May 24, 2012 International Trade / Washington D.C. Defense Trade Regulatory Requirements & National Security Reviews of Foreign Investment in the United

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

www.hoganlovells.com 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


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


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


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)


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


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)


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

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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


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


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• Technology Transfer• Employment of Foreign Persons

• Exports• Technology Transfer• Employment of

Foreign Persons

Establishing Joint Ventures in the U.S.

• ITAR Registration• Exports/Imports• Technology Transfer• Employment of Foreign Persons


Foreign Persons

Establishing a U.S. Branch or Greenfield Operation

• ITAR Registration• Exports/Imports• Technology Transfer• Employment of Foreign Persons


Foreign Persons

Supplying Equipment or Services to U.S. Government or U.S. Company

• Exports/Imports• Technology Transfer

• Exports• Technology Transfer

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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