Export Controls: Long Overdue But Still Waiting – ITAR Amendment on Dual/Third-Country Nationals

The Directorate of Defense Trade Controls (DDTC) published its final rule (76 Fed. Reg. 28174 (May 16, 2011)) today easing its longstanding policy of requiring authorized foreign recipients of ITAR-controlled technical data or defense articles to obtain express authorization before allowing full-time employees who are dual or third-country nationals to have access to controlled items. The ITAR amendment replaces specific government authorization with a requirement that approved foreign end-users screen employees, affirmatively decide to permit access, and maintain records of screening procedures. This liberalization is not effective until August 15, 2011, although DDTC has promised to provide guidance on how to transition in the interim.

The amended policy applies to "regular employees," a term expanded from the proposed rule to include not just permanent employees of a company but also full-time contractors who work exclusively for a company at its facilities, under the company's direction and control. Transfers to dual and third-country nationals must take place within the physical territory of the country where the end-user is located, where the governmental entity or international organization conducts official business, or where the consignee operates, and also be within the scope of an approved export authorization or exemption. Foreign end-users may satisfy the requirement for screening procedures by (1) requiring a security clearance approved by the host nation government for its employees, or (2) implementing a process to screen employees for "substantive contacts" with restricted or prohibited countries listed in 22 CFR § 126.1 and obtaining Non-Disclosure Agreements from employees.  The rule provides several examples of what would constitute "substantive contacts" with a 126.1 country. Transfers of defense articles and technical data to employees of foreign licensees with such contacts will continue to require express authorization from DDTC. Notably, while the amendment does not define the term "dual national," the preamble states that "citizens who relinquish citizenship of the former country would not require screening." (76 Fed. Reg. at 28176)

While the new rule is a welcome departure from State's prior restrictive policy regarding dual and third-country nationals, it is not a full about-face. The rule imposes significant procedural, screening, and recordkeeping obligations on foreign licensees, for which U.S. applicants will undoubtedly ultimately be held accountable.