Handle With Care

November/December 2014

Ever-changing U.S. export controls can keep even experienced scrap sellers on their toes. A legal compliance program SHOULD make reviewing risk part of every sales transaction.

By Andrew E. Bigart

The U.S. scrap recycling industry exported approximately $24 billion of scrap to 160 countries in 2013, according to data from the U.S. Census Bureau (Suitland, Md.) and U.S. International Trade Commis­sion (Washington, D.C.). Although U.S. scrap exports are down in volume and value in the past few years, the industry continues to expand its global presence and seek new foreign consumers for U.S. secondary materials.

As U.S. scrap sellers venture into foreign markets, they risk running afoul of the many complex U.S. laws and regulations that govern international trade. Even for experienced companies, complying with U.S. export controls, economic sanctions, and anti-corruption laws can present a significant challenge. Such restrictions most likely affect a small proportion of scrap export transactions, but that’s no reason to be complacent, especially because violations can carry significant civil and criminal penalties. A review of legal and regulatory compliance is an important part of any export transaction.

In other words, understanding the legal and practical implications of doing business with foreign customers is essential, whether your company is a longtime exporter or stepping into the international market for the first time. Here’s a brief summary of potential legal pitfalls related to international trade in scrap, along with some common-sense recommendations for mitigating those risks by developing appropriate due diligence, compliance, and contracting procedures.

The Legal Landscape

Complying with U.S. export controls, economic sanctions, and anti-corruption laws can present a significant challenge for companies whatever their size. Restrictions can originate in four different cabinet departments and address almost every aspect of a business transaction with a foreign entity.

Scrap, like all U.S. goods, is subject to the export control laws the U.S. departments of Commerce and State administer. Commerce regulates the export of commercial or “dual-use” items; State regulates the export of defense items. Restrictions can apply to any of four elements of a transaction: The material being exported, its intended end use, the destination country, and the individuals or companies involved. Most scrap can be exported overseas without an export license, but restrictions may apply to specific materials, proposed end users, and end uses. For example, beryllium metal alloy scrap containing more than 50 percent beryllium by weight, beryllium compounds, or items made from those materials are classified on the Commerce Department’s Commerce Control List as 1C230. You would need a Commerce Department license to ship anything with that classification to China—and such a license application would be subject to a policy of “extended review or denial.” You need no such license to export that material to, say, Brazil.

Copper scrap, in contrast, is most often classified as EAR99, a catch-all classification indicating you generally don’t need a license to export it—unless you’re exporting it to an embargoed or sanctioned country, a “party of concern,” or for a prohibited end use. For example, the United States has imposed export controls on Indian Rare Earths Ltd. (Mumbai), which is part of India’s Department of Atomic Energy, but not on many other entities in that country. And while a container of end-of-life printers would likely be classified as EAR99, a similar container of used GPS systems would potentially be classified as 7A994, which means a license would be required, depending on technical characteristics, to export them to certain countries, including Turkey and South Korea. In 2009, a U.S.-based freight forwarder agreed to pay a $70,000 fine for arranging to export scrap metal to a prohibited end user in Pakistan without having an export license. 

In addition to the State and Commerce Department-based restrictions, the Department of Treasury’s Office of Foreign Assets Control (Washington, D.C.) enforces trade embargoes and economic sanctions against specific countries (Cuba, Iran, North Korea, etc.) and individuals and entities (those identified as terrorists, narcotics traffickers, and other bad guys) on its Specially Designated Nationals List. The OFAC regulations generally prohibit U.S. persons from engaging in transactions involving a person or entity listed on the SDN List, including transactions involving any entity that those on the list own or control, directly or indirectly. Note that U.S. persons encompasses U.S. citizens and residents, wherever they are; persons in the United States; and companies formed in the United States or doing business here.

The Foreign Corrupt Prac­tices Act, which the U.S. Department of Justice and the U.S. Securities and Exchange Commission (both in Washington, D.C.) enforce, prohibits U.S. persons from paying bribes to foreign government officials for purposes of obtaining or retaining business. Although that might seem straightforward, U.S. companies often get tripped up trying to figure out who is a foreign government official and what types of payments are or are not permissible. For example, many scrap purchasers in China are state-owned entities or otherwise controlled by the government. Thus, a “facilitation” payment to the head of a Chinese scrap company to secure a contract could potentially violate the FCPA. In 2006, a U.S. scrap company pled guilty and paid a $7.5 million criminal fine for paying bribes to facilitate the sale of scrap to government-owned steel mills in China. The president and chairman and CEO of the company also paid fines. More recently, in March 2011, a U.S. corporation paid $300,000 to settle FCPA allegations regarding bribes that a subsidiary in Argentina had paid to Argentine government officials aimed at evading that country’s ban on exporting domestically produced copper scrap.

Of course, many other laws potentially apply to U.S. business transactions overseas, such as laws that forbid money laundering and those that penalize companies that support another country’s boycott of a country that the United States is not boycotting. Without going into all the details, the key takeaway is that you need to understand your legal obligations and potential risks before jumping into the international market. U.S. law places the burden of compliance squarely on U.S. companies and their officers and employees. The scrap industry might be particularly vulnerable given the volume of scrap exports to Asia—a region that has been attracting increased U.S. government scrutiny.

The potential consequences of noncompliance with U.S. laws governing foreign business transactions are severe and can include significant fines, a denial of future export privileges, federal contract debarment (a ban on contracting with the U.S. government), and even imprisonment in egregious cases. Debarment is particularly onerous for scrap dealers that otherwise would be in a position to purchase scrap from the U.S. government. Fortunately, whether your company is large or small, experienced at exporting or new to the international market, you can take some basic steps to limit your risk.

Minimizing Risk

The best way to reduce export-related risk is to understand the nature of your business and potential customers—including the who, what, and where of every transaction—and exercise reasonable care in complying with applicable U.S. export requirements. In practical terms, that might encompass the following three actions.

Develop a compliance program. An effective compliance program is not a “one-size-fits-all” endeavor. Your company’s program should take into account your size, operating structure, and business risks. That said, most written compliance policies have common elements, such as an overview of basic legal principles and prohibitions, a description of employee responsibilities, a statement that the company has zero tolerance for intentional violations, and an affirmation of the company’s commitment to compliance.

In addition to providing an overview of applicable laws, a compliance policy should require checking all business partners and customers against OFAC’s SDN list prior to each transaction, internal financial and audit controls to monitor export and FCPA compliance, and due diligence reviews of all agents or independent contractors. Note that under U.S. law, exporters that become aware of—or should be aware of—red flags must resolve the red flags before proceeding with a transaction.

It bears emphasizing that an export compliance program is only effective if your employees and contractors understand and follow it. Train your staff on a regular cycle to ensure that employees stay up to date on developments in geographic areas in which they do business, such as the sanctions involving Russia and Ukraine the U.S. government implemented earlier this year. Some companies require employees to sign an annual certification that they have reviewed and agree to abide by the written policy.

Build trustworthy business relationships. A big part of doing business abroad is working with reputable partners. Before hiring anyone as an employee, independent contractor, or distributor, make sure you are comfortable with his or her reputation and business practices.

Monitoring the activities of your business partners overseas is particularly important because the conscious avoidance of knowledge of wrongdoing is not a defense. Try to work directly with the end purchaser of your material rather than with a middleman. This not only helps minimize risk of an inadvertent export to a prohibited country or person, but it also will help ensure that if a business dispute arises, your company knows whom to hold responsible.

Structure transactions to minimize risk. Make sure that your contracts require counterparties to comply with applicable U.S. laws such as those mentioned above, as well as similar laws in the destination country that might apply. Spell out your clear expectations about compliance as well as appropriate and enforceable consequences for violating any compliance-related responsibilities.

At the same time you’re reviewing your contracts to ensure they help keep you in compliance with export controls, you might be able to reduce other kinds of risk your company faces in international transactions. Work with U.S. counsel or counsel in the destination country to structure the transaction to comply with the business and tax laws of the concerned jurisdictions. Check whether the contract protects your intellectual property rights, if needed. And make sure the contract gives you legal recourse in the event of a dispute. It should clearly define how disputes between the parties will be handled, with a preference that any disputes be subject to U.S. law and jurisdiction—including, potentially, arbitration in the United States or a third country under international “neutral” arbitration rules, like those of the International Chamber of Commerce.

Finally, remember that not every export transaction is a success. Make sure that you can pivot in the event of unexpected disruptions or restrictions in service resulting from transactional, financial, or country risk developments. Although goods move across the world faster than ever, there is no guarantee that your purchaser won’t walk away from a transaction before you get paid, leaving you scrambling to take care of goods on the other side of the world.

Unfortunately for some companies, the legal risks of doing business abroad are not apparent until something goes wrong. If you discover questionable business practices regarding your export-related activities, stop the conduct in question immediately and report the activities to your company’s compliance officer. If you believe your company may have violated U.S. export controls, consider voluntary disclosure. Each cabinet department and agency mentioned above maintains procedures that encourage companies to self-report violations under certain circumstances. Although such programs won’t allow your company to escape liability completely, they may offer reduced penalties and other incentives.

There is no doubt that the export market for scrap remains attractive to U.S. scrap processors. Before taking the leap internationally, however, take the time to review and understand your company’s responsibilities under U.S. export control, economic sanction, and anti-corruption laws. Make sure you are comfortable with your business partners and that you have structured the transaction so you can protect your company if the transaction goes awry. An ounce of prevention in this regard goes a long way in keeping your business profitable and out of trouble. 

Ever-changing U.S. export controls can keep even experienced scrap sellers on their toes. A legal compliance program SHOULD make reviewing risk part of every sales transaction.