May/June 2008
U.S. export controls dictate the who, what, and where of sending material and providing services outside the country. Violations—even accidental ones—can result in significant financial penalties or jail time, so it pays to know the rules.
By Matthew West
In June 2006, a scrap consumer pled guilty to violating U.S. export control laws and one of its vice presidents pled guilty to making false statements to the U.S. Department of Defense. The company had taken military surplus items—including missile bodies and demilitarized control sections of missiles—loaded them into a 40-foot shipping container, and delivered them to a U.S. port for export to a company in China that's partially owned by the Chinese government, a violation of the Arms Export Control Act and the International Traffic in Arms Regulations. The company had certified to DoD that it would melt the surplus items at a domestic facility and make the metal into ingots that it would sell only in the United States. U.S. Customs and Border Protection inspectors discovered the illegally shipped parts when they opened and inspected the container at the port. Ultimately, the company agreed to three years of corporate probation and a $250,000 fine. The vice president received two years of probation and a fine of $5,000.
The company was caught violating one of several laws and regulations that control U.S. companies' export of goods, software, technology, and services and their financial transactions with foreign parties. As this case shows, the restrictions apply just as much to scrap companies that export or arrange for the export of scrap materials as they do to large defense contractors and other U.S. exporters. Whether you're processing Defense Department scrap, shipping reclaimed pipe, selling material handlers, or simply providing training to a foreign company, these controls dictate what you can and cannot do. Even the most well-meaning company can run afoul of these regulations if it isn't attentive to its sales and service transactions. A basic understanding of the laws and regulations, the enforcing agencies, and the types of transactions to which they apply is essential for any company doing business outside the United States.
Who Enforces What
The U.S. government operates agencies in three separate cabinet departments that license or restrict transactions between U.S. and foreign entities. At the Commerce Department, the Bureau of Industry and Security controls the export of products that have both nonmilitary and military uses. The State Department's Directorate of Defense Trade Controls governs the export of military-related items and services. And the Treasury Department's Office of Foreign Assets Control is the primary enforcer of U.S. sanctions and embargoes, which tend to more broadly restrict trade with certain individuals, entities, and countries. (The other two agencies get involved in enforcing embargoes and sanctions as well.) Each agency has its own procedures and its own staff. Any U.S. company that exports can run afoul of the prohibitions these agencies administer, even if it didn't intend to violate the law or viewed itself as being only indirectly related to another party's violation.
Bureau of Industry and Security. The BIS enforces the Export Administration Regulations, which govern the broadest range of exports through bans and licensing requirements. Despite the EAR's potential to cover a wide range of products and services, only a small proportion of shipments ends up requiring the bureau's specific approval.
The regulations can restrict exports in terms of recipient countries, parties, and individuals and can ban or require licenses for the export of specific products. EAR mandates that companies cannot
- export to countries the regulations specify, such as Cuba, which is under a U.S. embargo;
- export items they know have
a specific link to weapons proliferation; or
- export to individuals or parties named on lists BIS maintains, including the Denied Persons List and the Entity List. The ban might prohibit all exports to those parties or just the export of specific products. (Though space does not allow for a detailed review of these prohibitions, the regulations go into minute detail on what exporters must do to comply.)
More important, perhaps, is that BIS maintains the Commerce Control List, a list of specific products subject to export licensing agreements. The EAR prohibits exporting or re-exporting products on the CCL without the required license or other authorization. The CCL restriction can be country-specific, meaning the regulations require a license or authorization to export the listed product to certain countries but not to others. BIS regulates exports for a variety of reasons, not just for national security. To give one scrap-specific example, BIS proposed in 2004, and later withdrew, an export control on scrap copper tubing because of allegations of short domestic supply.
Companies that fail to comply with the EAR can face severe criminal and civil penalties. BIS maintains its own large staff of enforcement agents who investigate violations, with additional law enforcement support from U.S. Immigration and Customs Enforcement special agents. Criminal violations can result in fines of up to $1 million and/or 20 years' imprisonment. Civil cases can result in fines of up to $250,000 per violation—even if the violation was unintentional—and BIS can impose a "denial order" on the defendant that restricts its ability to export goods from the United States.
Directorate of Defense Trade Controls. DDTC controls the export—and certain imports—of items deemed "defense articles" and "defense services" under the Arms Export Control Act and the International Traffic in Arms Regulations. Unlike the EAR, which regulates specific products, the ITAR identifies 21 broad categories of restricted products, technology, software, and services. Items range from those that are clearly for military use, such as firearms, to items with broad commercial uses, such as certain aircraft avionics, that are subject to defense controls due to their production heritage. (There is a process under the ITAR for reviewing whether a particular item is a defense article.)
A notable difference between the EAR and the ITAR is that any party that manufactures, exports, or acts as a broker for ITAR-covered items must register with DDTC. Even with that registration, to export a covered item a company will almost always need a DDTC license or other specific authorization. DDTC will not grant licenses for exporting ITAR-covered items to the more than two dozen countries against which we have arms embargoes.
As the scrap consumer's case shows, failure to register and obtain the proper export license can result in harsh criminal and civil penalties: up to $1 million and 10 years' imprisonment for criminal convictions; up to $500,000 per violation for civil cases. Multiple civil violations can result in penalties in the millions of dollars, and DDTC can ban the violating entity from receiving future export licenses, which can have wider implications for a company that conducts business with the U.S. government.
Office of Foreign Assets Control. The U.S. government maintains several broad economic sanctions programs that more widely restrict commercial and financial activities with specific countries, entities, and individuals. OFAC, part of the Treasury Department's antiterrorism and financial intelligence enforcement operations, administers these programs.
A single regulation does not encompass all of OFAC's sanctions programs in the way that EAR and ITAR govern those programs in the Commerce and State Departments, respectively. Instead, each program has its own set of regulations, sometimes promulgated based solely on an executive order by the president. The sanctions might restrict trade with an entire country (such as Cuba, Iran, and Sudan) or with specific individuals and entities that pose a risk to the United States (such as terrorists, narcotics traffickers, and government leaders in Belarus, Syria, and Zimbabwe). OFAC names the latter on its Specially Designated Nationals List, available at www.treas.gov/ofac.
Among other things, the sanction prohibitions can
- block assets of the target country or entity;
- restrict exports, re-exports, and imports (in addition to the BIS and DDTC restrictions);
- ban commercial transactions and the provision of services; and
- prohibit the facilitation of a foreign party's transaction with the sanctioned country or entity.
In certain limited cases, OFAC might license a company to engage in a specific transaction with a sanctioned country or entity, but that's a rare occurrence.
These sanctions prohibitions apply to any "U.S. person," which OFAC defines as any U.S. citizen or permanent resident alien (wherever located), companies organized under U.S. laws, and persons located in the United States. In certain programs, notably the Cuban embargo, this definition also includes controlled foreign subsidiaries of U.S. companies. Any U.S. person that fails to comply with a particular sanctions program prohibition, whether intentionally or unintentionally, can face significant criminal and civil penalties similar to those BIS imposes: up to $250,000 per civil violation and up to $1 million and/or 20 years' imprisonment per criminal violation.
Complying With the Rules
How can a company ensure it complies with all the many U.S. export regulations? It takes education and planning. Unlike the case described above, in which the prosecuting attorney argued that the company deliberately intended to ship Defense Department surplus items and conceal them in the export documentation, most violations occur because a company isn't familiar with its obligations or didn't have a plan to address them. To ensure your company is on the path to compliance, heed these recommendations:
Make compliance your goal. A commitment to compliance must come from the top of the company, but it also must be every employee's responsibility, especially those involved in purchasing, sales, and shipping.
Get training. Become familiar with the U.S. export controls and sanctions regulations that could affect your business. Each of the government agencies as well as industry associations and private firms conduct courses on the subject around the country, so look for them in your area.
Develop a compliance plan for your business. Each government agency also recommends best practices for complying with its export regulations,. Many private firms also can help a business develop a compliance plan.
Review your export sales before they happen. Know what material you're shipping and to whom you're shipping it. Find out if the shipment requires a license or other authorization before you can export it. Also, check your customers against the Denied Persons, Entity, and Specially Designated Nationals lists. Remember, most exports don't require a license. In cases where a shipment needs authorization, you must obtain the license or other permission before you ship the material. Once it's in transit, it's too late, the damage is done.
Examine your export shipment documentation. It's ultimately your responsibility—not your freight forwarder's—to provide correct information about your exports. You are liable for any false information you might provide to the government, even if you do so unintentionally.
Periodically evaluate your compliance plan. Like any system, an export compliance plan must be reviewed on a regular basis to make sure it's working. A compliance plan that doesn't work or one that no one uses can be worse than having no compliance plan at all.
The labyrinth of U.S. export laws and regulations can appear daunting, but with some education, planning, and effort, you can find your way through it. Identify the elements your company needs to address to ensure its compliance. That way you won't find your company named as the cautionary tale at the start of the next magazine article on export regulatory compliance. •
Matthew West is a partner in the international trade group in the Washington, D.C., office of Baker Botts, a Houston-based law firm. This article expresses the viewpoints of the author, not of Baker Botts, and readers should not interpret it as providing legal counsel.
U.S. export controls dictate the who, what, and where of sending material and providing services outside the country. Violations—even accidental ones—can result in significant financial penalties or jail time, so it pays to know the rules.