Many exporters are unaware
of the amount and nature of export regulations.
It is a trap for the unwary, and post 9-11 an
aggressively pursued area of the law. In 1775
Continental Congress outlawed the exportation
of goods to Great Britain which was the beginning
of export controls in the U.S., Export controls
have come a long way since then and exist for
three main reasons, national security, foreign
policy, or short supply. The U.S. Department of
Commerce1 is primarily responsible
for administering and enforcing export controls
called “Export Administration Regulations”
(EAR) which provides controls on the use or products,
types of export licenses required, types of commodities
and technical data under export control, U.S.
person activities and it addresses the various
anti boycott laws.2 The definition
of “export” under the EAR is far broader
than the standard dictionary definition of the
export “To ship an item away from a country
for sale to another country”3.
It is the actual shipment or transmission of items
subject to the EAR out of the U.S; or release
of certain technology or software subject to the
EAR to a foreign national. The Bureau of Industry
and Security (BIS), a division of the United States
Department of Commerce, oversees and enforces
the “Export Administration Regulations”
(EAR). It is divided into two branches, Export
Administration and Export Enforcement4.
BIS has done an admirable
job in an attempt to simply the compliance by including
graphs and charts, and automating the license application
process5 . However, as you will see it
is still a maze to determine who’s is on first,
and who is on second, when it comes to complying
with the various regulations. To start with, an
exporter needs to answer the following questions
for each product shipment:
1. What is the
item?
2. Where is it going?
3. Who will receive it?
4. What will they do with it?
5. What else does the end user do?
6. Who are the people and businesses involved
in the transaction?
Under the EAR products
must be defined and assigned a special number called
an “Export Control Classification Number”
or (ECCN). It is an alpha numeric code on the Commerce
Control List (CCL). The list consists of ten categories
with five product subgroups. Once found, the particular
product must be cross referenced with the Commerce
Country Chart which defines the reason for a control
for a particular country. Products will fall into
three categories “No License Requirement”,
“License Exception”, or “License
Requirement”. However, just matching the EAR
number to the country list is not enough. If the
product is going to a composite manufacturer and
that manufacturer is selling to a third country
that is on the control list you are to apply the
most restrictive regulations of the two. For example,
if you are shipping to country “A” which
is not on a restricted list, but country “A”
is assembling a packaged product which includes
your product to ship to country “B”
which is on a control list the government expects
the exporter to abide by the restrictions for country
“B” if the restrictions are more restrictive.
But, you’re still not done yet, approval for
shipment can depend upon who the end user is and
the use of the product.
BIS maintains lists
of people and businesses that the U.S. government
has determined, for purposes of national security
that you cannot “export”. BIS have four
lists, “Denied Persons List”, “Unverified
List,” “Entity List” and “Country
Code List”. The exporter must check the people
to whom you are selling to or through, where you
are selling to, the purpose of the product purchase,
and whether or not is a transfer point for further
sale to a person or country that is restricted.
The “Denied Persons List” is a list
of people who are terrorists or bad persons of some
sort. You cannot sell to them no matter what. “Unverified
Persons List” is a list of questionable persons
as determined by the U.S. government that you cannot
sell to because they are under suspicion. BIS will
send agents around the world to check out recipients
of products that are “sensitive” products,
like “Dual Use Products,” i.e. an inquiry
was attempted by a BIS agent who traveled to Pakistan,
the point of final destination for a product that
required a license, and it was learned that there
was never a business like that, at that location,
but the address was used for the order so persons
involved made the unverified list. “Dual Use”
products are products that are designed for commercial
use but may have military uses6. For
example, a sophisticated commercial pump could be
a pressure chamber for a rocket, hence the term
“Dual Use”. The bad guys of the world
will frequently attempt to construct a weapon out
of commercial products; somebody needs to be watching
and that is BIS. The “Denied Persons List”
is a list of known bad persons and selling to them
is definitely out of the question. There is also
an “Entity List.” An “Entity List”
is a list of businesses around the world that are
not allowed to receive certain products as determined
by the U. S. government. Lastly, for BIS, there
is the “Country Code List.” The “Country
Code List” will define restrictions for certain
products as organized under the Export Control Classification
Number or (ECCN). Had enough of the lists? That
is not all, you may not be able to sell those ginseng
knives yet, there is more!
There are other government
agencies and departments that get involved in export
controls due overlapping responsibilities. The U.S.
Department of Treasury7 maintains a “Specially
Designated Nationals and Blocked Persons List,”
the U.S. Department of Defense maintains a “U.S.
Munitions List,” and the U.S. Department of
State, pursuant to the authority delegated by the
President of the U.S. has the Office of Defense
Trade Controls (ODTC) in the State Department’s
Bureau of Political-Military Affairs which administers
the International Traffic in Arms Regulations (ITAR)8.
You could be in compliance with BIS on one category
but out of compliance with the U.S. Treasury Department,
DOD or State Department, simply because of the persons,
or businesses with whom you are dealing. There are
no combined lists. There are a variety of private
businesses that attempt to merge all of these lists
together (none comprehensively); daily monitoring
is critical. Detailed records are a requirement
and the liability rests with the exporter.
Because “export”
under the code is broadly defined the restrictive
lists apply to not only to the sale of products
but to the “activities” involved in
the transactions in and out of the U.S.9 For example,
if an exporter had a prospective customer in country
“A” who would like to come over and
study the product before the purchase you need to
check if he or she, or the business they are representing,
is on one of the lists. If they are, and you given
them grand tour of your factory, you have just violated
the law and could be subject to civil fines and
criminal prosecution. The rationale extends to foreign
trade shows; if a license is required you must get
a license to take the product to the trade show.
The regulations are to restrict “exports”,
the conveying of product and/or product knowledge.
Practitioners should
also be mindful of a significant area of the law
that overlaps into export matters the “Foreign
Corrupt Practices Act”, (FCPA)10.
The FCPA contains limitations on US investments
abroad involving payments to foreign government
officials for the purposes of obtaining or retaining
business. At first blush, you could say we are not
selling to governments but to private parties so
this law does not apply. However, are your sales
agents or the distributor of yours in a foreign
country paying government persons to facilitate
the sale, if so, you can be held criminally and
civilly liable for violations of the FCPA. The FCPA
is not part of the BIS administration or enforcement
activity.
Failure to properly
handle the broadly defined “export”
can cause significant exposure to civil fines and
criminal penalties. Compared to other law enforcement
agencies the enforcement side of the BIS is relatively
small but their bite can be bigger than their bark.
The operation is divided into nine satellite offices,
one of which is in Miami, Florida, and five overseas
Export Control Attaches. Section 15 C.F.R. 764 Enforcement
and Protective Measures informs the practitioner
of the types of violations, sanctions, and administrative
measures related thereto. Violations include Engaging
in prohibited conduct; Causing, aiding, or abetting
a violation; Solicitation and attempt; Conspiracy;
Acting with knowledge of a violation; Possession
with intent to export illegally; Misrepresentation
or concealment of facts; Evasion; Failure to comply
with reporting and recordkeeping requirements; License
Alterations; and Acting contrary to the terms of
a denial order. Sanctions include a civil penalty
from $10,000.00 to $100,000.00 for each violation,
denial of export privileges, exclusion form the
practice i.e. lawyers, accountants, freight forwarders...
Criminal sanctions include fines of up to five times
the value of the exports or assessment of as much
as $1,000,000.00 depending upon the various circumstances.
For those of us who litigate BIS has a defined administrative
hearing procedure for civil violations which includes
fundamental procedural requirements11.
Criminal violations are prosecuted by the respective
U.S. Attorney.
In conclusion remember
“exports” under the Bureau of Industrial
Security is more than the sale of goods to another
country. It includes the product, the place of end
use, the people involved, the businesses, and foreigners
having access here in the U.S. to products and technology
that are restricted. To aid your clients develop
a good internal compliance policy. It will help
mitigate damages if a violation occurs, and don’t
forget about the five year record retention requirement12.
[1]
Currently governed by the Export Administration
Act (EAA) of 1969 cite which has been extended by
Presidential Executive Order (there are other overlapping
laws).
[2] 15 CFR 730-774 covers the regulations, and see
15 CFR 730.1 What These Regulations Cover, and 15CFR
730.5 Coverage of more than exports.
[3] Dictionary of International Trade, 5th Edition,
World Trade Press 2002.
[5] See 15 CFR 732 Steps for using the EAR. The
automated system is called the Simplified Network
Application Processing (SNAP).
[6] See 15 CFR 730.3 Dual Use Exports
[7] The U.S. Department of Treasury operates the
Office of Foreign Assets Control (OFAC) controlling
exports, imports, and financial matters with other
countries.
