On December 2, 2015, the Bureau of Industry and Security (BIS) of the US Department of Commerce issued a proposed rule expanding the requirements to report offsets in defense sales agreements. The proposed rule would require companies to report certain offsets in the sale of items controlled in “600 series” Export Control Classification Numbers (ECCNs) on the Commerce Control List (CCL), except for certain submersible and semi-submersible cargo transport vessels and related equipment, software, and technology controlled in ECCN 8A620.b, 8B620.b, 8D620.b, and 8E620.b.

Pursuant to the Defense Production Act of 1950, BIS requires US firms to annually report certain offset agreements related to defense sales, both in licensed commercial transactions and the Foreign Military Sales (FMS) program. See 15 C.F.R. Part 701. Offset agreements often are required by foreign governments as a condition of the purchase of defense articles and can take many different forms, such as arrangements for co-production, technology transfer, subcontracting, credit assistance, training, licensed production, investment, and purchases.

The Defense Production Act requires BIS report to summarize the effect of offsets on “the full range of domestic defense productive capability.” See 50 U.S.C. § 2172(b)(1)(A). After the implementation of Export Control Reform (ECR), many defense articles were moved from the US Munitions List (USML) to the “600 Series” of the CCL. For more information about the “600 Series” and ECR, please see our previous advisories. Since the government has completed ECR on many categories in the USML and CCL, many former defense articles are subject to the EAR.

The proposed rule would change the Offsets Reporting Regulations to require reporting of offsets, in certain circumstances, for the sale of items in the “600 Series,” except for certain submersible and semi-submersible cargo transport vessels and related equipment, software, and technology controlled in ECCN 8A620.b, 8B620.b, 8D620.b, and 8E620.b. In effect, this would broaden the scope of the Offset Reporting Regulations to include the sales of items that moved from the USML to the CCL during ECR and items that are “of a military nature but that were already subject to the [Export Administration Regulations (EAR)].”

Although this is not a significant change to the scope of the Offset Reporting Regulations, the proposed rule may expose some companies to new reporting requirements, especially if their items were moved from other ECCNs into the “600 Series” during ECR.

Comments on the proposed rule must be received no later than February 1, 2016.

For a lengthier discussion of offsets, please see our prior post.