1. DTAG 28 November 2012 Plenary OEM Working Group Plenary Session November 28, 2012

2. Agenda Working Group Members Task Summary Issue Statement Goal Relevant ITAR Sections Realities of Global Supply Chain Working Group Proposal Key Provisions of the Proposed Exemption Handling Related Technical Data Benefits Issues Considered Possible Unintended Consequences Other Subparts Requiring Modification Proposed Exemption Language Additional Recommendation 2

3. OEM Task Working Group Members Marjorie Alquist, Lord Bryon Angvall, Boeing Gregory Bourn, Finmeccanica North America Brooke Butler, Globaleyes Michael Cormaney, Luks Cormaney LLP * Sandra Cross, Huntington Ingalls BJ Demery, Bell Helicopter * Lawrence Fink, SAIC Kim DePew, GE – Aviation Dana Goodwin, TradeLink Systems Krista Larsen, Flir Spencer Leslie, Tyco Thermal Controls Christine McGinn, Interglobal Trade Consulting Ramzi Robana, GLOBAL Integrated Security Sam Sevier, Sam Sevier LLC Bill Wade, Consultant *WG Leader 3

4. Task Review the ITAR subsections relative to return and repair of defense articles and make recommendations on regulatory requirements for ensuring that foreign defense articles are properly accounted for when being returned to the foreign original equipment manufacturer (OEM) for repair/replacement. 4

5. Issue Statement The ITAR requires proper authorization for exporting defense articles to foreign recipients. ITAR may not reflect the realities of today where defense articles are often produced in whole or in part by a foreign OEM. A license is required for repair or replacement of a defense article by a foreign OEM, even if the item is being temporarily exported or exchanged on a one-for-one basis. 5

6. Goal Provide a recommendation for the creation of an exemption or modification of existing exemptions that allows – Export on a one-for-one basis of defense articles to a foreign OEM for repair or replacement – Import of repaired or replaced item into the U.S. Identify any other subparts of the ITAR that may also require modification 6

7. Relevant ITAR Sections § 123.1 Requirement for Export or Temporary Import Licenses § 123.5 Temporary Export Licenses § 123.22 Filing, Retention, and Return of Export Licenses and Filing of Export Information § 123.26 Recordkeeping Requirement for Exemptions § 123.4(a) Temporary Import License Exemptions 7

8. Realities of the Global Supply Chain Rarely does a single entity manufacture an entire defense article from start to finish Companies have specialized suppliers delivering parts throughout the supply chain Large-scale programs utilize regional service and repair centers supported by suppliers in multiple countries Economic changes push companies out of business and others step in to take up that business Part obsolescence drives supply base changes 8

9. Working Group Proposal Create a new exemption in § 123 Authorize temporary exports that would normally be approved by DDTC for repair/replacement Exclusively for hardware Temporary foreign recipients beyond OEMs Restricted to servicing of defense articles in a foreign country and one-to-one replacement Must be returned to the U.S. within four years 9

10. Key Provisions of Proposed Exemption Temporary export of unclassified hardware – Must be returned within 4 years of original export – Allows for temporary reexports and retransfers within qualified end users Purpose of export – Servicing (e.g., inspection, testing, calibration, repair, overhaul or reconditioning) – One-to-one replacement at equal or greater capability Qualifying Temporary End Users – Original builder/supplier; or – Previously approved in conjunction with separate authorization. – Excludes § 126.1 destinations and denied parties Requirements – CBP filings pursuant to § 123.22 – Recordkeeping pursuant to § 122.5 10

11. Handling Related Technical Data Exclusively hardware exemption Does not cover technical data or defense services Sufficient options elsewhere in the ITAR to cover transfer of associated technical data and defense services 11

12. Benefits Lessens licensing burden on DDTC & industry Faster resolution for inoperable defense articles Adjusts to a growing global supply chain No significant increase in technology transfer risk – Similar coverage to § 123.4(a)(1), an exemption that has been widely used for years – Easily tracked through AES filings – Four year limit is consistent with DSP-73s 12

13. Issues Considered Discussed real life examples of defense articles flowing through a foreign partys supply chain under DSP-73s to effect the repair work Scope of exemption would be of limited utility if confined to OEMs only Addressed varying risk through tiering of temporary end users and consignees – OEM of the subject defense article/part; or – Previously authorized to receive the defense article. – Excludes § 126.1 countries and denied parties 13

14. Issues Considered Greater Capability – Accommodates minor increases in capability due to obsolescence of parts/components Example: Sending a receiver to the UK for repair, identifying a memory chip needs to be replaced, the only chip available that can fit into the receiver is one with a larger memory. The larger memory will help the receiver run faster and longer. – Upgrades Data transfers related to upgrades must be under separate authorization 14

15. Issues Considered Reviewed EAR exceptions TMP and RPL for comparison – TMP most closely relevant to Working Group exercise – Limitations to one year (with option to request a 6 month extension) Consensus of Working Group, one year was not sufficient for certain defense articles Currently working within a four year return cycle 15

16. Possible Unintended Consequences There may exist Foreign export laws that could impact the temporary reexport or retransfer Upgraded capability to defense articles that find their way into DOD programs without a DOD review 16

17. Other Subparts Requiring Modification None identified 17

18. Proposed Exemption Language (a)Port Directors of U.S. Customs and Border Protection shall permit the temporary export (and subsequent import) without a license of unclassified defense articles if all three of the following are met: (1) the defense article is temporarily exported to include follow-on temporary reexports or retransfers among and to any of the following: i.the original foreign equipment manufacturer, assembly or supply plant or supplier; or ii.a foreign manufacturer, assembly plant or repair center previously authorized by the U.S. Government to produce, assemble, manufacture, build or repair, overhaul or upgrade the defense article abroad pursuant to U.S. Government authorization; and (2) the defense article is exported, reexported or retransferred for the purpose of: i.servicing (e.g., inspection, testing, calibration, repair, overhaul, or reconditioning); or ii.one-to-one replacement at equal or greater capability; and (3) the defense article or its one-to-one replacement is subsequently returned to the United States within four years from the date of temporary export. 18

19. Proposed Exemption Language (b) Requirements. To use this exemption, the following criteria must be met: (1)The exporter/importer must meet the eligibility requirements set forth in § 120.1(c); (2)Any temporary exports, reexports or retransfers must not be to or on behalf of a proscribed country listed in § 126.1 unless an exception has been granted in accordance with § 126.3 of this subchapter. (3)U.S. origin defense articles exported, reexported or retransferred pursuant to this section may not be sold to a foreign person while they are overseas under this exemption unless the prior written authorization of the Directorate of Defense Trade Controls is obtained. 19

20. Proposed Exemption Language (c) Procedures. To the satisfaction of the Port Director of U.S. Customs and Border Protection, the exporter/importer must comply with the following procedures: (1) At the time of export, the U.S. exporter must comply with the requirements in §123.22(b)(1), and identify 22 CFR 123.xx as the authority for the export. (2) At the time of import, the paperwork presented to U.S. Customs and Border Protection must include the following: i.citation of 22 CFR 123.xx as the authority for the import; and ii.the Internal Transaction Number (ITN) generated by AES (see §120.30) for the export of the defense article. 20

21. Additional Recommendation Consider broader exemption coverage for additional temporary end users to accommodate the global supply chain Allow for the following: Foreign manufacturers, assembly plants, or repair centers, other than the original supplier or manufacturer, located in a European Union member country, a NATO member country, Australia, Israel, Japan, New Zealand or South Korea 21

22. Questions?