Defense Trade Regulatory Requirements & National Security Reviews of Foreign Investment in the United States

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Nov 18, 2013 (3 years and 9 months ago)

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May 24, 2012

International Trade / Washington D.C.

Defense Trade Regulatory Requirements & National
Security Reviews of Foreign Investment in the United
States


Presentation to IACC Aerospace, Defense & Homeland Security Session

Ajay Kuntamukkala, Partner



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2

Agenda


Overview


Export Controls


History of U.S. Export Control Policy Towards India


Export Administration Regulations


International Traffic in Arms Regulations


The Committee on Foreign Investment in the United
States (CFIUS)


Summary Matrix of Regulatory Issues


Questions

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Overview


The aerospace, defense, and homeland security industries
are highly regulated in the United States


U.S. export controls apply to the transfer of technology,
export and import of equipment, export of software and
source code, and the employment of foreign persons in the
United States


Mergers, acquisitions, and joint ventures involving foreign
entities may require national security reviews by CFIUS


Indian companies, like other foreign companies, may be
subject to these rules when they enter the U.S. market

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U.S. Export Control Laws

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History of U.S. Export Policy Towards India


Export controls policy is a key issue in the U.S.
-
India
commercial relationship


Exports controls affect only a small fraction of overall bilateral trade


However, export controls are viewed by India as a significant strategic
and economic issue


History of technology denial


Need for technology as a developing country


U.S. has gradually liberalized its export controls regulations
with regard to India to reflect India’s role as a strategic
partner


India is in the process of integrating into international export
controls and nonproliferation regimes





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History of U.S. Export Control Policy Regarding India


Post
-
Independence Era (1947
-
1970)


1950
-

US
-
India Technology Cooperation Agreement


1963
-

Early nuclear cooperation: purchase of GE nuclear reactor for Tarapur


1963
-

Early space cooperation: India launches U.S. rocket at Thumba


Era of Technology Denial (1970
-
2000)


1970
-

NPT comes into force, India does not sign


1971
-

Zangger Committee established


1974
-

India’s first nuclear tests; nuclear cooperation with India ceases


1974
-

Nuclear Suppliers Group formed in response to Indian nuclear tests


1998
-

India’s second nuclear tests; range of sanctions imposed by U.S. Government


Renaissance (2000
-
present)


2000
-

President Clinton visit and removal of certain sanctions against India


2001
-

President Bush waives remaining sanctions on India


2003
-

U.S.
-
India High Technology Cooperation Group


2004
-

Next Steps in Strategic Partnership


2005
-

U.S.
-
India Civil Nuclear Deal announced


2005
-

New Framework for US
-
India Defense Relationship signed


2009
-

End
-
Use Monitoring Arrangement; increased defense trade


2010
-

President Obama visit and subsequent removal of Indian firms from Entity List
and agreement on other export control initiatives





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U.S.
-
India Bilateral Understanding


On November 8, 2010, President Obama and Prime Minister
Singh committed to strengthen bilateral cooperation on
export controls and nonproliferation


U.S. to support India’s full membership in Nuclear Suppliers Group,
Missile Technology Control Regime, Australia Group, and Wassenaar
Arrangement


India to implement additional controls and meet requirements of each
regime


U.S. to remove Indian space and defense entities from the Entity List


U.S. to realign U.S. export control licensing policy to reflect India’s
status as a strategic partner, including removing India from list of
“countries of concern”


Expanded export control cooperation through U.S.
-
India High
Technology Cooperation Group

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Nuclear Regulatory
Commission

Structure of U.S. Nuclear Export Controls

Part 110 Regulations

Commercial and “dual use”
commodities and technology

State Department
:

Directorate of Defense Trade
Controls (DTC)

International Traffic in Arms
Regulations (ITAR)

Military items, including
nuclear weapons

Nuclear technology
and technical
assistance

Nuclear reactors, fuel
cycle facilities,
components and materials

Department of Energy

Part 810 Regulations

Department of Commerce:

Bureau of Industry and
Security (BIS)

Export Administration
Regulations (EAR)

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Export Administration Regulations


Administered by the Commerce Department’s Bureau of Industry and
Security (BIS)


The EAR’s Commerce Control List (CCL) controls the export and
reexport of commercial and “dual
-
use” (i.e., both commercial and military
applications) goods, software and technology


EAR also controls the transfer of certain technology to foreign persons,
including Indian nationals, in the United States (“deemed exports”)


Only a small fraction of exports to India now require export licenses from
BIS


In CY 2000, 24% of U.S. exports to India required export licenses


In CY 2009, 0.3% of U.S. exports to India required export licenses



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ITAR: Controlled Activities



Administered by State Department’s Directorate of Defense
Trade Controls (DDTC)


Broad restrictions on exports, reexports, imports, and
brokering of:


Defense Articles


Technical Data


Defense Services


Generally speaking, the ITAR are more restrictive than the
EAR


Manufacturers, exporters, and brokers are required to
register with DDTC

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ITAR: Controlled Activities



With limited exceptions, prior U.S. Government
authorization required for:


Exports and reexports of Defense Articles


Exports and reexports of Technical Data to foreign
persons (wherever located)


Provision of Defense Services to foreign persons
(wherever located)


Temporary imports of Defense Articles or Technical Data


Proposal to sell or manufacture certain Defense Articles


Brokering transactions involving Defense Articles or
Services


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ITAR: Who Must Comply?


All individuals located in the United States


U.S. citizens and permanent residents, wherever
located


Companies organized under U.S. laws and their
employees, wherever located


U.S. branches of non
-
U.S. companies


Foreign entities and persons dealing in U.S.
-
origin
Defense Articles (including Technical Data) or U.S.
-
origin Defense Services

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ITAR: Licenses and Approvals


Primary types of licenses and approvals under the
ITAR


Permanent Export License (DSP
-
5)


Temporary Export License (DSP
-
73)


Temporary Import License (DSP
-
61)


Agreements


Technical Assistance Agreement (TAA)


Manufacturing Licensing Agreement (MLA)


Distribution Agreement


Export license and agreements generally now bust be
filed via D
-
Trade

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Relevant ITAR Reform Initiatives


DDTC has not made any India
-
specific regulatory changes,
but overall export control reform efforts should improve
defense trade with India


Ongoing reform of U.S. Munitions List (USML)


Proposed rule on components (3/15/11)


Proposed rule on defense services (4/13/11)


Final rule on dual nationals and third
-
country nationals
(5/16/11)



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The Committee on Foreign
Investment in the United States

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The Committee on Foreign Investment in the
United States


CFIUS created to conduct national security reviews
of foreign investment and make recommendations
to the President


U.S. continues to maintain an open, non
-
discriminatory investment policy and to welcome
foreign investment


CFIUS mandated to conduct its reviews within
context of overall investment policy; intended to
ensure that foreign direct investment remains
benign


16

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Exon
-
Florio Amendment


Authorizes the review of any acquisition of control of
a US business by a non
-
US entity to determine if
the acquisition poses a threat to national security


Grants the President the authority to block, restrict
or order divestment of any such acquisition if he
determines that there is a national security threat
and no other law is adequate to deal with it


President’s authority only terminates
if

transaction is
reviewed and found not to threaten national security


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Covered Transactions Under CFIUS


US Business


Any entity engaged in US interstate commerce (even if foreign owned), but
only to the extent of its activities in interstate commerce


US business need not have separate legal identity; acquisition of a division
that operates as a business meets the test.


For Exon
-
Florio to apply, transaction must involve:


A merger, acquisition or takeover


By or with a foreign person


Which could result in foreign control


Of a US business


Foreign government
-
controlled transactions


Any covered transaction that could result in control of a US business, directly
or indirectly, by a foreign government



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CFIUS Procedures



Process initiated by voluntary notice by parties to
transaction


Significant amount of information required from parties (target and acquirer)


Submission of draft notice in advance of formal filing encouraged and often advisable


CFIUS also might initiate its own review


Review process has up to three formal stages


Initial review


30 days (CFIUS may request additional information from parties)


CFIUS decides whether to proceed with an extended 45
-
day review (investigation)


If CFIUS decides to pursue investigation, at end of 45 days CFIUS must present report
to President


President must make a decision within 15 days

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Regulatory Issues Relevant to Indian Corporations in the U.S.
Aerospace, Defense, and Homeland Security Industry

CFIUS

ITAR

EAR

Acquisition

of U.S.
Company


ITAR Registration


60
-
Day Notification


Exports/Imports


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Establishing Joint

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