8 Steps for Export Compliance

An Expert's View about Export Compliance in the United States

Last updated: 22 Sep 2011

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In many respects, export controls are just another cost of doing business in today’s global marketplace. They cannot be ignored. Responsible exporters must be dedicated and fully commit their company to compliance. They must stay informed of changes to the export control regulations, follow other laws applicable to their international operations, and adjust each compliance step as needed. While this may all seem very complex, the eight steps described in this article present an organized approach to export controls that can minimize risks and help keep a company’s foreign markets open.

Eight Steps for Export Controls Compliance Matthew A. Goldstein In evaluating international trade Summary of U.S. Export Controls opportunities, many United States Export controls promote U.S. national security exporters do not properly address interests and foreign policy, often at the cost of the challenge of entering foreign private enterprise. They restrict exports from markets. This is particularly true the U.S. and re-exports from one foreign in considerations of domestic laws location to another of U.S. origin commodities, that restrict exports, known as software, and technology (collectively referred ?export controls.? to as ?items?). Export controls also restrict the There are many criminal prosecutions against provision of certain services to foreign persons exporters for violations of export controls. In a and to foreign destinations. They require recent case, the defendant argued that he was licenses and other forms of advance approval, not responsible for failing to comply with the submission of certain applications, forms of export controls because these laws are too agreements, reports on activities, and the complex to understand. The court disagreed maintenance of these and other types of and affirmed the conviction. But it recognized records related to exporting and related that ?putting together the pieces of this activities. regulatory puzzle is not easy.? The scope of items and services restricted by Faced with the daunting complexity of export export controls is very broad, complex, and controls, some companies limit the availability constantly changing. Some of the controls of their products abroad or decide to forego come as no surprise. For example, the international opportunities entirely. At their implementing regulations restrict exports of own peril, other companies enter foreign military items, temporary imports of military markets without knowledge or any care of items, exports of nuclear materials and export controls. technology, and activities by U.S. persons related to the proliferation of nuclear, Eliminating market access without a full chemical, and biological weapons, missile understanding of the law is hasty and unwise. technology, and maritime nuclear propulsion Similarly, failing to assess applicable laws systems. They also restrict activities of U.S. before entering foreign markets risks heavy and foreign persons involved in brokering fines, lengthy terms of imprisonment, and military items and services related to military other penalties. While export controls are items. indeed complex, assessing eight preliminary steps to compliance is the proper approach. Copyright 2011 Matthew A. Goldstein, PLLC. All Rights Reserved. In perhaps their clearest restrictions, export Disclosures of export-controlled information to control regulations require adherence to foreign nationals can occur visually, orally, or various U.S. Government lists of prohibited through the application of personal knowledge parties. These are blacklists with names and or technical experience. For instance, showing addresses of narcotics traffickers, weapons blueprints to a foreign national or allowing a proliferators, known and suspected terrorists, foreign national to simply see a production line members of oppressive regimes, known and at a manufacturing plant in the U.S. would be suspected violators of export control considered an export to the foreign national?s regulations, and other bad guys with whom country of nationality if the viewing reveals dealings are severely restricted and, in most technical information. Similarly, disclosures of cases, altogether prohibited. this information by electronic mail, in-person at meetings, or on the telephone also constitute Nevertheless, many of the regulations are exports regardless of whether the foreign surprising because they restrict exports of not national was in the U.S. or in a foreign country just military items, but also restrict exports of a when they see the information. In one of the broad scope of commercial items, to include definition?s broadest applications, an export certain off-the-shelf valves, gauges, electronics, can be found by merely making controlled computers, optics, sensors, software, and other information available to a foreign person on a items of a seemingly commercial nature. Many computer network. of these items do not have to be solely of U.S. origin to be subject to control. In fact, among their most surprising aspects, export controls The Regulations and Agencies apply not only to exports of items from the U.S., but they also apply to exports from Many statutes and regulations address export foreign countries that involve foreign-produced controls. These include those safeguarding items containing more than a de minimus national security and the various trade amount of U.S. origin content; and they apply sanctions that form an integral part of U.S. to foreign produced items that are direct foreign policy. Of all these, the three primary products of U.S. technology or software. U.S. export control regulations most commonly encountered in everyday trade are the Definitions for what constitute ?exports? and International Traffic in Arms Regulations other key terms under the regulations are very (?ITAR?), administered by the Department of broad. An export means sending an export- State Directorate of Defense Trade Controls; controlled item (or items) outside the U.S. or the Export Administration Regulations disclosing export-controlled information inside (?EAR?), administered by the Department of or outside the U.S. to a foreign national in any Commerce Bureau of Industry and Security; manner. Accordingly, there are many actions and the Foreign Assets Control Regulations that are considered exports. administered by the Department of Treasury - 2 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. Office of Financial Assets Control. Other EIGHT STEPS TO COMPLIANCE regulations may apply to a particular export or service. These include the regulations ONE Learn the Rules administered by the Department of Energy, the Nuclear Regulatory Commission, the Food and TWO Determine Jurisdiction and Drug Administration, and the U.S. Patent and Classification Trademark Office. THREE Register as Required At times, the agencies share overlapping jurisdiction and a license may be required from FOUR Screen Each Transaction more than one agency for the same export, FIVE Obtain All Necessary service, or other activity. Also, each agency?s Authorizations regulations set forth their own prohibitions, requirements, and processes. At times, this SIX Make and Keep Records and maze of regulatory red tape seems unfair to Reports companies looking to conduct legitimate business abroad. However, fair or not, Article I SEVEN Implement a Written Compliance Section 8 of the Constitution provides Congress Program with the power to regulate trade with other EIGHT Monitor Compliance countries. Sanctions for failures to abide by this power are significant. Violators face seizures of their products by U.S. STEP ONE Customs agents, the loss of export privileges, fines that can skyrocket into millions of dollars, Learn the Rules lengthy terms of imprisonment, and other Step One is to learn the rules. Same as for any penalties. These official sanctions, as well as other aspect of your business, you must learn the threat of bad publicity, the loss of clients, and understand the scope of government and the duty of being a good corporate citizen, regulations applicable to your international are all reasons why an exporter must learn the activities. Of course, in conducting regulations and comply with them. Given all international trade, this will involve more than this, what preliminary steps can you take for just U.S. export control regulations. Other U.S. export compliance? laws, such as antiboycott laws, restrictions on financial transactions with prohibited parties, asset blocking statutes, the Foreign Corrupt Practices Act, trade agreements, conventions, and various industry customs and usages will apply to your international trade operations. - 3 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. In addition, U.S. exporters must ensure that end uses, and prohibited exports and services they comply with laws of the foreign country that support the proliferation of chemical, into which they are sending their exports. biological, and nuclear weapons, and the These foreign laws often include laws on means of their delivery (i.e., missile systems). competition, labeling, taxes, and tariffs of the If requested, the Department of Commerce will destination country. provide written advisement on how something is classified under the EAR. However, the Department only controls exports not subject STEP TWO to the exclusive control of another agency. So, before assessing whether your item or service is Determine Jurisdiction and controlled by the Department of Commerce Classification under the EAR, you must first determine Determining which U.S. Government agency or whether it is controlled by the Department of agencies controls the item or service at issue is State under the ITAR or subject to exclusive critically important. It is only by following this control by regulations administered by another step that you can confidently assess any agency. The complexity of export controls licensing and reporting responsibilities. regulations and individual agency practices often make this a gut-wrenching process that is The items controlled by the Department of full of potential pitfalls. Commerce under the EAR are described in the EAR Commerce Control List -- a categorical The Department of State?s ITAR contains the listing of commodities, technology, and United States Munitions List (?USML?). The software subject to control. Depending on the USML contains a categorical listing of items items, end destination, end use, and parties controlled by the ITAR, known as ?defense involved in a particular transaction, the EAR articles.? The ITAR also controls certain types may require a license for export unless there is of services related to defense articles, known as an ?exception? permitting an unlicensed ?defense services.? It controls the provision of export. EAR exceptions come with very proposals to sell defense articles and defense specific conditions for their use. services to certain prohibited destinations and end users, and it controls the brokering of Among other things, the EAR Commerce defense articles and defense services. The Control List and other EAR parts also include ITAR requires a license or other form of special restrictions on exports and services written Department of State authorization as involving encryption. Additional restrictions may be stated in the regulations for these are found in other parts of the EAR, to include exports and activities unless an ITAR license those that apply to the export of surreptitious ?exemption? applies. Similar to the EAR listening devices, items subject to short supply license exceptions, each ITAR exemption controls, exports intended for certain military - 4 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. comes with its own set of very specific lieu of or in addition to a license from another conditions for use. agency. If there is any doubt on which agency exercises control over an item or service, the best STEP THREE approach is to obtain a binding decision in writing from government agencies. Generally Register as Required speaking, an agency can only be bound by its own written determination in a form expressly Step Three is to make all requisite provided by it for that purpose. For instance, registrations. With very few and narrow the Department of State is the only U.S. exceptions, the Department of State requires Government agency that can provide a binding all persons and entities involved in the written determination on whether something is manufacture of defense articles, the export of subject to the ITAR. The Department does not defense articles, the provision of defense consider opinions provided by its employees services, or the brokering of defense articles over the telephone or in emails to constitute and defense services to register with the binding agency determinations. Instead, it Department of State Directorate of Defense provides a structured mechanism, known as a Trade Controls. Similarly, although its ?Commodity Jurisdiction Request,? to use in registration requirement is more limited in obtaining a binding written determination on scope, the Department of Commerce requires whether ITAR jurisdiction applies. that persons and entities involved in exports and technical assistance to foreign persons It is also important to keep in mind the many related to certain encryption technology U.S. trade sanctions programs administered by register with the Department of Commerce the Department of Treasury?s Office of Foreign Bureau of Industry and Security. Assets Control (?OFAC?). Under these regulations, which include comprehensive Registration with the online license application embargos and limited sanctions programs that systems maintained by the agencies is also are in part incorporated into export controls, required to submit license applications and U.S. trade sanctions prohibit dealings between various other requests to the respective U.S. companies and sanction targets. The agencies. In addition, registration with the sanctions programs can even prohibit dealings U.S. Census Bureau?s Automated Export between foreign subsidiaries with a sanctions System is required to file Electronic Export target. As such, irrespective of an item?s Information reports. Such reports must be classification, if a prospective export or service filed for all physical shipments from the U.S. will be provided to a person, entity, or country unless an exception to the Census Bureau filing subject to one of the trade sanctions programs requirement applies. administered by OFAC, a license from the Department of Treasury may be required in - 5 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. STEP FOUR This information, along with valid names and addresses for all the parties involved, is Screen Each Transaction necessary to screen the transaction against the agency control lists, prohibited end uses, Once you know which set of regulations applies prohibited party lists, and to ensure that no and how your item or service is classified under risks of diversion or other situations requiring them, you must screen each transaction to a license are present. determine whether any licensed or other pre- approval requirements or prohibitions apply. As part of this process, you must screen the This is a very fact-specific process that must be country of final destination, countries of completed separately for each and every transshipment, and countries of any offloading. transaction. While exports to countries subject to U.S. trade sanctions programs are generally prohibited You must answer questions on the who, what, without a license, exports of many items to where, and how of each transaction before you other destinations also require a license. Many begin the screens. These questions include: items, particularly military and dual use items, ? What is the precise commodity, technology, often require a license to export to countries software or service being provided? that are friendly with the U.S. because of the particular government interest attached to the ? Are all aspects of the item encompassed in item or technology. the particular classification relied upon? As noted above, the prohibited end uses ? What is the country of final destination and include end use in the proliferation of who is the prospective end user of the item? chemical, biological, nuclear weapons, and missile systems anywhere in the world. End ? In what countries will the item transit on its use controls also apply to certain commercial way to the final destination? items when exported to specific destinations ? Will the item be offloaded from any vessel for a military end use. prior to reaching its final destination? You must further screen end users and other ? Who will possess the item while it is in parties to the transaction, such as any brokers, transit? shippers, insurers, involved financial institutions, and other parties in your supply ? What will be done with the item after it is chain generally, to include suppliers and received? vendors, to ensure that they are not on any U.S. Government prohibited party lists. The largest ? How will the item be used by the final end of these is the list of Specially Designated user? Nationals maintained by the Department of ? Will there be any reexports of the item? Treasury. You must screen against this list as - 6 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. well as others depending on the scope of the Many other indicators are also listed. You may transaction, to include those maintained by the not proceed with an export with knowledge Department of Commerce, Department of that a violation is about to occur. So the State, and other agencies, such as the Food and presence of any of these indicators of diversion, Drug Administration, and the General Services referred to by the Department of Commerce as Administration. Depending on the scope of the ?red flags,? or similar suspicious circumstances transaction, the necessary lists may also establishes knowledge of a possible diversion include those maintained by other countries risk that must be resolved prior to any export. and international organizations. You must further watch for changes to the If your transaction involves ITAR defense transaction at issue. The appearance of new articles or defense services, you must also parties will require additional screening. Also, screen for unlicensed defense article brokers existing parties should be rescreened on a and ensure that all parties to the transaction regular basis to keep up with changes to the are properly registered with the Directorate of names contained in the prohibited party lists. Defense Trade Controls as required. Finally, you must screen for risks of diversion STEP FIVE to prohibited destinations, diversion to prohibited end users, and diversion for Obtain All Necessary prohibited end uses. Here, the Department of Authorizations Commerce provides particularly helpful guidance on how to spot diversion risks. It If a license or other form of advance approval is refers to this as its ?Know Your Customer required and the export or service does not Guidance,? which is available on its website at qualify for an applicable EAR exception (if the www.bis.doc.gov. This guidance contains a list transaction is subject to the EAR) or ITAR of non-inclusive indicators of diversion such exemption (if the transaction is subject to as: ITAR), you must obtain a license. Other forms of required advance approval may consist of ? The customer is reluctant to ofer Department of State approved technical information about the end use of the item. assistance or manufacturing license agreements for defense services, warehousing ? The capabilities of the item do not fit the and distribution agreements, and offshore buyer's line of business. procurement agreements. Government ? The shipping route is not normal for the approval may also require the completion of item or destination. other documents such as non-disclosure agreements, non-transfer and use certificates, end use assurances, the provision of specific language on shipping documents, known as a - 7 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. ?destination control statement? for the EAR investigation, or other official inquiry. It is also and ?retransfer statement? for the ITAR, and a good practice to retain all records related to completion of Electronic Export Information international trade for as long as possible in report filings on the Department of Census case the need to refute an alleged violation Automated Export System. arises. STEP SIX STEP SEVEN Make and Keep Records and Implement a Written Compliance Reports Program Once all the paperwork is completed, you must Step Seven requires implementation of a keep copies of export records for no less than written export compliance program. An export five years from the date of export, reexport, compliance program, carried out in written transshipment, termination of the transaction, policies and procedures and supported by license expiration, expiration of technical regular employee training, is the best way to assistance agreement or manufacturing license identify risks, minimize the chance of agreement, or other export related activity that inadvertent violations, and, when properly is the last in time. Regardless of whether implemented and followed, operates as a stored in electronic or paper format, these mitigating factor in agency enforcement records must be accessible, legible, and actions. accurate. Many of the agencies offer guidance on how to Types of records that must be retained include develop compliance policies and procedures. books of account, export licenses, emails of In fact, the current Department of Commerce export-controlled information, Electronic compliance program guidelines are over one Export Information reports, correspondence hundred pages long and quite detailed. with government agencies on international Additional guidance is provided by other activities, and any other records that relate in sources, to include the U.S. Sentencing any way to exports and services provided to Guidelines and a report known as the ?Nunn- foreign persons and foreign destinations. You Wolfowitz Task Force Report on Industry Best should also maintain records of all due Practices Regarding Export Compliance diligence performed relating to transactions. Programs.? These establish some core requirements for any efective export Keep in mind that you must always maintain compliance program. Consistent with them, and must not destroy records of any matter, export compliance programs must be in regardless of the last date of export activity, writing, require performance of all the eight which relates to a violation, government - 8 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. steps described in this article, and further Keep in mind that these are only some of the include: minimum requirements and are not offered as an exhaustive list. There is no one size fits all ? A policy, to include a written statement and you must review, classify, organize, and from senior management, establishing a map the approach to compliance best suited to corporate commitment to compliance, the actual way your company operates and the backed by policies and procedures that trade compliance risks it faces. foster a corporate culture of compliance; You must also regularly review and adapt your ? A means by which employees can report compliance program to changes in the scope of suspected violations to management and a your company?s international operations and to clear statement that employees can report changes in company technologies. You will violations without fear of reprisal; also need to update your compliance program to timely reflect any changes in the law relevant ? A clear delegation of responsibilities for to your operations. carrying out export compliance functions within the company; The prohibited party listings, export control lists and other parts of the regulations are the ? A procedure for handling gaps in subject of frequent revisions. These are compliance measures when identified in necessary to reflect changes in U.S. foreign employee reports, internal assessments, policy, national security concerns, and other and in regular audits; and government interests. At the time of this ? Requirements for regular employee training article, the regulations are also the subject of on the program and general procedures extensive reform efforts. These dynamics are utilizing daily checklists, memoranda, important because exporters must work with announcements, or other means to up-to-date copies of the regulations and maintain employee awareness of the prohibited party lists in making license regulations, the program, and the need to determinations. Accordingly, much like the ensure compliance. regulations they address, your company compliance program and any supplemental The policies and procedures should contain a internal forms should be treated as living sufficient level of detail and be written in plain documents that are subject to change. language that is understood by rank and file employees. Otherwise, the program is unlikely to serve as a useful tool for compliance. In the same vain, the program must be something that actually works and sufficient resources must be committed to carry out its requirements. - 9 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved. STEP EIGHT CONCLUSION Monitor Compliance In many respects, export controls are just another cost of doing business in today?s global Just having written policies and procedures is a marketplace. They cannot be ignored. good start, but it is definitely not enough. Responsible exporters must be dedicated and Stating the obvious, your company and its fully commit their company to compliance. employees must follow its written compliance They must stay informed of changes to the program and document compliance with it. export control regulations, follow other laws This should be done through thorough record applicable to their international operations, making and recordkeeping, regular internal and adjust each compliance step as needed. audits, and audits performed by outside While this may all seem very complex, the eight professionals. Preferably, licensed legal steps described in this article present an counsel should perform the audits and organized approach to export controls that can communicate their findings to your company minimize risks and help keep a company?s under the attorney-client privilege. foreign markets open. Regardless of who performs them, the audits should identify any and all compliance gaps. These must be corrected, and written Published: August 2011 documentation should create a record of all corrective actions. Where actual violations of the regulations are discovered, immediate notification should be provided to your company general counsel or in-house legal department and company senior management, to include company board of directors as needed. Swift action must be taken and proper determinations made as to whether notification to the relevant U.S. Government agencies is appropriate. Matthew A. Goldstein is an International Trade Attorney in Washington D.C. licensed to practice in the District of Columbia and the State of Arizona. He can be reached at: +1.202. 550.0040 - 10 - Copyright 2011 Matthew A. Goldstein. All Rights Reserved.
Posted: 21 September 2011, last updated 22 September 2011

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