//59 FR 45621// [Federal Register: September 2, 1994] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF STATE Bureau of Political-Military Affairs [Public Notice 2058] 22 CFR Parts 123 and 124 Amendment to the International Traffic in Arms Regulations AGENCY: Bureau of Political-Military Affairs, Department of State. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This rule amends the regulations implementing section 38 of the Arms Export Control Act (AECA). The rule establishes in the International Traffic in Arms Regulations (ITAR) a new licensing procedure to permit U.S. encryption manufacturers to make multiple shipments of items covered by Category XIII(b)(1) of the United States Munitions List (USML) directly to end users in an approved country without obtaining individual licenses. EFFECTIVE DATE: September 2, 1994. FOR FURTHER INFORMATION CONTACT: Rose Marie Biancaniello, Deputy Director for Licensing or Karen Hopkinson, Licensing Officer, Office of Defense Trade Controls, Department of State 703 875-6643 or FAX 703 875-6647. SUPPLEMENTARY INFORMATION: In April 1993, the President ordered a review of U.S. policy regarding the domestic use of, and export controls on, encryption technology. That review resulted in a determination that vital U.S. interests--national security, economic, and law enforcement--compel maintaining appropriate control of encryption. It also revealed that there are measures which can be taken to reform the existing export controls to ensure that controls are not unduly burdensome to U.S. exporters. On February 4, 1994, the Department of State announced reforms to the export control procedures applicable to products incorporating encryption technology. This final rule implements one of these reforms. Previously, almost every encryption export required an individual license. Only those exports covered by a distribution arrangement could be shipped without an individual license. This final rule, which adds a Sec. 124.15 to the ITAR, provides for a licensing procedure which permits direct distribution from the U.S. manufacturer, thus reducing the regulatory burden on exporters without a foreign distributor. The number of individual license applications required will also be reduced. Under this new licensing arrangement, U.S. encryption manufacturers may ship their products covered in Category XIII(b)(1) from the United States directly to customers within approved countries without obtaining individual licenses for each end user. The procedures are similar to existing distribution agreement procedures. Exporters are required to submit a proposed arrangement identifying, among other things, specific items to be shipped, proposed end users and end use and countries to which the items are destined. Upon approval of the arrangement, exporters will be permitted to ship the specified products directly to end users in the approved countries based on a single license. Therefore, manufacturers of products covered in Category XIII(b)(1) will now have the option to export to foreign distributors under a distribution agreement or directly from the U.S. under the new arrangement. Section 123.16(b)(1) is revised in conformity with the addition of Sec. 124.15, and to substitute the more precise term ``defense hardware'' for ``defense article''. The Department of State views this reform as beneficial to U.S. persons and industry and has decided to implement it immediately by publication of a final rule. Notwithstanding this final rule, public comment is welcomed. This amendment involves a foreign affairs function of the United States. It is exempt from review under E.O. 12866 and has been reviewed internally by the Department to ensure consistency with the purposes thereof. It is also excluded from the procedures of 5 U.S.C. 553 and 554. List of Subjects 22 CFR Part 123 Arms and munitions, Exports. 22 CFR Part 124 Arms and munitions, Exports, Technical assistance. Accordingly, for the reasons set forth in the preamble, 22 CFR Subchapter M, Parts 123 and 124 are amended as follows: PART 123--LICENSES FOR THE EXPORT OF DEFENSE ARTICLES 1. The authority citation for 22 CFR Part 123 continues to read as follows: Authority: Secs. 2 and 38, Pub. L. 90-629, 90 Stat. 744 (22 U.S.C. 2752, 2778); E.O. 11958, 42 FR 4311, 3 CFR 1977 Comp. 79; 22 U.S.C. 2658. 2. Section 123.16(b)(1) is revised to read as follows: Sec. 123.16 Exemptions of general applicability. * * * * * (b) * * * (1) District Directors of Customs shall permit the export without a license of defense hardware being exported in furtherance of a manufacturing license agreement, technical assistance agreement, distribution agreement or an arrangement for distribution of items identified in Category XIII(b)(1), approved in accordance with Part 124, provided that: (i) The defense hardware to be exported supports the activity and is identified by item, quantity and value in the agreement or arrangement; and (ii) Any provisos or limitations placed on the authorized agreement or arrangement are adhered to; and (iii) The exporter certifies on the Shipper's Export Declaration that the export is exempt from the licensing requirements of this subchapter. This is done by writing, ``22 CFR 123.16(b)(1) and the agreement or arrangement (identify/state number) applicable''; and (iv) The total value of all shipments does not exceed the value authorized in the agreement or arrangement. (v) In the case of a distribution agreement, export must be made directly to the approved foreign distributor. * * * * * PART 124--AGREEMENTS, OFF-SHORE PROCUREMENT AND OTHER DEFENSE SERVICES 3. The authority citation for 22 CFR Part 124 continues to read as follows: Authority: Secs. 2, 38, and 71, Pub. L. 90-629, 90 Stat. 744 (22 U.S.C. 2752, 2778, 2797); E.O. 11958, 42 FR 4311, 3 CFR 1977 Comp. p. 79; 22 U.S.C. 2658. 4. Section 124.15 is added to read as follows: Sec. 124.15 Arrangements for U.S. encryption (Category XIII(b)(1)) distribution by manufacturers. (a) Arrangements for the export of unclassified defense articles identified in Category XIII(b)(1) must be approved by the Office of Defense Trade Controls before they enter into force. Such arrangements will be limited to unclassified defense articles identified in Category XIII(b)(1) and must contain conditions for special distribution, end- use and reporting. Licenses for export pursuant to such arrangements must be obtained prior to export of the defense article unless an exemption under Sec. 123.16(b)(1) of this subchapter is applicable. (b) Required information. Proposed arrangements shall be submitted to the Office of Defense Trade Controls for review and approval. The following information must be included in all such proposed arrangements: (1) A description of the U.S. Munitions List articles involved. This shall include when applicable the Federal Stock Number, nameplate data, and any control numbers under which the articles were developed or procured by the U.S. Government; (2) A detailed statement of the terms and conditions under which the articles will be exported and distributed; (3) The duration of the proposed arrangement; and (4) Specific identification of the country or countries that comprise the distribution territory. A Nontransfer and Use Certificate (DSP-83) will be required in accordance with Sec. 123.10. (c) Required Statements. The following statements must be included in all arrangements: (1) This arrangement shall not enter into force, and shall not be amended or extended, without the prior written approval of the Department of State of the U.S. Government. (2) This arrangement is subject to all United States laws and regulations relating to exports and to all administrative acts of the U.S. Government pursuant to such laws and regulations. (3) The arrangement shall not affect the performance of any obligations created by prior contracts or subcontracts which the applicant may have individually or collectively with the U.S. Government. (4) No liability will be incurred by or attributed to the U.S. Government in connection with any possible infringement of privately owned patent or proprietary rights, either domestic or foreign, by reason of the U.S. Government's approval of this arrangement. (5) No export, sale, transfer, or other disposition of the U.S. Munitions List articles covered by this arrangement is authorized to any country outside the distribution territory without the prior written approval of the Office of Defense Trade Controls of the U.S. Department of State. (6) The applicant agrees that a semi-annual report of sales or other transfers pursuant to this arrangement of the licensed articles, by quantity, type, U.S. dollar value, and purchaser or recipient shall be provided by (applicant) to the Department of State. Such reports may cover calendar or fiscal years. Reporting shall continue until such time as all articles authorized under the arrangement or a permanent unclassified license (DSP-5) authorized in support of the arrangement have been reported. Reports shall be deemed proprietary information by the Department of State and will not be disclosed to unauthorized persons. (See Sec. 126.10(b) of this subchapter.) (7) The applicant agrees to notify (identify foreign end-user) of any end use or retransfer restrictions and (identify foreign end user) agrees to incorporate the following statement as an integral provision of a contract, invoice or other appropriate document when the articles covered by this arrangement are sold or otherwise transferred: ``These commodities are authorized for export by the U.S. Government only to (identify country of ultimate destination). They may not be resold, diverted, transferred, transshipped, or otherwise be disposed of in any other country, either in their original form or after being incorporated through an intermediate process into other end-items, without the prior written approval of the U.S. Department of State.'' (8) All provisions in this arrangement which refer to the United States Government and the Department of State will remain binding on the applicant after the termination of the arrangement. (d) The license will be valid for four years and quantities and values should reflect those for this time period. No application will be accepted for any export for which Congressional notification is required. The application shall be filled out in accordance with the instructions; however, in this instance, foreign end-user, foreign consignee, and foreign intermediate consignees need not be identified. In each block state: ``The foreign person in this block will be reported in accordance with Sec. 124.15 of the ITAR.'' The provisions of Sec. 126.13(b) with regards to foreign consignee and foreign intermediate consignee need not be complied with at the time the application is transmitted but will be reported semi-annually. (e) Transmittal letter. Requests for approval of the arrangement must be made by letter. The original letter and seven copies of the proposed arrangement shall be submitted to the Office of Defense Trade Controls. The letter shall contain the following: (1) A statement giving the applicant's Defense Trade Controls registration number. (2) A statement identifying the country or countries to comprise the distribution territory. (3) A statement identifying the defense articles to be distributed under the arrangement. (4) A statement identifying any U.S. Government contract under which the equipment may have been generated, improved, developed or supplied to the U.S. Government, and whether the equipment was derived from any bid or other proposal to the U.S. Government. (5) A statement that no classified defense articles or classified technical data are involved. (6) A statement identifying any patent application which discloses any of the subject matter of the equipment or related technical data covered by an invention secrecy order issued by the U.S. Patent and Trademark Office. (7) A statement that the applicant will not permit any exports to take place until the arrangement and the export license have been approved by the Department of State. Dated: August 1, 1994. Lynn E. Davis, Under Secretary for Arms Control and International Security Affairs, Department of State. [FR Doc. 94-21419 Filed 9-1-94; 8:45 am] BILLING CODE 4710-25-M