
[Federal Register: December 23, 2009 (Volume 74, Number 245)]
[Rules and Regulations]               
[Page 68136-68142]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23de09-4]                         

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DEPARTMENT OF COMMERCE

Bureau of Industry and Security

15 CFR Part 701

[Docket No. 080722875-91412-02]
RIN 0694-AE40

 
Reporting of Offsets Agreements in Sales of Weapon Systems or 
Defense-Related Items to Foreign Countries or Foreign Firms

AGENCY: Bureau of Industry and Security, Department of Commerce.

ACTION: Final rule.

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SUMMARY: This final rule amends title 15 of the Code of Federal 
Regulations, part 701, which implements Section 309 of the Defense 
Production Act of 1950 (``Section 309''), as amended. The Bureau of 
Industry and Security (``BIS'') is amending part 701 to update and 
provide clarification with regard to the information U.S. firms are 
required to submit each year to BIS to support BIS's preparation of the 
annual report to Congress on offsets in defense trade.

DATES: Effective date: This rule is effective January 22, 2010.

FOR FURTHER INFORMATION CONTACT: Ronald DeMarines, Bureau of Industry 
and Security, U.S. Department of Commerce, 14th Street and Constitution 
Avenue, NW., Room 3876, Washington, DC 20230, telephone: (202) 482-
3755, e-mail: redemarin@bis.doc.gov.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Defense Production Act Amendments of 1992 required the 
Secretary of Commerce to promulgate regulations for U.S. firms to 
furnish information on sales of defense articles or defense services to 
foreign countries or foreign firms when such sales are made pursuant to 
a contract subject to an offset agreement exceeding $5,000,000 in 
value. The Secretary of Commerce designated BIS as the organization 
responsible for promulgating such regulations. In 1994, BIS published 
the Reporting of Offsets Agreements in Sales of Weapon Systems or 
Defense-Related Items to Foreign Countries or Foreign Firms regulation 
(15 CFR part 701) (the ``Offset Reporting Regulation''). BIS aggregates 
and uses the information provided by U.S. firms pursuant to the Offset 
Reporting Regulation to determine the impact of offset transactions on 
the defense preparedness, industrial competitiveness, employment, and 
trade of the United States. Pursuant to Section 309, BIS submits 
reports annually to Congress.
    On April 29, 2009, BIS published a proposed rule (74 FR 19466) 
requesting comments on proposed amendments to the Offset Reporting 
Regulation. This final rule implements the amendments to the Offset 
Reporting Regulation.

II. Reasons for This Rule

    This rule will allow BIS to improve its assessment of the economic 
effects of offsets in defense trade. The amendments in this rule 
clarify the information BIS is seeking to receive from industry. BIS 
believes that these amendments will lead to less ambiguity and more 
consistency in industry submissions. BIS is also making these 
amendments to update its instructions to industry specific to the means 
of submission and the format of submitted data.
    This final rule also responds to a recommendation made by the 
Government Accountability Office (``GAO'') in its June 26, 2008 report 
entitled Defense Production Act: Agencies Lack Policies and Guidance 
for Use of Key Authorities (GAO-08-854). In its report, the GAO stated 
that Commerce provides useful summaries of offsets issues in its annual 
report to Congress, but the type of data collected from prime 
contractors limits BIS's ability to effectively analyze the impact of 
offsets on the U.S. economy.
    Consequently, the GAO recommended that Commerce update its Offset 
Reporting Regulation to require more precise information on the 
industry sectors in which offset activity occurs.

III. Comments on the Proposed Rule

    The comment period for the proposed rule ended on June 29, 2009. 
BIS received a total of three written submissions. The written 
submissions comprised nine distinct comments from two defense 
contractors and one industry association. BIS posted all comments 
received by the end of the comment period for public viewing at http://
www.regulations.gov and on the BIS Web site at http://
efoia.bis.doc.gov.
    The comments focused on the following topics: the proposed 
requirement to classify products and services involved in offset 
agreements and transactions using the North American Industry 
Classification System (``NAICS'') codes and the added burden created by 
this requirement; the proposed linking of offset transactions to offset 
agreements; the proposed increase in data specificity for performance 
measures and non-performance penalties associated with offset 
agreements; and the importance of protecting the business proprietary 
information submitted by U.S. firms.

Comments on the Classification of Offset Agreements and Transactions 
Products and Services

    BIS received three comments regarding the proposed requirement that 
certain information reported to BIS be classified using NAICS codes. 
All three commentators indicated that the NAICS reporting requirement 
was burdensome and time consuming. One commenter noted that BIS 
estimated that the requirement to classify offset agreements and 
transactions would add 33 percent to the total time required to prepare 
an annual submission pursuant to the Offset Reporting Regulation. 
Another commenter stated that the defense contractor industry does not 
track NAICS codes during sales and that many offset transactions would 
require more than one NAICS code. The third commenter stated that it 
would require at least an 18-month lead time to implement the changes 
to its database and to train users.
    BIS determined that the requirement to classify offset agreements 
and transactions would not result in an undue burden on the defense 
industry for several reasons. First, all companies conducting business 
with the U.S. Government, including those regularly involved in 
military export sales reported to Commerce, are required to classify 
their products and services, in accordance with the NAICS (See Central 
Contractor Registration Handbook, http://www.ccr.gov). The U.S. Census 
Bureau (``Census'') posts instructions on its Web site on how to 
properly classify products and services in accordance with the NAICS. 
The Census web site also contains a search feature that allows users to 
find the proper NAICS codes for their products based upon a keyword 
search.
    Moreover, Census requires the reporting of industrial activity 
using NAICS codes for all U.S. companies for the economic census it 
conducts every five years. Further, Census collects NAICS-based data 
monthly from the

[[Page 68137]]

aerospace industry for its Current Industrial Report on the Civil 
Aircraft and Aircraft Engines report. According to Census, pursuant to 
Title 13 of the U.S. Code, U.S. companies are required to report 
multiple NAICS codes for individual economic transactions to Census for 
both of these reports.
    In BIS's 15-year history of compiling offset data pursuant to the 
Offset Reporting Regulation, approximately 80 percent of offset 
activity involves products and services of the aerospace industry, 
which has a limited number of NAICS codes. The limited number of NAICS 
codes applicable to military export sales in general should also limit 
this burden. Given that companies are already required to report 
information including multiple NAICS codes for individual transactions 
to a U.S. Government agency other than BIS, and noting the limited 
number of applicable NAICS codes in the military export sales sector, 
BIS has determined that identifying military export sales and offset 
transactions by multiple NAICS codes, as applicable, would not cause an 
undue burden on industry.
    BIS is implementing this change in part as a response to the GAO's 
June 26, 2008 report entitled Defense Production Act: Agencies Lack 
Policies and Guidance for Use of Key Authorities (GAO-08-854) in which 
the GAO recommended that Commerce update its Offset Reporting 
Regulation to require more precise information on the industry sectors 
in which offset activity occurs. Further, this requirement will permit 
BIS to better utilize the NAICS-based Benchmark Input-Output Accounts 
(Input-Output) of the United States published by the U.S. Department of 
Commerce's Bureau of Economic Analysis in the preparation of its annual 
report to Congress. The Input-Output account is a representation of the 
United States economy used to predict how changes in one industry 
affect other U.S. industries and is a much more accurate economic model 
than the methodologies BIS used to analyze the impact of offsets in the 
past. BIS began using this model to calculate the economic impact of 
offset agreements and offset transactions for its 13th Annual Report to 
Congress in December 2008. The inclusion of data that includes six-
digit NAICS codes provided by industry will allow BIS to better utilize 
this model to provide a more accurate assessment of the economic impact 
of offsets in defense trade. This will allow BIS to better fulfill its 
mandate under Section 309 in its annual reports to Congress.
    With regard to the comment that reporting NAICS codes for offset 
agreements and transactions would add as much as 33 percent to the 
hourly burden incurred by firms in compiling information for its 
submissions to BIS, BIS notes that the 33 percent increase amounts to 
the addition of three hours to the existing nine hour burden. The 
commenter stated that for a larger company, this increase would be more 
substantial than for a small company because the compilation of data is 
more time consuming in a large company with many offset obligations. 
BIS notes that the nine hour burden estimate for the collection of the 
existing information under the Offset Reporting Regulation and the 
three additional hours estimated for the burden of reporting on NAICS 
codes is based upon an average for all U.S. firms subject to reporting 
under this regulation. BIS does not believe that this additional burden 
outweighs the long term benefits to both BIS and industry of abandoning 
use of the outdated Standard Industrial Classification codes and 
instead using the NAICS codes.
    In response to the request that BIS wait 18 months after publishing 
this final rule to make its changes effective, BIS has chosen to make 
this rule effective 30 days after publication because this rule 
contains only one significant additional requirement. U.S. firms 
reporting under the Offset Reporting Regulation should incorporate the 
new requirements in this rule in their submissions to BIS for calendar 
year 2009 (reportable to BIS by June 15, 2010). Although BIS recognizes 
that the changes included in the final rule will require adjustments to 
the internal tracking and filing systems used by U.S. firms reporting 
under this rule, given the existing reporting requirements administered 
by another U.S. Government agency and the limited number of significant 
changes included in this rule, BIS has determined that firms will be 
able to make these changes in time to comply with the final rule in 
their June 2010 submission. Note that this rule's requirements specific 
to the use of NAICS codes are only applicable to offset agreements and 
transactions reported to BIS beginning with calendar year 2009.
    BIS made one change in this final rule on the basis of comments 
specific to the NAICS requirement. In the proposed rule, BIS included a 
requirement for U.S. firms to assign NAICS codes to the credit value of 
each offset transaction. BIS has determined that it does not need this 
information to complete the analysis provided in the annual report and 
has thus removed the requirement in this final rule, easing some of the 
reporting burden for industry. In making this determination, BIS 
recognized that because credit value is generally assigned by foreign 
offset authorities and can involve multipliers, it would be difficult 
for U.S. firms to determine how to assign NAICS codes to credit values, 
given that the transaction could involve multiple codes and the credit 
value could be different than the actual value of the transaction.

Comments on Linking Offset Transactions to Offset Agreements

    BIS received one comment on the new requirement to link offset 
transactions to a particular offset agreement. The commenter stated 
that properly assigning each transaction to its agreement will be time 
consuming for U.S. companies because many companies have multiple 
offset agreements for the same product in the same country. The 
commenter noted that it may take some companies as much as a week of 
additional staff time to comply with this requirement.
    BIS reviewed this comment and notes that U.S. firms that report to 
BIS under the Offset Reporting Regulation are required by their foreign 
government customers to keep records of each offset transaction for 
which offset credit is claimed. The firms are also required to report 
their offset activities to the foreign government customers in order to 
account for their fulfillment of offset obligations. Both U.S. firms 
and their foreign government customers must track how much of a U.S. 
firm's offset obligation has been satisfied and what offset 
transactions are counted toward that obligation. Given this practice, 
BIS believes that the information BIS is requesting should be available 
to U.S. firms.

Comments on Increasing the Specificity of Performance Measures and Non-
Performance Penalties

    BIS received one comment regarding the proposed increase in the 
level of specificity required to be reported related to Performance 
Measures and Non-Performance Penalties. The commenter stated that 
providing more specific information on these topics could be cumbersome 
and would disadvantage U.S. companies in the global market place 
because such information, if released, would ``exacerbate U.S. 
industry's ability to negotiate a fair contract.''
    BIS notes that the requirement to report offset agreement 
performance measures and non-performance penalties is not a new 
requirement. The previous Offset Reporting Regulation required 
companies to report performance measures. The change in this final rule 
only requires industry to

[[Page 68138]]

report performance measures and non-performance penalties as separate 
line items. Therefore, this change will not add any additional burden 
on industry.
    Specific to the concern regarding U.S. industry negotiations, BIS 
does not include the specific performance measures and non-performance 
penalties submitted by industry in its annual report. Instead, BIS uses 
this information to better understand the trends in offset activities 
in defense trade. Country-specific offset policies that BIS has 
included in past reports were obtained from publicly available sources.

Comments on Protection of Business Proprietary Information

    BIS received three comments regarding the confidentiality of the 
offset-related data that companies submit to BIS in relation to the 
public availability of the annual report. One commentator stated that 
the release of proprietary information could be damaging to companies 
and to the defense industry. Two commentators expressed concerns that 
foreign governments use or may use the data from the annual report to 
win concessions from U.S. defense contractors in offset negotiations.
    Although the availability of the offset report and the 
confidentiality of offset-related data are outside the scope of this 
final rule, BIS is cognizant of the negative impacts of the release of 
proprietary information. As provided by Section 309(c) of the DPA, and 
Sec.  701.5 of the Offset Reporting Regulation, BIS is precluded from 
publicly disclosing the specific information it receives from U.S. 
companies pursuant to the Offset Reporting Regulation. Therefore, the 
offset-related information collected by BIS from defense contractors is 
highly aggregated so that the activities of individual companies cannot 
be determined. Additionally, in recent years, BIS has revised the 
annual report to remove certain sections that were identified as 
beneficial to foreign governments and made other sections of the report 
available only within the U.S. Government. BIS will continue to 
consider additional measures specific to this concern.

IV. Overview of Final Rule

    BIS is amending the Offset Reporting Regulation to update and 
provide clarification with regard to the information U.S. firms are 
required to submit each year to support the preparation of the annual 
report to Congress on offsets in defense trade.

Changes to Sec.  701.1

    This final rule amends the last sentence of Sec.  701.1 of the 
Offset Reporting Regulation to reflect that Commerce has already 
submitted and will continue to submit reports to Congress. The previous 
Sec.  701.1 suggested only that Commerce will be submitting reports in 
the future.

Changes to Sec.  701.2

    This final rule amends certain definitions in Sec.  701.2 of the 
Offset Reporting Regulation to reflect BIS's 15-year experience in 
preparing the annual report to Congress. Specifically, this rule 
updated the illustrative list of activities in the definition of 
``offset transaction'' in Sec.  701.2(f) and the definitions of 
``direct offset'' in Sec.  701.2(g) and ``indirect offset'' in Sec.  
701.2(h).
    In the definition of ``offset transaction'' in Sec.  701.2(f), this 
rule removes reference to activities not commonly reported to BIS 
(i.e., countertrade, barter, counterpurchase, and buy back) and adds 
reference to activities that are frequently reported (i.e., credit 
assistance, training, and purchases). Note that this list remains 
illustrative. Additionally, to clarify the meaning of the different 
types of offset transactions specified in Sec.  701.2(f), this final 
rule provides examples for each type of offset transaction listed. 
These examples were not included in the proposed rule and are intended 
to ensure better consistency in the data submitted to BIS. None of 
these terms are currently defined in the Offset Reporting Regulation.
    Example 1 to Sec.  701.2(f), clarifies that ``co-production'' 
includes transactions that are based upon a government-to-government 
agreement authorizing the transfer of technology to permit a foreign 
company to manufacture all or part of a U.S.-origin defense article. 
Such transactions are based upon an agreement specifically referenced 
in a Foreign Military Sale (``FMS'') Letter of Offer and Acceptance 
(LOA) and a government-to-government co-production Memorandum of 
Understanding. In Example 6, on the other hand, a foreign company 
receives technology to produce a component of a U.S. defense article, 
but in part because this transfer wasn't made pursuant to a co-
production agreement specifically referenced in an LOA and co-
production Memorandum of Understanding, it is classified as ``licensed 
production'' instead of ``co-production.'' Both of these examples also 
include ``technology transfers'', and that term is further described in 
Example 2.
    Additionally, in Example 4 to Sec.  701.2(f) a U.S. company makes 
arrangements for a line of credit at a financial institution, which is 
``credit assistance'' (distinguishable from the use of credited or 
``banked'' offset credits, which would be classified as ``other''). In 
its 15 years of collecting data for its report, BIS has observed that 
U.S. firms have submitted data on transactions under the ``credit 
assistance'' category for a wide variety of transactions, some of which 
BIS would not consider to be ``credit assistance.'' Section 701.2(f) 
also lists examples for all other terms referenced in the definition of 
``offset transaction.''
    This final rule amends the definitions for ``direct offset'' and 
``indirect offset'' in Sec.  701.2(g) and Sec.  701.2(h) by removing 
the references to ``defense articles'' and ``defense goods.'' This 
change was made to clarify that U.S. firms are required to report on 
all offset transactions for which offset credit of $250,000 or more has 
been claimed from a foreign representative, even if the offset 
transaction itself does not involve a defense article or service (i.e., 
items or services controlled pursuant to the International Traffic in 
Arms Regulations (22 CFR parts 120-130) (ITAR)). This change clarifies 
the intent of the reporting requirement and reflects current reporting 
practices.

Changes to Sec.  701.4

    This final rule modifies Sec.  701.4 of the Offset Reporting 
Regulation by reordering the section. The revised section begins with 
information pertaining to the reporting period and the date by which 
reports must be submitted to BIS each year, followed by updated 
reporting instructions on how to submit the report and on how the 
report should be formatted, and the contents of the required reports. 
This reordering will make it easier for companies affected by this 
regulation to identify all of the information they need to submit 
timely and accurate reports. This section also notes for the first time 
that BIS publishes an annual notice in the Federal Register to remind 
companies of their responsibility to report on offset agreements and 
transactions and to advise them of the reporting deadline (see Sec.  
701.4(a)).
    This final rule also amends Sec.  701.4(b) to update the address to 
which reported offsets data should be submitted and provides an e-mail 
address for electronic submissions and notes that data should be 
submitted in both hardcopy format and electronic format. This final 
rule deletes references to

[[Page 68139]]

outdated software and hardware formats that were described in Sec.  
701.4(c) of the previous Offset Reporting Regulation. Section 
701.4(b)(1) also contains the notice, previously found in Sec.  
701.4(a), that only the firms directly responsible for reporting to the 
foreign customer should report offset transactions to BIS. This notice 
has been slightly updated in this final rule to further clarify the 
scope of reporting required by BIS. Note that the term ``U.S. firm'' 
used in Sec.  701.4(c)(1) and Sec.  701.4(c)(2) refers to the prime 
contractors that are physically located in the ``United States'' 
(defined in Sec.  701.2(d)), and who are directly responsible for 
reporting to the foreign customer as described in Sec.  701.4(b)(1). 
Section 701.4(b) states that U.S. firms must generally only report on 
offset agreements they have entered into with a foreign customer, not 
agreements entered into by their foreign subsidiaries or affiliates. 
However, U.S. firms must report on all offset transactions that they 
are directly responsible for reporting to the foreign customer, 
including transactions performed by a foreign subsidiary or affiliate 
that are credited toward the U.S. firm's offset agreement.
    In order to better reflect the business cycle, the provisions of 
the Offset Reporting Regulation that required description of the 
contents of reports on offsets transactions (previously Sec.  701.4(d)) 
and offsets agreements (previously Sec.  701.4(e)) were reordered so 
that offset agreement reporting requirements are described in Sec.  
701.4(c)(1), before the offset transaction reporting requirements now 
found in Sec.  701.4(c)(2).
    Also in new Sec. Sec.  701.4(c)(1) and 701.4(c)(2), the term 
``military export sale'' (a defined term in Sec.  701.2) has replaced 
the term ``weapon system,'' in order to clarify that not all reported 
defense sales involve weapon systems. Further clarifying changes made 
to the descriptions of information required to be reported under Sec.  
701.4 are described below.
    In new Sec.  701.4(c)(1)(ii), this final rule expands the 
information required to be submitted to BIS to describe offset 
agreements. Whereas the previous Offset Reporting Regulation requested 
only the name or description of the defense article and/or service 
subject to the offset agreement, this change requires that both the 
name and description of such articles and/or services be provided as 
well as the month and year that the offset agreement was signed. These 
changes will ensure that offset agreements are correctly reported for 
the appropriate year and will facilitate BIS's ability to track the 
fulfillment of offset obligations.
    New Sec. Sec.  701.4(c)(1)(iii) and 701.4(c)(2)(iv), respectively, 
require companies to assign the appropriate North American Industry 
Classification System (``NAICS'') code(s) to each military export sale 
for which there is an offset agreement triggering a reporting 
requirement and to each offset transaction reported under the Offset 
Reporting Regulation. In addition, new Sec. Sec.  701.4(c)(1)(v) and 
701.4(c)(2)(viii), respectively, require the value of each military 
export sale and offset transaction to be classified by NAICS code. Note 
that for military export sales and offset transactions involving items 
categorized under more than one NAICS code, all codes should be listed 
and values should be listed by each of the applicable NAICS codes. This 
final rule includes illustrative examples in Sec. Sec.  
701.4(c)(1)(iii) and 701.4(c)(2)(iv) to assist industry in classifying 
military export sales and offset transactions by NAICS codes.
    Previously, BIS required industry to classify offset transactions 
by broad industry classification and to provide a name and description 
of the military export sale. Firms were directed to the Standard 
Industrial Classification (``SIC'') codes for assistance in identifying 
an appropriate industry category for offset transactions. As NAICS is 
the standard industrial classification system used in the United States 
and officially replaced the SIC in 1997 (see 62 FR 17288, Apr. 4, 
1997), this change updates BIS's instructions to industry. This change 
allows BIS to gather more accurate information on military export sales 
and offset transactions and will enhance BIS's ability to assess the 
economic impact of offsets on the U.S. industrial base by allowing BIS 
to better utilize other data published by statistical agencies of the 
U.S. Government.
    This final rule eliminates the requirement, previously found in 
Sec.  701.4(e)(1)(iii) of the Offset Reporting Regulation, that 
companies report the names and titles of the signatories to offset 
agreements. BIS has determined that this information is not necessary 
for the preparation of BIS's annual report to Congress. Under the new 
Sec.  701.4(c)(1)(iv), companies are required to report only the 
identity of the foreign government agency or branch that is a signatory 
to the offset agreement.
    In order to clarify the individual status of performance measures 
and non-performance penalties, the final rule separates their reporting 
requirements by moving them from old Sec.  701.4(e)(1)(vii) to new 
Sec.  701.4(c)(1)(viii) and new Sec.  701.4(c)(1)(ix), respectively. 
This rule also includes lists of examples for each.
    In new Sec.  701.4(c)(2)(ii), this final rule requires companies to 
report for each offset transaction the date when the related offset 
agreement was signed. This data will allow BIS to better track the 
fulfillment of offset agreements and identify trends in offset 
transaction activity.
    This final rule revises examples of offset transaction categories. 
The section entitled ``Description of Offset Product/Service'' in the 
previous Offset Reporting Regulation has been replaced by new Sec.  
701.4(c)(2)(iii), entitled ``Offset Transaction Category.'' The 
categories of offset transactions listed as examples in the new section 
more accurately reflect the types of offset transactions that have been 
reported to BIS since 1994. For example, the category of ``cash 
payment'' has been removed, and the categories of ``licensed 
production,'' ``investment,'' and ``credit assistance'' have been 
added, as was an ``other'' category (for which the reporting company 
must include a description). The final rule makes one minor change in 
this section from the proposed rule. The category entitled ``overseas 
investment'' in the proposed rule has been renamed ``investment.'' BIS 
made this change because it is aware that there may be investment-
related activities for which U.S. firms claim offset credit that may 
not be accurately labeled as ``overseas investment.''
    Finally, this final rule adds new Sec.  701.6 to describe the 
penalties available under the Defense Production Act (50 U.S.C. App. 
2155) should companies not comply with this regulation. Willful 
violation of the Defense Production Act may result in punishment by 
fine or imprisonment, or both. The maximum penalty provided by the 
Defense Production Act is a $10,000 fine, or one year in prison, or 
both. The Government may also seek an injunction from a court of 
appropriate jurisdiction to prohibit the continuance of any violation 
of, or to enforce compliance with, the Defense Production Act.

V. Rulemaking Requirements

    1. This rule has been determined to be significant for purposes of 
Executive Order 12866.
    2. Notwithstanding any other provision of law, no person is 
required to respond to nor be subject to a penalty for failure to 
comply with a collection of information, subject to the requirements of 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (``PRA''), 
unless that collection of information displays a currently valid

[[Page 68140]]

Office of Management and Budget (``OMB'') Control Number. This 
regulation contains a collection previously approved by the OMB under 
control number 0694-0084, which carries a burden hour estimate of nine 
hours for a reporting firm to prepare and submit once per year. In 
addition, this final rule amends that collection for reporting on 
offset agreements and transactions by NAICS code, which carries an 
estimated additional burden of three hours for companies submitting 
annual reports to BIS.
    3. This rule does not contain policies with Federalism implications 
as that term is defined in Executive Order 13132.
    4. The Regulatory Flexibility Act (``RFA''), as amended by the 
Small Business Regulatory Enforcement Fairness Act of 1996 
(``SBREFA''), 5 U.S.C. 601 et seq., generally requires an agency to 
prepare a regulatory flexibility analysis of any rule subject to the 
notice and comment rulemaking requirements under the Administrative 
Procedure Act (5 U.S.C. 553) or any other statute, unless the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities. Under section 605(b) of the 
RFA, however, if the head of an agency certifies that a rule will not 
have a significant impact on a substantial number of small entities, 
the statute does not require the agency to prepare a regulatory 
flexibility analysis. Pursuant to section 605(b), the Chief Counsel for 
Regulations, Department of Commerce, certified to the Chief Counsel for 
Advocacy, Small Business Administration, that this rule will not have a 
significant impact on a substantial number of small entities. The text 
of that certification was printed in the preamble to the proposed rule 
(74 FR 19468, April 24, 2009) and it is not repeated here. No comments 
were received regarding the economic impact of this final rule. As a 
result, no final regulatory flexibility analysis was prepared.

List of Subjects in 15 CFR Part 701

    Administrative practice and procedure, Arms and munitions, Business 
and industry, Exports, Government contracts, Reporting and 
recordkeeping requirements.

0
For the reasons set forth in the preamble, the National Security 
Industrial Base Regulations (15 CFR parts 700-709) are amended as 
follows:

PART 701--[AMENDED]

0
1. The authority citation for part 701 is revised to read as follows:

    Authority:  50 U.S.C. App. 2099 and Executive Order 12919, 59 FR 
29525, 3 CFR, 1994 Comp. 901 and Executive Order 13286, 68 FR 10619, 
3 CFR, 2003 Comp. 166.


0
2. In Sec.  701.1, revise the last sentence in the section to read:


Sec.  701.1  Purpose.

    * * * Summary reports are submitted annually to Congress pursuant 
to Section 309 of the Defense Production Act of 1950, as amended.

0
3. In Sec.  701.2, revise paragraphs (f), (g), and (h) to read as 
follows:


Sec.  701.2  Definitions.

* * * * *
    (f) Offset Transaction--Any activity for which the U.S. firm claims 
credit for full or partial fulfillment of the offset agreement. 
Activities to implement offset agreements are categorized as co-
production, technology transfer, subcontracting, credit assistance, 
training, licensed production, investment, purchases and other. 
Paragraphs (f)(1) through (f)(8) of this section provide examples of 
the categories of offset transactions.
    (1) Example 1. Company A, a U.S. firm, contracts for Company B, a 
foreign firm located in country C, to produce a component of a U.S.-
origin defense article subject to an offset agreement between Company A 
and country C. The defense article will be sold to country C pursuant 
to a Foreign Military Sale and the production role of Company B is 
described in the Letter of Offer and Acceptance associated with that 
sale and a government-to-government co-production memorandum of 
understanding. This transaction would be categorized as co-production 
and would, like all co-production transactions, be direct.
    (2) Example 2. Company A, a U.S. firm, transfers technology to 
Company B, a foreign firm located in country C, which allows Company B 
to conduct research and development directly related to a defense 
article that is subject to an offset agreement between Company A and 
country C. This transaction would be categorized as technology transfer 
and would be direct because the research and development is directly 
related to an item subject to the offset agreement.
    (3) Example 3. Company A, a U.S. firm, contracts for Company B, a 
foreign firm located in country C, to produce a component of a U.S.-
origin defense article subject to an offset agreement between Company A 
and country C. The contract with Company B is for a direct commercial 
sale and Company A does not license Company B to use any technology. 
The transaction would be categorized as subcontracting and would, like 
all subcontracting transactions, be direct.
    (4) Example 4. Company A, a U.S. firm, makes arrangements for a 
line of credit at a financial institution for Company B, a foreign firm 
located in country C, so that Company B can produce an item that is not 
subject to the offset agreement between Company A and country C. The 
transaction would be categorized as credit assistance and would be 
indirect because the credit assistance is unrelated to an item covered 
by the offset agreement.
    (5) Example 5. Company A, a U.S. firm, arranges for training of 
personnel from Company B, a foreign firm located in country C. The 
training is related to the production and maintenance of a U.S.-origin 
defense article that is subject to an offset agreement between Company 
A and country C. The transaction would be categorized as training and 
would be direct because the training is directly related to the 
production and maintenance of an item covered by the offset agreement.
    (6) Example 6. Company A, a U.S. firm, contracts for Company B, a 
foreign firm located in country C, to produce a component of a U.S.-
origin defense article that is subject to an offset agreement between 
Company A and country C. The contract with Company B is a Foreign 
Military Sale and Company A licenses Company B to use Company A's 
production technology to produce the component. There is no co-
production agreement between the United States and country C. The 
transaction would be categorized as licensed production and would be 
direct because it involves the item covered by the offset agreement.
    (7) Example 7. Company A, a U.S. firm, makes an investment in 
Company B, a foreign firm located in country C, so that Company B can 
create a new production line to produce a component of a defense 
article that is subject to an offset agreement between Company A and 
country C. The transaction would be categorized as investment and would 
be direct because the investment involves an item covered by the offset 
agreement.
    (8) Example 8. Company A, a U.S. firm, purchases various off-the-
shelf items from Company B, a foreign firm located in country C, but 
none of these items will be used by Company A to produce the defense 
article subject to the offset agreement between Company A and country 
C. The transaction would be categorized as purchases and would, like 
all purchase transactions, be indirect.

[[Page 68141]]

    (g) Direct Offset--an offset transaction directly related to the 
article(s) or service(s) exported or to be exported pursuant to the 
military export sales agreement. See the examples illustrating offset 
transactions of this type in Sec. Sec.  701.2(f)(1), 701.2(f)(2), 
701.2(f)(3), 701.2(f)(5), 701.2(f)(6) and 701.2(f)(7) of this part.
    (h) Indirect Offset--an offset transaction unrelated to the 
article(s) or service(s) exported or to be exported pursuant to the 
military export sales agreement. See the examples illustrating offset 
transactions of this type in Sec. Sec.  701.2(f)(4) and 701.2(f)(8) of 
this part.

0
4. Section 701.4 is revised to read as follows:


Sec.  701.4  Procedures.

    (a) Reporting period. The Department of Commerce publishes a notice 
in the Federal Register annually reminding the public that U.S. firms 
are required to report annually on contracts for the sale of defense-
related items or defense-related services to foreign governments or 
foreign firms that are subject to offset agreements exceeding 
$5,000,000 in value. U.S. firms are also required to report annually on 
offset transactions completed in performance of existing offset 
commitments for which offset credit of $250,000 or more has been 
claimed from the foreign representative. Such reports must be submitted 
to the Department of Commerce no later than June 15 of each year and 
must contain offset agreement and transaction data for the previous 
calendar year.
    (b) Reporting instructions. (1) U.S. firms must only report on 
offset agreements they have entered into with a foreign customer. U.S. 
firms must report offset transactions that they are directly 
responsible for reporting to the foreign customer, regardless of who 
performs the transaction (i.e., prime contractors must report for their 
subcontractors if the subcontractors are not a direct party to the 
offset agreement).
    (2) Reports must be submitted in hardcopy to the Offset Program 
Manager, U.S. Department of Commerce, Bureau of Industry and Security, 
Room 3876, 14th Street and Constitution Avenue, NW., Washington, DC 
20230, and as an e-mail attachment to OffsetReport@bis.doc.gov. E-mail 
attachments must include the information in a computerized spreadsheet 
or database format. If unable to submit a report in computerized 
format, companies should contact the Offset Program Manager for 
guidance. All submissions must include a point of contact (name and 
telephone number) and must be submitted by a company official 
authorized to provide such information.
    (c) Reports must include the information described below. Any 
necessary comments or explanations relating to the information shall be 
footnoted and supplied on separate sheets attached to the reports.
    (1) Reporting on offset agreements. U.S. firms shall provide an 
itemized list of new offset agreements entered into during the 
reporting period, including the information about each such agreement 
described in paragraphs (c)(1)(i) through (c)(1)(ix) of this section.
    (i) Name of foreign country. Identify the country of the foreign 
entity involved in the military export sale associated with the offset 
agreement.
    (ii) Description of the military export sale. Provide a name and 
description of the defense article and/or defense service referenced in 
the military export sale, as well as the date (month and year) that the 
related offset agreement was signed.
    (iii) Military export sale classification. Identify the six-digit 
North American Industry Classification System (``NAICS'') code(s) 
associated with the military export sale. Refer to U.S. Census Bureau's 
U.S. NAICS Manual for a listing of applicable NAICS codes (http://
www.census.gov/epcd/www/naics.html). Paragraphs (c)(1)(iii)(A) through 
(c)(1)(iii)(E) of this section provide examples that illustrate how to 
select the appropriate NAICS code(s).
    (A) Example 1. Company A enters into an offset agreement associated 
with the sale of 24 fighter aircraft and guided missiles to country B. 
Fighter aircraft manufacturing is classified in the NAICS as NAICS 
336411, Aircraft Manufacturing. Guided missiles are classified in the 
NAICS as NAICS 336414, Guided Missile and Space Vehicle Manufacturing. 
This military export sale should be classified under NAICS 336411 and 
NAICS 336414.
    (B) Example 2. Company B enters into an offset agreement associated 
with the sale of a navigation system for a fleet of military aircraft 
to country C. Navigation system manufacturing is classified in the 
NAICS as NAICS 334511, Search, Detection, Navigation, Guidance, 
Aeronautical, and Nautical System and Instrument Manufacturing. This 
military export sale should be classified under NAICS 334511.
    (C) Example 3. Company C enters into an offset agreement associated 
with the sale of radio communication equipment to country D. Radio 
communication equipment is classified in the NAICS as NAICS 334220, 
Radio and Television Broadcasting and Wireless Communication Equipment 
Manufacturing. This military export sale should be classified under 
NAICS 334220.
    (D) Example 4. Company D enters into an offset agreement associated 
with the sale of 30 aircraft engines to country E. Aircraft engines are 
classified in the NAICS as NAICS 336412, Aircraft Engine and Engine 
Parts Manufacturing. This military export sale should be classified 
under NAICS 336412.
    (E) Example 5. Company E enters into an offset agreement associated 
with the sale of armored vehicles to country F. Armored vehicles are 
classified in the NAICS as NAICS 336992, Military Armored Vehicle, 
Tank, and Tank Component Manufacturing. This military export sale 
should be classified under NAICS 336992.
    (iv) Foreign party to offset agreement. Identify the foreign 
government agency or branch that is the signatory to the offset 
agreement.
    (v) Military export sale value. Provide the U.S. dollar value of 
the military export sale. Should the military export sale involve more 
than one NAICS code, please separately list the values associated with 
each NAICS code.
    (vi) Offset agreement value. Provide the U.S. dollar value of the 
offset agreement.
    (vii) Offset agreement term. Identify the term of the offset 
agreement in months.
    (viii) Offset agreement performance measures. Identify each 
category that describes the offset agreement's performance measures: 
best efforts, accomplishment of obligation, or other (please describe).
    (ix) Offset agreement penalties for non-performance. Identify each 
category that describes the offset agreement's penalties for non-
performance. For example, the agreement may include penalties such as 
liquidated damages, debarment from future contracts, added offset 
requirements, fees, commissions, bank credit guarantees, or other 
(please describe).
    (2) Reporting on offset transactions. U.S. firms shall provide an 
itemized list of offset transactions completed during the reporting 
period, including the elements listed in paragraphs (c)(2)(i) through 
(c)(2)(x) of this section for each such transaction (numerical 
estimates are acceptable when actual figures are unavailable; estimated 
figures shall be followed by the letter ``E'').
    (i) Name of foreign country. Identify the country of the foreign 
entity involved in the military export sale associated with the offset 
transaction.
    (ii) Description of the military export sale. Provide a name and 
description of the defense article and/or defense

[[Page 68142]]

service referenced in the military export sale associated with the 
offset transaction, as well as the date the offset agreement was signed 
(month and year).
    (iii) Offset transaction category. Identify each category that 
describes the offset transaction as co-production, technology transfer, 
subcontracting, training, licensing of production, investment, 
purchasing, credit assistance or other (please describe).
    (iv) Offset transaction classification. Identify the six-digit 
NAICS code(s) associated with the offset transaction. Refer to U.S. 
Census Bureau's U.S. NAICS Manual for a listing of applicable NAICS 
codes (http://www.census.gov/epcd/www/naics.html). Paragraphs 
(c)(2)(iv)(A) through (c)(2)(iv)(E) of this section provide examples 
that illustrate how to select the appropriate NAICS code in the 
instances described therein.
    (A) Example 1. Company A completes an offset transaction by co-
producing aircraft engines in country B. Aircraft engine manufacturing 
is classified in the NAICS as NAICS 336412, Aircraft Engine and Engine 
Parts Manufacturing. This offset transaction should be classified under 
NAICS 336412.
    (B) Example 2. Company B completes an offset transaction by 
licensing the production of automotive electrical switches in country 
C. Company B also assists in structuring a wholesale distribution 
network for these products. Automotive electrical switch manufacturing 
is classified in the NAICS as NAICS 335931, Current Carrying Wiring 
Device Manufacturing, and the wholesale distribution network is 
classified in the NAICS as NAICS 423120, Motor Vehicle Supplies and New 
Parts Merchant Wholesalers. This offset transaction should be 
classified under NAICS 335931 and NAICS 423120.
    (C) Example 3. Company C completes an offset transaction by 
transferring technology to establish a biotechnology research center in 
country D. Biotechnology research and development is classified in the 
NAICS as NAICS 541711, Research and Development in Biotechnology. This 
offset transaction should be classified under NAICS 541711.
    (D) Example 4. Company D completes an offset transaction by 
purchasing steel forgings from a steel mill in country E. Steel 
forgings are classified in the NAICS as NAICS 331111, Iron and Steel 
Mills. This offset transaction should be classified under NAICS 331111.
    (E) Example 5. Company E completes an offset transaction by 
providing training assistance services in country F to certain plant 
managers. Training assistance is classified in the NAICS as NAICS 
611430, Professional and Management Development Training. This offset 
transaction should be classified under NAICS 611430.
    (v) Offset transaction type. Identify the offset transaction as a 
direct offset transaction, an indirect offset transaction, or a 
combination of both.
    (vi) Name of offset performing entity. Identify, by name, the 
entity performing the offset transaction on behalf of the U.S. entity 
that entered into the offset agreement.
    (vii) Name of offset receiving entity. Identify the foreign entity 
receiving benefits from the offset transaction.
    (viii) Actual offset value. Provide the U.S. dollar value of the 
offset transaction without taking into account multipliers or 
intangible factors. Should the offset transaction involve more than one 
NAICS code, please list the U.S. dollar values associated with each 
NAICS code.
    (ix) Offset credit value. Provide the U.S. dollar value credits 
claimed by the offset performing entity, including any multipliers or 
intangible factors.
    (x) Offset transaction performance location. Name the country where 
each offset transaction was fulfilled, such as the purchasing country, 
the United States, or a third country.

0
5. Sec.  701.6 is added to read as follows:


Sec.  701.6  Violations, penalties, and remedies.

    (a) Willful violation of the Defense Production Act may result in 
punishment by fine or imprisonment, or both. The maximum penalty 
provided by the Defense Production Act is a $10,000 fine, or one year 
in prison, or both.
    (b) The Government may seek an injunction from a court of 
appropriate jurisdiction to prohibit the continuance of any violation 
of, or to enforce compliance with, the Defense Production Act and this 
regulation.

    Dated: December 18, 2009.
Matthew S. Borman,
Deputy Assistant Secretary for Export Administration.
[FR Doc. E9-30488 Filed 12-22-09; 8:45 am]

BILLING CODE 3510-JT-P
