May 4, 2018
The demand for US-manufactured drones and related technology (collectively known as “unmanned aerial systems” or “UASs”) is robust. Our allies want to buy the most sophisticated and effective drone systems and the US, the global leader in drone technology, would appear to be the perfect partner. Given the obvious tactical and strategic advantages of having unequal access to drone technology, however, the Bush and Obama Administrations chose to impose tight controls on the transfer – even to US allies – of UASs to curtail global proliferation. In the absence of US exports, other countries (specifically Israel and China) have stepped up to satisfy the global demand. However, on April 19, 2018, President Trump approved a new policy on the export of UASs that will provide a much-needed boost to US drone manufacturers by making it easier for them to sell UASs and related technology to US allies.
HIGHLIGHTS OF THE NEW POLICY
The stated objectives of the new policy are to increase trade opportunities for US companies, bolster partner security and counterterrorism capabilities, and strengthen bilateral relationships, while simultaneously preserving the US military advantage and continuing to prevent the proliferation of weapons of mass destruction delivery systems. The Administration will seek to achieve these goals through the following specific initiatives:
- The majority of military UAS sales, whether armed or unarmed, will now be permitted through direct commercial sales (“DCS”) to foreign purchasers. DCS of UASs will give US manufacturers an alternative to the more time-consuming foreign military sales (“FMS”) process, which requires engagement with and facilitation by the US Department of Defense.
- The new rules reclassify UASs with strike-enabling technology (e.g., laser target designators) as “unarmed,” making it easier to export them.
- Contrary to what the UAS industry had hoped for, the new policy does not shift the “strong presumption of denial” that the Missile Technology Control Regime (“MTCR”) requires members to use when considering exports of certain long-range systems. However, the US will seek to work with its partners to revise the MTCR so that UASs will no longer be classified as “cruise missiles”, allowing the Administration to further streamline the export process.
- The policy requires recipient nations to arm UASs with US weapons only, to reduce recipient nations’ reliance on Chinese knock-offs and Russian systems.
- Consistent with prior policy, recipients of armed UASs will continue to be subject to end-use monitoring and periodic consultations with the US government on the use of certain UASs. Recipients will also continue to be prohibited from using armed UASs against their domestic populations.
NEW OPPORTUNITIES AND NEW CHALLENGES
The new UAS policy sets the stage for making the US more competitive in the global UAS market by easing several prior restrictions on UAS exports. Although DCS (often seen as the preferred method of procurement for exports of defense articles) should help in this regard, US manufacturers should review their internal compliance capabilities to assess their readiness to take advantage of DCS opportunities:
- Export Licensing Infrastructure & Compliance – Unlike FMS, DCS requires the manufacturer to obtain an export license from the Department of State prior to delivering the defense article. Export licensing carries additional compliance obligations and may require an organization to invest in additional compliance resources, capabilities, and systems.
- Government Engagement – One advantage of FMS is that the US government is often involved early in the transaction, leading to fewer surprises later in the process. In contrast, when utilizing the DCS process, manufacturers can sometimes fail to engage the US Government prior to submission of export license applications, surprising and frustrating regulators. This can result in delay of export licensing, and can sometimes lead to denial altogether. Accordingly, manufacturers planning to increase utilization of DCS should ensure they have the necessary capabilities and resources to effectively engage US Government stakeholders.
- Logistics Systems – Unlike FMS where the US Government is essentially a domestic buyer of the defense articles at issue and delivery usually takes place within the US, DCS involves sale of defense articles directly to foreign buyers, potentially with delivery overseas. Accordingly, the logistics of defense articles through a DCS program are more complex than FMS delivery obligations. Companies using DCS should assess and enhance their logistics capabilities, including policies, procedures and systems to meet the new compliance obligations.
- Contracts Management – In comparison to FMS contracts, DCS contracts offer more flexibility in their terms, including negotiated delivery schedules, warranty provisions, equipment trade-ins, and penalties for non-compliance. Manufacturers should consider whether their contracts organization is ready to handle highly complex negotiated contracts, and whether they have necessary internal controls and mechanisms to effectively monitor such contracts.
- ABAC (including Part 130) Risks & Obligations – Selling high-value items to foreign buyers may involve engagement with foreign sales agents to identify and facilitate sales opportunities. As such, drone manufacturers contemplating usage of DCS should ensure their compliance programs assess and address risks and requirements associated with US and foreign anti-bribery and anti-corruption (ABAC) laws, as well as International Traffic in Arms Regulations Part 130 requirements.
The new UAS policy should be a boon for US manufacturers of UASs and allow this important manufacturing sector to continue growing through exports. However, this new opportunity also comes with new compliance responsibilities and manufacturers should prepare themselves by thoroughly reviewing and enhancing their current export compliance programs.
Ankura’s international trade controls team understands both what regulators care about and how complex organizations operate. Our team leverages these diverse perspectives to assess, build, and enhance compliance programs; embed regulatory requirements in business systems and processes; facilitate data-driven program analytics and risk identification; provide jurisdiction and classification analysis and licensing support; and execute regulatory investigations, compliance reviews, and audits. At Ankura, we partner with our clients to understand and leverage their culture, objectives, and systems. We use practical, process-based methods to identify our clients’ compliance risks and integrate measurable export compliance solutions into their operations, to enable them to achieve compliance at the speed of business.