DATE: April 18, 2009 SUBJECT: NCITD Meeting of April 8, 2009 This memorandum summarizes the presentations and discussion at the National Council on International Trade Development (“NCITD”) Trade Compliance Committee Meeting held in Washington, D.C. on April 8, 2009. Comments are in [square brackets]. The principal author within MK Technology was Kay Morrell, Esq. and Terence Murphy was the reviewer under standard procedure.

I. Off-the-Record Comments by Mr. Joe Cortez and Ms. Christina Farr, Regulations, Outreach and Education Branch, Foreign Trade Division, U.S. Census Bureau, U.S. Department of Commerce

Mr. Cortez and Ms. Farr provided an update on Census Bureau issues, particularly those relating to the Federal Trade Regulations (FTR). These regulations are intended to facilitate the Bureau’s efforts to obtain trade statistics for use by policy makers, law enforcement personnel, and the various trade authorities, such as the Bureau of Industry and Security, the Directorate of Defense Trade Controls, and the Office of Foreign Assets Control. Much of this information is collected through filings by exporters using the Automated Export System (AES), which is now mandatory under the FTR. The filings made through the AES are called Electronic Export Information (EEI). The EEI replaces the old paper Shipper’s Export Declaration (SED) form. Under the FTR, all parties involved in an export transaction are responsible to ensure that the information in the EEI is correct and accurate. This includes the U.S. Principle Party in Interest, the freight forwarder, and the common carriers. The amendments to the FTR which went into effect last year provided several enhancements to the filing system and the regulations themselves. The amendments provided clarification to existing regulations by adding definitions to many terms. The amendments also consolidated the definitions into one section, since many of them were scattered throughout the regulations and were difficult to locate. This definitions section was moved to the front of the regulations to make it easier to locate. The amendments also made changes to the EEI

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required filing time frames, provided for an electronic letter of explanation, made changes to the penalty provisions, and provided a procedure for filing Voluntary Self Disclosures (VSD). Mr. Cortez was asked to clarify when a VSD would be necessary under the FTR. He noted that there are many times when an exporter or their agent enters information into AES and later realizes that there was an error in the information provided. Because the Census Bureau requires accurate information when preparing trade statistics, the FTR require that inaccurately reported information should be corrected. Exporters are expected to make corrections within 15 months of the original entry and most of these reporting errors are not considered serious by the Census Bureau. However, some errors are serious, and may result in the imposition of penalties. The VSD process was created to provide some mitigation for these more serious errors. Mr. Cortez then provided some examples. Adding a new foreign consignee, changing the listed Schedule B number, or correcting the classification of an Antiterrorism-controlled item from EAR99 to its correct classification are permissible corrections. However, stating that an item may be exported under No License Required (NLR), when it really required a license, is not a correctable error. This change would require a VSD, and would also be referred to the appropriate licensing agency. Mr. Cortez also pointed out that while exporters have 15 months to make corrections, the Bureau would prefer that corrections be entered as soon as possible and preferably before April of the year following the reporting error. Failure to make corrections within the required 15 month period will affect a company’s compliance rate, which is used to determine which companies the Bureau will visit and review. Companies with a compliance rate below 95% will be visited by the Bureau. If the company fails to improve its rate within 3 to 4 months, it may lose its filing privileges. This would be a major impact for freight forwarders, which often provide the service of filing AES records on behalf of exporters. While freight forwarders are not required to share their compliance reports with potential customers, the Bureau recommends that exporters request this information before deciding which freight forwarder to use. Mr. Cortez and Ms. Farr then provided also provided a review of some of the new issues that the Census Bureau is attempting to address. Chief among these is a review of how the current reporting system might be hurting U.S. productivity. For example, the AES system currently does not permit the sale of goods which are already in route to the foreign country. AES records must be filed prior to departure. Since in-transit sales are a common practice worldwide among distributors, the Bureau does not want to put U.S. businesses at a disadvantage. Although the AES record cannot be completed for such a sale before the goods leave the port of exit, the Bureau is permitting the U.S. exporter to file the AES record for such sales as soon as they occur.

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The Bureau is also trying to improve the lengthy turn-around time now experienced by exporters when they request a copy of their records. The current delay is around eight weeks and is primarily due to limited manpower. The Bureau has had to shift some of its staff to compliance duties because the number of VSDs has increased under the new regulations.

II. Off-the-Record Comments by Ms. Lauren Airey, Senior Legislative Assistant, Office of Congressman Don Manzullo

Congressman Manzullo is a Republican member of the U.S. House of Representatives Committee on Foreign Affairs. He has been an active participant in legislation affecting U.S. trade. Ms. Airey is Congressman Manzullo’s primary staff member for handling legislative matters relating to trade. She met with the Committee to provide an update on current legislation. One of the pieces of legislation that is currently being drafted is the “Export Controls Improvement Act.” As currently drafted, this legislation would provide for the following:

Authorize the Bureau of Industry and Security (BIS) to create an export registration system

Allow the export agencies to use funds or charge fees for education seminars

Provide for changes to the AES that would alert filers to potential filing errors

Permanently reauthorize BIS without reauthorizing the Export Administration Act

Provide parameters for the regulatory designation of countries with a history of diversion issues

A section on the Verified End-User program has been removed from the draft bill because the U.S. has worked out certain inspection issues with the Chinese Government, and it is hoped that similar non-legislative progress can be made with Indian Government. Congressman Manzullo is hopeful that this legislation will be considered this year. His staff is working with U.S. Senate staff to create a companion bill in the Senate. Ms. Airey was asked why this legislation will not address the reauthorization of the Export Administration Act (EAA) and why it is setting parameters for points of diversion rather than just listing specific countries. She noted that there have been many efforts to reauthorize the EAA, but these have all failed because Congress could not reach a consensus. The thought among the Foreign Affairs Committee leadership is to rewrite the law, rather than reauthorize it. This effort will likely take a few years.

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With respect to countries known to have a risk of diversion, Ms. Airey noted that the export agencies already identify countries with a risk of diversion. Setting parameters will assist foreign governments in knowing what steps they must take to avoid being placed on a list. It will also remove the concern expressed by some governments that there is currently no way to determine what criteria the export agencies are using when they designate a country as posing a risk of diversion. Ms. Airey was also asked why the Congressman apparently is not happy with the recent changes to the AES and feels it is necessary to mandate additional changes. She stated that the Congressman likes the recent changes to the System. He simply would like to see it provide more assistance to U.S. exporters. He would like to see AES provide protections for exporters to help them avoid unintentional errors and violations. For example, AES should not allow a filing to be completed for an export subject to the International Traffic in Arms Regulations (ITAR), if the appropriate license has not already been lodged with the Customs office. Currently, AES cannot retrieve this information because it cannot communicate with the U.S. Customs and Border Protection computer system. This legislation would require the agencies to make sure that their electronic systems can communicate this type of information. Another piece of legislation that is being prepared is the “Defense Trade Controls Improvement Act.” This bill will probably be included as part of the State Department Reauthorization bill. One of the primary goals of this legislation is to create process improvements. Although State Department licensing times have improved, this bill would codify required time-lines for license consideration. Another legislative issue that will be considered this year is the export authority over satellites. Several years ago Congress placed this responsibility with the State Department under the ITAR. Hearings have already been held this year about the possibility of moving export authority for commercial satellites back to the Commerce Department. No legislation has been drafted yet, and it is possible that Congress will remove the earlier State Department mandate and leave the jurisdictional question for a decision by the Administration. It is also likely that there will be legislative activity to address the issue of foreign subsidiaries of U.S. companies that continue to conduct business with countries like Iran and Sudan. No legislation has been introduced to address this issue, but it is an issue that must be reviewed. In conclusion, Ms. Airey noted that the legislative time-line for this Congress is likely to be affected by the appointment of key Administration officials. Many positions remain open, and some of them will likely be filled by Committee staff. This shuffling of personnel will undoubtedly slow down legislative activity.

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III. Off-the-Record Comments by Mr. Nikhil Khanna, Director for Policy Advocacy in Aerospace & Defense, Transportation, Infrastructure, and Manufacturing, US-India Business Council

Mr. Khanna works with the US-India Business Council, an organization of U.S. and Indian business interests that are working to improve the strategic relationship and opportunities for trade between these two countries. Because of these goals, U.S. export control policy is very important to this group. Overall, the Business Council believes that much progress has been and will continue to be made on improving the relationship between the U.S. and India. Both Governments are currently undergoing changes because of recent elections, but the Business Council believes the new Governments will continue to build on the progress that has already been reached. The required nuclear agreements are complete and the negotiators are focusing on areas of security. There is need for more cooperation in combating terrorism, but significant progress has already occurred, as evidenced by FBI assistance in India following the recent terrorist activity. The FBI had high profile success in recovering certain GPS equipment that was a key factor in the terrorist attacks. To reach the next level, the Governments are working on agreements to permit the sharing of intelligence, defense, and technology. They will also need to reach an understanding on end-use monitoring of exported commodities and technology. While there is still much opposition in India to doing business with the U.S., the last ten years have seen major strides in improved relationships. The U.S. business community sees India’s expanding economy as a major stimulus for the U.S. economy. The Business Council has been lobbying the new U.S. Administration to continue these efforts. Following India’s last election, most bureaucrats have not taken any major steps because they are waiting for direction from the new Indian Government. At the same time, the new Indian Government is waiting for strong signals from the new U.S. Administration that it wishes to continue in the same direction as the last U.S. Administration. They are prepared to re-bid some defense equipment purchases to allow U.S. industry to participate, if they feel the new U.S. Administration is going to continue to move forward. The Business Council has identified several issues which it views as export challenges that need to be addressed. These include:

Establishing an agreeable end-use monitoring procedure Demonstrating that the U.S. can be a reliable supplier Removing unnecessary export control hurdles Creating of a policy to establish India as a preferred country Granting India major non-NATO status (the same as Pakistan)

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Improving India’s status in the charts and tiers of the Commerce export regulations

Improving the Congressional notification process for defense sales to India

Encouraging India to join the Wassenaar and Australia Group Regimes Improving India’s internal controls with respect to Indian parties on U.S.

denied parties lists Ensuring that U.S. and Indian trade policies are implemented at the export

licensing level