Why Export Controls Matter

To steal shamelessly from Mark Twain, the reports of the death of globalization have been greatly exaggerated. Despite ongoing economic trade wars, other indicators tell a different story, including the continued diversification of supply chains, a steady worldwide demand for talented employees and contractors, and the unabated promise of new markets for American goods and services overseas.

As such, any company hoping to compete in the global marketplace must understand the world of export controls – what they are and why they matter. In this two-part series, I will cover both of these topics. In Part 1, I will provide an overview of how U.S. export control laws and regulations work; and in Part 2 (coming next month), I will focus on intangible export controls, particularly data.

WHAT IS AN EXPORT?
A client once said to me, “I thought exports were just goods and hardware.” While this is indeed one kind of export, and perhaps the most recognizable (imagine shipping containers filled with stuff traveling the world, being loaded and unloaded at busy ports, airports, and rail stations), it only scratches the surface.

Outside or Transiting the U.S.
At its most basic level, an export is the shipment, transmission, or transfer of U.S.-originated goods, services, information, or know-how to any destination outside of the United States. Export examples include:

• A shipment of computers to Europe
• The downloading of software from a U.S. server by a user in Ethiopia
• Delivery of manufacturing blueprints, schematics, or other technical information to a contract manufacturer in China, whether in person or electronically
• An international zoom call to discuss product development
• A presentation at a trade show in Colombia

Exports also include transshipments of goods or technology of foreign origin through the United States, even if the U.S. is not the end-use destination of the items in question. As a personal example from my years in the satellite industry, satellite blueprints and circuit schematics, developed in Singapore and sent to Washington, DC, could not (at the time) be sent back to Singapore

Within the United States
An export can also occur without goods, services, or technology leaving U.S. soil. How, you may ask?  Simply by sharing the export with a non “U.S. Person,” which is defined under the law as a citizen and permanent resident of the United States. Anyone outside the scope of this definition is considered a “foreign national.” Depending on the technology in question and what regime controls or regulates its export, a dual citizen may actually be considered a foreign national under U.S. export law, particularly with regard to military items and technology.

For example, attendees at a trade show in Peoria, Illinois have gathered from the four corners of the globe to network, meet current and potential customers, and hear presentations on the latest and greatest in the industry. Any conversation or seminar presentation, whether in the exhibit hall or over drinks after dinner, can be considered an export situation. Likewise, when a U.S. company hires an H1B Visa holder to work in its California office, these situations are referred to as “deemed exports” and must follow applicable laws and licensing requirements, just as you would with a shipment of hardware or software overseas.

THE UNITED STATES EXPORT CONTROL REGIME
The main statutes governing export controls in the United States are as follows:

• The Arms Export Control Act of 1976, as amended (“AECA”) which controls exports of military items and technology and is administered by the U.S. Department of State.

• The Export Administration Act of 1979, as amended (“EAA”) which controls exports of commercial or “dual use” items and technology and is administered by the U.S. Department of Commerce. “Dual use” means having both military and commercial applications, yet not requiring regulation by the more restrictive AECA regime. Under the EAA, exports can be controlled or limited not only for national security reasons, but also for foreign policy objectives, and short supply.

The regulations governing export controls under these statutes are the International Trafficking in Arms Regulations (ITAR) and the Export Administration Regulations (EAR), respectively. Each system maintains a series of export classifications and designations, indicating how an export is to be identified in the required documentation, and whether a license is required from the U.S. Government to export the item in question. ITAR regulates the export licensing of military items and technology pursuant to the AECA and is administered by the Directorate of Defense Trade Controls (DDTC) in the State Department. Defense articles and services regulated for export under the ITAR are listed on the United States Munitions List (USML). 

The EAR regulates commercial and dual use export licensing pursuant to the EAA and is administered by the Bureau of Industry and Security (BIS) in the Commerce Department. Factors determining license requirements under the EAR include classification of the item under the Commerce Control List (CCL), destination of export, intended use, and end user or “ultimate recipient.”

WHY IT MATTERS
Failure to comply with export licensing and laws and regulations carry significant consequences, including both civil and criminal penalties. Penalties generally are calculated on a per violation basis. Monetary penalties can start in the thousands and go into the millions. Willful violation penalties are at the higher end of the range and can include prison time of up to 20 years per violation. Additional sanctions can include the loss of government contracts or funds, and suspension or debarment from export. Export violations are no joke.

DETERMINING EXPORTS CLASSIFICATIONS
Export classification is a highly technical and collaborative review process requiring cooperation among lawyers, trade compliance staff, scientists and engineers, and operations. Self-classification of items for export is permissible under both regulatory regimes, although the company remains responsible for its determination. When a company is uncertain how to classify its items, it can submit a Commodity Jurisdiction request (CJ) to the DDTC to determine whether the item is controlled by the ITAR or EAR.  For EAR items, if the company is uncertain how its item is classified on the CCL, it can submit a Commodity Classification request (CCATS) to BIS for determination. 

Economic and trade sanctions regulations, including state sponsors of terrorism, country-specific sanctions, and the denied parties list of Specifically Designated Nationals (SDN), are administered by the Office of Foreign Assets Control (OFAC) at the Treasury Department. Both DDTC and BIS also maintain lists of parties to whom export is prohibited. Accordingly, even if an export to a specific country is permissible, with or without a license, it still may be a violation to send an export to a specific individual, company, or organization in that country.

SUMMARY
Any company engaged in international business, on the sale side or the supply side, needs an export control program, not only for internal operations, but also, in your contractual relationships with customers and suppliers. If U.S. technology is involved, the laws and regulations apply regardless of where goods, services, personnel, or contractors are located around the world and the U.S. Government will not hesitate to enforce the law beyond its borders. 

If you have questions about export controls, please contact Michael Mendelson at [email protected].

Michael Mendelson is a Partner with OGC and brings over 25 years of legal and business experience to his clients. He regularly handles a broad variety of matters for established and start-up clients, including complex international transactions, international trade compliance, M&A, early stage financing, government contracts, and commercial contracts.