Orchid Advisors: Making International Sales Happen Under Export Control Reform

How to make international sales happen faster under Export Control Reform

The transfer of non-military firearms, components and ammunition from the International Traffic in Arms Regulations (ITAR) to the Export Administration Regulations (EAR) under Export Control Reform (ECR) will give U.S. exporters big opportunities to reduce, and in some instances eliminate, delays in fulfilling international orders that arise from the processing time for export licenses.

In the old days – i.e., now – a manufacturer or other exporter had to be in possession of a purchase order in appropriate form before it could submit an export license. Also required were an import permit from the destination country, an end user statement and in some instances a DSP-83, all in the correct form and with English translations if they were not in English. Mess these up, or the DSP-5 application, and DDTC could make you start over again.

Firearm orders of $1 million or more? Fuggedaboutit! With the ITAR’s requirement for “Congressional Notification” of million-dollar-plus firearms exports and the many-months wait for Congressional sign-off, those guns wouldn’t go out the door until long after foreign competitors’ guns had been delivered and deployed.

Under the new rules being introduced under Export Control Reform, purchase orders will no longer be required when submitting export licenses. This is a much bigger change than you may think.

Apply for licenses based on sales forecasts

The first thing to rethink when ECR goes into effect is why wait for a purchase order if you don’t need one?

If you sell non-military firearms to repeat customers in foreign countries, it will make sense to apply for EAR licenses periodically based on sales forecasts. That way, you can have a license in place before the customer places its order.

All you need from the customer is an import permit. If you already have a current import permit on file covering the guns in the forecast, you won’t even need the customer’s participation to put the license in place.

The commentary published by the Department of Commerce, Bureau of Industry and Security (BIS) with its ECR rules encourages industry to take advantage of this new opportunity:

“Under the [ITAR] licensing procedure, an applicant must include a purchase order or contract with its application.  There is no such requirement under the [EAR] licensing procedure . . . . [An EAR] license applicant need not limit its application to the quantity or value of one purchase order or contract. It may apply for a license to cover all of its expected exports or reexports to a particular consignee over the life of a license, reducing the total number of licenses for which the applicant must apply.”

ECR will enable you and your customer to design your sales / license cycle to suit your operations planning needs and the customer’s delivery requirements. The only limiting factor will be the validity period of the customer’s import permit, which ordinarily will be less than the four-year term of an EAR license.

If you turn out to have been too optimistic and a purchase order never arrives from a customer for whom you’ve obtained a license, have you wasted a $250 license fee? No; there is no fee for EAR licenses.

Drive license preparation from your ERP system

When a new or occasional customer places a purchase order that you haven’t anticipated, you will be able to accelerate license receipt by taking advantage of technology. Whether you apply for export licenses based on sales forecasts or the receipt of purchase orders, the information required to populate EAR export licenses can flow directly from your ERP system to the license application using software solutions that have been available for years but that haven’t been cost-effective for most firearm companies under the ITAR.

Imagine having your company’s “digital brain” populate license applications with information that is already in the system, accelerating the license-approval process and shifting the focus of licensing personnel from data entry to license review and approval and license system management.

Obtain $1 million+, multi-year blanket licenses

Under ECR, there will no longer be a U.S. regulatory disincentive to accepting multi-million-dollar blanket purchase orders. The ITAR discourage manufacturers and other exporters from doing what they most want, which is to accept very large purchase orders from good customers. That’s because licenses for firearm exports of $1 million or more must be notified to Congress, adding months to the license approval process.

In addition, DDTC will not approve so-called “blanket” purchase orders that establish maximum quantities and prices, but which don’t obligate the customer to purchase everything on the purchase order.

Both these problems disappear under ECR for non-military firearms. As noted above, a purchase order is not even required under the EAR so “blanket” arrangements are easy to put into place. As for Congressional Notification, that doesn’t exist under the EAR.

Go for it on the large POs when the EAR take effect in 2019!

Apply for licenses at the beginning of tenders, rather than the end

If your company sells non-automatic or semi-automatic firearms with law enforcement or military applications, one of the most exciting changes may be the effect ECR will have on your ability to compete in large foreign tenders.

Consider this scenario. A foreign government announces a tender for semi-automatic AR rifles for its national police force. Assume that an import permit is not required under local law for the designated governmental end user. If you obtain an official letter at the outset of the tender that an import permit is not required, you will have what you need to apply for a license, long before you have been selected as the winning bidder. Depending on the pace of the selection process, you may already have your license in hand when your bid is accepted. You certainly can’t do that today.

The availability of this opportunity is addressed in the commentary to the new ECR rules:

“[Under the EAR] the applicant has a way of determining whether the U.S. Government would authorize the transaction before it enters into potentially lengthy, complex and expensive sales presentations or contract negotiations. Under the [ITAR] licensing procedure, the applicant would need to caveat all sales presentations with a reference to the need for government approval and would more likely have to engage in substantial effort and expense with the risk that the government might reject the application.”

Furthermore, because there is no Congressional Notification under the EAR, this approach will work even when your sales price will equal or exceed $1 million. Imagine shortening a nine-month post-award wait for approval of a $2.5 million export to zero!

How can Orchid Advisors help?

Orchid Advisors, the #1 provider of regulatory compliance solutions to the firearms and ammunition industry, is looking beyond the mechanical changes in licensing and export compliance programs that ECR will entail to the exciting new business opportunities that will become available to the industry when ECR becomes effective in 2019.

Orchid’s ITAR / EAR Practice helps companies in the firearms and ammunition industry (i) sell firearms, ammunition and components to foreign customers, (ii) build sustainable export compliance programs, and (iii) design, source and manufacture firearms, components, tools and accessories outside the United States.

Look to Orchid Advisors to help you take command of the new export environment in the following ways:

·Formulation of EAR-driven international sales and sourcing strategies.

·Preparation of export licenses and provision of other “export compliance department” services on an outsourced basis.

·Practical advice on making near-term decisions under the ITAR that will be affected in 2019 by the new rules.

·Development of integrated export and ATF compliance solutions for transitioning to the post-ITAR world.