License Issues for Distributors of Explosive Materials

We often receive questions from distributors about their obligations to comply with regulations beyond those of the FAA or industry standards specifically addressing the aerospace distribution community. In many of these cases, distributors may not be perfectly clear on how to comply with certain regulations, or that those regulations even exist. Some examples of these scenarios include export licensing requirements, export reporting requirements, and hazmat or dangerous goods shipping requirements.

Recently, we have received a number of questions regarding regulatory requirements surrounding explosives regulated by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF).  Some people are not even aware that regulated explosive materials are present in a variety of aircraft parts or that they may be handling these parts or that the ATF imposes license and permit requirements on a wide range of people who handle such explosives. It is therefore important to understand what ATF licensing obligations apply when distributors are handling explosive materials.

In general, anyone who imports, manufactures, or deals in explosive materials must obtain a license from the ATF. Because “dealing” under the regulation means distributing explosive materials at wholesale or retail the license requirement casts an extremely wide net that encompasses any type of sales model.

The ATF explosives license is obtained by applying to the ATF using forms ATF F 5400.13, ATF F 5400.28 to identify employees authorized to possess explosive materials as applicable, and submitting the appropriate fee. Each license is valid for three years.

So where do regulated explosives appear in aircraft parts? Frequently explosives will appear in safety apparatus.  Fire suppression systems may contain explosive actuators (or “squibs”); similarly, emergency escape systems like door slides may also contain explosive squibs. Other articles that may contain explosives include the flares or other signaling devices found in survival kits. These explosives may be present in certain assemblies and components, so it is important to identify and ship them properly once they have been identified.

Although regulated explosive materials generally required the distributor to have a license in order to deal in those products, certain aviation articles may be exempted from the regulations. These exemptions are typically sought by the manufacturer of a particular article and when granted are specific to the article by part number. One common example of articles often subject to exemption is signaling devices.

Unfortunately, the ATF does not offer a searchable database of issued exemptions, but instead recommend that manufacturers provide a copy of the exemption with their exempted products. As a matter of practice, however, this is not always done, whether because the manufacturer is unaware that they are permitted to do provide the exemption, are unaware that the exemption follows the product, or even possibly for competitive reasons.  The net result is that some distributors may be handling exempt materials as though they were subject to the ATF licensing requirements. When dealing with exempt materials it is important to remember that it is the article itself that is exempted, and the exemption is not limited only to the manufacturer, so everyone can take advantage of the product’s exemption.

Finally, it is important to remember that the ATF licensing regime is separate from DOT hazmat shipping regulations.  An explosive article can be exempt from the ATF licensing provisions but still be regulated as a class one explosive for the purposes of hazmat shipping. It is always necessary to ensure compliance to each applicable regulatory regime, and that separate regulatory regimes are not necessarily consistent.

Overlapping regulatory regimes—ATF, DOT, FAA, BIS, DDTC, OFAC—can become quite confusing.  When in doubt about your licensing and compliance regulations always remember to consult an attorney who can help you make sense of these conflicting regimes and develop systems to help your business ensure ongoing compliance.

If you have questions about your compliance obligations be sure to visit us while you are at the ASA conference in Las Vegas, June 26-28!

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US Denies Export Privileges to Aviation Industry Parties

The U.S. Bureau of Industry and Security has issued an order denying the export privileges of:

  • Ribway Airlines Company Limited,
  • Af-Aviation Limited,
  • Andy Farmer,
  • John Edward Meadows, and
  • Jeffrey John James Ashfield.

This is a temporary denial order that is only valid for 180 days, unless extended.  Although published in today’s Federal register, the order is actually dated January 19, 2016.  The Order prohibits the denied parties from engaging in export transactions, and it includes a prohibition against third parties exporting from the U.S. to any of these denied parties.

ASA members with a history of doing business with any of these parties should ensure that their future transactions remain consistent with U.S. law.

Expediting Export: MT Controlled License Exceptions

We often write in this space about various export license exceptions that can help distributors better service their customers–particularly customers in AOG situations when waiting for an export license approval simply isn’t an option.

In just the past couple weeks, we have had several members ask questions related to the export of avionics controlled for Missile Technology reasons (MT).  Generally, articles controlled for reason MT are not eligible for export license exceptions.  Part 740 (License Exceptions) of the Export Administration Regulations explains that “[y]ou may not use any License Exception if any one or more of the following apply: . . . The item is controlled for missile technology (MT) reasons . . . .” (15 C.F.R. § 740.2(a)(5)(i)).  Generally, then, it is not possible to use export license exceptions to export articles controlled for MT reasons; many businesses simply have a blanket prohibition against using license exceptions for MT articles to avoid running afoul of this restriction.  Obviously this is not compatible with AOG service.

However, the restriction on use of license exceptions for MT-controlled articles then goes on to carve out several specific ECCNs; exceptions to the restriction on exceptions, if you will.  It is this carve-out that can serve to benefit distributors dealing in navigation and avionics equipment.

After stating that items controlled for MT reasons are not eligible for any license exception, 15 C.F.R. § 740.2(a)(5)(i) goes on to offer the following allowances:

“the items described in ECCNs 6A008, 7A001, 7A002, 7A004, 7A101, 7A102, 7A103, 7A104, 7A105, 7B001, 7D001, 7D002, 7D003, 7D101, 7D102, 7E003, 7E101 or 9A515, may be exported as part of a spacecraft, manned aircraft, land vehicle or marine vehicle or in quantities appropriate for replacement parts for such applications under §740.9(a)(4) (License Exception TMP for kits consisting of replacement parts), §740.10 (License Exception RPL), §740.13 (License Exception TSU), or §740.15(b) (License Exception AVS for equipment and spare parts for permanent use on a vessel, aircraft or spacecraft).”

Obviously this is very useful for navigation equipment and avionics exporters.

A quick perusal of the ECCNs listed reveals that many of them control articles such as accelerometers, angular rate sensors, gyros, and nav instruments.

Note, however, that ECCN 7A003, dealing with certain inertial measurement units and systems, is NOT included in the carve out, and therefore not eligible for any export license exception.

License exceptions RPL and AVS are particularly valuable exceptions for the aviation industry, and we spend time discussing them in depth during ASA workshops. If you have determined your MT-controlled article fits one of the above-mentioned ECCNs, you should be sure you understand the requirements of each of those exceptions before you use them.  When you are sure of your ECCN and your use of the appropriate license exception, your company will be able to rapidly service your AOG customers’ needs.

Finally, always remember to consult an export compliance attorney if you have questions.

Cuba: Open for Aircraft Parts Business (sort of) ….

Many of ASA’s are wondering whether they can begin selling aircraft parts to Cuban operators. The short answer is yes (if you obtain a license).

Americans are still generally prohibited from doing business or investing in Cuba unless licensed by the Treasury Department’s Office of Foreign Asset Control (OFAC).  For articles subject to Commerce Department jurisdiction, a license from the Bureau of Industry and Security is also typically necessary.  The problem?  There is a general policy of denial that applies to such licenses.

But as of September 21, 2015, there is special licensing program that permit the sale of aircraft parts.  This program is similar in scope to the program that permitted licenses to be issued for aircraft parts transactions to Iran.  It permits licenses to be issued on a case-by-case basis for the export to Cuba of:

(6) … items to ensure safety in civil aviation, including the safe operation of commercial passenger aircraft ….  15 C.F.R. § 746.2(b)(6).

The new rules have also removed Cuba from Country Group E:1 (terrorist supporting countries) in Supplement No. 1 to Part 740 of the EAR.  80 Federal Register 43314 (July 22, 2015). This is an important removal because it makes Cuba potentially subject to certain useful license exceptions.  Look carefully at the license exceptions before using them, because some special Cuba-related-provisions have been added to some of the useful license exceptions.  80 Federal Register 56898 (Sept. 21, 2015).
An OFAC general license (a form of published exception) is a special exception to the rules.  There is an OFAC general license that authorizes the export from the United States to Cuba in those cases where the export is already licensed or otherwise authorized by the Commerce Department’s Bureau of Industry and Security (BIS). 15 C.F.R. § 515.533(a)(1).  This general license restricts payment methods to either cash-in-advance or financing by a banking institution located in a third country (not the US or Cuba).  15 C.F.R. § 515.533(a)(2).
Interested in visiting potential customers in Cuba?  U.S. trade delegations are now authorized to travel to Cuba in limited situations.  For example, travel to Cuba is authorized when it is incidental to exporting authorized goods.  This includes “market research, commercial marketing, sales negotiation,accompanied delivery, or servicing in Cuba of items consistent with the export or re export licensing policy of the Commerce Department.”  31 CFR § 515.533(d).

Expediting Export: “600 Series” Articles and License Exception STA

We’ve previously written in this space about ways to take advantage of export license exceptions to more expeditiously serve you customers when exporting “600 Series” articles.  In this article, we’ll take a look at one very specific exception that can help you efficiently work around the license application process when you have a customer with consistent or regular need for certain parts.

License exception Strategic Trade Authorization (STA) authorizes exports to foreign nationals in lieu of an export license that would otherwise be required under the Bureau of Industry and Security (BIS) Export Administration Regulations (EAR). We have occasionally heard from members that after certain license applications they have received communication from BIS stating that the export for which they sought a license was eligible for license exception STA and asking why the exporter had not elected to use STA.  We have not heard of anyone being told they should be using STA, and the licenses were typically issued; these inquiries are generally informational by BIS.

STA is a useful license exception for those exporters doing regular, predictable business with a specific customer; for example a customer that requires a dozen units on a monthly basis, for which an export license is required.  When each export shipment requires a license both the exporter and BIS must spend time and resources processing that application.  STA allows the exporter to legally bypass that delay.

The transition of many formerly ITAR-controlled articles to the new “600 Series” ECCNs has resulted in a corresponding shift in license application processing burden away from the DDTC (good news for exporters of ITAR-controlled articles, whose average application processing time continues to decline) and toward BIS, which has seen an increase in license application processing times, as more controlled articles fall within BIS’s regulatory sphere.  One way BIS is able to reduce processing times and relieve some of its own burden is to encourage (correct) use of license exceptions.  For regular and predictable exports STA is a good way to save time and reduce costs for both exporter and BIS, hence BIS’s outreach after applications that appear to be a good fit for use of STA.

STA is a valuable—but under-utilized—license exception.  This is because unlike a number of other exceptions it requires quite a bit of up-front planning and coordination with the customer. Because of this additional effort, we must first understand how STA works generally, and then the specifics that apply to “600 Series” articles.

The License Exception STA Process

As a threshold matter, the exporter seeking to use exception STA must ensure that the article is controlled only for a reason identified in an authorizing paragraph of the regulation.  Articles controlled for reasons National Security (NS), Chemical or Biological Weapons (CB), Nuclear Nonproliferation (NP), Regional Stability (RS), Crime Control (CC), or Significant Items (SI) are authorized for destinations in Country Group A:5.  Those articles controlled only for reason NS and not otherwise restricted by the ECCN are authorized to Country Group A:6.

Once the exporter has determined that the destination is eligible for license exception STA the exporter must satisfy a series of conditions.  First, it must provide to the consignee the ECCN of each discrete article that will be shipped under exception STA. This is a one-time requirement for each article and the ECCN does not need to be provided for subsequent shipments, assuming all information remains accurate.

Next, after providing the ECCNs to the consignee, but prior to shipping any articles, the exporter must obtain and keep in its records a written Consignee Statement. One statement may be used for multiple shipments, provided the items, parties, party names, item descriptions, and ECCNs are the same and remain correct. The exporter must retain a record of each shipment made under each particular Consignee Statement.  Don’t forget the paperwork!

15 C.F.R. § 740.20(d)(2) provides the specific text that must be included in each Consignee Statement.  Among other things, the Consignee Statement must identify the articles, ECCNs, and parties to the transactions, and include clauses acknowledging the restrictions and responsibilities of the parties. Each Consignee Statement should use the exact template language stated in the regulation.

Finally, the exporter must notify the consignee in writing (email and fax are permissible) for each shipment under license exception STA.  The notice must clearly identify the shipment and identify the specific items (or whole shipments) that are being shipped pursuant to STA.

Note that different rules apply under STA for software and technology releases.

“600 Series” Restrictions

Though valuable, license exception STA does entail some obvious additional effort.  Even further considerations arise when using STA for the export of “600 Series” ECCNs.  Additional restrictions make sense when we recall the”600 Series” articles are those articles that until very recently were controlled under the ITAR and therefore merit a greater level of control.

 First, STA may not be used when the articles are specifically identified by the ECCN as ineligible.  Second, a “600 Series” article may be exported to a non-governmental person in a group A:5 country only if the ultimate end user is the armed forces or other governmental agency of the country; “600 Series” articles may not ship to non-governmental end-users under STA. Third, STA may not be used to export certain “600 Series” end items, such as a completed aircraft under 9A610.a or Major Defense Equipment when the value to be exported exceeds $25 million.

Finally, in order to export “600 Series” items under STA, the purchaser, intermediate and ultimate consignees, and end user must previously have been approved on a license or other approval issued by the DDTC or a general correspondence approval from BIS. The exporter must also ensure language specific to “600 Series” articles appears on the prior Consignee Statement.

Whew!

License exception STA can be a very useful tool for companies that do regular business with a customer and have to repeatedly apply for an export license for the same articles.  Given the amount of preparation involved, STA is not very useful for one-off or only occasional shipments.  But those exporters with regular supply contracts to foreign governments (for example) may find STA a very efficient way to reliably service their customer (without risking license delays or the occasional government shutdown).

Although it cannot be used for every article, STA does allow the exporter to save significant time and money by eliminating the need to prepare a license application and the delay in waiting for approval.  It is also among the more complex and technical of the export license exceptions.  Because of the complexities involved, companies seeking to take advantage of license exception STA are advised to consult with an export attorney to ensure proper compliance.

Exporting under Russia-Ukraine Sanctions

Recently, we have had several questions from members regarding export of aircraft parts to Russia and the Ukraine. As most readers no doubt know, the United States and the EU, in response to the conflict in eastern Ukraine, have imposed various economic sanctions on certain persons and businesses in Russia.  When sanctions like these are imposed, those companies doing business with customers in Russia and Ukraine wisely want to know whether and what type of affect these sanctions may have on their business.

Questions regarding business relations in Russian and Ukraine typically take one of two forms: The first, can I do business with the customer at all?  The second, can I export this particular part to the customer?

To answer these questions, we first need to know what sanctions have been imposed and to whom they apply. We then need to recall our basic export compliance principles and apply those principles to determine whether the part itself can be exported.  Those who have attended ASA workshops in the past may recognize these steps as part of the process of export compliance.

The United States, through the Treasury Department, has issued several rounds of sanctions directed at specific industries and parties.  For the most part, the targeted industries have been companies in the Russian financial and energy sectors, while the individuals mainly officials and individuals with ties to Vladimir Putin.

However, companies in the financial and energy sectors are the only ones that have been targeted.  Importantly, Avia Group and Avia Group Nord, business aviation groups, were also targeted with U.S. sanctions.  This means that although not yet a focal point, the aviation industry can by targeted if the United States deems it necessary, and so is a good reminder that exporters of aircraft parts need to be aware.  The Treasury Department maintains an up to date list of Ukraine-related sanctions on its website.

Although it appears that the Russian aviation sector has not been highly targeted by the United States yet, these sanctions illustrate the importance of knowing your customer. Further, simply because the United States has not sanctioned an organization does not mean they may not be sanctioned by another body.  For instance, the EU recently issued sanctions against Dobrolet, a low-cost Russian carrier.  If you are based in the the EU, you should review the European Union’s restrictive measures in force to ensure you remain compliant with EU sanctions.

As our industry well knows, wealthy entities and individuals, such as those named in sanctions, frequently own or operate their own aircraft.  Given the wealth and high-ranking status of individuals and companies named, it is  important to review the Treasury Department Office of Foreign Asset Control’s Specially Designated Nationals list.  Furthermore, it is important to take this step with every transaction, because new individuals and entities can be added at any time, whether announced as a new round of sanctions or not.

Once we have determined whether sanctions apply to our prospective customer, we can rely on our export compliance program to take us the rest of the way.  The exporter must determine whether the article it plans to export is ITAR or EAR controlled.  Once the appropriate export regime is determined the exporter must determine whether an export license is required for the particular part or whether any license exceptions apply.  If a license is required, the exporter should apply as usual.  Be aware that both the State Department DDTC and the Commerce Department BIS may deny export license applications for high-tech items that could contribute to Russian military capability.  In most cases, however, articles for civil aviation may still be exported.

The highly publicized nature of these sanctions rightfully causes many companies to hesitate before undertaking an export transaction to the listed countries.  This hesitation is appropriate, given the already complex nature of export compliance. But these delays can also help the exporter to ensure that the transaction is undertaken correctly and legally.

The good news is that an effective export compliance system will enable you to easily comply with whatever sanctions and restrictions are enacted.  An effective compliance system should find the exporter following the same steps, reviewing the same lists, and performing the same analyses with every export transaction.  An export compliance program that is second nature to the exporter’s employees will ensure that no matter what sanctions are issued, or against whom, your company will remain compliant. Our law firm has helped many companies establish effective export compliance programs.  If you have questions regarding compliance, please feel free to contact us.

The New “600 Series” ECCNs Effective Today!

As of today, October 15, a significant change to the export regulations will remove many articles from the ITARs and move them to the Commerce Department’s export jurisdiction.  This is a tremendous benefit for the civil aviation industry, which has found it difficult at times to correctly classify parts under the right export regime.  This change means that most dual use items (article used on both civil and defense aircraft) are transferred to the export jurisdiction of the Commerce Department’s Bureau of Industry and Security (BIS) where they will be regulated under the Export Administration Regulations (EARs).

Note that the rule change was largely aimed at aircraft parts, and non-aviation items may not be affected by this change.

So after the change, which aircraft parts remain subject to Directorate of Defense Trade Control (DDTC) export jurisdiction? Here is a partial list:

  • Certain enumerated articles (and their parts) that are specially designed for controlled aircraft:
  • Inertial Navigation Systems (INS)
  • Inertial Measurement Units (IMUs)
  • Attitude and Heading Reference Systems (AHRS)
  • Parts for DoD-funded developmental aircraft
  • Parts for B-1B, B-2, F-15SE, F/A-18E/F/G [parts for earlier models are subject to the EAR], F-22, F-35, F-117
  • Parts found in a positive list:
  • List is published at 22 C.F.R. 121.1 – VIII(h)
  • List includes articles with defense-specific purposes, like:
    • Threat-adaptive flight control systems;
    • Wing folding systems;
    • Certain high velocity gearboxes;
    • Defense-specific parts, like tail hooks, wing folding systems and bomb racks;
    • Certain technical related to export-controlled items;
    • Classified items;
    • “Commodities, software, and technical data subject to the EAR (§ 120.42 of this subchapter) used in or with defense articles controlled in this category.”

These above-referenced parts remain on the United States Munition List (USML), which is part of the International Trade in Arms Regulations (ITARs).  So their exports will continue to be subject to ITAR control.  But what is important is what is no longer on this list!

Parts that were previously described on the USML and were thus subject to DDTC/ITAR export jurisdiction but that are now moved to BIS/EAR jurisdiction have mostly been moved to the 600 series Export Commodity Classification Numbers (ECCNs).  These are ECCNs with the number “6” in the middle spot of the five-character ECCN. The 600-series is designated for Wassenaar Arrangement Munitions List (WAML) articles and for former USML articles.

As of today, the Commerce Control List (CCLs) on the Commerce Department website did not include the 600-series ECCNs, and the fact that the government is shut down suggests that they might not be updated soon.  But you can still see the new ECCNs by looking at the Federal Register publication of the final rule.

Many aircraft parts that are no longer regulated under the DDTC ITARs are moved to ECCN 9A610.  If an article remains on the USML, like an Attitude and Heading Reference Systems (AHRS), then its unclassified software may have moved to a BIS/EAR 600 series ECCN; the unclassified software and technology indirectly related to such USML articles move to new ECCNs 9D610/9E610 (aircraft software/technology) or 9D619/9E619 (engine software/technology).  There is also new ECCN for military commodities outside the US that are derived from “600 series” controlled content (ECCN 0A919 – Category 0 includes miscellaneous items).

In some cases, the precise placement of an article may depend on whether it is “specially designed” for 600-series articles or for non-600 series articles.  BIS has provided an online decision tree-based tool to help with the “specially designed” determination and it is available at http://www.bis.doc.gov/index.php/specially-designed-tool.

Licenses from BIS will still be required to export and reexport most 600 series items worldwide (except to Canada), unless an EAR license exception is available.  If you have an article that was subject to the DDTC/ITAR jurisdiction and has been moved to BIS/EAR jurisdiction, then your existing ITAR licenses may remain valid.  Details on how this works and when your license may remain valid are available in last week’s post about grandfathering existing export licenses.

Got questions?  ASA provides export training through its workshops and through its Annual Conference.  We look forward to seeing you at one of our upcoming events!  The Washington Aviation Group continues to provide export legal advice.  So if you need to get really creative, please give the Washington Aviation Group a call and let them work with you to find a solution.

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