Exporting Commercial Satellite Technology: Coping in the Current Regulatory Environment

The satellite industry's hopes that the new administration would be able to create a quick fix for export licensing delays that have hurt the U.S. commercial satellite industry have been largely dashed. However, the Department of State (State) has improved its licensing process, and potential legislative changes are on the horizon. In the near term, satellite technology exports will remain subject to detailed export control requirements, and violations will likely continue to be highly publicized. This article examines the underlying policy issues, practical legal difficulties faced by satellite technology companies, and how they are handling the current export environment.

The current export environment for satellite technology arose out of legislation passed in late 1998 transferring licensing responsibility for commercial satellite exports from the Department of Commerce (Commerce) to State, Office of Defense Trade Controls (ODTC).¹ Commerce generally controls "dual use" high-technology items, whereas ODTC licenses defense-related exports. The legislation was largely the result of allegations of unlicensed disclosure of sensitive technical information to the People's Republic of China by U.S. aerospace companies, in particular during investigations of launch failures on Chinese rockets. The House Select Committee on U.S. National Security and Military/Commercial Concerns with the People's Republic of China, chaired by Representative Christopher Cox (R-CA), investigated these incidents an released a multi-volume report (the Cox Report) in May 1999 detailing its findings.² The Cox Report helped make commercial satellite exports a sensitive political issue.

Initially, ODTC had minimal expertise in commercial satellite issues and limited manpower to handle the influx of commercial satellite license requests. Because ODTC historically oversaw exports of armaments, its licensing mechanism is complex, restrictive, and often time consuming. Further, regulated companies must either already have or must institute certain policies and procedures before they can begin exporting under an ODTC license. These factors, combined with the particular sensitivity of commercial satellite technology in the wake of the Cox Report, led to significant delays in processing export license applications for satellites and satellite components. Since not only the ultimate export of a satellite but also exports of components and exchanges of information require ODTC authorization, licensing delays can cause and have caused backlogs, cancelled orders, and the like.

The shift of export licensing authority from Commerce to State has had a significant negative impact on the U.S. satellite manufacturing industry's share of the worldwide market. One industry report shows an 11 percent drop in the share of the $17.2 billion satellite manufacturing business in 2000.³ The Aerospace Industries Association reported that exports of satellites and satellite components fell to 246.6 million in 2000, down from $739.4 million in 1999 and from $1.202 billion in 1998.⁴ These numbers are supported by individual accounts of lost contracts, delays, and missed bid opportunities.⁵

The impact goes beyond U.S. manufacturers and affects the country's satellite telecommunications service providers as well. Even technical discussions between U.S. companies and foreign vendors or customers to purchase or lease transponder time or to provide telecommunications services often require ODTC licenses. And the launch of a U.S. satellite from a U.S. platform on U.S. soil could require an export license—for example, if technical information had to be shared with foreign insurers (the majority of space launch insurance comes from the London and European markets).

In fairness, statistics showing the rapid loss of market share by U.S. satellite manufacturers may also reflect other changes in the industry. In the United States, the separation of several manufacturing units from their service providers has increased competition. For example, GE Americom, having sold its satellite manufacturing unit to Lockheed Martin, is now purchasing a number of satellites from Alcatel, and Hughes Electronics sold its satellite construction arm to Boeing.⁶ The consolidated European satellite manufacturers, such as Astrium and Alcatel Space, have largely caught up to U.S. manufacturers in technology and quality. When coupled with a strong dollar, these European satellite manufacturers offer ever-increasing competition, even without the complications arising from U.S. export controls.

Although few reject the need for export licensing, understanding the complexity and dangers for companies highlights why the current system has had such a negative impact on the industry. Some of the major issues are explained below:

When is a license needed? Except under certain exemptions, the International Traffic in Arms Regulations (ITARs) require a license to export any "defense article," "technical data," or "defense service." A "defense article" includes many components or parts designed to be used in or with a satellite; controlled "technical data" include documents, blueprints, and drawings beyond basic marketing information; and a "defense service" covers furnishing or assisting in the design, operation, or repair of a satellite system. Because these definitions are broad and overlapping, companies find it difficult to determine what license is required and whether certain exemptions apply.⁷ In addition, because disclosure of technical data to a foreign person is considered to be an export, a license might be required for plant visits, meetings, and employment of certain foreign nationals. As a practical matter, U.S. companies often need a license in order to respond to a bid or quotation or to engage in the kind of preliminary discussion of requirements and capabilities that often precede formal contract negotiations.

The license application. Except for purchases of off-the-shelf components (e.g., space qualified transmitter or crycooler), which have a relatively simple licensing process, most satellite technology transactions involve the sharing of information between customer and manufacturer, even in the early stages of discussions. To obtain licensure, the U.S. party submits a proposed Technical Assistance Agreement (TAA) and additional documentation describing the parties, the specific defense articles to be exported, technical data, defense services to be provided, the value of services, and other information.

The review process. ODTC typically sends copies of the application to the Defense Threat Reduction Agency (DTRA) and other government agencies for review. DTRA, a U.S. Department of Defense (DOD) agency, will forward the application for review to the relevant DOD components. Average time for all applications staffed to other agencies has been reduced to between 51 and 55 days.⁸ Although ODTC does not publish statistics for satellite agreement approvals, anecdotal reports indicate that processing times for such applications, which in 1999 took six to 12 months, are now between three and six months. However, where there are policy considerations, such as exports to China, ODTC might delay processing indefinitely.

License conditions, including security plans. ODTC authorizations for satellite export transactions typically contain a number of limitations and requirements before the export can proceed. Frequently, the provisos will limit or alter the scope of what the applicant requested. For TAA authorizations, the U.S. party will be required to implement a Technology Transfer Control Plan (TTCP) that must be approved by DTRA. This TTCP is, in essence, a detailed security and training plan between the domestic and foreign parties approved by DTRA. It details the types of activities allowed and those that require DOD monitoring. Typically, the applicant will bear the cost of DOD monitoring.

Record keeping and monitoring. Once the TAA and TTCP are approved and the TAA executed, the U.S. and foreign entity can begin exchanging information within the scope of the TAA authorization without the need for further licensing. However, because each telephone conversation, e-mail, or meeting is potentially an export, monitoring and record-keeping requirements and the limitations of the TAA also must be followed. This necessarily chills the free flow of information. In our electronic age, exchanges of information are virtually impossible for company export control officers to police. For example, in March 2001 Boeing paid $3.8 million in fines, largely for disclosing in proposals and presentations technical data beyond the scope of licenses received.

Special regime for export of certain components to U.S. allies. In May 2000, ODTC published new regulations establishing a regime for expedited export licensing of components and technical data related to commercial communications satellites for pre-approved entities in NATO and nine major American allies (Argentina, Australia, Egypt, Israel, Japan, Jordan, New Zealand, South Korea, and Sweden). The intent of this process was to limit the required documentation necessary to allow domestic companies to participate in international communications satellite projects with companies from these countries. While making it easier for them to provide bids and to participate, this exemption is limited in several key respects:

• Commercial communications satellite components and technical data are the only categories exempted. Remote sensing and other types of commercial satellite ventures are excluded;
• Technical data must not include detailed design, development, manufacturing, or production data;
• Contracts must fall below certain dollar thresholds; and

• Only specific satellite programs and specific manufacturers are eligible.

Since its inception, there has been little publicity about this special process. Therefore, it is difficult to judge how useful it has been in reducing license processing times.

Since 1999, ODTC has improved its ability to process license applications. Many of these improvements are part of a larger policy initiative called the Defense Trade Security Initiative (DTSI), which includes increases in staffing, streamlining of processes, and regulatory changes allowing expedited licensing for certain exports to NATO and allied countries, detailed as follows:

• Staffing. Both ODTC and DTRA have brought on new staff to help with the overwhelming number of applications related to commercial satellites.
• Information flow. In the past it was virtually impossible to contact ODTC licensing officers directly to obtain advice, but improvements are tangible. ODTC has a new website that for the first time lists points of contact and provides additional useful guidance.
• Process changes. ODTC has streamlined its procedures to reduce processing delays, both internally and in the interagency review process.
• New regulations. ODTC has promulgated several new regulatory exemption provisions or regimes designed to ease licensing requirements with U.S. allies.
• Country exemptions. State has renegotiated a relatively broad exemption policy for U.S.-Canada defense trade, and it is in the process of negotiating similar country exemptions with the U.K. and Australia.⁹

Although much negative attention has focused on the State Department, the current export licensing logjam is largely the unintended consequence of legislation designed to prevent sensitive technology from falling into the wrong hands. Because the Bush administration is largely inactive on this issue, crafting and passing new export legislation that meets national security concerns without unduly burdening the U.S. satellite industry will be a difficult process. A first step was the Foreign Relations Authorization Act for FY 2000, which authorized State to create a separate system for expeditious licensing of communication satellite components to NATO countries and major non-NATO U.S. allies. Other proposed legislative remedies have met with resistance in the past. For example, the Satellite Exports with Security Act of 2000, H.R. 4417, introduced in May 2000, which would have shifted satellite exports back to the Commerce Department, died in committee.

The Satellite Trade & Security Act of 2001. After laying the groundwork for many months, in May 2001, Representatives Dana Rohrabacher (R-CA.) and Howard Berman (D-CA.) introduced the Satellite Trade and Security Act of 2001, H.R. 1707. This act would return jurisdiction for licensing most commercial satellites and related items, and with the CIA for U.S. satellites and related components (including satellite fuel, interface equipment, certain orbit transfer engines, and replacement parts) to Commerce. This legislation includes safeguards to address congressional concerns about regulation and monitoring, requiring a number of specific procedural safeguards, including:

• Consultation with DOD and State will be required on all applications to export satellites being launched overseas;
• All licenses to export satellites or related items for launch in non-NATO and allied countries will require a Technology Control Plan and DOD monitoring of the technical exchange, satellite integration, and launch (at the licensee's expense);
• U.S. involvement in post-accident investigation of a foreign launch failure must be licensed by State and monitoring by DOD; and
• Licenses for satellite exports must be noticed to Congress.

The U.S. Chamber of Commerce Space Enterprise Council and other industry groups support H.R. 1707.¹⁰ Although approved by the House International Affairs Committee, this bill was then included in a larger piece of export legislation, the Export Administration Act of 2001, H.R. 2581, which reauthorizes and revises Commerce's export authority. This is significant because Congress has been unable to pass comprehensive export legislation in the past several years, even without the current focus of Congress on terrorism.

One of the most difficult aspects for counsel when advising on the export control laws is that, while compliance with the letter of the export regulations (in particular, record-keeping requirements) is difficult, violations—even inadvertent ministerial violations—can result in substantial penalties and other administrative action by ODTC.

Violations. ODTC takes a fairly strict approach on violations, even when such violations are inadvertent. In addition to significant fines, ODTC will often require other conditions as part of a settlement. For example, in 1998 Boeing paid $7.5 million in fines for alleged violations relating to its SeaLaunch joint venture and agreed to a significant export compliance restructuring, including implementing computerized controls and hiring an independent auditor to monitor its compliance. Two years later, Lockheed Martin paid $8 million for alleged violations relating to its assistance to Chinese companies in assessing rocket launch failures. In this environment, some U.S. companies might be shying away from certain kinds of relationships with foreign entities. For example, according to press reports, recent fines imposed by ODTC against Boeing for export violations have made Boeing reevaluate its relationships with foreign operators and its related export sales.¹¹

Once ODTC issues a proposed charging letter regarding violations, a company has limited legal recourse and, as a practical matter, must negotiate a consent agreement, largely on ODTC's terms. Under the Arms Export Control Act, and as a function of foreign affairs, avenues for judicial review or even administrative due process are limited.¹² As a practical matter, ODTC has wide discretion in assessing violations and penalties and has the authority to suspend a company's export privileges entirely.

Voluntary disclosures. For in-house export compliance officers trying to improve their company's internal export controls, voluntary disclosure is a dilemma. For example, even if a voluntary disclosure does not result in civil penalties, ODTC except in rare circumstances will cease processing applications related to the infringing contract or other applications, preventing the disclosing company from moving forward with other export business while the facts of the voluntary disclosure are reviewed by ODTC. ODTC may also "request" that the company perform an internal audit of all its defense exports and report the results of the audit back to it.

For companies in the space industry, the best way to reduce the risk of violations and to mitigate fines or other penalties in case of an inadvertent violation is to have a strong export compliance program in place. An effective export compliance program includes the following components:

• Performance of an initial baseline internal audit of export processes and existing procedures, followed by periodic audits;
• Assignment of designated and empowered export compliance personnel;
• Development of an export compliance procedures manual tailored to fit each company's existing processes;
• Implementation of training and education programs for all personnel involved in handling controlled items.

Such a program, properly implemented, could significantly reduce the risk of exposure of a company's directors and officers or key personnel of other business entities to criminal penalties under the Federal Sentencing Guidelines.

Many major companies have recently revised their compliance programs. For example, Hughes Electronics formed a special task force headed by former Senator Sam Nunn and Dr. Paul Wolfowitz. The report issued by this task force contains concise and useful guidance.¹³

Conclusion

Restrictive national security controls on U.S. exports to satellite technology are likely to remain in effect for the foreseeable future, even if proposed legislation is implemented. Government agencies and industry will need to continue to improve and refine processes and requirements to minimize the negative impact on U.S. industry. In the meantime, companies must continue to comply with export controls to avoid potentially significant penalties.

Notes

Jonathan M. Epstein practices in the Washington, D.C., office of Holland & Knight LLP and chairs the Commercial Space Division of the ABA Forum on Air & Space Law. This article was reprinted from ABA AIR & SPACE LAWYER, 17 (Fall 2001), a publication of the American Bar Association Forum on Air & Space Law.

¹Strom Thurmond National Defense Authorization Act of 1999, Pub. L. 105-261, 112 Stat. 2172 (Oct. 17, 1998). return to article

²H.R. Rep. No. 105-851 (1999). return to article

³Satellite Numbers Show Both Growth and Decline for Industry, SATELLITE NEWS, June 18, 2001. return to article

⁴Satellite Companies Still Waiting for Final Export Regulations, SATELLITE NEWS, Apr. 30, 2001. return to article

⁵See California Space Authority, Export Licensing and Control Issues, Dec. 1999 available at www.csta.net/fed20000a.html return to article

⁶Shifting Market Shares for Satellite Manufacturing, SATELLITE NEWS, Aug. 6, 2001. return to article

⁷See 22 C.F.R. § 120 (definitions). For example, the definition of "defense article," 22 C.F.R. § 1206, includes technical data, and the definition of "defense service," 22 C.F.R. § 120.9, includes furnishing of technical data. return to article

⁸OTDC, Apr.-July 2001, available at www.pmdtc.org/processtime.htm return to article

⁹The Canada exemption applies only to certain categories of commercial satellites and components. See 22 C.F.R. § 126.5(b)(9). return to article

¹⁰Satellite Numbers Show Both Growth and Decline for Industry, SATELLITE WEEK (June 18, 2001). return to article

¹¹Satellite Companies Still Waiting for Final Export Regulations, COMMUNICATIONS DAILY, Apr. 24, 2001. return to article

¹²See 22 C.F.R. § 128.1: "[t]he administration of the Arms Export Control Act is a foreign affairs function encompassed within the meaning of the military and foreign affairs exclusions of the Administrative Procedures Act and is thereby expressly exempt from various provisions of that Act." return to article

¹³Nunn-Wolfowitz Task Force Report: Industry "Best Practices" Regarding Export Compliance Programs (July 25, 2000), available at www.hughes.com/pdfs/report.pdf. return to article