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 May 24, 2012 International Trade / Washington D.C.

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

U.S. Export Control Laws

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

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

Structure of U.S. Nuclear Export Controls Nuclear Regulatory Commission Department of Energy Part 110 Regulations Part 810 Regulations Nuclear reactors, fuel cycle facilities, components and materials Nuclear technology and technical assistance Department of Commerce: Bureau of Industry and Security (BIS) State Department: Directorate of Defense Trade Controls (DTC) Additional U.S. Government agencies with possible jurisdiction over export activities include the Department of Energy (Nuclear Regulatory Commission), Food and Drug Administration, and the Bureau of Alcohol, Tobacco and Firearms Export Administration Regulations (EAR) International Traffic in Arms Regulations (ITAR) Commercial and “dual use” commodities and technology Military items, including nuclear weapons

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

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

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

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

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

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

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

Regulatory Issues Relevant to Indian Corporations in the U. S 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 Establishing Joint Ventures in the U.S. Establishing a U.S. Branch or Greenfield Operation Supplying Equipment or Services to U.S. Government or U.S. Company

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