New rule imposes additional export controls on government defense contractors

Blog Post
Over the past several years, the Obama administration has engaged in a process of export control reform, in a purported attempt to reform regulations so as to reduce the amount of red tape needed to produce and export many types of commercial products and technologies. This has been accomplished by transferring many goods and services formerly considered “defense articles” from the State Department administered United States Munitions List (“USML”) and its accompanying onerous regulations, over to the dual-use commercial and military list maintained by the Commerce Department, the Commerce Control List (“CCL”), with its generally much less restrictive requirements.

However, the new regulatory definition of “defense article” has changed in a way that has the opposite effect, increasing compliance obligations for government contractors and forcing them to apply for licenses and registrations. The new rule by default classifies almost any electronics item developed with Defense Department funding as a “defense article” under the strict auspices of the International Traffic in Arms Regulations (“ITAR”), regardless of whether the technology is a sensitive military system or is also intended for civilian applications.

The regulatory definition applies to “developmental electronic equipment or systems funded by the Department of Defense via contract or other funding authorization.” ITAR controls are thereby being imposed on a broad swath of research & development projects funded by Defense contracts and funding authorizations that are dated July 1, 2015, or later. Pursuant to the definition, arguably any good containing an electronic component developed with Defense Department funds would be subject to ITAR controls.

Such a change will impose costly compliance requirements on small startups and large contractors alike that hope to develop technology that, while initially funded by the Pentagon, could have potential civilian applications such as in medical devices, agricultural drones, or camera sensors. It may cause many that would otherwise have sought defense funding to look for other options, given the potential regulatory implications. Start-ups and commercial firms without the expertise or infrastructure to handle ITAR compliance obligations may be caught by surprise as the new regulations begin to be enforced. Such obligations can be much more costly to ignore than to implement, given that the failure to comply with export control laws and regulations can lead to significant civil and/or criminal penalties, including monetary penalties up to $1,000,000.00, prisons term up to 20 years, denial of export privileges, and debarment from U.S. government contracts.

All hope is not lost, however, as certain steps can potentially be taken to relieve the regulatory burden. If the product is not otherwise specifically enumerated on the USML, contractors can attempt to challenge this classification by filing a commodity jurisdiction request with the State Department. The particular language in a company’s contracts with the Defense Department likewise could potentially have an impact on whether the product will ultimately fall under the ITAR or a lesser degree of controls imposed by the Export Administration Regulations administered by the Commerce Department.

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