Contract manufacturers (CMs) have become the de facto production division for many U.S. companies. The reasons for this continued trend include outsourcing non-core competencies (i.e. manufacturing), reducing supply chain costs, reducing capital expenditures, and building flexibility into production operations.
The CM’s customer who exports is required to comply with the U.S. Department of Commerce Export Administration Regulations (EAR) and the U.S. Department of State International Traffic in Arms Regulations (ITAR). The EAR has jurisdiction over “dual use” items, that is, those items with both commercial and military applications, while ITAR has jurisdiction over defense articles. But what about the CM’s export compliance requirements?
CMs must first establish whether or not the assemblies or products they produce are under the jurisdiction of ITAR or EAR. For this reason it is important that the CM have a good understanding of their customer’s business. Receiving drawings stamped “ITAR Controlled” are a sure bet that the products fall under ITAR jurisdiction. Are the assemblies used in defense, satellite or aerospace applications? Are the items used in telecommunications or commercial applications? If so, what are the end articles produced and what are their end-uses? CMs will likely already know the answers to these questions, which will help to determine the commodity jurisdiction.
Items under ITAR jurisdiction are defined on the U.S. Munitions List (USML), which can be found in CFR 22, Part 121. In addition to ammunition, missiles and explosives, this list includes military vessels, vehicles, aircraft, training equipment, protective personnel equipment, military electronics, optical and guidance control equipment.
It is imperative that the CM knows that the USML includes components, parts, accessories, attachments, and associated equipment specifically designed or modified for use with the equipment in each of the USML categories. Consequently, the subassemblies that a CM produces are controlled on the USML. In addition, ITAR Part 120.10 controls technical data which is required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles. This includes information in the form of blueprints, drawings, photographs, plans, instructions and documentation.
Items under EAR jurisdiction can be found on the Commerce Control List (CCL) in CFR 15, Part 774. The CCL includes items (commodities, software, and technology) subject to the authority of the U.S. Department of Commerce, Bureau of Industry and Security (BIS) and include “dual use” items as well as purely commercial items. The CCL does not include those items exclusively controlled for export by another department or agency of the U.S. Government. In instances where other agencies administer controls over related items, entries in the CCL will contain a reference to these controls.
If you are unsure of the export jurisdiction of an item or service, you should request a commodity jurisdiction (CJ) determination from the U.S. Department of State, Directorate of Defense Trade Controls (DDTC).
SO, WHAT DOES A CM NEED TO KNOW ABOUT EXPORT COMPLIANCE?
Under ITAR Jurisdiction
* Registration with the Department of State (DDTC). This is required even if the CM does not export the controlled items
* Notification of the DDTC of violations of criminal statutes, changes in senior management, changes in foreign ownership, and mergers and acquisitions
* Maintenance of records concerning the manufacture, acquisition and disposition of defense articles and technical data
* Application for licenses (or use of appropriate exemption) for exports of items on the USML
* Application for licenses (or use of appropriate exemption) for technology transfers of items on the USML to foreign persons or entities
Under EAR Jurisdiction
* Application for licenses (or use of appropriate exception) for exports of items on the CCL and Commerce Country Chart as required
* Application for licenses (or use of appropriate exception) for technology transfers to foreign persons or entities of items on the CCL and Commerce Country Chart as required
* Checking on end-user against government lists of prohibited parties/entities
* Ensuring that items are not intended for prohibited end-uses (i.e. WMD)
Failure to comply with these federal regulations can result in significant criminal penalties (possible prison sentences and fines) and civil action (e.g., fines and denial of export privileges).
For more information about corporate trade compliance or to contact an export trade compliance specialist please visit http://www.wearecompliant.com