In his most recent State of the Union Address, President Obama announced a new National Export Initiative with the goal of doubling the United States’ exports to other countries over the next five years. Since that announcement, the Obama administration has established an Export Promotion Cabinet of top-level officials to develop and coordinate implementation of the initiative and has pledged additional funds to the Commerce Department’s International Trade Administration to encourage small- and medium-sized businesses to grow their sales through exports.
With this increased focus on export support, the time may be right for companies seeking to expand their global presence to emphasize exports in their business plan. As in any new venture, however, companies should take the time to understand the rules of the game first. Exports are strictly regulated by a variety of government agencies, and corporate penalties for violations of export controls can be as high as $1,000,000 per occurrence, depending on the nature of the violation. Further, individuals can be criminally charged and sentenced to prison, even if acting in their capacity as employees of a company.
The purpose of this article is to give a broad overview of the regulatory framework applicable to exports, while recognizing that special rules may apply to specific categories of products or certain destination countries. Any company new to exporting may be surprised by the effort required to establish and maintain sufficient internal controls to ensure compliance. Even companies that do not intend to engage in traditional export activities should familiarize themselves with the legal landscape if they deal with any foreign companies or individuals. In either case, we recommend that companies engage expert advice at the outset to avoid inadvertent violations.
Overview
U.S. export policy attempts to strike a balance between promoting commercial interests abroad and protecting U.S. national security interests. The overarching objective of the many regulations and restrictions is to prevent the wrong people from getting their hands on goods and technologies that could be used to harm the U.S. or its allies. Generally, no special permission is required to export low-tech consumer goods or widely available off-the-shelf software to countries other than embargoed countries (currently Cuba, Iran, Myanmar (formerly Burma), North Korea, Sudan and Syria) or to people or entities other than those who have been identified by the U.S. as problematic recipients.
The four federal agencies1 primarily tasked with enforcing export controls are:
- The Bureau of Industry and Security (BIS) at the Department of Commerce, which enforces the Export Administration Regulations (EAR) to regulate the export of non-military and “dual-use” goods and services that are not regulated by other agencies (e.g., other agencies regulate the export of nuclear technology, natural gas and electricity and certain medical devices and pharmaceuticals);
- The Directorate of Defense Trade Controls (DDTC) at the State Department, which enforces the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR) to regulate the export of “defense articles” (items listed on the U.S. Munitions List) and related defense services;
- The Office of Foreign Assets Control (OFAC) at the Department of Treasury, which administers and enforces economic and trade sanctions against targeted foreign countries, terrorism-sponsoring organizations and international narcotics traffickers; and
- U.S. Customs and Border Protection (CBP) at the Department of Homeland Security, which is charged, among other things, with maintaining border security, combating trade in counterfeit goods, and enforcing trade and tariff laws.
Scope of Regulations
Generally, export controls apply to the transfer of products, services and technologies from any “U.S. person” to any “foreign person.” A U.S. person is defined slightly differently among the different regulatory bodies, but generally, a U.S. person is any individual who is a citizen or permanent resident of the United States or any entity incorporated to do business in the United States and located within the United States, as well as U.S. federal, state and local governmental entities.
In contrast, foreign citizens, U.S. citizens with dual citizenship, international organizations, foreign business entities and governments are all “foreign persons,” regardless of where they are located or whether they do business in the United States. U.S. citizens located outside the United States, as well as foreign subsidiaries and affiliates of U.S. companies, are also considered “foreign persons.” It is critical to note that, for purposes of export controls, an individual who qualifies as a U.S. person while physically located in the United States becomes a “foreign person” for any time spent outside the U.S., even for a brief trip abroad.
Export controls may apply in any of the following scenarios:
- a physical item or software program is shipped from a U.S. person to a foreign person
- a physical item containing a U.S. product or U.S. technology is shipped from one foreign person to another foreign person
- a U.S. employee writes an e-mail giving technical advice to a colleague in a foreign subsidiary or to an off-shore contract manufacturer
- a U.S. company invites foreign colleagues or customers to tour its U.S. facilities
- a sales representative who is normally considered a U.S. person gives a pitch to foreign customers or to U.S. customers who happen to be abroad at a trade show.
If a product, service or technology is “controlled” under one or more of the regulatory regimes, then a license or an exception for all of the activities above will be required. In addition, if a company is engaged in the manufacture or export of defense articles, it will be required to register with the DDTC, regardless of whether it intends to export.
The Five Questions
Export regulations come into play whenever a U.S. person plans to sell a product or provide services or technological know-how to any foreign person. The analysis can be extremely complex, but the first steps should be to ask the five questions below, as provided by the Export Administration Regulations:
1. What is it?
Before exporting any commodity, technology or software, the most critical step is to determine which federal agency has jurisdiction over the item. Exporters should review the extensive listing of products and technologies established by the Commerce Department, called the Commerce Control List (CCL), which will either provide an Export Control Classification Number for the product (ECCN) or a cross-reference to the agency with likely jurisdiction over the item. Note, however, that the CCL is not conclusive regarding other agencies’ jurisdiction and certain items may be controlled by more than one agency. If the jurisdiction is not clear, exporters should request a commodity jurisdiction ruling from the agencies involved.
Companies should also be aware that a seemingly minor component of a larger product may be regulated under one regime, such as ITAR, while the larger product appears to be subject to the less stringent Commerce Department controls. In that case, the “See-Through Rule” may apply, which would then subject the entire larger product to the more demanding ITAR licensing requirements. For this reason, it is critical that companies fully understand the origin of their product’s design as well as the origin of the components comprising that product.
2. Where is it going?
The next step is to determine the ultimate destination of the item. U.S. export controls apply whether a U.S. person is sending something to another country or whether a controlled product of U.S. origin is re-exported from one foreign country to another. Therefore, the regulations impose a duty on the U.S. exporter to perform due diligence to ensure that the destination named by the customer is the actual destination and not merely a transition point. Once the destination is established, exporters can consult the Commerce Department’s “Commerce Country Chart” to determine whether a license will be required based on the ECCN of the item and the destination country.
3. Who will receive it?
The ultimate end-user of the item cannot appear on any of the lists of prohibited individuals or organizations established by any of the following agencies:
- BIS at the Department of Commerce, which publishes three different lists relating to individuals or organizations suspected of engaging in activities related to the proliferation of nuclear, chemical or biological weapons, or related missile delivery systems;
- OFAC at the Department of Treasury, which publishes a list of “Specially Designated Nationals” with whom U.S. persons are prohibited from doing business; and
- The State Department, which publishes lists of foreign individuals, entities and governments that engage in weapons proliferation activities, and therefore, are subject to sanctions by the U.S. government.
In addition, the DDTC at the State Department publishes lists of parties who have been either statutorily or administratively debarred from directly or indirectly exporting defense articles and services, typically because of prior violations of the ITAR. Therefore, no other party may export defense articles on behalf of such parties.
4. What will they do with it?
Exporters have a duty to know their customers and understand the intended end-use for the commodities, technology or software exported to such customers. The BIS publishes a list of so called “red flags” indicating that an export might be destined for an inappropriate end-user, use or destination. Red flags may be triggered by a customer who hesitates to offer information about the end-use of a product or who purchases products that do not seem to fit its business. Companies have a duty to investigate further if red flags are present. If a red flag cannot be justified, a company that proceeds with the transaction in question risks export violations. Companies in such circumstances should refrain from the transaction or apply for a license.
5. What else do they do?
Export controls prohibit U.S. persons from doing business with anyone known to be assisting in weapons proliferation. Prohibited conduct includes doing almost anything in support of the design, development, production, use or stockpiling of certain types of weapons and missiles. Some country-specific exceptions may apply. If an end-user is known to engage in prohibited activities, and no exceptions apply, then a U.S. exporter must apply for a license to transact business with that person or abandon the transaction.
Conclusion
Exports of goods, services and technology can boost sales and grow a company’s global market-share. With additional resources promised by the federal government to support access to new markets, U.S. businesses should examine whether increasing their export activity is right for them, while evaluating the extra costs of compliance with a complicated regulatory regime.
1. The Obama administration is currently planning to perform a major overhaul of this multi-agency export regime to create a single licensing agency and a single enforcement agency, as well as to integrate the many independent information technology systems. Until those reforms (some of which will require Congressional approval) are complete, the regulatory structure set out in this article will continue to apply.