

test equipment exported by a U.S. person to its subsidiary, affiliate

or facility in a country in Country Group B that is owned or controlled

by the U.S. person, if the components, part, tool or test equipment is

to be used for manufacture, assembly, testing, production or

modification, provided that no components, parts, tools or test

equipment or the direct product of such components, parts, tools or

test equipment are transferred or reexported to a country other than

the United States from such subsidiary, affiliate or facility without a

license or other authorization from BXA.

--In Sec. 740.11, excludes items controlled for EI reasons from

eligibility under the International Safeguards provisions of License

Exception GOV.

--In Sec. 740.14, clarifies existing provisions of License Exception

BAG to distinguish temporary from permanent exports and imposes a

restriction on the use of BAG for exports or reexports of EI-controlled

items to terrorist supporting destinations or by persons other than

U.S. citizens and permanent residents.

--New Supplement No. 3 to part 740 is added to list the countries

eligible to receive under License Exception KMI general purpose non-

recoverable non-voice encryption commodities or software of any key

length for distribution to banks and financial institutions.

--In Sec. 742.15, adds 40-bit DES as being eligible for consideration

under the 15-day review, for mass-market eligibility, subject to the

additional criteria listed in Supplement No. 6 to part 742.

--In Sec. 742.15(b)(1), clarifies that subsequent bundling, updates or

releases may be exported and reexported under applicable provisions of

the EAR without a separate one-time technical review so long as the

functional encryption capacity of the originally reviewed mass-market

encryption software has not been modified or enhanced.

--New paragraph (b)(4) is added to Sec. 742.15 to authorize exports and

reexports under an Encryption Licensing Arrangement of general purpose

non recoverable, non-voice encryption commodities and software of any

key length for use by banks/financial institutions as defined in part

772 of the EAR in all destinations except Cuba, Iran, Iraq, Libya,

North Korea, Syria and Sudan. No business or marketing plan is

required. Exports and reexports for the end-uses to secure business

financial communications or between the bank and/or financial

institution and its customers will receive favorable consideration. No

customer to customer communications or transactions are eligible under

the Encryption Licensing Arrangement.

--In Supplement No. 4 to part 742, paragraph (3), revises ``reasonable

frequency'' to ``at least once every three hours'' to resolve the

ambiguity on how often the output must identify the key recovery agent

and material/information required to decrypt the ciphertext.

--In Supplement No. 4 to part 742, paragraph (6)(i), clarifies that the

U.S. government must be able to obtain the key(s) or other material/

information needed to decrypt all data, without restricting the means

by which the key recoverable products allow this.

--In Supplement No. 6 to part 742 for 7-day mass-market classification

requests, clarifies that a copy of the encryption subsystem source code

may be used instead of a test vector to determine eligibility for

License Exception TSU for mass market software.

--In Sec. 743.1, requires reporting under the Wassenaar Arrangement for

items controlled under ECCNs 5A002 and 5D002 when exported under

specific provisions of License Exception KMI. This is not a new

reporting requirement, but replaces and narrows the scope of the

reporting requirement under the Encryption License Arrangement for

financial-specific commodities and software and general purpose non-

recoverable non-voice encryption commodities and software of any key

length for distribution to banks and financial institutions that are

eligible for License Exception KMI.

--In Secs. 748.9 and 748.10, clarifies a long-standing policy that no

support documentation is required for exports of technology or

software, and it removes the requirement for such support documentation

for exports of technology or software to Bulgaria, Czech Republic,

Hungary, Poland, Romania, or Slovakia. This rule also exempts from

support documentation requirements all encryption items controlled

under ECCNs 5A002, 5B002, 5D002 and 5E002. This conforms with the

practice under the ITAR prior to December 30, 1996.

--In Sec. 750.7, allows requests to add countries of destination to

Encryption Licensing Arrangements by letter.

--In Sec. 752.3, excludes encryption items controlled for EI reasons

from eligibility for a Special Comprehensive License.

--In Sec. 770.2, adds a new interpretation to clarify that encryption

software controlled for EI reasons under ECCN 5D002 may be pre-loaded

on a laptop and exported under the tools of trade provision of License

Exception TMP or the personal use exemption under License Exception

BAG, subject to the terms and conditions of such License Exceptions.

--In part 772, adds new definitions for ``bank'', ``effective

control'', ``encryption licensing arrangement'', and ``financial

institution''.

--In Supplement No. 1 to part 774, Category 5--Telecommunications and

Information Security is amended by revising ECCN 5A002 to authorize

exports of components and spare parts under License Exception LVS,

provided the value of each order does not exceed $500 and the

components and spare parts are destined for items previously authorized

for export, and to clarify that equipment for the encryption of

interbanking transactions is not controlled under that entry.

--Revises the phrase ``up to 56-bit key length DES'' where it appears

to read ``56-bit DES or equivalent'', and makes other editorial

changes.

Note that this rule does not affect exports or reexports authorized

under licenses issued prior to the effective date of this rule.

Several commenters also noted that the exemptions found under

Sec. 125.4(b) of the ITAR should be implemented in the EAR. Most of the

exemptions found in Sec. 125.4(b) of the ITAR are already available

under existing provisions of the EAR. For example, Sec. 125.4(b)(4) of

the ITAR authorizes exports without a license of copies of technical

data previously authorized for export. The EAR has no restrictions on

the number of copies sent to a consignee authorized to receive

technology under license or a License Exception. Section 125.4(b)(5)

authorizes exports without a license of technical data in the form of

basic operations, maintenance, and training information relating to a

defense article lawfully exported or authorized for export provided the

technical data is for use by the same recipient. Further, Section

125.4(2) authorizes exports of technical data in furtherance of a

manufacturing license or technical assistance agreement. License

Exception

[[Page 50519]]

TSU for operation technology and software (see Sec. 740.13 of the EAR)

authorizes the export and reexport of the minimum technology necessary

for the installation, operation, maintenance and repair of those

products (including software) that are lawfully exported or reexported

under a license, a License Exception, or non license required (NLR).

Section 125.4(b)(7) of the ITAR allows the return of technical data to

the original source of import. License Exception TMP similarly

authorizes the return of any foreign-origin item, including technology,

to the country from which it was imported if the characteristics have

not been enhanced while in the United States (see Sec. 740.9(b)(3) of

the EAR).

BXA has also received many inquiries on Shipper's Export

Declaration (SED) requirements for Canada. Note that the EAR do not

require exporters to file an SED for exports of any item to Canada for

consumption in Canada, unless a license is required. Further note that

a license is not required for exports of encryption items for

consumption in Canada, including certain exports over the Internet.

Finally, BXA has received many requests for clarification on SED

requirements for electronic transfers. Neither the EAR nor the FTSR

provide for the filing of SEDs for electronic transfers of items

controlled by the Department of Commerce under the EAR .

As further clarifications and changes to the encryption provisions

of the EAR are intended, in particular regarding Supplement Nos. 4 and

5 to part 742 of the EAR, BXA will publish additional interim rules in

the Federal Register.

Rulemaking Requirements

1. This interim rule has been determined to be significant for

purposes of E. O. 12866.

2. Notwithstanding any other provision of law, no person is

required to respond to, nor shall any person be subject to a penalty

for failure to comply with a collection of information, subject to the

requirements of the Paperwork Reduction Act, unless that collection of

information displays a currently valid Office of Management and Budget

Control Number. This rule contains collections of information subject

to the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.). These

collections have been approved by the Office of Management and Budget

under control numbers 0694-0088, ``Multi-Purpose Application,'' which

carries a burden hour estimate of 52.5 minutes per submission; and

0694-0104, ``Commercial Encryption Items Transferred from the

Department of State to the Department of Commerce,'' which carries the

following burden hours: marketing plans (40 hours each); semiannual

progress reports (8 hours each); safeguard procedures (4 hours);

recordkeeping (2 hours); annual reports (4 hours); and Encryption

Licensing Arrangement letters (15 minutes).

3. This rule does not contain policies with Federalism implications

sufficient to warrant preparation of a Federalism assessment under E.O.

12612.

4. The provisions of the Administrative Procedure Act (5 U.S.C.

553) requiring notice of proposed rulemaking, the opportunity for

public participation, and a delay in effective date, are inapplicable

because this regulation involves a military and foreign affairs

function of the United States (Sec. 5 U.S.C. 553(a)(1)). Further, no

other law requires that a notice of proposed rulemaking and an

opportunity for public comment be given for this interim final rule.

Because a notice of proposed rulemaking and an opportunity for public

comment are not required to be given for this rule under 5 U.S.C. or by

any other law, the requirements of the Regulatory Flexibility Act (5

U.S.C. 601 et seq. ) are not applicable.

However, because of the importance of the issues raised by these

regulations, this rule is issued in interim form and comments will be

considered in the development of final regulations. Accordingly, the

Department of Commerce encourages interested persons who wish to

comment to do so at the earliest possible time to permit the fullest

consideration of their views.

The period for submission of comments will close November 6, 1998.

The Department of Commerce will consider all comments received before

the close of the comment period in developing final regulations.

Comments received after the end of the comment period will be

considered if possible, but their consideration cannot be assured. The

Department will not accept public comments accompanied by a request

that a part or all of the material be treated confidentially because of

its business proprietary nature or for any other reason. The Department

of Commerce will return such comments and materials to the person

submitting the comments and will not consider them in the development

of final regulations. All public comments on these regulations will be

a matter of public record and will be available for public inspection

and copying. In the interest of accuracy and completeness, the

Department of Commerce requires comments in written form.

Oral comments must be followed by written memoranda, which will

also be a matter of public record and will be available for public

review and copying. Communications from agencies of the United States

Government or foreign governments will not be made available for public

inspection.

The public record concerning these regulations will be maintained

in the Bureau of Export Administration Freedom of Information Records

Inspection Facility, Room 4525, Department of Commerce, 14th Street and

Pennsylvania Avenue, NW, Washington, DC 20230. Records in this

facility, including written public comments and memoranda summarizing

the substance of oral communications, may be inspected and copied in

accordance with regulations published in Part 4 of Title 15 of the Code

of Federal Regulations (CFR). Information about the inspection and

copying of records at the facility may be obtained from Margaret

Cornejo, Bureau of Export Administration Freedom of Information

Officer, at the above address or by calling (202) 482-5653.

List of Subjects

15 CFR Parts 732, 740, 743, 748, 750, and 752

Administrative practice and procedure, Exports, Foreign trade,

Reporting and recordkeeping requirements.

15 CFR Part 734

Administrative practice and procedure, Exports, Foreign trade.

15 CFR Parts 742, 770, 772 and 774

Exports, foreign trade.

Accordingly, 15 CFR chapter VII, subchapter C, is amended as

follows:

1. The authority citation for 15 CFR parts 732, 740, 748, 752 and

772 continues to read as follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;

E.O. 12924, 59 FR 43437, 3 CFR, 1994 Comp., p. 917; Executive Order

13026 (November 15, 1996, 61 FR 58767); Notice of August 17, 1998

(63 FR 55121, August 17, 1998).

2. The authority citation for 15 CFR part 734 continues to read as

follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;

E.O. 12924, 59 FR 43437, 3 CFR, 1994 Comp., p. 917; E.O. 12938, 59

FR 59099, 3 CFR, 1994 Comp., p. 950; Executive Order 13026 (November

15, 1996, 61 FR 58767); Notice of August 17, 1998 (63 FR 55121,

August 17, 1998).

3. The authority citation for 15 CFR part 742 continues to read as

follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;

18 U.S.C. 2510 et seq.;

[[Page 50520]]

22 U.S.C. 3201 et seq.; 42 U.S.C. 2139a; E.O. 12058, 43 FR 20947, 3

CFR, 1978 Comp., p. 179; E.O. 12851, 58 FR 33181, 3 CFR, 1993 Comp.,

p. 608; E.O. 12924, 59 FR 43437, 3 CFR, 1994 Comp., p. 917; E.O.

12938, 59 FR 59099, 3 CFR, 1994 Comp., p. 950; Executive Order 13026

(November 15, 1996, 61 FR 58767); Notice of August 17, 1998 (63 FR

55121, August 17, 1998).

4. The authority citation for 15 CFR part 743 continues to read as

follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;

E.O. 12924, 59 FR 43437, 3 CFR, 1994 Comp., p. 917; Notice of August

17, 1998 (63 FR 55121, August 17, 1998).

5. The authority citation for 15 CFR part 750 continues to read as

follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;

E.O. 12924, 59 FR 43437, 3 CFR, 1994 Comp., p. 917; Notice of August

15, 1995 (60 FR 42767, August 17, 1995); E.O. 12981, 60 FR 62981;

Notice of August 17, 1998 (63 FR 55121, August 17, 1998).

6. The authority citation for 15 CFR part 770 continues to read as

follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;

E.O. 12924, 59 FR 43437, 3 CFR, 1994 Comp., p. 917; Notice of August

17, 1998 (63 FR 55121, August 17, 1998).

7. The authority citation for 15 CFR part 774 continues to read as

follows:

Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;

10 U.S.C. 7420; 10 U.S.C. 7430(e); 18 U.S.C. 2510 et seq.; 22 U.S.C.

287c; 22 U.S.C. 3201 et seq.; 22 U.S.C. 6004; Sec. 201, Pub. L. 104-

58, 109 Stat. 557 (30 U.S.C. 185(s)); 30 U.S.C. 185(u); 42 U.S.C.

2139a; 42 U.S.C. 6212; 43 U.S.C. 1354; 46 U.S.C. app. 466c; 50

U.S.C. app. 5; E.O. 12924, 59 FR 43437, 3 CFR, 1994 Comp., p. 917;

Executive Order 13026 (November 15, 1996, 61 FR 58767); Notice of

August 17, 1998 (63 FR 55121, August 17, 1998).

PART 732--[AMENDED]

Sec. 732.2 [Amended]

8. Section 732.2(d) amended by revising the phrase ``ECCN 5A002 or

ECCN 5D002'' to read ``ECCNs 5A002, 5D002 or 5E002''.

Sec. 732.3 [Amended]

9. Section 732.3(e)(2) is amended by revising the phrase ``ECCN

5A002 or ECCN 5D002'' to read ``ECCNs 5A002, 5D002 or 5E002''.

PART 734--[AMENDED]

10. Section 734.2 is amended by revising paragraph (b)(9)(ii) to

read as follows:

Sec. 734.2 Important EAR terms and principles.

(a) * * *

(b) * * *

(9) * * *

(ii) The export of encryption source code and object code software

controlled for EI reasons under ECCN 5D002 on the Commerce Control List

(see Supplement No. 1 to part 774 of the EAR) includes downloading, or

causing the downloading of, such software to locations (including

electronic bulletin boards, Internet file transfer protocol, and World

Wide Web sites) outside the U.S. (except Canada), or making such

software available for transfer outside the United States (except

Canada), over wire, cable, radio, electromagnetic, photo optical,

photoelectric or other comparable communications facilities accessible

to persons outside the United States (except Canada), including

transfers from electronic bulletin boards, Internet file transfer

protocol and World Wide Web sites, unless the person making the

software available takes precautions adequate to prevent unauthorized

transfer of such code outside the United States or Canada. Such

precautions shall include ensuring that the facility from which the

software is available controls the access to and transfers of such

software through such measures as:

(A) The access control system, either through automated means or

human intervention, checks the address of every system requesting or

receiving a transfer and verifies that such systems are located within

the United States or Canada;

(B) The access control system provides every requesting or

receiving party with notice that the transfer includes or would include

cryptographic software subject to export controls under the Export

Administration Regulations, and that anyone receiving such a transfer

cannot export the software without a license; and

(C) Every party requesting or receiving a transfer of such software

must acknowledge affirmatively that he or she understands that the

cryptographic software is subject to export controls under the Export

Administration Regulations and that anyone receiving the transfer

cannot export the software without a license. BXA will consider

acknowledgments in electronic form provided that they are adequate to

assure legal undertakings similar to written acknowledgments.

* * * * *

Sec. 734.4 [Amended]

11. Section 734.4 is amended by revising the phrase ``ECCN, 5A002,

ECCN 5D002, and 5E002'' in paragraph (b)(2) to read ``ECCNs 5A002,

5D002, and 5E002''.

PART 740--[AMENDED]

12. Section 740.3 is amended by adding a new paragraph (d)(5) to

read as follows:

Sec. 740.3 Shipments of limited value (LVS).

* * * * *

(d) * * *

(5) Exports of encryption items. For components or spare parts

controlled for ``EI'' reasons under ECCN 5A002, exports under this

License Exception must be destined to support an item previously

authorized for export.

* * * * * .

13. Section 740.6 is amended by revising the first sentence in

paragraph (a)(3) to read as follows:

Sec. 740.6 Technology and software under restriction (TSR).

(a) * * *

(3) Form of written assurance. The required assurance may be made

in the form of a letter or any other written communication from the

importer, including communications via facsimile, or the assurance may

be incorporated into a licensing agreement that specifically includes

the assurances. * * *

* * * * *

14. Section 740.8 is amended:

(a) By revising paragraph (b)(2);

(b) By revising the phrase ``recovery encryption software and

equipment'' in paragraph (d)(1) to read ``recoverable encryption

items'';

(c) By revising the phrase ``March 1 and no later than September

1'' in paragraph (e)(2) to read ``February 1 and no later than August

1'', as follows:

Sec. 740.8 Key management infrastructure.

* * * * *

(b) * * *

(2)(i) Non-recoverable encryption commodities and software.

Eligible items are non-recoverable 56-bit DES or equivalent strength

commodities and software controlled under ECCNs 5A002 and 5D002 that

are made eligible as a result of a one-time BXA review. You may

initiate this review by submitting a classification request for your

product in accordance with paragraph (d)(2) of this section.

(ii) Non-recoverable financial-specific encryption commodities and

software of any key length. (A)(1) After a one-time technical review

through a classification request (see Sec. 748.3 of the EAR), non-

recoverable, financial-specific encryption software (which is not

eligible under the provisions of License Exception TSU for mass market

software such as SET or similar protocols); and commodities of any key

length that are

[[Page 50521]]

restricted by design (e.g., highly field-formatted with validation

procedures, and not easily diverted to other end-uses) for financial

applications to secure financial communications/transactions for end-

uses such as financial transfers, or electronic commerce will be

permitted under License Exception KMI for export and reexport to all

destinations except Cuba, Iran, Iraq, Libya, North Korea, Sudan, and

Syria.

(2) For such classification requests, indicate ``License Exception

KMI'' in block #9 on Form BXA748P. Submit the original request to BXA

in accordance with Sec. 748.3 of the EAR and send a copy of the request

to: Attn: Financial Specific Encryption Request Coordinator, P.O. Box

246, Annapolis Junction, MD 20701-0246.

(B) Upon approval of your classification request for a non-

recoverable financial-specific encryption commodities or software, you

will become eligible to use License Exception KMI. This approval allows

the export or reexport of encryption commodities and software

specifically designed and limited for use in the processing of

electronic financial (commerce) transactions, which implements

cryptography in specifically delineated fields such as merchant's

identification, the customer's identification and address, the

merchandise purchased, and the payment mechanism. It does not allow for

encryption of data, text or other media except as directly related to

these elements of the electronic transaction to support financial

communications/transactions. For exports and reexports under the

provisions of this paragraph (b)(2)(ii), no business and marketing plan

is required, and the reporting requirements of paragraph (e) of this

section and the criteria described in Supplement Nos. 4 and 5 to part

742 of the EAR are not applicable. However, you are subject to the

reporting requirements of the Wassenaar Arrangement (see Sec. 743.1 of

the EAR)

(iii) General purpose non-recoverable encryption commodities or

software of any key length for use by banks/financial institutions.

(A)(1) After a one-time technical review through a classification

request (see Sec. 748.3 of the EAR), exports and reexports of general

purpose non-recoverable non-voice encryption commodities or software of

any key length will be permitted under License Exception KMI for

distribution to banks and financial institutions as defined in part 772

of the EAR in all destinations listed in Supplement No. 3 to part 740

of the EAR, and to branches of such banks and financial institutions

wherever located. The end-use is limited to secure business financial

communications or transactions and financial communications/

transactions between the bank and/or financial institution and its

customers. No customer to customer communications/transactions are

permitted.

(2) For such classificiation requests, indicate ``License Exception

KMI'' in block #9 on Form BXA748P. Submit the original request to BXA

in accordance with Sec. 748.3 of the EAR and send a copy of the request

to: Attn: Financial Specific Encryption Request Coordinator, P.O. Box

246, Annapolis Junction, MD 20701-0246.

(3) Upon approval of your classification request for a non-

recoverable financial-specific encryption commodities or software, you

will become eligible to use License Exception KMI.

(B) Software and commodities that have already received a one-time

technical review through a classification request or have been licensed

for export under an Encryption Licensing Arrangement or a license are

eligible for export under the provisions of this paragraph (b)(2)(iii)

without an additional one-time technical review.

(C) Software and commodities that have already been approved under

an Encryption Licensing Arrangement to banks and financial institutions

in specified countries may now be exported or reexported to other banks

and financial institutions in those countries under the same Encryption

Licensing Arrangement.

(D) For exports and reexports under the provisions of this

paragraph (b)(2)(iii), no business and marketing plan is required and

the reporting requirements of paragraph (e) of this section are not

applicable. However, you are subject to the reporting requirements of

the Wassenaar Arrangement (see Sec. 743.1 of the EAR).

* * * * *

15. Section 740.9 is amended:

a. By revising paragraph (a)(2)(i);

b. By revising the reference to ``Sec. 740.9(a)'' in paragraph

(a)(2)(ii)(C) to read ``Sec. 740.10(a)'';

c. By revising the reference to ``under Sec. 740.8(b)(1)'' in the

introductory text of paragraph (b)(1)(iii) to read ``under this

paragraph (b)(1)''; and

d. By adding a new paragraph (a)(2)(ix) to read as follows:

Sec. 740.9 Temporary imports, exports, and reexports (TMP).

* * * * *

(a) * * *

(2) * * *

(i) Tools of trade. Usual and reasonable kinds and quantities of

tools of trade (commodities and software) for use by the exporter or

employees of the exporter in a lawful enterprise or undertaking of the

exporter. Eligible tools of trade may include, but are not limited to,

such equipment and software as is necessary to commission or service

goods, provided that the equipment or software is appropriate for this

purpose and that all goods to be commissioned or serviced are of

foreign origin, or if subject to the EAR, have been legally exported or

reexported. The tools of trade must remain under the effective control

of the exporter or the exporter's employee (see part 772 of the EAR for

a definition of ``effective control''). The shipment of tools of trade

may accompany the individual departing from the United States or may be

shipped unaccompanied within one month before the individual's

departure from the United States, or at any time after departure. No

tools of the trade may be taken to Country Group E:2 (see Supplement

No. 1 to part 740) or Sudan. For exports under this License Exception

of laptop computers loaded with encryption software, refer to item

interpretation 13 in Sec. 770.2 of the EAR.

* * * * *

(ix) Temporary exports to a U.S. subsidiary, affiliate or facility

in Country Group B. (A) Components, parts, tools or test equipment

exported by a U.S. person to its subsidiary, affiliate or facility in a

country listed in Country Group B (see Supplement No. 1 to this part)

that is owned or controlled by the U.S. person, if the components,

part, tool or test equipment is to be used for manufacture, assembly,

testing, production or modification, provided that no components,

parts, tools or test equipment or the direct product of such

components, parts, tools or test equipment are transferred or

reexported to a country other than the United States from such

subsidiary, affiliate or facility without prior authorization by BXA.

(B) For purposes of this paragraph (a)(2)(ix), U.S. person is

defined as follows: an individual who is a citizen of the United

States, an individual who is a lawful permanent resident as defined by

8 U.S.C. 1101(a)(2) or an individual who is a protected individual as

defined by 8 U.S.C. 1324b(a)(3). U.S. person also means any juridical

person organized under the laws of the United States, or any

jurisdiction within the United States (e.g., corporation, business

association, partnership, society, trust, or any other entity,

organization or group that is

[[Page 50522]]

incorporated to do business in the United States).

* * * * *

Sec. 740.10 [Amended]

16. Section 740.10 is amended by revising the reference to

``Sec. 740.8(a)(2)(ii)'' in paragraph (a)(2)(i) to read

``Sec. 740.9(a)(2)(ii)''.

17. Section 740.11 is amended by adding new paragraph (a)(3) to

read as follows:

Sec. 740.11 Governments and international organizations (GOV).

* * * * *

(a) International safeguards. * * *

(3) No encryption items controlled for EI reasons under ECCNs

5A002, 5D002, or 5E002 may be exported under the provisions of this

paragraph (a).

* * * * *

18. Section 740.14 is amended by revising paragraphs (a), (b), and

(c); by adding a sentence to the end of paragraph (d); and by adding

paragraph (f) to read as follows:

Sec. 740.14 Baggage (BAG).

(a) Scope. This License Exception authorizes individuals leaving

the United States either temporarily (i.e., traveling) or longer-term

(i.e., moving) and crew members of exporting or reexporting carriers to

take to any destination, as personal baggage, the classes of

commodities and software described in this section.

(b) Eligibility. Individuals leaving the United States may export

or reexport any of the following commodities or software for personal

use of the individuals or members of their immediate families traveling

with them to any destination or series of destinations. Individuals

leaving the United States temporarily (i.e., traveling) must bring back

items exported and reexported under this License Exception unless they

consume the items abroad or are otherwise authorized to dispose of them

under the EAR. Crew members may export or reexport only commodities and

software described in paragraphs (b)(1) and (b)(2) of this section to

any destination.

(1) Personal effects. Usual and reasonable kinds and quantities for

personal use of wearing apparel, articles of personal adornment, toilet

articles, medicinal supplies, food, souvenirs, games, and similar

personal effects, and their containers.

(2) Household effects. Usual and reasonable kinds and quantities

for personal use of furniture, household effects, household

furnishings, and their containers.

(3) Vehicles. Usual and reasonable kinds and quantities of

vehicles, such as passenger cars, station wagons, trucks, trailers,

motorcycles, bicycles, tricycles, perambulators, and their containers.

(4) Tools of trade. Usual and reasonable kinds and quantities of

tools, instruments, or equipment and their containers for use in the

trade, occupation, employment, vocation, or hobby of the traveler or

members of the household being moved. For special provisions regarding

encryption items subject to EI controls, see paragraph (f) of this

section.

(c) Limits on eligibility. The export of any commodity or software

is limited or prohibited, if the kind or quantity is in excess of the

limits described in this section. In addition, the commodities or

software must be:

(1) Owned by the individuals (or by members of their immediate

families) or by crew members of exporting carriers on the dates they

depart from the United States;

(2) Intended for and necessary and appropriate for the use of the

individuals or members of their immediate families traveling with them,

or by the crew members of exporting carriers;

(3) Not intended for sale or other disposal; and

(4) Not exported under a bill of lading as cargo if exported by

crew members.

(d) * * * No items controlled for EI reasons may be exported or

reexported as unaccompanied baggage.

* * * * *

(f) Special provisions: encryption software subject to EI controls.

(1) Only a U.S. citizen or permanent resident as defined by 8 U.S.C.

1101(a)(20) may permanently export or reexport encryption items

controlled for EI reasons under this License Exception.

(2) The U.S. citizen or permanent resident must maintain effective

control of the encryption items controlled for EI reasons.

(3) The encryption items controlled for EI reasons may not be

exported or reexported to Country Group E:2, Iran, Iraq, Sudan, or

Syria.

19. New Supplement No. 3 is added to read as follows:

Supplement No. 3 To Part 740--Countries Eligible To Receive General

Purpose Encryption Commodities and Software for Banks and Financial

Institutions

Anguilla

Antigua

Argentina

Aruba

Australia

Austria

Bahamas

Barbados

Belgium

Brazil

Canada

Croatia

Denmark

Dominica

Ecuador

Finland

France

Germany

Greece

Hong Kong

Hungary

Iceland

Ireland

Italy

Japan

Kenya

Luxembourg

Monaco

Netherlands

New Zealand

Norway

Poland

Portugal

St. Kitts & Nevis

St. Vincent/Grenadines

Seychelles

Singapore

Spain

Sweden

Switzerland

Trinidad & Tobago

Turkey

Uruguay

United Kingdom

PART 742--[AMENDED]

20. Section 742.15 is amended:

a. By revising paragraph (b)(1);

b . By revising the phrase ``up to 56-bit key length DES or

equivalent strength'' to read ``56-bit DES or equivalent'' in paragraph

(b)(3) wherever it appears;

c.-d. By revising the phrase ``The use of License Exception KMI''

in the seventh sentence of paragraph (b)(3)(i) to read ``Authorization

to use License Exception KMI';

e. By redesignating paragraphs (b)(4) and (5) as (b)(6) and (7);

f. By adding new paragraphs (b)(4) and (b)(5); and

g. By revising newly designated paragraph (b)(6)(i) to read as

follows:

Sec. 742.15 Encryption items.

* * * * *

(b) * * *

(1) Certain mass-market encryption software. (i) Consistent with

E.O. 13026 of November 15, 1996 (61 FR 58767), certain encryption

software that was transferred from the U.S. Munitions List to the

Commerce Control List pursuant to the Presidential Memorandum of

November 15, 1996 may be released from EI controls and thereby made

eligible for mass market treatment after a one-time technical review.

To determine eligibility for mass market

[[Page 50523]]

treatment, exporters must submit a classification request to BXA. 40-

bit mass market encryption software using RC2 or RC4 may be eligible

for a 7-day review process, and company proprietary software or 40-bit

DES implementations may be eligible for 15-day processing. Refer to

Supplement No. 6 to part 742 and Sec. 748.3(b)(3) of the EAR for

additional information. Note that the one-time technical review is for

a determination to release encryption software in object code only

unless otherwise specifically requested. Exporters requesting release

of the source code should refer to paragraph (b)(3)(v)(E) of Supplement

No. 6 to part 742.

(ii) If, after a one-time technical review, BXA determines that the

software is released from EI controls, such software is eligible for

all provisions of the EAR applicable to other software, such as License

Exception TSU for mass-market software. Furthermore, for such software

released from EI controls, subsequent bundling, updates, or releases

consisting of or incorporating this software may be exported and

reexported without a separate one-time technical review, so long as the

functional encryption capacity (e.g., algorithm, key modulus) of the

originally reviewed mass-market encryption software has not been

modified or enhanced. However, if BXA determines that the software is

not released from EI controls, a license is required for export and

reexport to all destinations, except Canada, and license applications

will be considered on a case-by-case basis.

(2) * * *

(3) * * *

(4) General purpose non-recoverable encryption commodities or

software of any key length for use by banks/financial institutions. (i)

Commodities and software that have already received a one-time

technical review through a classification request or have been licensed

for export under an Encryption Licensing Arrangement or a license are

eligible for export under License Exception KMI (see

Sec. 740.8(b)(2)(iii) of the EAR) without an additional one-time

technical review, providing that the export meets all the terms and

conditions of License Exception KMI.

(ii) For exports not eligible under License Exception KMI, exports

of general purpose non-recoverable non-voice encryption commodities or

software of any key length will be permitted under an Encryption

Licensing Arrangement for use by banks and financial institutions as

defined in part 772 of the EAR in all destinations except Cuba, Iran,

Iraq, Libya, North Korea, Syria and Sudan. No business or marketing

plan is required. Applications for such commodities and software will

receive favorable consideration when the end-use is limited to secure

business financial communications or transactions and financial

communications/ transactions between the bank and/or financial

institution and its customers, and provided that there are no concerns

about the country or financial end-user. No customer to customer

communications or transactions are allowed. Furthermore, licenses for

such exports will require the license holder to report to BXA

information concerning the export such as export control classification

number, number of units in the shipment, and country of ultimate

destination. Note that any country or end-user prohibited to receive

encryption commodities and software under a specific Encryption

Licensing Arrangement is reviewed on a case-by-case basis, and may be

considered by BXA for eligibility under future Encryption Licensing

Arrangement requests.

(5) Non-recoverable financial-specific encryption items of any key

length. After a one-time technical review via a classification request,

non-recoverable financial-specific encryption items of any key length

that are restricted by design (e.g. highly field-formatted and

validation procedures, and not easily diverted to other end-uses) for

financial applications will be permitted for export and reexport under

License Exception KMI (see Sec. 740.8 of the EAR). No business and

marketing plan is required.

(6) All other encryption items. (i) Encryption licensing

arrangement. Applicants may submit license applications for exports and

reexports of certain encryption commodities and software in unlimited

quantities for all destinations except Cuba, Iran, Iraq, Libya, North

Korea, Syria, and Sudan. Applications will be reviewed on a case-by-

case basis. If approved, encryption licensing arrangements may be valid

for extended periods as requested by the applicant in block #24 on Form

BXA-748P. In addition, the applicant must specify the sales territory

and class(es) of end-user(s). Such licenses may require the license

holder to report to BXA certain information such as ECCN, item

description, quantity, and end-user name and address.

* * * * *

21. Part 742 is amended by revising Supplement Nos. 4 and 6 to read

as follows:

Supplement No. 4 to Part 742--Key Escrow or Key Recoverable Products

Criteria

Key Recoverable Feature

(1) The key(s) or other material/information required to decrypt

ciphertext shall be accessible through a key recoverable feature.

(2) The product's cryptographic functions shall be inoperable

until the key(s) or other material/information required to decrypt

ciphertext is recoverable by government officials under proper legal

authority and without the cooperation or knowledge of the user.

(3) The output of the product shall automatically include, in an

accessible format and with a frequency of at least once every three

hours, the identity of the key recovery agent(s) and information

sufficient for the key recovery agent(s) to identify the key(s) or

other material/information required to decrypt the ciphertext.

(4) The product's key recoverable functions shall allow access

to the key(s) or other material/information needed to decrypt the

ciphertext regardless of whether the product generated or received

the ciphertext.

(5) The product's key recoverable functions shall allow for the

recovery of all required decryption key(s) or other material/

information required to decrypt ciphertext during a period of

authorized access without requiring repeated presentations of access

authorization to the key recovery agent(s).

Interoperability Feature

(6) The product's cryptographic functions may:

(i) Interoperate with other key recoverable products that meet

these criteria, and shall not interoperate with products whose key

recovery feature has been altered, bypassed, disabled, or otherwise

rendered inoperative;

(ii) Send information to non-key recoverable products only when

assured access is permitted to the key(s) or other material/

information needed to decrypt ciphertext generated by the key

recoverable product. Otherwise, key length is restricted to less

than or equal to 56-bit DES or equivalent.

(iii) Receive information from non-key recoverable products with

a key length restricted to less than or equal to 56-bit DES or

equivalent.

Design, Implementation and Operational Assurance

(7) The product shall be resistant to efforts to disable or

circumvent the attributes described in criteria one through six.

(8) The product's cryptographic function's key(s) or other

material/information required to decrypt ciphertext shall be

escrowed with a key recovery agent(s) (who may be a key recovery

agent(s) internal to the user's organization) acceptable to BXA,

pursuant to the criteria in supplement No. 5 to part 742. Since the

establishment of a key management infrastructure and key recovery

agents may take some time, BXA will, while the infrastructure is

being built, consider exports of key recoverable encryption products

which facilitate establishment of the key management infrastructure

before a key recovery agent is named.

[[Page 50524]]

Supplement No. 6 To Part 742--Guidelines for Submitting a

Classification Request for a Mass Market Software Product That Contains

Encryption

Classification requests for release of certain mass market

encryption software from EI controls must be submitted on Form BXA-

748P, in accordance with Sec. 748.3 of the EAR. To expedite review

of the request, clearly mark the envelope ``Attn.: Mass Market

Encryption Software Classification Request''. In Block 9: Special

Purpose of the Form BXA-748P, you must insert the phrase ``Mass

Market Encryption Software. Failure to insert this phrase will delay

processing. In addition, the Bureau of Export Administration

recommends that such requests be delivered via courier service to:

Bureau of Export Administration, Office of Exporter Services, Room

2705, 14th Street and Pennsylvania Ave., NW, Washington, DC 20230.

In addition, send a copy of the request and all supporting

documents by Express Mail to: Attn: Mass Market Encryption Request

Coordinator, P.O. Box 246, Annapolis Junction, MD 20701-0246.

(a) Requests for mass market encryption software that meet the

criteria in paragraph (a)(2) of this Supplement will be processed in

seven (7) working days from receipt of a properly completed request.

Those requests for mass market encryption software that meet the

criteria of paragraph (a)(1) of this supplement only will be

processed in fifteen (15) working days from receipt of a properly

completed request. When additional information is requested, the

request will be processed within 15 working days of the receipt of

the requested information.

(1) A mass market software product that meets all the criteria

established in this paragraph will be processed in fifteen (15)

working days from receipt of the properly completed request:

(i) The commodity must be mass market software. Mass market

software is computer software that is available to the public via

sales from stock at retail selling points by means of over-the-

counter transactions, mail order transactions, or telephone call

transactions;

(ii) The software must be designed for installation by the user

without further substantial support by the supplier. Substantial

support does not include telephone (voice only) help line services

for installation or basic operation, or basic operation training

provided by the supplier; and

(iii) The software includes encryption for data confidentiality.

(2) A mass market software product that meets all the criteria

established in this paragraph will be processed in seven (7) working

days from receipt of the properly completed request:

(i) The software meets all the criteria established in paragraph

(a)(1)(i) through (iii) of this supplement;

(ii) The data encryption algorithm must be RC4 or RC2 with a key

space no longer than 40-bits. The RC4 and RC2 algorithms are

proprietary to RSA Data Security, Inc. To ensure that the subject

software is properly licensed and correctly implemented, contact RSA

Data Security, (415) 595-8782;

(iii) If any combination of RC4 or RC2 are used in the same

software, their functionality must be separate. That is, no data can

be operated sequentially on by both routines or multiply by either

routine;

(iv) The software must not allow the alteration of the data

encryption mechanism and its associated key spaces by the user or

any other program;

(v) The key exchange used in data encryption must be:

(A) A public key algorithm with a key space less than or equal

to a 512-bit modulus and/or;

(B) A symmetrical algorithm with a key space less than or equal

to 64-bits; and

(vi) The software must not allow the alteration of the key

management mechanism and its associated key space by the user or any

other program.

(b) To submit a classification request for a product that is

eligible for the seven-day handling, you must provide the following

information in a cover letter to the classification request. Send

the original to the Bureau of Export Administration. Send a copy of

the application and all supporting documentation by Express Mail to:

Attn.: Mass Market Encryption Request Coordinator, P.O. Box 246,

Annapolis Junction, MD 20701-0246.

Instructions for the preparation and submission of a

classification request that is eligible for seven day handling are

as follows:

(1) If the software product meets the criteria in paragraph

(a)(2) of this supplement, you must call the Department of Commerce

on (202) 482-0092 to obtain a test vector, or submit to BXA a copy

of the encryption subsystem source code. The test vector or source

code must be used in the classification process to confirm that the

software has properly implemented the approved encryption

algorithms.

(2) Upon receipt of the test vector, the applicant must encrypt

the test plain text input provided using the commodity's encryption

routine (RC2 and/or RC4) with the given key value. The applicant

should not pre-process the test vector by any compression or any

other routine that changes its format. Place the resultant test

cipher text output in hexadecimal format on an attachment to form

BXA-748P.

(3) You must provide the following information in a cover letter

to the classification request:

(i) Clearly state at the top of the page ``Mass Market

Encryption Software--7 Day Expedited Review Requested';

(ii) State that you have reviewed and determined that the

software subject to the classification request meets the criteria of

paragraph (a)(2) of this supplement;

(iii) State the name of the single software product being

submitted for review. A separate classification request is required

for each product;

(iv) State how the software has been written to preclude user

modification of the encryption algorithm, key management mechanism,

and key space;

(v) Provide the following information for the software product:

(A) Whether the software uses the RC2 or RC4 algorithm and how

the algorithm(s) is used. If any combination of these algorithms are

used in the same product, also state how the functionality of each

is separated to assure that no data is operated by more than one

algorithm;

(B) Pre-processing information of plaintext data before

encryption (e.g. the addition of clear text header information or

compression of the data);

(C) Post-processing information of cipher text data after

encryption (e.g. the addition of clear text header information or

packetization of the encrypted data);

(D) Whether a public key algorithm or a symmetric key algorithm

is used to encrypt keys and the applicable key space;

(E) For classification requests regarding source code:

(1) Reference the applicable executable product that has already

received a one-time technical review;

(2) Include whether the source code has been modified by

deleting the encryption algorithm, its associated key management

routine(s), and all calls to the algorithm from the source code, or

by providing the encryption algorithm and associated key management

routine(s) in object code with all calls to the algorithm hidden.

You must provide the technical details on how you have modified the

source code;

(3) Include a copy of the sections of the source code that

contain the encryption algorithm, key management routines, and their

related calls; and

(F) Provide any additional information which you believe would

assist in the review process.

(c) Instructions for the preparation and submission of a

classification request that is eligible for 15-day handling are as

follows:

(1) If the software product meets only the criteria in paragraph

(a)(1) of this supplement, you must prepare a classification

request. Send the original to the Bureau of Export Administration.

Send a copy of the application and all supporting documentation by

Express Mail to: Attn.: Mass Market Encryption Request Coordinator,

P.O. Box 246, Annapolis Junction, MD 20701-0246.

(2) You must provide the following information in a cover letter

to the classification request:

(i) Clearly state at the top of the page ``Mass Market Software

and Encryption: 15-Day Expedited Review Requested';

(ii) State that you have reviewed and determined that the

software subject of the classification request, meets the criteria

of paragraph (a)(1) of this supplement;

(iii) State the name of the single software product being

submitted for review. A separate classification request is required

for each product;

(iv) State that a duplicate copy, in accordance with paragraph

(c)(1) of this supplement, has been sent to the 15-day Encryption

Request Coordinator; and

(v) Ensure that the information provided includes brochures or

other documentation or specifications relating to the software, as

well as any additional information which you believe would assist in

the review process.

(3) Contact the Bureau of Export Administration on (202) 482-

0092 prior to

[[Page 50525]]

submission of the classification to facilitate the submission of

proper documentation.

PART 743--[AMENDED]

Sec. 743.1 [Amended]

22. Section 743.1 is amended by revising the phrase ``and GOV'' in

paragraph (b) to read ``GOV and KMI (under the provisions of

Sec. 740.8(b)(2)(ii) and (iii) only''.

PART 748--[AMENDED]

23. Section 748.9 is amended by revising paragraph (a)(7) and by

adding new paragraph (a)(8) to read as follows:

Sec. 748.9 Support documents for license applications.

(a) * * *

(7) The license application is submitted to export or reexport

software or technology.

(8) The license application is submitted to export or reexport

encryption items controlled under ECCNs 5A002, 5B002, 5D002 and 5E002.

* * * * *

24. Section 748.10 is amended by revising paragraph (b)(1) to read

as follows:

Sec. 748.10 Import and End-User Certificates.

* * * * *

(b) * * *

(1) Any commodities on your license application are controlled for

national security (NS) reasons, except for items controlled under ECCN

5A002 or 5B002;

* * * * *

PART 750--[AMENDED]

25. Section 750.3 is amended by revising paragraph (b)(2)(i) to

read as follows:

Sec. 750.3 Review of license applications by BXA and other government

agencies and departments.

* * * * *

(b) * * *

(2) * * *

(i) The Department of Defense is concerned primarily with items

controlled for national security and regional stability reasons and

with controls related to encryption items;

* * * * *

26. Section 750.7 is amended:

a. By redesignating paragraphs (c) introductory text through (c)(5)

as (c)(1) introductory text through (c)(1)(v);

b. By redesignating paragraphs (c)(6) introductory text through

(c)(6)(v) as (c)(1)(vi) introductory text through (c)(1)(vi)(E);

c. By redesignating paragraphs (c)(7) and (8) as (c)(1)(vii) and

(viii); and

d. By adding a new paragraph (c)(2) to read as follows:

Sec. 750.7 Issuance of licenses.

* * * * *

(c) * * *

(2)(i) For Encryption Licensing Arrangements issued by BXA for

exports and reexports of items controlled under ECCN 5A002, 5B002, and

5D002, and for encryption commodities and software previously on the

U.S. Munitions List and currently authorized for export or reexport

under a State Department license, distribution arrangement or any other

authority of the State Department, you must by letter to BXA a request

for approval of any additional country of destination.

(ii) Letters requesting changes pursuant to paragraph (c)(2)(i) of

this section should be made by the license holder on company

letterhead, clearly identifying the original license number and the

requested change. In addition, requests for changes to State licenses

or other authorizations must be accompanied by a copy of the original

State license or authorization. The requested changes may not take

effect until approved in writing by BXA. Send requests for changes to

the following address: Office of Strategic Trade, Bureau of Export

Administration, U.S. Department of Commerce, Room 2705, 14th Street and

Pennsylvania Ave., NW, Washington, DC 20230, Attn: Encryption Division.

* * * * *

PART 752--[AMENDED]

27. Section 752.3 is amended by redesignating paragraphs (a)(5)

through (a)(10) as (a)(6) through (a)(11) and adding a new paragraph

(a)(5) to read as follows:

Sec. 752.3 Eligible items.

(a) * * *

(5) Items controlled for EI reasons on the CCL;

* * * * *

PART 758--[AMENDED]

28. Section 758.1 is amended by adding a new paragraph (e)(1)(i)(D)

to read as follows:

Sec. 758.1 Export clearance requirements.

* * * * *

(e) * * *

(1) * * *

(i) * * *

(D) Exports of tools of trade under License Exception TMP or BAG.

* * * * *

PART 770--[AMENDED]

29. Section 770.2 is amended by revising the section title and

adding a new paragraph (m) to read as follows:

Sec. 770.2 Item interpretations.

* * * * *

(m) Interpretation 13: Encryption software controlled for EI

reasons. Encryption software controlled for EI reasons under ECCN 5D002

may be pre-loaded on a laptop and exported under the tools of trade

provision of License Exception TMP or the personal use exemption under

License Exception BAG, subject to the terms and conditions of such

License Exceptions. This provision replaces the personal use exemption

of the International Traffic and Arms Regulations (ITAR) that existed

for such software prior to December 30, 1996. Neither License Exception

TMP nor License Exception BAG contains a reporting requirement.

PART 772--[AMENDED]

30. Part 772 is amended by adding, in alphabetical order, new

definitions for ``Bank'', ``Effective control'', ``Encryption licensing

arrangement'', and ``Financial Institution'', and revising paragraph

(b) under the definition of ``U.S. person'' to read as follows:

* * * * *

Bank. Means any of the following:

(a) Bank, savings association, credit union, bank holding company,

bank or savings association service corporation, Edge Act corporation,

Agreement corporation, or any insured depository institution, which is

organized under the laws of the United States or any State and

regulated or supervised by a Federal banking agency or a State bank

supervisor; or

(b) A company organized under the laws of a foreign country and

regulated or supervised by a foreign bank regulatory or supervisory

authority which engages in the business of banking, including without

limitation, foreign commercial banks, foreign merchant banks and other

foreign institutions that engage in banking activities usual in

connection with the business of banking in the countries where such

foreign institutions are organized or operating; or

(c) An entity engaged in the business of providing clearing or

settlement services, that is, or whose members are, regulated or

supervised by a Federal banking agency, a State bank supervisor, or a

foreign bank regulatory or supervisory authority; or

(d) A branch or affiliate of any of the entities listed in

paragraphs (a), (b), or

[[Page 50526]]

(c) of this definition, regulated or supervised by a Federal banking

agency, a State bank supervisor or a foreign bank regulatory or

supervisory authority; or

(e) An affiliate of any of the entities listed in paragraph (a),

(b), (c), or (d) of this definition, engaged solely in the business of

providing data processing services to a bank or financial institution,

or a branch of such an affiliate.

* * * * *

Effective control. You maintain effective control over an item when

you either retain physical possession of the item, or secure the item

in such an environment as a hotel safe, a bonded warehouse, or a locked

or guarded exhibition facility. Retention of effective control over an

item is a condition of certain temporary exports and reexports.

Encryption licensing arrangement. A license that allows the export

of specified products to specified destinations in unlimited

quantities. In certain cases, exports are limited to specified end-

users for specified end-uses. Generally, reporting of all sales of the

specified products is required at six month intervals. This includes

sales made under distribution arrangements and distribution and

warehousing agreements that were previously issued by the Department of

State for encryption items.

* * * * *

Financial Institution. Means any of the following:

(a) A broker, dealer, government securities broker or dealer, self-

regulatory organization, investment company, or investment adviser,

which is regulated or supervised by the Securities and Exchange

Commission or a self-regulatory organization that is registered with

the Securities and Exchange Commission; or

(b) A broker, dealer, government securities broker or dealer,

investment company, investment adviser, or entity that engages in

securities activities that, if conducted in the United States, would be

described by the definition of the term ``self-regulatory

organization'' in the Securities Exchange Act of 1934, which is

organized under the laws of a foreign country and regulated or

supervised by a foreign securities authority; or

(c) A US board of trade that is designated as a contract market by

the Commodity Futures Trading Commission or a futures commission

merchant that is regulated or supervised by the Commodity Futures

Trading Commission; or

(d) A US entity engaged primarily in the business of issuing a

general purpose charge, debit, or stored value card, or a branch of, or

affiliate controlled by, such an entity; or

(e) A branch or affiliate of any of the entities listed in

paragraphs (a), (b), or (c) of this definition regulated or supervised

by the Securities and Exchange Commission, the Commodity Futures

Trading Commission, or a foreign securities authority; or

(f) An affiliate of any of the entities listed in paragraph (a),

(b), (c), or (e) of this definition, engaged solely in the business of

providing data processing services to one or more bank or financial

institutions, or a branch of such an affiliate.

* * * * *

U.S. person. (a) * * *

(b) See also Secs. 740.9 and 740.14, and parts 746 and 760 of the

EAR for definitions of ``U.S. person'' that are specific to those

parts.

* * * * *

PART 774--[AMENDED]

31. In Supplement No. 1 to part 774, Category 5--Telecommunications

and Information Security is amended by revising ECCNs 5A002 and 5D002

to read as follows:

5A002 Systems, equipment, application specific ``assemblies'',

modules or integrated circuits for ``information security'', and

specially designed components therefor.

License Requirements

Reason for Control: NS, AT, EI.

------------------------------------------------------------------------

Control(s) Country chart

------------------------------------------------------------------------

NS applies to entire entry............... NS Column 1.

AT applies to entire entry............... AT Column 1.

------------------------------------------------------------------------

EI applies to encryption items transferred from the U.S.

Munitions List to the Commerce Control List consistent with E.O.

13026 of November 15, 1996 (61 FR 58767) and pursuant to the

Presidential Memorandum of that date. Refer to Sec. 742.15 of this

subchapter.

License Requirement Notes: See Sec. 743.1 of the EAR for

reporting requirements for exports of commodities controlled under

5A002 and exported under License Exceptions LVS or GOV.

License Exceptions

LVS: Yes: $500 for components and spare parts only. N/A for

equipment.

GBS: N/A

CIV: N/A

List of Items Controlled

Unit: $ value

Related Controls: See also 5A992. This entry does not control:

(a) ``Personalized smart cards'' or specially designed components

therefor, with any of the following characteristics: (1) Not capable

of message traffic encryption or encryption of user-supplied data or

related key management functions therefor; or (2) When restricted

for use in equipment or systems excluded from control under the note

to 5A002.c, or under paragraphs (b) through (h) of this note. (b)

Equipment containing ``fixed'' data compression or coding

techniques; (c) Receiving equipment for radio broadcast, pay

television or similar restricted audience television of the consumer

type, without digital encryption and where digital decryption is

limited to the video, audio or management functions; (d) Portable or

mobile radiotelephones for civil use (e.g., for use with commercial

civil cellular radiocommunications systems) that are not capable of

end-to-end encryption; (e) Decryption functions specially designed

to allow the execution of copy-protected ``software'', provided the

decryption functions are not user-accessible; (f) Access control

equipment, such as automatic teller machines, self-service statement

printers or point of sale terminals, that protects password or

personal identification numbers (PIN) or similar data to prevent

unauthorized access to facilities but does not allow for encryption

of files or text, except as directly related to the password or PIN

protection; (g). Data authentication equipment that calculates a

Message Authentication Code (MAC) or similar result to ensure no

alteration of text has taken place, or to authenticate users, but

does not allow for encryption of data, text or other media other

than that needed for the authentication; (h) Cryptographic equipment

specially designed, developed or modified for use in machines for

banking or money transactions, and restricted to use only in such

transactions. Machines for banking or money transactions include

automatic teller machines, self-service statement printers, point of

sale terminals, or equipment for the encryption of interbanking

transactions.

Related Definitions: For the control of global navigation

satellite systems receiving equipment containing or employing

decryption (i.e. GPS or GLONASS), see 7A005. Items:

a. Systems, equipment, application specific ``assemblies'',

modules or integrated circuits for ``information security'', and

specially designed components therefor:

a.1. Designed or modified to use ``cryptography'' employing

digital techniques to ensure ``information security'';

a.2. Designed or modified to perform cryptoanalytic functions;

a.3. Designed or modified to use ``cryptography'' employing

analog techniques to ensure ``information security'';

Note: 5A002.a.3 does not control the following:

1. Equipment using ``fixed'' band scrambling not exceeding 8

bands and in which the transpositions change not more frequently

than once every second;

2. Equipment using ``fixed'' band scrambling exceeding 8 bands

and in which the transpositions change not more frequently than once

every ten seconds;

3. Equipment using ``fixed'' frequency inversion and in which

the transpositions change not more frequently than once every

second;

[[Page 50527]]

4. Facsimile equipment;

5. Restricted audience broadcast equipment; and 6. Civil

television equipment;

a.4. Designed or modified to suppress the compromising

emanations of information-bearing signals;

Note: 5A002.a.4 does not control equipment specially designed to

suppress emanations for reasons of health and safety.

a.5. Designed or modified to use cryptographic techniques to

generate the spreading code for ``spread spectrum'' or the hopping

code for ``frequency agility'' systems;

a.6. Designed or modified to provide certified or certifiable

``multilevel security'' or user isolation at a level exceeding Class

B2 of the Trusted Computer System Evaluation Criteria (TCSEC) or

equivalent;

a.7. Communications cable systems designed or modified using

mechanical, electrical or electronic means to detect surreptitious

intrusion.

* * * * *

5D002 Information Security--``Software''.

License Requirements

Reason for Control: NS, AT, EI

------------------------------------------------------------------------

Control(s) Country chart

------------------------------------------------------------------------

NS applies to entire entry............... NS Column 1.

AT applies to entire entry............... AT Column 1.

------------------------------------------------------------------------

EI applies to encryption items transferred from the U.S.

Munitions List to the Commerce Control List consistent with E.O.

13026 of November 15, 1996 (61 FR 58767) and pursuant to the

Presidential Memorandum of that date. Refer to Sec. 742.15 of the

EAR.

Note: Encryption software is controlled because of its

functional capacity, and not because of any informational value of

such software; such software is not accorded the same treatment

under the EAR as other ``software''; and for the export licensing

purposes encryption software is treated under the EAR in the same

manner as a commodity included in ECCN 5A002. License Exceptions for

commodities are not applicable.

Note: Encryption software controlled for EI reasons under this

entry remains subject to the EAR even when made publicly available

in accordance with part 734 of the EAR, and it is not eligible for

the General Software Note (``mass market'' treatment under License

Exception TSU for mass market software). After a one-time BXA

review, certain encryption software may be released from EI controls

and made eligible for the General Software Note treatment as well as

other provisions of the EAR applicable to software. Refer to

Sec. 742.15(b)(1) of the EAR, and Supplement No. 6 to part 742 of

the EAR.

License Requirement Notes: See Sec. 743.1 of the EAR for

reporting requirements for exports of software controlled under

5D002 and exported under License Exception GOV.

License Exceptions

CIV: N/A

TSR: N/A

List of Items Controlled

Unit: $ value

Related Controls: See also 5D992. This entry does not control

``software'' ``required'' for the ``use'' of equipment excluded from

control under to 5A002 or ``software'' providing any of the

functions of equipment excluded from control under 5A002.

Related Definitions: N/A

Items:

a. ``Software'' specially designed or modified for the

``development'', ``production'' or ``use'' of equipment or

``software'' controlled by 5A002, 5B002 or 5D002.

b. ``Software'' specially designed or modified to support

``technology'' controlled by 5E002.

c. Specific ``software'' as follows:

c.1. ``Software'' having the characteristics, or performing or

simulating the functions of the equipment controlled by 5A002 or

5B002;

c.2. ``Software'' to certify ``software'' controlled by

5D002.c.1.

Dated: September 14, 1998.

R. Roger Majak,

Assistant Secretary for Export Administration.

[FR Doc. 98-25096 Filed 9-21-98; 8:45 am]

BILLING CODE 3510-33-P