Alerts

BIS and State Department Issue Rules on Key Export Control Definitions and Cloud Computing

Alerts / June 13, 2016

On June 3, 2016, the Department of Commerce’s Bureau of Industry and Security (BIS) and the Department of State’s Directorate of Defense Trade Controls (DDTC) issued new rules revising existing definitions and adding new ones in the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR). The new rules, part of the Administration’s Export Control Reform Initiative, seek to enhance clarity, promote consistency of terms across the two export control regimes, and update the EAR’s treatment of electronically transmitted and stored technology and software. Following is an overview of some of the key revised and new definitions.

BIS Final Rule

The BIS Final Rule goes into effect on September 1, 2016, and is not subject to further public comment (unlike the DDTC’s contemporaneous interim final rule described below, which is subject to further public comment by July 5, 2016).

Exports to the “Cloud”

The Final Rule provides that transmitting or storing electronic data that meet certain security standards would not constitute an export of that data, provided that the technology or software is:

(1) Unclassified;
(2) Secured using "end-to-end encryption";
(3) Secured using cryptographic modules (hardware or software) compliant with Federal Information Processing Standards Publication 140-2 (FIPS 140-2) or its successors, supplemented by software implementation, cryptographic key management, and other procedures and controls that are in accordance with guidance provided in current U.S. National Institute for Standards and Technology publications, or other equally or more effective cryptographic means; and
(4) Not intentionally stored in a military-embargoed country or in the Russian Federation.

Thus, transmission of controlled technology and data to, or storage in, a foreign country under these conditions no longer constitutes an export. As ongoing (i.e., end-to-end) encryption is a requirement for this safe harbor provision, the EAR now include a definition of “end-to-end encryption” as (i) the provision of cryptographic protection of data such that the data are not in unencrypted form between an originator (or the originator’s in-country security boundary) and an intended recipient (or the recipient’s in-country security boundary), and (ii) the means of decryption are not provided to any third party. The originator and the recipient may be the same person. Transmissions within a cloud service infrastructure also fit within this safe harbor provision when the transmission is made from one node or cloud infrastructure element to another, provided that it was appropriately encrypted before any data crossed a national border.

Access Information

The rule also includes a definition for “access information,” which is information (like decryption keys, network access codes and passwords) that would allow access to encrypted technology and software in unencrypted form. Such access information is subject to the same level of export controls as the data being accessed if the data were un-encrypted. The rule also clarifies that a victim of a data or security breach related to encrypted data is not considered responsible for the export, reexport, or transfer of that data, provided that the originator of the technology did not provide access information or otherwise permit access to the encrypted data.

Such revisions make feasible a wider variety of cloud computing and cloud storage solutions, and significantly simplify associated compliance with export controls, relative to EAR controlled technology and software. However, the EAR also contain an important limitation that releasing decryption keys or other access information that will permit a foreign person access to technology or technical data will constitute an export and be subject to the export control restrictions applicable to the foreign country in question. In addition to maintaining the requisite level of encryption, companies will need to establish ongoing data security practices to take advantage of this provision. It is important to keep in mind that these changes do not apply to ITAR controlled technical data, with respect to which restrictions on the use of the cloud have not changed. Thus, it remains critically important that companies continue to distinguish between EAR controlled technology and software, on the one hand, and ITAR controlled technical data, on the other hand, when considering the use of cloud services.

Fundamental Research

The rule revises the definition of “fundamental research” to make it more concise and straightforward while covering the same scope. The shorter definition eliminates previous references to basic and applied research and instead focuses on the core concept of fundamental research – ordinarily published and shared broadly without restriction. Fundamental research is now defined as research in science, engineering or mathematics, the results of which ordinarily are published and shared broadly within the research community, and for which the researchers have not accepted restrictions on publication for proprietary or national security reasons.

Deemed Exports and Reexports

The rule retains the deemed export rule in the EAR, which provides that a release of technology or source code subject to the EAR to a foreign national, outside of or within the United States, is deemed to be an export to the home country of that foreign national. The rule affirms longstanding BIS policy that the export is deemed to occur to the foreign national’s most recent country of citizenship or permanent residency.

If a U.S. or foreign national releases technology or source code in a country other than his home country, such release is not considered a deemed reexport if the receiving party is authorized to receive the technology or source code (by license, license exception or where no license is required) and the receiving party’s home country is a country to which export of the technology or source code would be authorized. Additionally, release to bona fide, regular and permanent employees of an entity is not considered a deemed reexport if (i) the entity is authorized to receive the source code or technology, (ii) the employee is a national exclusively of 36 NATO-member and certain other friendly countries and (iii) the release takes place entirely within the physical territory of any such country or within the United States.

State Department Interim Final Rule

Export and Reexport

The DDTC Interim Final Rule revises the ITAR definition of “export” to more closely align with, but is not the same as, the EAR’s definition, and to remove activities that now fall within the definitions of “reexport” or “retransfer,” as discussed below. The revised definition of “export” clarifies that any release of technical data in the United States to a foreign person is considered an export to all countries where that person holds or has held citizenship, or holds permanent residency. In this way, the ITAR and EAR definitions of “export” still differ, as the EAR only considers such a release of technical data to be an export to the foreign person’s last country of citizenship or permanent residency. The State Department also revised the definition of “reexport” to mirror the new definition of “export.” The new definition applies to shipments, releases or transfers between two foreign countries, or to a third country national outside the United States.

Release

The rule adds to the ITAR a definition of “release.” Under the new definition, activities that constitute a release include allowing a foreign person to inspect a defense article such that technical data is revealed, and oral or written exchanges of technical data with a foreign person, either in the United States or abroad. Prior to the new rules, there had been uncertainty about whether merely allowing the ability to access controlled technical data, where the foreign person did not actually access the data, constituted a release. The Department clarified with the interim rule that merely providing access does not constitute a release, but rather the foreign person must access the data as a result of the physical access he or she was granted for a release to have occurred. The Department also specifically noted that all ITAR controlled software remains technical data, and as such, is subject to the rules governing “releases.”

Retransfer

The Interim Final Rule also implements a new definition of “retransfer.” Under the new definition, a “retransfer” occurs when there is a change in the item’s end user or end use within the same country. Authorization will still be required to provide a defense article to a subcontractor or intermediate consignees in the same country (unless previously authorized, e.g., via TAA), as that would constitute a change in end user and end use. Certain activities, such as disclosures of technical data to a foreign national abroad, may be covered by the new definitions of both “reexport” and “retransfer.”

Also of note, the interim rule allows foreign persons who are authorized to receive technical data in the U.S. to receive that same technical data abroad, when on temporary assignment for their employer.  This exemption covers “reexports” and “retransfers” as well, though technical data must be secured while abroad to prevent unauthorized “release.”  This change builds upon the Department’s amendment last year authorizing U.S. persons employed by a U.S. company to travel abroad with ITAR-controlled technical data for their own use and to share such data with fellow U.S. person employees of the same company while abroad.

The State Department did not adopt all of the proposed definitional rule changes that were originally announced on June 3, 2015, during the initial stage of the rulemaking process, but rather indicated that the remaining provisions will be subject to additional separate rulemakings. The proposed rules that were not adopted in this final interim rule included significant changes to the ITAR’s treatment of technical data exports. It remains to be seen whether, and in what form, those proposed revisions will be adopted.

Conclusion

The new rules significantly harmonize the EAR’s and ITAR’s terminology and treatment of reexports and transfers, and clarify key terms like “export” and “deemed export,” which should assist companies that deal in exports controlled under both the EAR and ITAR in their efforts to comply with both sets of regulations. Moreover, the new EAR regulations will allow companies to use cloud technology to transfer and store “dual use” unclassified technology and software, without the burden of export control requirements, as long as such data meets the encryption requirements described above. Companies that deal in technical data subject to ITAR controls must be alert to the fact that the State Department has not yet issued such rules exempting exports of encrypted data, e.g., to the cloud, from ITAR regulations. These rule changes represent an ideal time for companies to assess and update their export control compliance programs, and determine whether they can avail themselves of the new provisions regarding technical data and software.

As noted, the BIS and State Department rules will take effect on September 1, 2016, with the State Department accepting comments on the Interim Final Rule until July 5, 2016. The State Department has not yet announced when it plans to publish rulemakings on the remainder of the definitions it proposed in June of last year. Companies should remain alert to expected further developments from DDTC in this area.

For more information on the material presented in this alert, please contact Melvin S. Schwechter at mschwechter@bakerlaw.com or 202.861.1559, Kerry T. Scarlott at kscarlott@bakerlaw.com or 202.861.1585, or your BakerHostetler relationship contact.

Authorship credit: Melvin S. Schwechter, Kerry T. ScarlottCasey E. Holder and Hannah C. Choate


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