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

Summary

The Bureau of Industry and Security (BIS) is proposing to amend 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) to update and provide clarification with regard to the information U.S. companies are required to submit each year to BIS to support the preparation of the annual report to Congress on offsets in defense trade.

Full text

SUMMARY: The Bureau of Industry and Security (BIS) is proposing to 
amend 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) to update and provide clarification with regard to 
the information U.S. companies are required to submit each year to BIS 
to support the preparation of the annual report to Congress on offsets 
in defense trade.

DATES: Comments must be received by June 29, 2009.

ADDRESSES: You may submit comments, identified by RIN 0694-AE40, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: OffsetReport@bis.doc.gov. Include ``RIN 0694-
AE40'' in the subject line of the message.
     Fax: 202-482-5650.
     Mail/Hand Delivery: Offset Program Manager, U.S. 
Department of Commerce, Bureau of Industry and Security, Office of 
Strategic Industries and Economic Security, Room 3876, 14th Street and 
Pennsylvania Avenue, NW., Washington, DC 20230, ATTN: RIN 0694-AE40.

FOR FURTHER INFORMATION CONTACT: Ronald DeMarines, Office of Strategic 
Industries and Economic Security, tel. (202) 482-3755, e-mail 
rdemarin@bis.doc.gov. SUPPLEMENTARY INFORMATION:

Background

    The Defense Production Act Amendments of 1992 required the 
Secretary of Commerce to promulgate regulations for U.S. firms to 
furnish information regarding 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. 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) (hereinafter, the ``Offset Reporting Regulation'') was first 
published in 1994. The information provided by U.S. firms pursuant to 
the Offset Reporting Regulation is aggregated and used to determine the 
impact of offset transactions on the defense preparedness, industrial 
competitiveness, employment, and trade of the United States. Summary 
reports are submitted annually to the Congress pursuant to Section 309 
of the Defense Production Act of 1950, as amended.

Reasons for the Changes Proposed by This Rule

    The changes proposed in this rule are a result of an internal BIS 
review of the data that has been collected in the past pursuant to the 
Offset Reporting Regulation. The changes in this proposed rule clarify 
the information BIS is seeking from companies. BIS anticipates that 
these changes will lead to less ambiguity and more consistency in 
submissions from industry and thus will allow BIS to improve the 
assessment of the economic effects of offsets on defense trade.
    This proposed rule is also in response 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 that the type of data collected from prime 
contractors limits the ability of BIS to effectively analyze the impact 
of offsets on the U.S. economy. Consequently, the GAO recommended that 
Commerce update its offset reporting regulation to request more precise 
information on the industry sectors that offset activity was occurring 
in from prime contractors, in order to improve the assessment of the 
economic effects of offsets.
    The revisions proposed in this rule are not anticipated to impose 
significant new burdens on parties subject to the reporting 
requirements of the Offset Reporting Regulation.

Specific Changes That Would be Made by This Proposed Rule

    This rule would amend 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 current 
Sec.  701.1 suggests only that Commerce will be submitting reports in 
the future.
    In addition, this rule would amend certain definitions in Sec.  
701.2 of the Offset Reporting Regulation to reflect BIS's 15-year 
experience in preparing the report to Congress. Specifically, the 
illustrative list of activities listed in the definition of ``offset 
transaction'' in Sec.  701.2(f) would be updated. Activities not 
commonly reported to BIS would be removed (i.e., countertrade, barter, 
counterpurchase, and buy back) and replaced with activities that are 
frequently reported (i.e., credit assistance, training, and purchase). 
This list remains illustrative.
    This rule also would amend the definitions for ``direct offset'' 
and ``indirect offset'' in Sec.  701.2(g) and Sec.  701.2(h) of the 
Offset Reporting Regulation. The current references to ``defense 
articles'' and ``defense goods'' in the definitions of ``direct 
offset'' and ``indirect offset'' would be deleted 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)). Companies regularly report information to Commerce on 
offset transactions that do not involve defense articles or defense 
services. This change would clarify the intent of the reporting 
requirement and would reflect current reporting practices. Companies 
are required to keep records of each offset transaction for which 
offset credit is claimed, so this information is readily available to 
firms that are required to report under this section. The definitions 
would further be clarified and examples would be provided to illustrate 
the differences between direct and indirect offsets.
    This rule would modify Sec.  701.4 of the Offset Reporting 
Regulation by reordering the section in a logical fashion, beginning 
with the reporting period and date by which reports shall be submitted 
to BIS, followed by updated reporting instructions, and finally the 
contents of the required reports to BIS related to offset agreements 
and offset transactions concluded during the reporting period. BIS 
feels that this reordering will make it easier for those affected by 
this regulation to identify all of the information they need to submit 
timely and accurate reports. This section would also note that BIS 
publishes an annual notice in the Federal Register to remind companies 
of their responsibility to report on offset agreements and transactions 
and the deadline.
    This rule would update the reporting instructions described in 
Sec.  701.4(b) of the Offset Reporting Regulation regarding the address 
to which reported offsets data should be submitted, including through 
the addition of a new e-mail address. Reports are now requested to be 
submitted in both hardcopy format and electronic format when possible. 
This rule would also delete references to outdated software and 
hardware formats described in Sec.  701.4(c) of the Offset Reporting 
Regulation.
    The provisions of the Offset Reporting Regulation currently 
describing the contents of reports on offsets transactions (Sec.  
701.4(d)) and offsets agreements entered into (Sec.  701.4(e)) would 
also be reordered so that offset agreement reporting requirements would 
be described in Sec.  701.4(c)(1) and then offset transaction reporting 
requirements would be described later in Sec.  701.4(c)(2). BIS 
believes it makes more sense to first describe reporting requirements 
for offsets agreements, and then describe reporting requirements for 
offsets transactions taken pursuant to offsets agreements. In addition, 
terminology would be updated and revised to ensure consistency 
throughout Part 701. BIS had used the term ``weapon system'' in Sec.  
701.4(d) and Sec.  701.4(e). The proposed rule would replace the term 
``weapon system'' with ``military export sale,'' a defined term in 
Sec.  701.2, which BIS believes is a more appropriate term in Sec.  
701.4 because not all reported defense sales with offset agreements are 
of weapon systems. Further, additional clarifying changes would be made 
to the descriptions of information required to be reported under Sec.  
701.4 of the Offset Reporting Regulation.
    This proposed rule would eliminate the requirement, currently 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 believes that this information is 
not necessary for the preparation of BIS's annual report to Congress. 
Under proposed Sec.  701.4(c)(1)(iv), companies would instead be 
required to report only the identity of the foreign government agency 
or branch that is a signatory to the offset agreement.
    The proposed rule would also separate the reporting requirements on 
offset agreement performance measures and non-performance penalties 
currently found in Sec.  701.4(e)(1)(vii) of the Offset Reporting 
Regulation. The current section contemplates that non-performance 
penalties would be included in a description of performance measures. 
However, BIS experience has revealed that such penalties are best 
treated as a separate category. Accordingly, Sections 701.4(c)(1)(viii) 
and 701.4(c)(1)(ix) in the proposed rule clarify the reporting 
requirements concerning offset agreement performance measures and non-
performance penalties respectively and include lists of examples for 
each based on data collected during the past 15 years.
    The proposed rule would 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 (see proposed Sec.  701.4(c)(1)(iii)), and to 
each offset transaction reported under the Offset Reporting Regulation 
(see proposed Sec.  701.4(c)(2)(iv)). NAICS is the standard industrial 
classification system used in the United States. In the current 
regulation, BIS asks industry to classify offset transactions by broad 
industry classification and provide a name and description of the 
military export sale. Firms are directed to the Standard Industrial 
Classification (SIC) codes for assistance in identifying an appropriate 
industry category for offset transactions. The SIC has been replaced by 
the NAICS. (See 62 FR 17288, Apr. 4, 1997.)
    All companies that conduct business with the U.S. Government are 
required to classify their products and services, including those 
regularly involved in military export sales reported to Commerce, in 
accordance with the NAICS (See Central Contractor Registration 
Handbook, http://www.ccr.gov). The U.S. Census Bureau posts 
instructions on its Web site on how to properly classify products and 
services in accordance with the NAICS. Requiring respondents to 
classify military export sales and offset transactions by NAICS codes 
will ensure that submissions under the Offset Reporting Regulation are 
prepared in a consistent manner. This change will also allow BIS to 
gather more accurate information on military export sales and offset 
transactions because NAICS is more specific 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. BIS has included 
illustrative examples in Sec.  701(c)(1)(iii) and Sec.  701(c)(2)(iv) 
of the proposed rule on classifying military export sales and offset 
transactions by NAICS codes.
    This proposed rule also would require companies to report for each 
offset transaction the date when the related offset agreement was 
signed (Sec.  701.4(c)(2)(ii)). This data will allow BIS to better 
track the fulfillment of offset agreements and identify trends in 
offset transaction activity. Companies involved in defense exports and 
offset agreements are required to keep records of each offset 
transaction for which offset credit is claimed so they can accurately 
account for their obligations, so this information is readily available 
to firms reporting under this section.
    The proposed rule also would revise examples of offset transaction 
categories. Section 701.4(d)(1)(vii) in the current regulation, 
entitled ``Description of Offset Product/Service'', would be replaced 
by 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. In particular, the category of 
``cash payment'' will be removed, and the categories of ``licensed 
production'', ``overseas investment'', and ``credit assistance'' will 
be added, as will a suggestion that other categories could be labeled 
``other'' and accompanied by a description.
    Finally, this rule would add a new section, Sec.  701.6, to the 
Offset Reporting Regulation, to describe the penalties available under 
the Defense Production Act 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.

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 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 
proposed rule will amend that collection for reporting on offset 
agreements and transactions by NAICS code, which carries an estimated 
burden of three hours for companies submitting annual reports to BIS. 
The 60-day comment period on this proposed rule will also serve as the 
public comment period regarding the burden of the collection of 
information associated with preparation and submission of offset 
agreements and transactions by NAICS code. Send comments regarding this 
burden estimate or any other aspect of this collection of information, 
including suggestions for reducing the burden, to Jasmeet K. Seehra, 
Office of Management and Budget, by e-mail at jseehra@omb.eop.gov or by 
fax to (202) 395-7285 and to the Offsets Program Manager, Bureau of 
Industry and Security, Department of Commerce, as indicated in the 
ADDRESSES section of this proposed rule.
    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 of Regulations, Department of Commerce, certified to the 
Chief Counsel for Advocacy, Small Business Administration, that this 
proposed rule, if promulgated, will not have a significant impact on a 
substantial number of small entities for the reasons explained below. 
Consequently, BIS has not prepared a regulatory flexibility analysis.
    Small entities include small businesses, small organizations and 
small governmental jurisdictions. For purposes of assessing the impacts 
of this proposed rule on small entities, small entity is defined as: 
(1) A small business according to RFA default definitions for small 
business (based on SBA size standards), (2) a small governmental 
jurisdiction that is a government of a city, town, school district or 
special district with a population of less than 50,000, and (3) a small 
organization that is any not-for-profit enterprise which is 
independently owned and operated and is not dominant in its field. BIS 
has determined that this final rule would not affect any of these 
categories of small entities.
    Since BIS began collecting in 1994, virtually all of the 
submissions that it received are from a small number of very large 
companies that do not meet the SBA size standards for a small business. 
Since 1994, the number of companies that submit data to BIS pursuant to 
this regulation has been less than 25 per year. On average, the 
companies that submit data to BIS have annual revenues well in excess 
of $1 billion. For instance, in the most recent year in which BIS 
collected data pursuant to this regulation, only four of the 25 
companies that submitted data had reported revenue of less than $1 
billion with the lowest revenue at $120 million. According to SBA's 
size standards, the maximum annual revenue for a small business is 
$33.5 million and the maximum number of employees is between 500 and 
1,000.
    Some small businesses likely are involved in fulfilling offset 
obligations by acting as subcontractors to the large prime contractors 
that report directly to BIS, meaning that they report indirectly to BIS 
pursuant to this section. However, this proposed rule will not 
significantly increase the burden on such companies. The information 
collected by BIS pursuant to this section is already collected by such 
small businesses so that they can accurately account for their 
obligations under the offset agreement and report them to the prime 
contractor. The only new reporting requirement in this proposed rule is 
the classification of offset agreements and transactions by NAICS code. 
Even subcontractors involved in the manufacture of defense articles are 
likely to conduct business with the U.S. government and, therefore, be 
required to classify their products and services, in accordance with 
the NAICS (See Central Contractor Registration Handbook, http://www.ccr.gov). In addition, the U.S. government takes steps to 
facilitate selection of the correct NAICS code by private parties. The 
U.S. Census Bureau posts instructions on its Web site on how to 
properly classify products and services in accordance with the NAICS. 
BIS has included illustrative examples in Sec.  701(c)(1)(iii) and 
Sec.  701(c)(2)(iv) on classifying military export sales and offset 
transactions by NAICS codes.
    In addition, small governmental entities and small organizations, 
not being businesses, are not likely to be involved in international 
defense trade, and would therefore have no reason to submit data to BIS 
pursuant to this regulation. Consequently, this proposed rule, if 
promulgated, will not have a significant impact on a substantial number 
of small entities.

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.

    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

    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.

    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.
    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 include co-production, 
technology transfer, subcontracting, credit assistance, training, 
licensed production, overseas investment, and purchases.
    (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. For example, a U.S. firm 
subcontracting with a foreign firm to supply a subassembly for a 
defense article exported pursuant to that military export sales 
agreement could be a direct offset.
    (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. For example, a U.S. firm co-producing, 
with a foreign government or foreign firm, an item unrelated to an 
article or service exported pursuant to that military export sales 
agreement could be an indirect offset.
    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 for 
offset agreement and transaction data for the previous calendar year.
    (b) Reporting instructions.
    (1) To avoid double counting, firms shall report only offset 
transactions that they are directly responsible for reporting to the 
foreign customer (i.e., prime contractors shall 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 Pennsylvania 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) of the 
related offset agreement.
    (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 
United States NAICS Manual for a listing of applicable NAICS codes 
(www.census.gov/epcd/www/naics.htmll). Paragraphs (c)(1)(iii)(A) through 
(c)(1)(iii)(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 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 North American 
Industry Classification System (NAICS) as NAICS 336411, Aircraft 
Manufacturing. Guided missiles are classified in the NAICS as NAICS 
336414, Guided Missile and Space Vehicle Manufacturing.
    (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.
    (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.
    (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.
    (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.
    (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 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 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 (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 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: co-production, technology transfer, 
subcontracting, training, licensing of production, overseas investment, 
purchasing, credit assistance or other (please describe).
    (iv) Offset transaction classification. Identify the six-digit 
North American Industry Classification System (NAICS) code(s) 
associated with the offset transaction. Refer to U.S. Census Bureau's 
United States 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.
    (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.
    (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.
    (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.
    (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.
    (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 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 values associated with each NAICS code.
    (ix) Offset credit value. Provide the dollar value credits claimed 
by the offset performing entity, including any multipliers or 
intangible factors. Should an offset transaction involve more than one 
NAICS code, please list the values associated with each NAICS code.
    (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.
    5. Section 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: April 21, 2009.
Matthew S. Borman,
Acting Assistant Secretary for Export Administration.
[FR Doc. E9-9514 Filed 4-28-09; 8:45 am]
BILLING CODE 3510-JT-P  

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