How to Comply with Complex Foreign, Dual and Third Country National Rules

Nelson G. Dong Olga King Partner Global Trade Compliance Manager Dorsey & Whitney LLP Esterline Corporation Seattle, Washington Bellevue, Washington

#ACIITAR

U.S IMMIGRATION AND THE U.S. TECHNOLOGY WORKFORCE by Nelson G. Dong Dorsey & Whitney LLP Seattle, Washington

#ACIITAR PROFESSIONAL BACKGROUND • Seattle partner in 550-attorney international law firm • Head of Dorsey & Whitney’s National Security Law Group and co-head of its Asian Law Group • International technology lawyer with >30 years experience in global business • Export control adviser to many technology companies, universities, engineering societies • Frequent speaker, writer, commentator on U.S. export control laws and export control policy advisor to U.S. Commerce Department; member of PECSEA • White House Fellow, former Justice Department official and federal prosecutor #ACIITAR AMERICA’S GLOBALIZED WORKFORCE AND CONTRIBUTIONS MADE BY IMMIGRANTS

#ACIITAR IMMIGRANTS & AMERICAN MAJOR LEAGUE SPORTS (2012) • Major League Soccer: 184 of 487 players are foreign born from 57 countries (38% of all players) • Major League Baseball: 272 of 1,029 players are foreign born from 18 countries (26% of all players) • National Hockey League: 193 of 764 players are foreign born from 19 countries (25% of all players) • National Basketball Association: 87 of 434 players are foreign born from 40 countries (20% of all players)

Source: Elias Sports Bureau, in July 15, 2012 Seattle Times #ACIITAR A LOCAL CASE STUDY: THE SEATTLE SOUNDERS SOCCER TEAM (2013) • Current Sounders first team roster of 29 players includes 10 players from 10 other nations • Americas: Brazil, Costa Rica, Guatemala • Caribbean: Cuba, Grenada, Jamaica • Europe: England, France, Switzerland, • Africa: Nigeria

Source: SoundersFC.com #ACIITAR IMMIGRANTS AND ATOMIC ENERGY

Hans Bethe Felix Bloch Albert Einstein Enrico Fermi Otto Frisch

Leo Szilard Theodore John von Kármán von Neumann

#ACIITAR IMMIGRANTS AND MISSILE TECHNOLOGY Operation Paperclip Fort Bliss, TX (1945-46) Dr. and 125 others

#ACIITAR IMMIGRANTS & MODERN U.S. INDUSTRY ANDREW S. GROVE (1936 - ) (Hungary) – Developer of basic semiconductor technologies

– Co-founder of Intel Corporation

IGOR SIKORSKY (1889-1972) (Russia)

– Designer of first four-engine airplane, modern

– Founded Corporation (now part of UTC)

TSU WONG (1893-1965) (China) – 1916 engineering graduate of MIT – Hired as Boeing’s first Chief Engineer; designed its first Model C training seaplane sold to U.S. Navy

#ACIITAR IMMIGRANTS & U.S. INNOVATION • June 2011 study by Partnership for New American Economy entitled The “New American” Fortune 500: • More than 40% of 2010 Fortune 500 companies founded by immigrants or children of immigrants • Almost 20% of newest Fortune 500 companies (i.e., founded since 1985) founded by an immigrant • Fortune 500 companies founded by immigrants or children of immigrants employ > 10 million workers worldwide, with those founded by immigrants employing 3.6 million • Fortune 500 companies founded by immigrants or children of immigrants had combined revenues of US$4.2 trillion, which is more than GDP of every country in world except U.S., China and Japan • Familiar corporate names: AT&T, Boeing, Ford, GE, Google, Heinz, Hertz, Home Depot, Kraft, Mattel, McDonald’s, P&G

#ACIITAR IMMIGRANTS & U.S. INNOVATION • Aug. 2007 study by scholars at Duke, NYU and Harvard (V. Wadhwa, et al.): • Immigrant inventors produced 72% of Qualcomm’s patents, 65% of Merck’s patents, 64% of GE’s patents and 41% of U.S. Government worker patents • Sept. 2008 study by economists at McGill University and Princeton University (NBER Working Paper 14312): • Immigrants obtain U.S. patents at double the rate that native born Americans do because immigrants disproportionately represented in science, technology, engineering and math (STEM) fields in U.S. • Projection: each 1% increase in immigrant college graduates will yield 15% increase in patents per capita

#ACIITAR IMMIGRANTS & U.S. INNOVATION • June 2012 study by Partnership for New American Economy entitled Patent Pending: How Immigrants are Reinventing America: • 76% of 1,466 patents issued in 2011 to top 10 U.S. research universities (ranked by patent activity) had at least one foreign born inventor (faculty member, staff or student) • Foreign born inventors involved in 87% of semiconductor manufacturing, 84% of information technology, 83% of pulse or digital communications, 79% of pharmaceutical and drug and 77% of optics inventions covered by issued patents • Foreign born inventors within 1,466 issued U.S. patents came from 88 different countries around the world • 10 universities surveyed in PNEA study: California*, Stanford, MIT, Wisconsin (Madison campus), Texas*, Cal Tech, Illinois*, Michigan*, Cornell, Georgia Tech

* State university system as a whole

#ACIITAR AMERICA’S PIPELINE OF FUTURE SCIENTISTS AND ENGINEERS

#ACIITAR U.S. COLLEGES AND UNIVERSITIES AND FOREIGN STUDENTS • In 2012-13 academic year, more foreign students attended U.S. universities than ever before: • 819,644 foreign students studied at U.S. universities • Foreign student enrollment in U.S. grew 7% over the prior year • Top countries sending foreign students in U.S.: • China: 237,697 (29%) • India: 98,357 (12%) • South Korea: 73,768 (9%) • Saudi Arabia: 40,982 (5%) • Canada: 24,589 (3%) • 49% of international students come from China, India, and South Korea. Source: Institute of International Education (2014)

#ACIITAR U.S. COLLEGES AND UNIVERSITIES AND FOREIGN STUDENTS (cont.) • Top three states for foreign student enrollment: California, New York, Texas • Top 5 fields of study by foreign students in U.S. (2012-13 data): • Business and management (22%) • Engineering (19%) • Mathematics and computer science (10%) • Social sciences (9%) • Physical and life sciences (8%)

Source: Institute of International Education (2014) #ACIITAR

FOREIGN-BORN STEM STUDENTS

#ACIITAR U.S. IMMIGRATION LAWS & COMMONLY AVAILABLE VISAS

#ACIITAR H-1B VISA OVERVIEW • Temporary work visa for professionals • Most widely used visa for non-immigrant scientists, engineers, technical personnel • 6-year maximum term • May be renewed • U.S. Government agencies involved in assessment • US Citizenship & Immigration Services (USCIS) within U.S. Department of Homeland Security • U.S. Department of Labor • U.S. Department of State at consulates around world • Job must require a bachelor’s degree or equivalent as a minimum for entry into field of employment • Employee must have required degree(s) or equivalent and any required licenses • Job must relate directly to academic degree(s) held

#ACIITAR H-1B WAGE REQUIREMENTS • Employer must pay “prevailing” or “actual” wage, whichever is higher • Prevailing wage: average wage paid to similar workers in same geographical area • Actual wage: actual wage paid by particular employer to similar employee, if any • Employer must also offer same employment benefits to H-1B employee as to U.S. workers • Health, dental, life insurance • Holidays • Maternity/paternity benefits • Eligibility for bonus plans

#ACIITAR AVAILABILITY OF H-1B VISAS • 65,000 “new” H-1B visas each fiscal year under current law • First 20,000 applications with U.S. master’s or Ph.D. degree exempt from 65,000 cap, so, effectively 85,000 visa/year • Average applications (2001-11): 311,889/year • Each fiscal year is October 1 - September 30 • File by April 1 for October 1 start date (if subject to cap) • Next new H-1B availability: October 1, 2014 • Currently exempt employers/employees from caps: • Colleges and universities or “affiliated” organizations • Non-profit research institutions • Government research institutions • Already in H-1B visa status with a different U.S. employer

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TN VISA OVERVIEW

• Professionals who are eligible under North American Free Trade Agreement (NAFTA) • Certain qualified Canadian, Mexican citizens for temporary work in U.S. in a professional field • No quota and always available • Initial term of up to 3 years • Easier, faster processing than H-1B, L-1 or E visas • Job must be temporary in nature, so a TN visa may be difficult to extend with same employer • Could potentially roll into H-1B visa if longer term needed

#ACIITAR TN VISA REQUIREMENTS • Limited only to qualified Canadian or Mexican citizens • Has a profession listed in USCIS regulations (accountant, physician, engineer, etc.) • Note: NOT ALL NORMAL PROFESSIONS ARE INCLUDED • Has a job offer from a U.S. company/organization in that profession • Application process: • Canadian: May apply directly to US-Canada border office without need to apply for a visa or file a petition with USCIS. Instant adjudication. • Mexican: Must obtain a TN visa at a U.S. embassy/consulate in Mexico or elsewhere first but no need to file a petition with USCIS • Application documents: (1) Canadian/Mexican passport; (2) offer letter from U.S. employer detailing prospective employment; and (3) copy of college diploma, licenses and job experience letters (if relevant)

#ACIITAR U.S. EXPORT CONTROL LAWS & FOREIGN PERSONS

#ACIITAR “U.S. PERSON” & “FOREIGN PERSON” • “U.S. person” as defined in ITAR § 120.15: • [U.S. citizen] (not expressly stated but implied) • U.S. lawful permanent resident (so-called “green card” holder) • Person in the United States who is bona fide refugee or asylum seeker • Organization (e.g., corporation, partnership, trust, etc.) formed under any U.S. law • Government entity under U.S. law • “foreign person” as defined in ITAR § 120.16: • Natural person who is not a “U.S. person” • Organization formed under any non-U.S. law • International organizations, foreign governments or agencies or subdivisions thereof (e.g., diplomatic mission)

#ACIITAR “DEEMED EXPORTS” • Disclosure (in any form or medium) of U.S. export controlled technical information (“technical data”) to a “foreign person” inside U.S. is legally equivalent to physical export to home nation of that person • If ITAR-controlled, company must be registered with DDTC and must obtain DDTC approval by DSP-5 export license or “Technical Assistance Agreement” (TAA) for such an export • If EAR-controlled, company must examine complex rules for specific technology and specific nationality to determine if BIS export license needed or if ok to rely on license exception (e.g., TSU, TSR, STA, etc.) • OFAC embargoes effectively embedded within ITAR, EAR controls for embargoed country “foreign persons”

#ACIITAR ECR & HUMAN RESOURCES • Indirect effect of Export Control Reform will be to create somewhat more employer flexibility in recruitment, placement of “foreign person” workers • Under ITAR controls, every disclosure of controlled “technical data” requires prior DDTC approval • Under EAR controls, employers can make own initial judgment about whether each unique intersection of technology and worker nationality is eligible for “deemed export” without BIS export license • Will reduce cases where prior ITAR licensing would automatically have been needed • But will not change situation for CCL “600 series” items, especially for “foreign persons” from China

#ACIITAR CONCLUSION • U.S. technology employers, especially in aerospace and defense, face complex, diverse work force & global market issues • Most U.S. technology employers will likely want/need to recruit, employ more “foreign persons,” especially in light of university student and U.S. technology work force demographics • U.S. visa policies will constrain pipeline of eligible “foreign persons” who can lawfully work in U.S. • However, even if visa available, employers must separately consider “deemed export” rules for “foreign persons” as defined in ITAR, EAR, OFAC embargo regulations • ITAR treats all “foreign persons” as “export license” cases • EAR has more subtle, nuanced approach based on type of U.S. technology, country of origin of foreign worker, license exceptions • OFAC embargoes only narrowly touch upon certain foreign nationals if they are from embargoed countries or are SDNs #ACIITAR

CONCLUSION (cont.) • ECR will allow companies to gradually phase in changes to USML, CCL, which may alter recruitment, employment strategies for “foreign persons” • Movement from “black and white” binary division of ITAR to more nuanced EAR Part 739 “Country Chart” world • More reliance upon EAR Part 740 license exceptions • More emphasis upon internal documentation of compliance decisions taken, especially if company straddles both ITAR and EAR control regimes, even after ECR • Record keeping especially central to new license exception STA • Subtle but probably critical shifts to adjust recruitment and employment to allow consideration of more “foreign persons,” especially in light of university student and U.S. work force demographics

#ACIITAR CONCLUSION (cont.) • If foreign person employed outside U.S., different sets of issues • Unless based in “visa waiver program” country, may still need entry visa to come for U.S. meetings, conferences • Still concerned about “exports” or “deemed exports” to a foreign person • May involve subtle issues of dual or third country nationality • May involve human or civil rights of host country in how much data can be collected or used to make key export control choices • DDTC has published several guidances in past couple of years – included in the program materials FYI

#ACIITAR NELSON G. DONG Dorsey & Whitney LLP Columbia Center 701 Fifth Avenue, Suite 6100 Seattle, WA 98104-7043 Phone: (206) 903-8871 Fax: (206) 903-8820 Email: [email protected]

#ACIITAR Practical Approach to Utilizing § 126.18 Exemption

Olga King Global Trade Compliance Manager Esterline|Corporate Office 500 - 108th Avenue NE, Suite 1500 Bellevue, WA 98004 #ACIITAR (818) 800-9170 Mobile § 126.18 Exemption

• § 126.18 Exemption regarding intra- company, intra-organization, and intra-governmental transfers to employees who are dual nationals or third-country nationals.

#ACIITAR Where does §126.18 get inserted? • ITAR § 126.18 can be utilized when it is inserted in an authorized license • Manufacturing License Agreements • Technical Assistance Agreements • Warehouse and Distribution Agreements • And other export authorizations, and license exemptions under which a defense article is received.

#ACIITAR Understanding §126.18 a. Subject to the requirements of paragraphs (b) and (c) of this section and notwithstanding any other provisions of this part, and where the exemption provided in § 124.16 (transfer to NATO, EU, Australia, Japan, New Zealand & Switzerland) cannot be implemented because of applicable domestic laws, no approval is needed from the Directorate of Defense Trade Controls (DDTC) for the transfer of unclassified defense articles, which includes technical data (see § 120.6), to or within a foreign business entity, foreign governmental entity, or international organization that is an authorized end-user or consignee (including approved sub-licensees) for those defense articles, including the transfer to dual nationals or third-country nationals who are bona fide regular employees, directly employed by the foreign consignee or end-user. The transfer of defense articles pursuant to this section must take place completely within the physical territory of the country where the end-user is located, where the governmental entity or international organization conducts official business, or where the consignee operates, and be within the scope of an approved export license, other export authorization, or license exemption.

#ACIITAR Understanding §126.18 b. The provisions of § 127.1(b) are applicable to any transfer under this section. As a condition of transferring to foreign person employees described in paragraph (a) of this section any defense article under this provision, any foreign business entity, foreign governmental entity, or international organization, as a “foreign person” within the meaning of § 120.16, that receives a defense article, must have effective procedures to prevent diversion to destinations, entities, or for purposes other than those authorized by the applicable export license or other authorization (e.g., written approval or exemption) in order to comply with the applicable provisions of the Arms Export Control Act and the ITAR.

#ACIITAR Understanding §126.18 c. The end-user or consignee may satisfy the condition in paragraph (b) of this section, prior to transferring defense articles, by requiring:

(1) A security clearance approved by the host nation government for its employees, or

(2) The end-user or consignee to have in place a process to screen its employees and to have executed a Non-Disclosure Agreement that provides assurances that the employee will not transfer any defense articles to persons or entities unless specifically authorized by the consignee or end-user. • The end-user or consignee must screen its employees for substantive contacts with restricted or prohibited countries listed in § 126.1. • Substantive contacts include regular travel to such countries, recent or continuing contact with agents, brokers, and nationals of such countries, continued demonstrated allegiance to such countries, maintenance of business relationships with persons from such countries, maintenance of a residence in such countries, receiving salary or other continuing monetary compensation from such countries, or acts otherwise indicating a risk of diversion.

#ACIITAR Understanding §126.18

• (2) continued Although nationality does not, in and of itself, prohibit access to defense articles, an employee who has substantive contacts with persons from countries listed in § 126.1(a) shall be presumed to raise a risk of diversion, unless DDTC determines otherwise. End- users and consignees must maintain a technology security/clearance plan that includes procedures for screening employees for such substantive contacts and maintain records of such screening for five years. The technology security/clearance plan and screening records shall be made available to DDTC or its agents for civil and criminal law enforcement purposes upon request.

#ACIITAR Foreign Subsidiaries • EU, UK and Canada have strict privacy rules that govern collection, use or disclosure of the personal information. • These rules recognize the right of privacy of individuals with respect to their personal information.

#ACIITAR Foreign Subsidiary Challenges with Complying under §126.18 • U.S. entity cannot ask their EU, UK or Canadian foreign subsidiary employees nationality questions. • U.S. entity cannot “screen its foreign subsidiary employees for substantive contacts”. • U.S. entity cannot (most certainly) collect and maintain records of their foreign subsidiary employee “relationships and/or contacts”.

#ACIITAR How can we help our foreign subs comply? Depends on the country… • United Kingdom • UK-US General Security Agreement • Nationals and dual/third country nationals who have undergone the UK’s Baseline Personnel Security Standard (BPSS) meet §126.18 (c)(1) requirements. • BPSS screening can be limited to only those employees that require access to ITAR data. • UK List X sites; these are UK commercial site s(i.e. non-Government) that are approved to hold UK government protectively marked information marked as 'confidential' and above. It is applied to a company's specific site and not a company as a whole. This rating is equivalent to facility security clearance (FSC) used in other countries. • Security assessment can be limited to employees requiring access to ITAR data. However, this action can be interpreted as an act of discrimination if only a few require screening.

#ACIITAR How can we help our foreign subs comply? • Canada • Canada - US Security Agreement • Controlled Goods Directorate (CGD) • Canadian registered end users perform the security assessment, using a uniform assessment instrument, developed by the CGD. • This security assessment meets §126.18 (c)(1) requirements. • Security assessment can be limited to employees requiring access to ITAR data. • The Defense Production Act mandates that Canadian registered end users maintain all screening records, and technology security/clearance plans while they are in the program and for five years beyond.

#ACIITAR How can we help our foreign subs comply? • EU and others • We have to revert to section (c)(2) The end-user or consignee to have in place a process to screen its employees and to have executed a Non-Disclosure Agreement that provides assurances that the employee will not transfer any defense articles to persons or entities unless specifically authorized by the consignee or end-user. The end-user or consignee must screen its employees for substantive contacts with restricted or prohibited countries listed in § 126.1. • Privacy laws in France and other countries render the requirement untenable.

#ACIITAR Summary • Before requesting approval for use of §126.18 review your ability to meet the requirements. • Foreign jurisdiction human rights and privacy laws may prohibit you from asking nationality or questions regarding “substantive” contacts. • Partner with an in-country law firm that can assist you with the implementation of a solution that does not violate local laws.

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