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18-0612 Tuesday “Daily Bugle”

18-0612 Tuesday “Daily Bugle”

Tuesday, 12 June 2018

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The Daily Bugle is a free daily newsletter from Full Circle Compliance, containing changes to export/import regulations (ATF, DOE/NRC, Customs, NISPOM, EAR, FACR/OFAC, FAR/DFARS, FTR/AES, HTSUS, and ITAR), plus news and events.  Subscribe 
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  1. President Continues National Emergency With Respect to Belarus 
  2. DHS/CBP Implements Mandatory Air Cargo Advance Screening, Program 
  3. State Seeks Comments on DSP-5, DSP-61, DSP-85, DSP-73, DSP-6, DSP-62, DSP-74, and DSP-83 
  1. Items Scheduled for Publication in Future Federal Register Editions
  2. Commerce/BIS Announces ZTE Settlement
  3. State/DDTC: (No new postings.)
  4. UK Introduces New Merger and Takeover Rules
  1. Fortune: “Senate Moves to Block Trump’s Settlement with China’s ZTE, a ‘Personal Favor’ to President Xi Jinping”
  2. The Gazette: “Federal Appeals Court Upholds 3 Family Members’ Convictions for Smuggling Guns to Lebanon”
  3. Guns.com: “Proposed Export Reform Will Boost International Gun Sales, Industry Expects”
  4. International Financial Law Review: “Asian Businesses Face Export Control, Sanction Compliance Headaches”
  5. South China Morning Post: “ZTE to Replace Board, Fire Senior Management Under U.S. Deal”
  1. T.B. McVey, C.R. Webb & C.E. James, Jr.: “Export Control Amendments Proposed for Commercial Firearms, Ammunition and Related Products”
  2. Xiaomeng Lu: “What Chinese Companies Can Learn From ZTE’s Mistakes”
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Latest Amendments: ATF (15 Jan 2016), Customs (12 Jun 2018), DOD/NISPOM (18 May 2016), EAR (6 Jun 2018), FACR/OFAC (19 Mar 2018), FTR (24 Apr 2018), HTSUS (8 Jun 2018), ITAR (14 Feb 2018) 
  3. Weekly Highlights of the Daily Bugle Top Stories 

EXIMITEMS FROM TODAY’S FEDERAL REGISTER

EXIM_a1

1.
President Continues National Emergency With Respect to Belarus
(Source: Federal Register, 12 Jun 2018.) [Excerpts.]
 
83 FR 27287: Notice of June 8, 2018: Continuation of the National Emergency with Respect to the Actions and Policies of Certain Members of the Government of Belarus and Other Persons to Undermine Democratic Processes or Institutions of Belarus
 
On June 16, 2006, by Executive Order 13405, the President declared a national emergency pursuant to the International Emergency Economic Powers Act (50 U.S.C. 1701-1706) to deal with the unusual and extraordinary threat to the national security and foreign policy of the United States constituted by the actions and policies of certain members of the Government of Belarus and other persons to undermine Belarus’s democratic processes or institutions, manifested in the fundamentally undemocratic March 2006 elections; to commit human rights abuses related to political repression, including detentions and disappearances; and to engage in public corruption, including by diverting or misusing Belarusian public assets or by misusing public authority.
 
The actions and policies of certain members of the Government of Belarus and other persons continue to pose an unusual and extraordinary threat to the national security and foreign policy of the United States. For this reason, the national emergency declared on June 16, 2006, and the measures adopted on that date to deal with that emergency, must continue in effect beyond June 16, 2018. Therefore, in accordance with section 202(d) of the National Emergencies Act (50 U.S.C. 1622(d)), I am continuing for 1 year the national emergency declared in Executive Order 13405. … 
 
  [Presidential Signature.]
 
THE WHITE HOUSE,
June 8, 2018. 

* * * * * * * * * * * * * * * * * * * * 

EXIM_a2

2.
DHS/CBP Implements Mandatory Air Cargo Advance Screening, Program
(Source: Federal Register, 12 Jun 2018.) [Excerpts.] 
 
83 FR 27380-27407: Air Cargo Advance Screening (ACAS); Final Rule
 
* AGENCY: U.S. Customs and Border Protection, DHS.
* ACTION: Interim final rule; request for comments.
* SUMMARY: To address ongoing aviation security threats, U.S. Customs and Border Protection (CBP) is amending its regulations pertaining to the submission of advance air cargo data to implement a mandatory Air Cargo Advance Screening (ACAS) program for any inbound aircraft required to make entry under the CBP regulations that will have commercial cargo aboard. The ACAS program requires the inbound carrier or other eligible party to electronically transmit specified advance cargo data (ACAS data) to CBP for air cargo transported onboard U.S.-bound aircraft as early as practicable, but no later than prior to loading of the cargo onto the aircraft. The ACAS program enhances the security of the aircraft and passengers on U.S.-bound flights by enabling CBP to perform targeted risk assessments on the air cargo prior to the aircraft’s departure for the United States. These risk assessments will identify and prevent high-risk air cargo from being loaded on the aircraft that could pose a risk to the aircraft during flight.
* DATES: 
  – Effective date: This interim final rule is effective June 12, 2018.
  – Comment date: Comments must be received by August 13, 2018. … 
* SUPPLEMENTARY INFORMATION: … 
 
I. Public Participation … 
II. Executive Summary … 
III. Background and Purpose … 
    A. Current Regulatory Requirements … 
      1. CBP Regulatory Requirements …   
      2. TSA Requirements … 
    B. Air Cargo Security Risks … 
    C. ACAS Pilot … 
IV. Mandatory ACAS Program … 
    A. New 19 CFR 122.48b, Air Cargo Advance Screening (ACAS) … 
    B. Eligible ACAS Filers … 
    C. Time Frame for Filing ACAS Data … 
    D. ACAS Data … 
      1. ACAS Data Definitions … 
      2. Mandatory ACAS Data … 
      3. Conditional ACAS Data: Master Air Waybill Number … 
      4. Optional ACAS Data … 
    E. Filing and Updating the ACAS Data … 
    F. ACAS Referrals … 
    G. Do-Not-Load (DNL) Instructions … 
    H. Responsibilities of ACAS Filers … 
      1. Responsibility To Provide Accurate and Timely Data … 
      2. Responsibility To Resolve ACAS Referrals …
      3. Responsibility To Address Do-Not-Load (DNL) Instructions … 
    I. Amendments to Bond Conditions … 
    J. Amendments to 19 CFR 122.48a … 
      1. Flight Departure Message (FDM) … 
      2. Other Amendments to 19 CFR 122.48a … 
    K. Flexible Enforcement …
 
  Dated: June 4, 2018.
Kirstjen M. Nielsen, Secretary.

* * * * * * * * * * * * * * * * * * * * 

EXIM_a3

3.
State Seeks Comments on DSP-5, DSP-61, DSP-85, DSP-73, DSP-6, DSP-62, DSP-74, and DSP-83 
(Source: Federal Register, 12 Jun 2018.) [Excerpts.] 
 
83 FR 27362-27364: 30-Day Notice of Proposed Information Collection: Six DDTC Information Collections
 
* ACTION: Notice of request for public comments.
* SUMMARY: The Department of State has submitted the information collection described below to the Office of Management and Budget (OMB) for approval. In accordance with the Paperwork Reduction Act of 1995 we are requesting comments on this collection from all interested individuals and organizations. The purpose of this Notice is to allow 30 days for public comment.
* DATES: Submit comments directly to the Office of Management and Budget (OMB) up to July 12, 2018. … 
* FOR FURTHER INFORMATION CONTACTDirect requests for additional information regarding the collection listed in this notice, including requests for copies of the proposed collection instrument and supporting documents, to Andrea Battista, SA-1, 12th Floor, Directorate of Defense Trade Controls, Bureau of Political Military Affairs, U.S. Department of State, Washington, DC 20522-0112, via phone at (202) 663- 3136, or via email at battistaal@state.gov
* SUPPLEMENTARY INFORMATION: 
  
  – Title of Information Collection: Application/License for Permanent Export of Unclassified Defense Articles and Related Unclassified Technical Data.
  – OMB Control Number: 1405-0003.
  – Type of Request: Extension of a Currently Approved Collection.
  – Originating Office: Bureau of Political-Military Affairs, Directorate of Defense Trade Controls, PM/DDTC.
  – Form Number: DSP-5. … 
  – Obligation to Respond: Required to Obtain or Retain a Benefit.
 
  – Title of Information Collection: Application/License for Temporary Import of Unclassified Defense Articles.
  – OMB Control Number: 1405-0013.
  – Type of Request: Extension of Currently Approved Collection.
  – Originating Office: Bureau of Political-Military Affairs, Directorate of Defense Trade Controls, PM/DDTC.
  – Form Number: DSP-61. … 
  – Obligation to Respond: Required in Order to Obtain or Retain Benefits. 
 
  – Title of Information Collection: Application/License for Permanent/Temporary Export or Temporary Import of Classified Defense Articles and Related Classified Technical Data.
  – OMB Control Number: 1405-0022.
  – Type of Request: Extension of Currently Approved Collection.
  – Originating Office: Bureau of Political-Military Affairs, Directorate of Defense Trade Controls, PM/DDTC.
  – Form Number: DSP-85. … 
  – Obligation to Respond: Required in Order to Obtain or Retain Benefits.
 
  – Title of Information Collection: Application/License for Temporary Export of Unclassified Defense Articles.
  – OMB Control Number: 1405-0023.
  – Type of Request: Extension of Currently Approved Collection.
  – Originating Office: Bureau of Political-Military Affairs, Directorate of Defense Trade Controls, PM/DDTC.
  – Form Number: DSP-73. … 
  – Obligation to Respond: Required in Order to Obtain or Retain Benefits.
 
  – Title of Information Collection: Application for Amendment to License for Export or Import of Classified or Unclassified Defense Articles and Related Classified Technical Data.
  – OMB Control Number: 1405-0092.
  – Type of Request: Extension of Currently Approved Collection. 
  – Originating Office: Bureau of Political-Military Affairs, Directorate of Defense Trade Controls, PM/DDTC.
  – Form Number: DSP-6; DSP-62; DSP-74. … 
  – Obligation to Respond: Required in Order to Obtain or Retain Benefits.
 
  – Title of Information Collection: Nontransfer and Use Certificate.
  – OMB Control Number: 1405-0021.
  – Type of Request: Extension of Currently Approved Collection.
  – Originating Office: Bureau of Political-Military Affairs, Directorate of Defense Trade Controls, PM/DDTC.
  – Form Number: DSP-83.
  – Obligation to Respond: Required in Order to Obtain or Retain Benefits. … 
 
Abstract of Proposed Collections
 
  The export, temporary import, and brokering of defense articles, including technical data, and defense services are authorized by The Department of State, Directorate of Defense Trade Controls (DDTC) in accordance with the International Traffic in Arms Regulations (“ITAR,” 22 CFR parts 120-130) and section 38 of the Arms Export Control Act. Those who manufacture, broker, export, or temporarily import defense articles, including technical data, or defense services must register with the Department of State and obtain a decision from the Department as to whether it is in the interests of U.S. foreign policy and national security to approve covered transactions. Also, registered brokers must submit annual reports regarding all brokering activity that was transacted, and registered manufacturers and exporter must maintain records of defense trade activities for five years.
  1405-0003, Application/License for Permanent Export of Unclassified Defense Articles and Related Unclassified Technical Data: In accordance with part 123 of the ITAR, any person who intends to permanently export unclassified defense articles or unclassified technical data must obtain authorization from DDTC prior to export. “Application/License for Permanent Export of Unclassified Defense Articles and Related Unclassified Technical Data” (Form DSP-5) is the licensing vehicle typically used to obtain permission for the permanent export of unclassified defense articles, including unclassified technical data, enumerated on the USML. This form is an application that, when approved by PM/DDTC, Department of State, constitutes the official record and authorization for the permanent commercial export of unclassified U.S. Munitions List articles, pursuant to the Arms Export Control Act and the International Traffic in Arms Regulations.
  1405-0013, Application/License for Temporary Import of Unclassified Defense Articles: In accordance with part 123 of the ITAR, any person who intends to temporarily import unclassified defense articles must obtain DDTC authorization prior to import. “Application/License for Temporary Import of Unclassified Defense Articles” (Form DSP-61) is the licensing vehicle typically used to obtain permission for the temporary import of unclassified defense articles covered by USML. This form is an application that, when approved by PM/DDTC, Department of State, constitutes the official record and authorization for the temporary commercial import of unclassified U.S. Munitions List articles, pursuant to the Arms Export Control Act and the International Traffic in Arms Regulations.
  1405-0022, Application/License for Permanent/Temporary Export or Temporary Import of Classified Defense Articles and Related Classified Technical Data: In accordance with part 123 of the ITAR, any person who intends to permanently export, temporarily export, or temporarily import classified defense articles, including classified technical data must first obtain DDTC authorization. “Application/License for Permanent/Temporary Export or Temporary Import of Classified Defense Articles and Related Classified Technical Data” (Form DSP-85) is used to obtain permission for the permanent export, temporary export, or temporary import of classified defense articles, including classified technical data, covered by the USML. This form is an application that, when approved by PM/DDTC, Department of State, constitutes the official record and authorization for all classified commercial defense trade transactions, pursuant to the Arms Export Control Act and the International Traffic in Arms Regulations.
  1405-0023, Application/License for Temporary Export of 
Unclassified Defense Articles: In accordance with part 123 of the ITAR, any person who intends to temporarily export unclassified defense articles must obtain DDTC authorization prior to export. “Application/License for Temporary Export of Unclassified Defense Articles” (Form DSP-73) is the licensing vehicle typically used to obtain permission for the temporary export of unclassified defense articles covered by the USML. This form is an application that, when approved by PM/DDTC, Department of State, constitutes the official record and authorization for the temporary commercial export of unclassified U.S. Munitions List articles, pursuant to the Arms Export Control Act and the International Traffic in Arms Regulations.
  1405-0092, Application for Amendment to License for Export or Import of Classified or Unclassified Defense Articles and Related Classified Technical Data: In accordance with part 123 of the ITAR, any person who intends to permanently export, temporarily import, or temporarily export unclassified or classified defense articles or related technical data must obtain DDTC authorization. “Application for Amendment to License for Export or Import of Classified or Unclassified Defense Articles and Related Classified Technical Data” is used to obtain permission for certain changes to previously approved licenses. This form is an application that, when +approved by PM/DDTC, Department of State, constitutes the official record and authorization for all requests to amend existing defense trade authorizations made pursuant to the Arms Export Control Act and the International Traffic in Arms Regulations.
   1405-0021, Nontransfer and Use Certificate: Pursuant to Sec.  123.10 of the ITAR, a completed Nontransfer and Use Certificate” (Form DSP-83) must accompany an export license application to export significant military equipment and classified articles and technical data. Pursuant to Sec.  124.10 of the ITAR, a completed “Nontransfer and Use Certificate” must be submitted with any request for a manufacturing license agreement or technical assistance agreement that relates to significant military equipment or classified defense articles and technical data. The foreign consignee (if applicable), foreign end-user, and applicant execute this form. By signing the certificate the foreign end-user certifies that they will not, except as specifically authorized by prior written approval of the Department of State, re-export, resell or otherwise dispose of the defense articles enumerated in the application (1) outside the foreign country named as the country of ultimate destination; or (2) to any other person. With respect to agreements that involve classified articles or classified technical data, an authorized representative of the foreign government must also sign the form.  
  Methodology: This information collection may be sent to the Directorate of Defense Trade Controls via the following methods: Electronically or mail.
 
Anthony M. Dearth, Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, U.S. Department of State.

* * * * * * * * * * * * * * * * * * * * 

OGSOTHER GOVERNMENT SOURCES

OGS_a14. Items Scheduled for Publication in Future Federal Register Editions
(Source: Federal Register)

[No items of interest noted today.]
* * * * * * * * * * * * * * * * * * * *

OGS_abc25
Commerce/BIS Announces ZTE Settlement
(Source: 
Commerce/BIS, 12 Jun 2018.) [Summary.]  
 
* Respondent: Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. of Shenzen and Hi-New Shenzen, China, respectively.

* Charges: On 6 March 2018, ZTE notified BIS that it had made false statements in two letters it sent to BIS regarding the discipline of ZTE employees involved in the violations that led to the March 2017 Settlement Agreement and 23 March 2017 order. 

* Penalties:

  – Civil Penalty of $1,761,000,000 and placement of ZTE on the Denied Parties List (“DPL”). 
BIS will remove ZTE from the DPL Denied Persons List after ZTE makes the required payment and deposit into escrow.

  – Within 30 days of the date of the order, BIS will select and ZTE shall retain at its expense an independent Special Compliance Coordinator (“SCC”) to coordinate, monitor, assess, and report on compliance by ZTE and its subsidiaries and affiliates worldwide.

  – ZTE must also:

    — Complete and submit nine audit reports of its compliance with U.S. export control laws;

    — Ensure that all records required to be kept or retained under the Regulations are stored in or fully accessible from the United States;

    — Publish on its website all Export Control Classification Numbers as necessary to determine applicable requirements; 

    — Hold two public symposia in China regarding compliance with applicable U.S. export control regulations. 

* Debarred: 10 years from the date of this order, unless ZTE completes the full and timely payment as described above.

* Date of Order: 7 Jun 2018.
 
 

[The Draft Charging Letter, Superseding Settlement Agreement, and Superseding Order are available 
HERE. See also the related 7 June press release from the Department of Commerce, available 
HERE.]

* * * * * * * * * * * * * * * * * * * *

* * * * * * * * * * * * * * * * * * * *

OGS_a37. 
UK Introduces New Merger and Takeover Rules

(Source: 
UK ECJU
, Notice to Exporters 2018/13, 12 Jun 2018.) [Excerpts.] 
 
The UK Export Control Joint Unit (ECJU) announced that the UK government has strengthened its ability to scrutinize mergers and takeovers with relation to possible national security concerns through new rules that came into force on 11 June 2018.
 
These rules follow the publication of the National Security and Infrastructure Investment Review’ Green Paper in October 2017. This review set out proposals to close gaps in our current framework in the short term, and proposals for a more comprehensive regime over the longer term.
 
The government has now responded to the consultation on the short-term proposals and secondary legislation came into force on 11 June 2018.
 
The new regulations amend the threshold tests for businesses in the military, dual-use, computing hardware and quantum technology sectors that are most likely to have implications for our security. Businesses that develop or produce goods on certain of the Strategic Export Control Lists will be covered by the amended thresholds.
 
Today’s changes allow ministers to intervene for public interest reasons when the target business’s UK turnover is more than £1 million, down from £70 million under the previous rules, and remove the requirement that a merger or takeover in these sectors lead to an increase in the parties’ combined share of supply of relevant goods or services before the Government is able to intervene.
 
Action for Exporters
 

Ensure your company is familiar with the legislation amending the share of supply test and turnover threshold and accompanying guidance. …  

* * * * * * * * * * * * * * * * * * * * 

NWSNEWS

NWS_a18. 
Fortune: “Senate Moves to Block Trump’s Settlement with China’s ZTE, a ‘Personal Favor’ to President Xi Jinping”
(Source: Fortune, 12 Jun 2018.) [Excerpts.] 
 
The Senate has adopted a measure to block a deal between the Trump administration and Chinese telecommunications company ZTE.
 
The motion was adopted late Monday night, only hours after the deal became public and less than a week after it was signed. The announced settlement would allow the company to resume buying parts and selling products in the U.S. after having been banned by the U.S. Commerce Department in April for breaking the U.S. embargo against Iran.
 
The Senate added the block to the National Defense Authorization Act, a must-pass piece of legislation. It would block the deal by retroactively reinstating financial penalties and upholding the ban on ZTE selling products to the U.S. government. The Senate’s action is based on national security fears over ZTE’s products. The intelligence community suspects the company’s devices are mechanisms for espionage that can be remotely tracked and used to steal intellectual property. … 

* * * * * * * * * * * * * * * * * * * * 

NWS_29.
The Gazette: “Federal Appeals Court Upholds 3 Family Members’ Convictions for Smuggling Guns to Lebanon”
(Source: The Gazette, 11 Jun 2018.) 
 
Appeal for fourth family member remains pending
 
A federal appeals court Monday upheld convictions of three Cedar Rapids family members for smuggling 252 guns among skid loaders bound for Lebanon in 2014 and 2015.
 
U. S. Court of Appeals for the 8th Circuit affirmed sentences for Ali Al Herz, his brother Bassem Herz and Herz’s wife, Sarah Zeaiter, for their part of smuggling guns from Cedar Rapids to Lebanon in shipping containers. The three pleaded, along with Al Herz’s son, Adam Al Herz, 25, in 2016.
 
Adam Al Herz’s appeal was filed later and is pending.
 
  – Ali Al Herz, 53, pleaded guilty to being a prohibited person in possession of firearms, firearms conspiracy, conspiracy to commit money laundering and violation of the Arms Export Control Act, meaning he didn’t have a license to export firearms. He was sentenced to 27 years.
  – Bassem Herz, 33, pleaded guilty to firearms conspiracy, conspiracy to commit money laundering and violation of the Arms Export Control Act, which is not having a license to export firearms. He was sentenced to eight years
  – Sarah Zeaiter, 26, pleaded guilty of one count each to firearms conspiracy, conspiracy to commit money laundering and violation of the Arms Export Control Act. She was sentenced to seven years.
  – Adam Al Herz, 23, pleaded guilty to firearms conspiracy, conspiracy to commit money laundering and violation of the Arms Export Control Act – that he didn’t have a license to export firearms. He was sentenced to 20 years.
 
Ali Al Herz argued U.S. District Senior Judge Linda Reade, who was chief judge at the time, should not have imposed an enhancement regarding the number of guns. According to evidence, he told investigators there was an estimated 227 firearms in the March and August 2014 and May 2015 shipments, but he argued that didn’t distinguish between ones he purchased and what others purchased and shipped. The appeals court found he was accountable for at least 200 guns.

* * * * * * * * * * * * * * * * * * * * 

NWS_310. 
Guns.com: “Proposed Export Reform Will Boost International Gun Sales, Industry Expects”
(Source: Guns.com, 12 Jun 2018.) [Excerpts.] 
 
Firearm industry experts believe the proposed export reform will boost international gun sales. … 
 
The Directorate of Defense Trade Controls unveiled the long-awaited ITAR changes last month, shifting oversight of commercial arms sales to the Commerce Department and its Export Administration Regulations (EAR).
 
The rule change would give American manufacturers more leeway to sell guns internationally. Lawrence Keane, senior vice president for the National Shooting Sports Foundation, said in September relaxed restrictions would boost annual gun sales by as much as 20 percent. … 
 
The proposal removes non-automatic and semi-automatic firearms from ITAR categories I and II. Corresponding parts and ammunition will no longer remain in category III. Firearms dealers large and small would no longer pay a $2,250 ITAR registration fee or a $250 licensing fee.
 
Instead, the products will transfer to the EAR and undergo far less scrutiny. … 

* * * * * * * * * * * * * * * * * * * * 

NWS_411. 
International Financial Law Review: “Asian Businesses Face Export Control, Sanction Compliance Headaches” 
(Source: International Financial Law Review, 11 Jun 2018.) [Excerpts; subscription required.]
 
Asian businesses, especially Chinese companies, are facing increasing pressure as the U.S. increasingly resorts to export control and sanction regulations as a foreign policy tool.
 
The issue was recently amplified by the ZTE case which has been heavily criticized by market participants globally. Due to breaching terms of an existing sanctions settlement with the U.S., ZTE was initially banned from purchasing components central to its business from US partners for seven years. The ban has now been lifted after ZTE signed an agreement with the US to pay $1.4 billion to settle the case.
 

According to panelists at the recent Asialaw In-House Counsel Summit in Hong Kong, what Asian corporates are finding most challenging is tracking channel partners with little to no resources on export controls and the technical difficulty of knowing the percentage of U.S. content across complex product lifecycles when there are large volumes of products. … 

* * * * * * * * * * * * * * * * * * * * 

NWS_512. 
South China Morning Post: “ZTE to Replace Board, Fire Senior Management Under U.S. Deal”
(Source: South China Morning Post, 12 Jun 2018.) [Excerpts.]
 
ZTE Corp. has agreed to pay an additional US$1 billion in civil penalties to the U.S. Department of Commerce and put US$400 million in escrow to settle its violation of export controls that threatened to put it out of business.
 
The Shenzhen-based telecommunications company, which had to shut down major operations after the U.S. banned it from buying American parts, will also employ a special compliance coordinator (SCC) and a team of assistants at its expense for a period of 10 years, according to a detailed settlement agreement on the U.S. Commerce Department’s website.
 
The entire boards of directors of ZTE Corp. and ZTE Kangxun will be replaced within 30 days of the agreement dated June 7, and all members of senior leadership at or above the senior vice-president level and employees responsible for the export violations will be terminated. … 
 
As part of the agreement, ZTE will also hold two public symposiums in China within four years regarding compliance with the regulations, focused on best compliance practices for Chinese companies. … 

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COMMCOMMENTARY

COMM_a0
13
T.B. McVey, C.R. Webb & C.E. James, Jr.: “
Export Control Amendments Proposed for Commercial Firearms, Ammunition and Related Products”

(Source: Williams Mullen, 11 Jun 2018.) 
 
* Author: Thomas B. McVey, Esq., tmcvey@williamsmullen.com; Camden R. Webb, Esq., crwebb@williamsmullen.com; and Charles E. “Chuck” James, Jr., Esq., cjames@williamsmullen.com. All of Williams Mullen. 
 
On May 24, 2018 the State and Commerce Departments issued proposed regulations regarding the transfer of export jurisdiction for commercial firearms and ammunition from the International Traffic in Arms Regulations (“ITAR”) to the Export Administration Regulations (“EAR”). [FN/1] Specifically, the proposals would amend Categories I, II and III of the U.S. Munitions List (“USML”) to remove certain commercial firearms products, ammunition, and certain parts, components, accessories and attachments and transfer these items to the Commerce Control List (“CCL”) under the EAR.  This is the first step in the long-awaited process under export control reform to transfer firearms products that no longer warrant control as military products from ITAR to the less restrictive EAR.  This is welcome news to our clients and many in the firearms and firearms accessory market.  The following is a summary of a number of the proposed changes and the impact on companies dealing in these products.
 
At the outset, it should be recognized that these are proposed amendments – they are not the final versions of the regulations.  State and Commerce have provided these in proposed form and are requesting comments from interested parties during a 45-day comment period.  Upon the receipt of comments, the agencies may make further modifications to the proposals and must still issue final regulations.  Consequently, companies should be alert to any additional changes and not act on the proposed regulations until they become final.  Nevertheless, companies can become engaged in the process now by submitting comments with recommendations for further revisions and begin planning for the transition to the new regulatory program.  Many industry groups and advocacy organizations are encouraging their members to offer comments in support of the proposed regulations. 
 
Amendments Under ITAR
.  Under the proposed State Department rule, USML Category I, covering firearms and related articles, will be amended to remove non-automatic and semi-automatic firearms up to caliber .50 (12.7 mm) inclusive and certain parts, components, accessories and attachments “specially designed” for such articles.  The goal of such amendments is to remove common items like modern sporting rifles while continuing to control under ITAR “only defense articles that are inherently military or that are not otherwise widely available for commercial sale.” [FN/2] Such products would be transferred to be controlled under the EAR (discussed further below).  Certain products, however, would continue to remain on USML Category I and subject to ITAR that fit within the above parameters, including the following:
 
  – Firearms that fire caseless ammunition;
  – Fully automatic firearms to caliber .50 inclusive;
  – Firearms specially designed to integrate fire control, automatic tracking and automatic firing systems;
  – Fully automatic shotguns;
  – Silencers, mufflers, sound suppressors, and specially designed parts and components;
  – Barrels, receivers (frames), bolts, bolt carriers, slides, and sears, specially designed for the firearms in Category I;
  – High capacity (greater than 50 rounds) magazines, and parts and components to convert a semi-automatic firearm into a fully automatic firearm; and
  – Accessories and attachments specially designed to automatically stabilize aim (other than gun rests) or for automatic targeting.
 
Category II, covering guns and armaments, would be amended to specifically list the items subject to controls and to establish a “bright line” between the USML and the CCL for the control of these items.  Items removed and transferred to the CCL include engines for self-propelled guns and howitzers, [FN/3] tooling and equipment for the production of articles controlled in USML Category II [FN/4] and certain test and evaluation equipment. [FN/5] Items specifically remaining on the USML and subject to ITAR would include certain apparatus and devices for launching or delivering ordnance, [FN/6] certain autoloading systems currently controlled under USML Category II paragraph (i), developmental guns and armaments funded by the Department of Defense [FN/7] and specially designed parts and components of such developmental products. 
 
Category III, covering ammunition and ordinance, would be amended to be consistent with Category I, including the removal of ammunition for small arms that were transferred out of Category I.  Category III would also be amended to remove the broad “catch-alls” previously covered and to specifically enumerate the remaining items to be controlled.
 
New Controls Under the EAR
.  Items removed from the USML as described above would be transferred to be controlled under the EAR which is administered by the Bureau of Industry and Security (“BIS”) within the Commerce Department.  As part of this transfer, BIS has established 17 new export control classification numbers (“ECCN’s”) on the CCL to control items that were removed from the USML. 
 
Items covered by these ECCN’s will continue to be subject to significant export restrictions.  For example, these items will require export licenses for exports, reexports and in-country transfers.  In addition, certain “technology” related to the transferred firearms, ammunition and related products will be controlled on the CCL – in many cases licenses will be required for the transfer of controlled technology out of the U.S. and the transfer or disclosure of controlled technology to foreign persons in the U.S.  Certain license exceptions would also be available for the transferred items (although the license exceptions under the EAR frequently differ from the license exemptions under ITAR).  As with ITAR licenses issued by DDTC, items exported under a license would only be authorized for the end user and end use specified on the license – any reexports or in-country transfers of such items beyond such authority will require specific additional license authorization from BIS. 
 
Continued ITAR Controls On Brokering of Commercial Firearms
.  Notwithstanding the changes described above, commercial firearms and ammunition would continue to be covered under the ITAR brokering requirements.  Specifically, the State Department proposed rule states that products listed on the U.S. Munitions Import List (used by the Bureau of Alcohol, Tobacco, Firearms and Explosives for administering controls on the permanent import of firearms products) will continue to be subject to the ITAR brokering requirements set forth in 22 CFR Part 129.  Category I(a) of the USMIL includes nonautomatic and semiautomatic firearms, to caliber .50 inclusive, and USMIL Category III(a) includes ammunition for such products.  Thus, despite the broad changes to USML Categories I and III under the proposed amendments, parties will still be subject to ITAR regulation for brokering and “facilitation” in the sale of commercial firearms products, including requirements for registration, obtaining advanced authorizations for certain transactions, reporting, recordkeeping and restrictions on brokering transactions involving the “proscribed” countries identified in 22 CFR §126.1.
 
Impact on Firearms Companies
.  The proposed changes will most likely affect many companies in the firearms industry in a number of ways including:
 
  – Export Classifications
.  Companies will review the export jurisdiction and classification of their products to determine if they have been transferred to BIS jurisdiction and, if so, to determine the correct ECCN’s for their products.  This will apply to firearms, ammunition, parts, components, accessories and attachments.
  – Licenses For Products, Technology and Software.
  As referenced above, companies will still be required to obtain export licenses for exports, reexports and in-country transfers for controlled products, technologies and software.  However, in many cases these will be from a different licensing agency under different licensing procedures.  Consequently, many companies will be amending their export compliance procedures to conform to these new requirements.
  – Registration
.  There is no requirement for companies to register under the EAR, as exists under ITAR.  Of course, if companies still engage in activities regulated under ITAR (such as brokering commercial firearms products or the sale of items remaining in USML Categories I, II and III), they will be required to maintain their DDTC registration.
  – Defense Services
.  There are reduced controls on performing services under the EAR as compared with those under ITAR. [FN/8]
  – Temporary Imports
.  The EAR does not contain controls on the temporary import of items subject to the EAR as required under ITAR.
  – Reports for Payments of Fees, Commissions
 and Political Contributions.  The EAR does not require exporters to file reports on the payment of political contributions, fees and commissions as under ITAR Part 130.
  – Items Still Regulated Under ITAR
.  For items that remain listed on the USML after the amendments, such items will still be subject to ITAR and the requirements thereunder.
 
Status of Amendments
.  As stated above, the amendments described in this alert are proposed changes only and not final amendments.  Parties have until July 9, 2018 to submit comments to State and Commerce on the proposed regulations.  Companies are encouraged to review the proposals carefully to assess how they will apply to their businesses as there is still opportunity to propose further amendments.  Officials at DDTC and BIS typically review the comments carefully and often adopt changes recommended by commenters.
 
While the transfer of commercial firearms products from ITAR to EAR controls is not yet concluded, the process has begun.  This is the time for companies to become engaged – in reviewing, commenting on and planning ahead for these changes.
 
———

  [FN/1] The proposed State Department rule is available 
here, and the proposed Commerce Department rule is available 
here.

  [FN/2] See State proposed rule p. 24,198.
  [FN/3] To be transferred to the CCL under ECCN 0A606.
  [FN/4] To be transferred to the CCL under ECCN 0B602
  [FN/5] To be transferred to the CCL under ECCN 0B602.
  [FN/6] To be included in a new USML paragraph (a)(4).
  [FN/7] To be included in new USML paragraph (a)(5).
  [FN/8] The performance of services is addressed in the EAR in 15 CFR §744.6(a)(1)(ii) and §744.6(a)(2).  In addition, the BIS proposed rule states as follows regarding defense services: “The EAR does not include a concept of “defense services,” and the “technology” related controls are more narrowly focused and apply in limited contexts as compared to the ITAR.”  See BIS proposed rule at p. 24,167. 

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COMM_a01
14. 
Xiaomeng Lu: “What Chinese Companies Can Learn From ZTE’s Mistakes”

(Source: The Diplomat, 12 Jun 2018.) 
 
* Author: Xiaomeng Lu is Access Partnership’s International Public Policy Manager and China practice lead. 
 
Starting in 2010, Chinese telecommunications equipment company ZTE violated the U.S. embargo against Iran in order to sell export-controlled technology to Iranian entities. During the course of the U.S. government investigation, ZTE engaged in evasive conduct designed to prevent investigators from detecting their violations. This unprecedented scheme led to a record-high penalty of $1.19 billion. At the time ZTE fully admitted its wrongdoing and promised to bring the company’s practice in compliance with U.S. law. However, only a year later, ZTE was found issuing misleading statements and again violating U.S. sanctions during the probationary period under the 2017 Settlement Agreement.
 
This time around, the U.S. government placed an export ban on ZTE, cutting the company off from all of its U.S. suppliers for seven years, effectively putting the business on the brink of collapse. This ban was lifted a few days ago, after ZTE agreed to pay another $1 billion fine and let the United States install a compliance team within the company – a deal struck by U.S. and Chinese officials in the midst of intense trade negotiations.
Reportedly ZTE’s top management had an internal debate back in 2012 over how to respond to the U.S. investigation. The executives were divided into two groups: one that wanted to resist investigators and another that wanted to comply. The dark side prevailed, and ZTE chose to resist the investigation, with severe consequences.
 
Maybe it is time for some telecom executives in China to watch more Marvel Comics-based movies, and pay particular attention to the often quoted (including by the U.S. Supreme Court) Spider Man saying: “With great power comes great responsibility.” While not as powerful as GE or Amazon, ZTE is China’s second largest telecommunications manufacturer and has 80,000 employees to be responsible for.
 
A person’s behavioral problems may reveal deeper issues in his or her family; similarly, ZTE’s case reveals some structural issues within the Chinese tech environment. In the Chinese government-enterprise relationship, corporations often play the role of children, while the government wants to act like parents. Like a stereotypical overbearing parent, the Chinese government has been trying to bring up successful kids by giving them the most materialistic help, ranging from subsidies and R&D funding to preferential treatment in government procurement projects. A parent’s measure of success is healthy kids doing well in school; the Chinese government is looking for a company to increase its revenue stream, market share, and physical presence. However, over time this parenting model often produces spoiled grown-ups who lack a moral compass and social awareness. When the coddled young adult takes a serious, criminal misstep, and gets arrested, the helicopter parent over-steps again to bail out the offspring at all cost.
 
Hopefully last week’s parental rescue is a wake-up call not only to ZTE, but to other mature and growing Chinese tech companies. It is time for Chinese firms to learn how to become independent, responsible multinational corporate adults. Family education is a big part of who you are, but peer-learning in school is equally important. Look no further than cases like Microsoft’s data privacy lawsuit against the U.S. government, or Apple’s encryption dispute with the FBI – questioning and challenging the “parents” (i.e., the host government) is the first step in becoming a full-fledged adult.
 
In addition to becoming independent from the government, Chinese tech companies may consider taking the following steps to become globally-respected players.
 
(1) List on a U.S. stock exchange:
 Companies have to meet the minimum entry listing requirements in order to be traded on the New York Stock Exchange or NASDAQ. Once a company registers with the Securities and Exchange Commission (SEC) and publicly places securities in the United States, it would be responsible to outside stakeholders and subject to additional disclosure requirements. This process provides a training course for Chinese companies to learn about stakeholder management and improve transparency. As Beijing encourages Chinese tech companies to return to the domestic stock market, it is also establishing the Chinese Depository Receipt mechanism to allow internet giants listed overseas, such as Baidu, Alibaba, Tencent, and JD.com, to raise funds in the domestic Chinese capital market in parallel with their existing public offering abroad.
 
(2) Adopt an open communication style:
 Like many Silicon Valley start-ups, Chinese tech companies are run by introverted engineers. The Economist once called Huawei’s CEO, Ren Zhengfei, “the most reclusive boss in the technology industry.” Despite having been in the middle of the export control scandal for over a year now, ZTE’s leadership hasn’t spoken to any non-Chinese media about the controversy. Last Friday, after closing the second settlement deal, ZTE’s CEO finally penned an apology letter, saying, “I would like to apologize to all employees, customers, shareholders, and partners.”
 
However, by American standards, a global technology company’s CEO is expected to confront issues, explain corporate strategy, and make human connections with investors and customers. Conversely, a CEO’s silence will send the message to the public that he or she has something to hide. For example, Facebook is also facing an uphill battle in the wake of its privacy scandal. Though its CEO Mark Zuckerberg is a coder, not a communicator, by training, he took a more open approach and testified in front of the U.S. Congress and the EU Parliament. Through the course of Zuckerberg’s 10 hour testimony in Washington, DC Facebook’s stock price climbed up more than 5 percent. Taking note of Zuckerberg’s experience, ZTE’s CEO may want to consider an interview with tech journalist Kara Swisher, who previously grilled Bill Gates and Steve Jobs on stage, to redeem the company’s corporate image.
 
(3) Respect the rule of law and understand the political environment:
 Many “Doing business in China 101” guidebooks lecture American business people on the need to learn about China’s history and its culture. The same advice is applicable to Chinese businesses in the United States. It is important to respect the long-established norms that honor laws, regulations, and other legally binding obligations in the United States.
 
In addition, the bilateral relationship between the U.S. and China is increasingly confrontational given the growing sense of competition between the two countries. Both presidents have blended national security with economic security – indicating a worsening investment environment for foreign investors in both countries. It is advisable for Chinese companies to take this political risk into consideration and avoid projects involved with sensitive security elements.

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ENEDITOR’S NOTES

 
*Harriet Martineau (12 Jun 1802 – 27 Jun 1876; was a British social theorist and Whig writer, often cited as the first female sociologist. Martineau wrote many books and a multitude of essays from a sociological, holistic, religious, domestic, and perhaps most controversially, feminine perspective; she also translated various works by Auguste Comte. She earned enough to support herself entirely by her writing, a rare feat for a woman in the Victorian era.)
  – “You had better live your best and act your best and think your best today; for today is the sure preparation for tomorrow and all the other tomorrows that follow.”

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EN_a316
. Are Your Copies of Regulations Up to Date?
(Source: Editor)

The official versions of the following regulations are published annually in the U.S. Code of Federal Regulations (C.F.R.), but are updated as amended in the Federal Register.  The latest amendments to applicable regulations are listed below.
 
*
ATF ARMS IMPORT REGULATIONS
: 27 CFR Part 447-Importation of Arms, Ammunition, and Implements of War
  – Last Amendment: 15 Jan 2016: 81 FR 2657-2723: Machineguns, Destructive Devices and Certain Other Firearms; Background Checks for Responsible Persons of a Trust or Legal Entity With Respect To Making or Transferring a Firearm. 
 
*
CUSTOMS REGULATIONS
: 19 CFR, Ch. 1, Pts. 0-199
  – 
Last Amendment: 12 Jun 2018: 
83 FR 27380-27407
: Air Cargo Advance Screening (ACAS); Final Rule
 
DOD NATIONAL INDUSTRIAL SECURITY PROGRAM OPERATING MANUAL (NISPOM): DoD 5220.22-M

  – Last Amendment: 18 May 2016: Change 2
: Implement an insider threat program; reporting requirements for Cleared Defense Contractors; alignment with Federal standards for classified information systems; incorporated and cancelled Supp. 1 to the NISPOM (Summary 
here
.)


EXPORT ADMINISTRATION REGULATIONS (EAR)
: 15 CFR Subtit. B, Ch. VII, Pts. 730-774

  – Last Amendment: 6 June 2018: 83 FR 26204-26205: Unverified List (UVL); Correction

  
*
FOREIGN ASSETS CONTROL REGULATIONS (OFAC FACR)
: 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders

  – Last Amendment: 19 Mar 2018:
83 FR 11876-11881: Inflation Adjustment of Civil Monetary Penalties 

 
*
FOREIGN TRADE REGULATIONS (FTR)
: 15 CFR Part 30
  – Last Amendment: 24 Apr 2018: 3 FR 17749-17751: Foreign Trade Regulations (FTR): Clarification on the Collection and Confidentiality of Kimberley Process Certificates
  – HTS codes that are not valid for AES are available
here.
  – The latest edition (30 Apr 2018) of Bartlett’s Annotated FTR (“BAFTR”), by James E. Bartlett III, is available for downloading in Word format. The BAFTR contains all FTR amendments, FTR Letters and Notices, a large Index, and approximately 250 footnotes containing case annotations, practice tips, Census/AES guidance, and explanations of the numerous errors contained in the official text. Subscribers receive revised copies in Microsoft Word every time the FTR is amended. The BAFTR is available by annual subscription from the Full Circle Compliance websiteBITAR subscribers are entitled to a 25% discount on subscriptions to the BAFTR. Government employees (including military) and employees of universities are eligible for a 50% discount on both publications at www.FullCircleCompiance.eu.  
 
*
HARMONIZED TARIFF SCHEDULE OF THE UNITED STATES (HTS, HTSA or HTSUSA)
, 1 Jan 2018: 19 USC 1202 Annex. (“HTS” and “HTSA” are often seen as abbreviations for the Harmonized Tariff Schedule of the United States Annotated, shortened versions of “HTSUSA”.)
  – Last Amendment:
8 Jun 2018: Harmonized System Update 1809, containing 901 ABI records and 192 harmonized tariff records. 

  – HTS codes for AES are available 
here.
  – HTS codes that are not valid for AES are available 
here.
 
INTERNATIONAL TRAFFIC IN ARMS REGULATIONS (ITAR): 22 C.F.R. Ch. I, Subch. M, Pts. 120-130.

  – Last Amendment: 14 Feb 2018: 83 FR 6457-6458: Amendment to the International Traffic in Arms Regulations: Addition of South Sudan [Amends ITAR Part 126.] 

  – The only available fully updated copy (latest edition: 25 Apr 2018) of the ITAR with all amendments is contained in Bartlett’s Annotated 
ITAR

(“BITAR”)
, by James E. Bartlett III. The BITAR contains all ITAR amendments to date, plus a large Index, over 800 footnotes containing amendment histories, case annotations, practice tips, DDTC guidance, and explanations of errors in the official ITAR text. Subscribers receive updated copies of the BITAR in Word by email, usually revised within 24 hours after every ITAR amendment.
 The BITAR is available by annual subscription from the Full Circle Compliance
 
website
. BAFTR subscribers receive a 25% discount on subscriptions to the BITAR, please
contact us
to receive your discount code. 

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EN_a0317
Weekly Highlights of the Daily Bugle Top Stories

(Source: Editor) 

Review last week’s top Ex/Im stories in “Weekly Highlights of the Daily Bugle Top Stories” published 
here

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EPEDITORIAL POLICY

* The Ex/Im Daily Update is a publication of FCC Advisory B.V., compiled by: Editor, James E. Bartlett III; Assistant Editors, Alexander P. Bosch and Vincent J.A. Goossen; and Events & Jobs Editor, John Bartlett. The Ex/Im Daily Update is emailed every business day to approximately 8,000 readers of changes to defense and high-tech trade laws and regulations. We check the following sources daily: Federal Register, Congressional Record, Commerce/AES, Commerce/BIS, DHS/CBP, DOE/NRC, DOJ/ATF, DoD/DSS, DoD/DTSA, FAR/DFARS, State/DDTC, Treasury/OFAC, White House, and similar websites of Australia, Canada, U.K., and other countries and international organizations.  Due to space limitations, we do not post Arms Sales notifications, Denied Party listings, or Customs AD/CVD items.

* RIGHTS & RESTRICTIONS: This email contains no proprietary, classified, or export-controlled information. All items are obtained from public sources or are published with permission of private contributors, and may be freely circulated without further permission, provided attribution is given to “The Export/Import Daily Bugle of (date)”. Any further use of contributors’ material, however, must comply with applicable copyright laws.

* CAVEAT: The contents of this newsletter cannot be relied upon as legal or expert advice.  Consult your own legal counsel or compliance specialists before taking actions based upon news items or opinions from this or other unofficial sources.  If any U.S. federal tax issue is discussed in this communication, it was not intended or written by the author or sender for tax or legal advice, and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any transaction or tax-related matter.


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