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Thursday, January 1, 2009

Regulators Debate PMA Rules in State vs Commerce

By Charlotte Adams

Export control regulations weigh heavily on the aerospace industry, even the relatively small PMA domain. One of the latest twists, which has raised eyebrows in the community, is a rule published by the State Department on Aug. 14, 2008. This purports to clarify how parts manufacturers can determine whether the Commerce Department regulates their components. Companies typically prefer the Commerce Department to the State Department, as the former agency does not always require export licenses, offers more license exceptions, processes license requests more speedily and sanctions less severely. Articles deemed to be defense-related and under State Department jurisdiction require a State Department license or exception for export and penalties for breaches are severe.

Technically, the State Department has amended the text of the Intl Traffic in Arms Regulations (ITAR), Part 121, to clarify the implementation of the criteria of Section 17(c) of the Export Administration Act of 1979 (EAA). Although this law lapsed in 2001, its provisions have been extended by executive order. Among other things, Section 17(c) of the EAA stated that the Commerce Department has jurisdiction over integral, FAA-certified civil aircraft parts not being exported to a "controlled" country.

Simply put, there are three questions to ask oneself in deciding whether one’s part comes under Commerce Department export jurisdiction: is the part "standard equipment"?; is it on an FAA-approved, non-military, civil aircraft?; and is the part integral to such a non-military, civil aircraft? If these criteria are met — and the part has not been classified as significant military equipment (SME) — a restrictive ITAR designation — a commodity jurisdiction (CJ) determination is not required to establish that one’s part is under Commerce. But the meanings of "standard equipment," FAA-approved, and "integral" are hotly debated. And although the rule seems to change things, the issuing agency insists that nothing relative to jurisdiction has changed. Though there may be benefits in some quarters, parts that are classified as SME are not helped by the rule unless they were already integral to civil aircraft prior to the effective date of the rule. The rule states, going forward, that SME parts always require a State Department CJ determination to exclude them from State’s jurisdiction.

Rules and Reasons

Some see the rule as an attempt to ease the industry’s discomfort following the State Department’s decision on the QRS-11, a navigation chip that found its way into both the Maverick missile and the Boeing 737, where, according to press reports, it was incorporated into a backup navigation system. (State earlier had blessed the chipmaker’s export of the component to Thales for use in the standby navigation system later adopted by Boeing.) However, the QRS-11 had been defined as both ITAR and SME. Therefore, although the avionics system was FAA-approved, standard and integral to the aircraft, State applied its "see-through" policy to essentially declare the system under its jurisdiction. The "see-through" policy means that State always sees a USML (U.S. munitions list) item, no matter how tiny or no matter what has been done to it. Boeing argued that the avionics system was not under State’s jurisdiction, possibly because it was a civil application, but the agency found the airframer at fault and assessed a large fine and other penalties. The impasse was resolved by putting the chip under Commerce control when it’s built into a civil avionics system, but under State when the chips are loose or in a military system. Although the QRS-11 wasn’t a PMA part, it lurks in the background of many discussions.

Another case that has roiled the industry involved the L-100, the civil version of the C-130. Three years ago the State Department asserted, for reportedly geopolitical reasons, jurisdiction over parts that are common between the C-130 and the L-100, but that were not used on other commercial aircraft. The action put some legitimate companies on the wrong side of the regulations, and L-100 parts that had appeared to be civilian turned out to be military.

Others see the rule as a genuine attempt by the State Department to clarify what types of components it is not interested in. The agency wanted to eliminate "nuisance" CJ requests — required if jurisdiction is in doubt — according to Steve Shriber, a partner with Exportfolio compliance consultants. In its publication of the proposed rule in April 2008, State complained about the "increasing number of [CJ] requests for certain basic parts and components having a long history of use on both civil and military aircraft." The agency claimed its intent was "to make it clear that these parts and components are not subject to the jurisdiction of the Department of State...."

PMA Effects?

Obviously, State did not design the new rule around PMA. An agency official told Aviation Maintenance that the "PMA piece" was not a big issue. "We just wanted to be careful that we didn’t say that purely getting PMA is enough," she said. PMA, for example, "does not meet the second criterion [of FAA approval!]," the official said. (The rule describes FAA approval in terms of a TC, amended TC, or supplemental TC.) PMAs wouldn’t pass the test anyway, as the agency pointed out in its disposition of comments, since the components can be approved for exclusively military use. If a PMA part is a copy of a TC’d or STC’d part, it is governed by the same export controls that apply to the original part. It may even have been wise, as one analyst points out, for State to exclude PMAs from automatic approval since "that would create a large loophole in the controls — it would give the FAA the ability to inadvertently determine export control."

Taking the opposite tack is the Modification and Replacement Parts Association (MARPA), an organization representing the PMA industry. In his comment on the proposed rule, Jason Dickstein, president of MARPA, says the State Department action "does not adequately account for aircraft parts manufactured under FAA [PMA]." Dickstein also expresses concern that PMA parts jurisdiction could shift. "It would not make sense for such parts to start life subject to Commerce Department export jurisdiction, and then later be examined under a State Department [CJ] request merely because the Air Force has chosen to begin purchasing commercially available parts for its own aircraft," he says.

MARPA’s comment claims that PMA parts were inappropriately "excluded" from part 2 of the test although part 2 recognizes TC and STC parts and PMAs are approved by the FAA. PMA parts, MARPA points out, "often reflect parts manufactured in competition with parts manufactured by the type certificate holder, so the [TC] holder has an economic incentive to avoid listing the PMA part in the [TC]." MARPA suggested language that would have broadened the scope of test to explicitly include PMA, but was denied.

Interpretations

Other consultants took the rule to mean that since PMA is an FAA certification, it automatically falls under Commerce jurisdiction, Shriber says. They told their clients not to worry about PMA parts, but that’s bad advice, he continues.

Several experts had at least something favorable to say about the rule. The Aerospace Industries Association (AIA) told AM it was a net gain. "The vast majority of my companies feel better off with it," says Remy Nathan, the association’s assistant VP for international affairs. Although he conceded he’s primarily talked to people at the higher end of the supply chain, they are the ones who "get the phone call that says, ‘Hey, I’m eight levels down from you, but I’m not sure if I’m really giving you a commercial widget.’"

Also on the plus side is Kevin Wolf, a partner with Bryan Cave LLP. In a memorandum to attendees of a Boeing supplier conference, a copy of which was obtained by AM, Wolf said that under the new rule "it is now easier to make a self-determination that a standard part or component installed on a civil aircraft or civil aircraft engine covered by a... [TC] is, with few exceptions, not ITAR-controlled." Wolf added that although PMA parts are not in the original type design, and although the State Department excluded these components from the "standard equipment" category, PMAs can be treated as Commerce-controlled in the following circumstance: "If [a PMA is] identical in...form, fit, and function to that of a part that is standard equipment and within the scope of the type design of an FAA-certified civil aircraft or aircraft engine."

Others see benefit but continued ambiguity. Thomas deButts, a partner at Pillsbury Winthrop Shaw Pittman LLP, noted in his comment on the proposed rule that the amendment "fails to directly confront the unpublished... [see-through] policy." The agency in the past applied this policy to a fastener originally used on a fighter aircraft but later in civil applications, deButts told AM. Since the component was still on the munitions list, however, a CJ determination was required to get it off.

According to deButts, the three-part test is regarded as a net benefit. It gives some companies, who were determining the status of their parts but weren’t completely sure State would have agreed with them, "more comfort in allowing them to make their own classification," he says. It may have had that effect: according to State Department statistics, the number of 17(c)-related CJ requests in 2008 has declined from 31 before Aug. 14 (the rule’s effective date) to five as of Dec. 5.

But since the rule seems to be an exception to the see-through policy, yet does not explicitly say so, it continues to be "totally ambiguous" on that point, deButts says. The agency official simply says that "in our view [the rule] is not related to that [see-through] policy." The official conceded a certain degree of ambiguity in the rule, but referenced questions about the meaning of the term, "standard" in part 1 of the test. She clarified that an unpublished, single-company standard "won’t cut it." It has to be a civil aviation industry standard.

Shriber says the rule doesn’t change much. If a part is specifically designed for a military platform, it is ITAR-controlled. If it is originally designed for a commercial platform and subsequently used (unmodified) by a military customer, it is still Commerce-controlled. The rule has only "made it easier for people who don’t understand to make a mistake," Shriber says. The three-part test is really a "four-part rule because you still need to understand the design and use of an item," Shriber continues.

However, he sees a net gain for non-SME components even if they had originally been designed for military platforms. If such parts are subsequently built into an FAA type-certificated aircraft, and had never been classified as SME, the FAA approval would basically "clean the part," he says.

He cites the case of one large manufacturer who has used the three-part test to reclassify a rivet on a landing light used by both military and commercial customers. The company determined that it had originally mischaracterized the part as ITAR and that the component should be moved to Commerce control. It was able to do this without a CJ process because of the new rule, Shriber says.

The State Department official questioned whether even a non-SME part originally designed for a military application would come within the meaning of "standard" as understood by the agency, but conceded that if it truly meets the three-part test, "it’s not ITAR."

Dual-Use Parts

Traditionally, products designed for commercial use, or not specifically designed for any particular use, which remain unmodified and are used in both commercial and military applications, have come under Commerce jurisdiction, although it seems that the jurisdiction can shift based on the end-user’s application. The new rule does not clarify this situation.

The rule "doesn’t negate the utilization of dual-use as a criteria for inclusion in the [Commerce] licensing program," according to Jack Brodbeck, head of USACompliance, an export control consultancy. Therefore "you end up creating a risky business of dealing with civilian parts that might possibly be used in a military fashion." After all, he points out, almost any civilian aircraft could be converted to military use. "You could take a Curtiss Wright Flyer and turn it into a warplane."

Korry Electronics, in its comments on the proposed rule, pointed out the same ambiguity, but called for a clarification to eliminate the possibility of inferring that "non-SME parts specifically designed for both military and civilian aircraft...are not subject to [Commerce]." Their suggestion was denied.

The dual-use arena is "where it gets tricky," deButts agrees. If a company has a catalog of parts, for example, and all of them have been designed for dual-use — not originally for a military customer — then they can sell these parts to the military without risking a jurisdictional shift. "But the minute they take a part and change it in any way — even the most minor modification to that part," the risk of a shift increases. Changing the placement of a hole drilled in a fuel pump for a military customer, for example, could trigger a shift, he says.

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