Complying with complex A&D Export Control regulations
As the complexities of Export Control regulations in the Aerospace & Defence (A&D) industry increase, Kevin Deal, vice president of defence for IFS North America, takes a look at regulation across the globe in the A&D market, outlining eight specific functions which enterprise software must handle in order to protect a company from such regulation.
In those countries which export high technology and armaments, their respective governments have put in place their own Export Controls which help enforce Government policy including the obligations those Governments have signed up to in international controls treaties.
In the USA, ever since the 1976 enactment of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR), manufacturers in the aerospace and defence (A&D) industry have had to avoid selling items categorised on Export Control listings such as the US Munitions List to non-US parties unless authorised by the US Department of State or by special exemption.
More recently, USA enforcement efforts have increased exponentially, putting A&D companies and their executives at risk. The US Department of State in 1999 increased its focus on the enforcement of export control. Then, a Presidential Executive Order on Export Control Reform, issued on March 8, 2013, caused the USA Departments of State and Commerce to issue important new rules which take effect on 15 October, 2013.
A point to note is that even if you are a company outside of the USA, you could still be subject to the ITAR, even though operating in another country. These rules require those companies around the world which manufacture, export or re-export USA ITAR-controlled items to evaluate and amend their current authorisations and restructure compliance activities. Failure to comply to ITAR results in those companies potentially being refused access to controlled goods produced in the USA which they might want to build into their own products for re-sale to export markets elsewhere.
Export Controls Elsewhere
In addition to the US ITAR and other US Export Control regulations such as the Export Administration Regulations (EAR), the United Kingdom has its own Export Controls, mostly related to items on the UK Military List, and the rest of the European Nations have their own Export Controls mostly related to the EU Military List items. The European Controls are now being harmonised across the European Union member states.
Export Controls in the United Kingdom have in the past come under scrutiny by NGOs forcing the UK Government to offer more transparency about what is being exported and for what purposes, thus imposing new reporting requirements upon UK exporters.
The complexity faced by A&D equipment manufacturers, distributors, operators and maintainers is significant, starting with the multiple regulatory documents with which manufacturers are confronted. As a USA example, the Commerce Control List (CCL), and the United States Munitions List (USML) both mention different items which must be controlled. To confuse matters more, different agencies are responsible for different types of application procedures; the USA Department of Commerce for the CCL items and the USA Department of State controlling the USML items. In the UK the Department for Business Innovation and Skills has its Export Control Organisation which is responsible for assessing Export Licence applications, and it has to liaise with the UK MOD and the UK Foreign and Commonwealth office as well as other agencies to assess the Licence applications. Then when the items are actually at the UK port of embarkation they will be scrutinised by UK HMRC.
Is your ERP system protecting you?
Enterprise Resource Planning (ERP) vendors know that export control is a serious challenge facing companies in the industry, and may claim to offer some level of compliance functionality. In selecting a new system of record in an A&D manufacturing or contracting environment, however, there are specific and granular types of functionality to look for to ensure your new system will meet your export control needs. As such, it requires an ERP solution with a specific A&D focus and functionality.
As such, one requirement that should almost go without saying is that now more than ever, suppliers and contractors to the A&D industry need an integrated application where data from customer relationship management, manufacturing, supply chain management, engineering and other functions can be shared in a cross-functional, agile fashion. Data and ERP functionality from these and other areas of the business are central to the compliance process, and ERP software must effectively mash up these functions with third party denied lists and other data so orders can be taken and fulfilled without delay or exposure to organisational risk.
Here are eight functions which your enterprise software must handle to in order to protect you, your company and your directors:
1. Denied Party check – When committing to a sales order, the ERP software needs to check to ensure the order isn’t going to a denied party. This might be achieved through a link to a database of denied parties that is compiled and updated regularly by an agency or third party. But you need to have confidence that you have checked the denied parties list before processing the order.
2. Management of part specific regulatory schema – For items that might be export controlled, the ERP system needs to indicate which regulation and regulatory body covers the part or material and the classification or rating within that schema that applies to it. Are there specific end usages that are allowed for export and other end usages that are not? The parts catalogue needs to hold that information about each part.
3. Management on the assembly level – If you are handling an order for an assembly, an ERP application needs to record the parts within that assembly and the extent to which they are covered by different export regulations and commodity jurisdictions. The overall assembly might need one licence or several licences from different agencies. So the application needs to analyse the bill of material (BOM) and register:
• Which licences for regulatory parts are in place?
• What commodities do they cover?
• Which end usages are they allowed for?
• What dollar value does the licence allow for?
• What quantity of the parts does the licence permit?
4. Licence Application – If it turns out that the assembly requires a licence the company does not have in place, the ERP software needs to record that licence amendment request by pulling in email traffic with the outside parties. If the licence application or application to increase coverage of the licence is not progressing in a timely manner, ERP needs to escalate that matter up the organisation automatically. The order will need to be halted before regulations are broken, and this requires some forced order connections between licences and orders for controlled parts.
5. Licence Usage Reporting – The software needs to report on usage of licences from various government agencies. These licences are both a valuable commodity and a potential constraint on sales, and executives will need to use ERP to monitor the consumption of licences by orders and manage that consumption.
6. Secure Document Management – Some documents having to do with control items have licences that can only be viewed by certain people. Ideally, the same user permissions the ERP software uses to control access of sensitive data within the enterprise software can be made to apply to the document management solution. This means ERP with embedded, native document management functionality will be more desirable for export control.
7. Control of the export of data and intangibles – The ERP system must offer at least some support in controlling the export of technical data or intangibles. This includes ad hoc data exchanges like the shipping of a controlled piece of equipment to an overseas trade exposition. That event will not be on a sales order, BOM, or other formal document subject to other control points in ERP. But this shipping of a sample or display model will probably require a licence, so ERP must offer functionality to identify and manage these situations that fall outside of established controls.
Data may also require a licence if a company is working collaboratively with a partner company overseas. If, for instance, that overseas partner needs one of their parts or assemblies so they can create the interfacing part, it may require a licence. Again, there is no sales order involved, and the ERP application must offer functionality to help link these ad-hoc events to export licences.
8. Other countries’ requirements – Exporters often have overseas divisions who might be working in the US, UK, other countries in the European Union, Australia, and other countries worldwide, each with export controls requirements. And doing business overseas makes it even more important to have the ability to fluidly move your items and control types from one regulatory schema to another.
Various international agreements and regulations that bear close attention include:
• The Nuclear Suppliers Group —“The Nuclear Suppliers Group (NSG) is a group of nuclear supplier countries which seeks to contribute to the non-proliferation of nuclear weapons through the implementation of guidelines for nuclear exports and nuclear related exports. The NSG guidelines are implemented by each participating government in accordance with its national laws and practices. Decisions on export applications are taken at the national level in accordance with national export licensing requirements.” http://www.nuclearsuppliersgroup.org/
• UN Security Council Sanctions Committees—“Under Chapter VII of the Charter, the Security Council can take enforcement measures to maintain or restore international peace and security. Such measures range from economic and/or other sanctions not involving the use of armed force to international military action.” http://www.un.org/sc/committees/
• The Wassenaar Arrangement on export controls for conventional arms and dual-use goods and technologies. http://www.wassenaar.org
• Australia Group—“The Australia Group (AG) is an informal forum of countries which, through the harmonisation of export controls, seeks to ensure that exports do not contribute to the development of chemical or biological weapons.” http://www.australiagroup.net
• The Missile Technology Control Regime—“The Missile Technology Control Regime is an informal and voluntary association of countries which share the goals of non-proliferation of unmanned delivery systems capable of delivering weapons of mass destruction, and which seek to coordinate national export licensing efforts aimed at preventing their proliferation.” http://www.mtcr.info/english/index.html
• Zangger Committee—“... was formed following the coming into force of the Nuclear Non-Proliferation Treaty (NPT) to serve as the ‘faithful interpreter’ of its Article III, paragraph 2, to harmonize the interpretation of nuclear export control policies for NPT Parties.” http://www.zanggercommittee.org
Keeping pace with Export Control
Export control regulations are changing rapidly, and will continue to do so. Keeping abreast of regulation on each and every order and transaction is not a process that can be effectively handled manually – at least not on a level that ought to inspire confidence from management. Manufacturers and contractors involved in the A&D industries as well as other industries dealing with materials and equipment of strategic importance will need to rely on more automated systems to they can profitably and efficiently meet customer demands without exposing themselves to legal repercussions.
ERP software with a specific track record in A&D functionality, and that is designed specifically for export control, may offer the most direct route to an export control process that inspires confidence while protecting the company and its Directors.
Above: Kevin Deal