News from Reeves & Dola, LLP 
*** R|D ALERT ***

January 17 , 2020

They're Here!
Final Rules to Revise USML Cats. I-III Set to be Published  

After almost ten long years of fits and starts and Congressional holds, today the U.S. Departments of State and Commerce released their respective Final Rules to remove most commercially available firearms and ammunition from the export controls of the International Traffic in Arms Regulations (ITAR) and over to the controls of the Commerce Department's Export Administration Regulations (EAR). The public inspection versions are available now on the Federal Register website (See links above). However, keep in mind what is posted now is not the official publication, which won't happen until the January 23, 2020 issue of the Federal Register. Once the official version publishes, a 45-day implementation period will start and the rules will become effective on March 9, 2020.
As you may recall, the proposed revisions to USML Categories I, II, and III originally published on May 24, 2018, with requests for the public to submit comments. As we covered in our four-part Alert series published in May and June of 2018, the purpose of these revisions to the USML is to describe more precisely the articles that provide a critical military or intelligence advantage or, in the case of weapons, perform an inherently military function and thus warrant export and temporary import control under the ITAR. All of the items removed from the U.S. Munitions List (USML) to the Commerce Control List (CCL) will now be subject to the licensing requirements of the EAR. Our Primer on the Export Administration Regulations provides an overview of the EAR, which is a helpful backdrop to the changes made in these final rules.
The following provides a very general overview and excerpts of some of the major changes that are being made to both the ITAR and the EAR. The summary does not capture all revisions compared to the May 2018 proposed rule making, and is not intended to be a substitute for reviewing the final rules. Companies should carefully review the changes made to both the ITAR and EAR, in conjunction with this Alert.

The Department of State did not make significant changes to the final rule in response to the public comments received. An important note for many, the rule amends Category I to remove non-automatic and semi-automatic firearms to .50 caliber (12.7mm) inclusive, formerly controlled under paragraph (a), and all of the parts, components, accessories, and attachments for those articles. Such items will now be subject to the EAR under new controls in Export Control Classification Numbers (ECCNs) 0A501, 0A502, 0A503, 0A504, 0A505, 0B501, 0B505, 0D501, 0D505, 0E501, 0E502, 0E504, and 0E505. 
USML Category II remains largely the same from the proposed version, however the items formerly controlled in paragraph (f), (i.e., engines specifically designed or modified for the self-propelled guns and howitzers controlled in paragraph (a)), are removed from the USML and placed in ECCN 0A606. Tooling and equipment specifically designed or modified for the production of items controlled in USML Category II, formerly in paragraph (g), is also removed from the USML and transferred to ECCN 0B602. And, test and evaluation equipment and test models, formerly in paragraph (h), is removed from the USML and transferred to ECCN 0B602.
A few changes were made to USML Category III, most significantly, paragraphs (a) and (d) are revised to remove broad catch-alls and enumerate the articles controlled. Additionally, the SME designator is moved from paragraph (a) in its entirety to only those paragraphs of III(a) warranting control. Ammunition that is not specifically enumerated in paragraph (a) or captured by paragraph (a)(10) is transferred to the EAR.
Each Category will now contain a new (x) paragraph, allowing ITAR licensing for all commodities, software, and technology subject to the EAR, provided those commodities, software, and technology are to be used in or with defense articles controlled in USML Category I and are described in the purchase documentation submitted with the license application.
Conforming changes have been made throughout the ITAR to reflect the changes made in Categories I-III. Most notably, the firearms exemptions formerly at § 123.17(a) through (e) are removed and the subsections reserved as a consequence of the removal from the USML of non-automatic and semi-automatic firearms and their transfer to the EAR. Additionally, § 129.1(b) is amended to clarify that the regulations on brokering activities in part 129 apply to those defense articles and defense services designated as such on the USML and those items described on the U.S. Munitions Import List (USMIL) (27 CFR § 447.21). Items that transfer to the EAR for export control purposes, but are on the USMIL for permanent import control purposes, remain subject to the brokering requirements of part 129 with respect to all brokering activities, including facilitation in their manufacture abroad, permanent import, transfer, reexport, or retransfer.
As noted above, non-automatic and semi-automatic firearms to .50 caliber (12.7mm) inclusive, and all of the parts, components, accessories, and attachments for those articles move to the EAR. It is very important to underscore up front the revisions to the USML do not deregulate the transferred items - a license will still be required to export or reexport to any country a firearm or other weapon that is being moved from the USML to the CCL, including releases of related technology and software to foreign persons in the United States. Further, Department of Commerce licenses are subject to an interagency review process that includes review by the Departments of State, Defense, and Energy. The interagency review process for Commerce licenses is specified in Executive Order 12981 and in part 750 of the EAR.
As with the State final rule, the Department of Commerce did not make many significant changes from the proposed rule.  There are a few revisions worthy of note though.  For example, certain software or technology for the production of a firearm or firearm frame or receiver will remain controlled under ECCN 0A501, even if made available by posting on the internet if such posting is "in electronic format and that may be directly loaded without further modification by the machine operator into a computer numerically controlled machine tool, additive manufacturing equipment, or any other equipment that makes use of the "software" or "technology" to produce the firearm frame or receiver or complete firearm." This is an addition that BIS made in response to Sen. Menendez's concerns expressed in his "Hold" placed against publication of the final transition rules that was supposed to occur in February 2019.
Some of the other clean up revisions include revising ECCN 0A501.d to include a definition of "complete breech mechanism" and ECCN 0A501.y to make it clear that only those items specifically listed will be classified under .y, with all other parts and components not elsewhere specified, including magazines with a capacity under 16 rounds, classified under .x (not EAR99!).  References to "combat shotguns" are removed to improve clarity, and the value limit for LVS exception in ECCN 0A505 increased from $100 to $500.
All exports of firearms and ammunition (except exports authorized under license exception BAG) will require Electronic Export Information (EEI) entries into the Automated Export System (AES). The EEI entries for temporary exports must include the serial numbers, make, model and caliber of each firearm. This requirement may also be triggered if an export license contains a proviso requiring such information be entered into AES. The final rule explains that "BIS has confirmed with CBP and the U.S. Census Bureau that AES on the ACE platform can accommodate EEI filers to submit the serial number, make, model, and caliber information."
It is important to note that the Commerce Department monitors AES. "BIS also notes that this final rule imposes a requirement to file Electronic Export Information (EEI) in Automated Export System (AES) for nearly all exports of firearms being moved to the CCL. The EAR includes robust recordkeeping requirements that have been enhanced further for the firearms being moved to the CCL. BIS can and does on a regular basis contact parties to a transaction to request all records related to a particular export or reexport or series of exports or reexports. These record requests may also involve in-person visits from representatives of EE."
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The 45-day delayed effective date is a very short window.  These new rules will impact existing authorizations. Companies will need to act immediately to make sure they are taking the necessary steps to implement these changes. Come March 9, 2020, any new exports must be made according to the new rules and DDTC will return without action license applications for items that are no longer on the USML. 

The above alert is for informational purposes only and is not intended to be construed or used as legal advice. Receipt of this alert does not establish an attorney-client relationship.     

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About Reeves & Dola

Reeves & Dola is a Washington, DC law firm that specializes in helping clients navigate the highly regulated and complex world of manufacturing, sales and international trade of defense and commercial products. We have a deep understanding of the Federal regulatory process, and use our expertise in working with a variety of Federal agencies to assist our clients with their transactional and regulatory needs.

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