Many countries have laws governing the export, re-export, and transhipment of controlled goods and items (including information). The United States has the toughest requirements, which results in companies shaping their export control compliance program so it conforms to U.S. legislation.
Studies indicate barely 50 per cent of exporting companies subject to the legislation have a full export compliance program in place. This leaves companies and their management and directors exposed to penalties, fines, and prison terms that have been dramatically rising — including statutory sanctions, seizure and forfeiture, cross-debarment, denial of licences or approvals, suspensions of the right to contract with the United States Government, and the ultimate sanction of being barred from carrying on business in the U.S. altogether.
Small and medium-sized firms claim to have difficulty introducing compliance programs because of resource constraints, and their sense that checks and balances will choke the supply chain. This view is somewhat surprising given there are remarkably good software systems on the market that make compliance straightforward. In fact, these databases tend to accelerate product delivery and dramatically improve record-keeping.
Online training and compliance certification, which teaches employees their legal obligations as well as certifies on a regular basis their obligations are understood and being complied with, are also available to exporters.
Having an effective export compliance program in place is a mitigating factor if a violation does occur. Companies that stand accused of a violation of U.S. export laws will tell you it is not a pleasant experience. Senior enforcement officers often have military backgrounds and will come at you like a drill sergeant, literally. Having a program in place is at least half the battle.
The program can be broken down into key components.
The U.S. government has extraterritorial reach to control U.S. exports, and to add an additional level of complexity into the mix, the legal framework falls under the purview of multiple government agencies.
The Export Administration Regulations, which is administered by the Department of Commerce’s Bureau of Industry and Security, regulates the export (and re-export from third countries) of commercial goods and some items that can have a military application (“dual use”). The EAR can require exporters to obtain a licence before exporting controlled items to specific destinations.
The Department of State’s Directorate of Defense Trade Control regulates the export and re-export of military use items, which are classified on the United States Munitions List, through the International Traffic in Arms Regulations. U.S. exporters, manufacturers, and brokers of USML items must register with DDTC. The Department of State also maintains lists of prohibited parties it is illegal to export or re-export certain military goods and items to. Note the term “item” is defined very broadly in export control legislation and includes software, blueprints, schematics, and a wide variety of other types of information.
The Department of Treasury’s Office of Foreign Assets Control administers and enforces economic sanctions to further foreign policy and national security aims. These sanctions can be against organizations, individuals, countries, or actions and can prohibit U.S. persons from exporting, importing, financing, as well as merely facilitating transactions to the foregoing.
The U.S. government has several lists of businesses, individuals, and organizations with which U.S. persons cannot export to or do business (denied persons and denied entities, and understandably the lists are dynamic and change regularly).
Anti-boycott regulations prohibit exporters from participating in boycotts against certain countries and also require firms to report boycott requests to the U.S. government.
Companies are often caught off guard by the deemed export rules. The release of controlled technology to a company’s own employees in the U.S. who are nationals of a country to which the export of the technology is controlled is deemed to be the equivalent of exporting the technology to his or her country of nationality (in other words, a violation). A release is considered to take place if the technology is made available to the foreign national for visual inspection (such as reading technical specifications, plans, blueprints, etc.), when exchanged orally, or when technology is made available to the employee by practice or application.
In addition to having the appropriate tools in place, companies are required to have a designated export compliance officer with overall accountability with respect to compliance.
Notwithstanding the automated screening provided by the compliance database, judgment is still required to ensure nothing slips through the cracks. U.S. legislation requires companies to conduct due diligence and ask a number of questions to avoid engaging in business with prohibited persons or places. Legislation requires organizations consider what is being shipped, who the product or item is being shipped to, where it is being shipped to, who the end-user will be, and what the end-use will be when determining whether the transaction is authorized by U.S. law. The BIS and DDTC web sites provide checklists of questions to consider (“red flags”).
Destination control statements are required on controlled export shipping documents. The statement is used to notify carriers and foreign parties the shipment has only been licensed for particular destinations.
An Electronic Export Information form must be filed for all U.S. shipments to foreign countries and is used by the U.S. Census Bureau for statistical and export control purposes.
Export regulations require complete and accurate records are kept for a period of at least five years from the date of export.
The consequences of a transgression can be financially catastrophic. A violation may mean your client or its management or directors may be debarred and required to disclose in future to customers and suppliers they have been debarred in the past.
Investigations by enforcement officials are comprehensive and can be drawn out. If you suspect your client is exporting controlled products or items, or there is reason to believe as additional features and functionality is added to its products it may cross the line making it subject to export control laws, the appropriate tools can make compliance a fairly painless experience and may in fact help streamline and accelerate the supply chain, including record-keeping.