Enforcement Agencies Grant Temporary Trade Sanctions and ITAR Compliance Relief Due to COVID-19

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Introduction

With COVID-19 having an extraordinary impact on international trade and businesses that operate across borders, US enforcement agencies have taken a number of steps to bring relief from some trade compliance burdens that have resulted from the COVID-19 pandemic. Businesses around the world that work with defense articles and technical data controlled under the International Traffic in Arms Regulations (ITAR) will have fewer regulatory obligations to deal with, at least for the near term. In addition, financial institutions and other businesses subject to US trade sanctions compliance obligations may also be granted relief if facing reporting delays or other hardships stemming from the COVID-19 pandemic.

Temporary Relief Granted Under the ITAR

The temporary relief under the ITAR results from a series of published rules granting relief under specific circumstances. The US Department of State, Directorate of Defense Trade Controls (DDTC), which administers the ITAR, has published a rule that as of May 1, 2020, gives effect to and in some cases expands certain previously announced measures intended to mitigate the impact of the pandemic on compliance with the ITAR.¹ DDTC subsequently published a second rule on May 6, 2020, temporarily reducing certain ITAR-related registration fees.²

It is important to note that, as reflected in DDTC's original announcement of these measures on April 23, the rule applies retroactively to March 13, 2020, when the President declared the COVID-19 national emergency. Therefore, in certain circumstances, these measures retroactively mitigate or eliminate actions from March 13 onward that would in other circumstances have been considered ITAR violations.

In particular, the May 1 rule enacts four temporary measures:

• Certain ITAR Registration Due Dates Extended for Two Months. ITAR registrations set to expire February 29, March 31, April 30, May 31, or June 30, 2020 are extended for two months from the original date of expiration.
• Certain ITAR Licenses and Agreements Extended for Six Months. Effective as of March 13, 2020, existing ITAR licenses and agreements that expire between March 13, 2020, and May 31, 2020, are automatically extended for six months provided there are no changes to the scope or value of the authorization and no name or address changes are required. The rule explains that the DDTC believes a six-month extension is appropriate "in light of the unique challenges applicants face in the current environment when attempting to coordinate with US and foreign business partners regarding the scope of applications."³
• Temporarily, Contract Employees Do Not Need to Work at a Company's Facilities to Qualify as "Regular Employees." Effective March 13, 2020, contract employees are permitted to work remotely and still qualify as regular employees for purposes of ITAR licensing and authorizations,⁴ as long as the contract employee is not located in Russia or a country listed in 22 C.F.R. § 126.1.⁵ This temporary suspension of the ITAR requirement that contract employees must work at a company's facilities to qualify as a regular employee is effective until July 31, 2020, unless the suspension is extended in writing.
• Temporarily, Regular Employees Working With Data Transferred Under an ITAR Agreement can Work Remotely in Most Countries Not Expressly Approved by DDTC on the Face of the Agreement. Effective March 13, 2020, regular employees of entities who are working remotely in a country not currently authorized by a technical assistance agreement (TAA), manufacturing license agreement (MLA), or exemption to send, receive, or access any technical data authorized for export, reexport, or retransfer to their employer via a TAA, MLA, or exemption are permitted to work remotely as long as the employee is not located in Russia or a country listed in ITAR § 126.1. This authorization for remote work under certain circumstances is effective until July 31, 2020, unless extended in writing.

The May 6 rule also relieves regulatory burdens by reducing certain registration fees. Effective May 1, 2020, fees for new applicants to register with the DDTC have been reduced from $2,250 to $500. The rule also reduces registration fees to $500 for current registrants whose original expiration date is between May 31, 2020 and April 30, 2021. These temporary fee reductions are effective until April 30, 2021, unless extended by a subsequent notification in the Federal Register. The rule explicitly excludes "Tier III" registrants (i.e., those for whom DDTC has reviewed, adjudicated, or issued more than 10 license applications during a 12 month period 90 days prior to expiration of a current registration) from a reduction in registration fees. DDTC expects this temporary reduction in fees to save regulated industry of $20 million over the course of the coming year.

DDTC has separately announced on its website a number of additional measures to relieve administrative burdens associated with ITAR compliance, including switching to electronic filing and correspondence systems for licenses, general correspondence, and even voluntary disclosures, extending deadlines to response to requests for information, and adding additional points of contact to its website.

OFAC Trade Sanctions Relief

Similarly, the US Department of the Treasury, Office of Foreign Assets Control (OFAC), which administers most economic sanctions programs, issued a press release on April 20, 2020, acknowledging that financial institutions or other businesses may face technical and resource challenges in compliance with OFAC requirements due to the pandemic.⁶ In the release, OFAC notes its awareness that businesses may have inevitable reporting delays or may need to temporarily reallocate sanctions compliance resources.

In the release, OFAC encourages all businesses impacted by the COVID-19 pandemic to contact OFAC "as soon as practicable" upon realization that it may be delayed in meeting regulatory requirements administered by OFAC.⁷ These requirements include, among others, the ten business day obligation to file blocking and reject reports,⁸ responses to administrative subpoenas,⁹ and reports mandated by general or specific licenses.¹⁰

Relating to enforcement considerations, OFAC reminds all businesses that it supports a "risk-based approach to sanctions compliance."¹¹ Significantly, OFAC notes its awareness that businesses facing technical and resource challenges due to the COVID-19 pandemic may need to temporarily reallocate sanctions compliance resources to resolve COVID-19 challenges. These temporary reallocations must be in accordance with a business's risk-based approach to sanctions compliance. However, in the event of an apparent violation during the COVID-19 period,¹² OFAC notes it will consider COVID-19 challenges "as a factor" on a case-by-case basis "in determining the appropriate administrative response."¹³

OFAC also previously issued guidance on the various provisions of its sanctions programs that permit the provision of medical and humanitarian assistance for sanctioned countries.¹⁴

Conclusion

These measures signal that both DDTC and OFAC are increasingly aware of the substantial burdens that the COVID-19 pandemic has placed on compliance with the ITAR and trade sanctions regimes. Any company who utilizes these suspensions, modifications, and exceptions to provisions of the ITAR should ensure that each action is appropriately documented and fully complies with the relevant DDTC guidance. Similarly, any financial institutions or businesses who may face reporting delays or temporarily need to reallocate compliance resources in response to challenges of the COVID-19 pandemic should also ensure these decisions are consistent with OFAC guidance and well-documented and confer with OFAC as necessary. Finally, affected entities should also engage with the appropriate agency where additional relief may be necessary given the extraordinary impact of the pandemic.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.