- Exporting Products or Technology? Assess Before You Ship or Transmit
- December 1, 2005
- Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
Last year, dozens of U.S. companies were charged and heavily fined for violating U.S. export laws. These included charges against a Cincinnati company ($17,500) for attempting to ship window shade fabric to Iran through France; a Missouri company ($222,000) for exporting firearms scopes and mounts to Canada, Mexico, Argentina, and several other countries without licenses; and an Oregon company ($560,000) for exporting semi-conductor microchips and releasing related technical data to China and Chinese national employees without licenses. The companies have all been required to implement export management systems to facilitate future compliance.
Export violations can be triggered by the intended destinations, purchasers, or end uses; the nature of the products (e.g. technology); or a combination of these. For companies that export products to many destinations worldwide, it is critical to have an export management system in place. This system should assess individual orders prior to shipment and confirm that they are not prohibited under U.S. export laws and that no additional authorizations from government agencies are required.
Regulations and agencies
The Office of Foreign Asset Control (OFAC) in the Department of Treasury administers federal statutes that impose the United States' economic sanctions and restrict exports to embargoed and other countries, entities, and individuals.
The Bureau of Industry and Security (BIS) in the Department of Commerce is responsible for enforcing the Export Administration Regulations (EAR) that govern the export of products (particularly software, hardware, or other types of technology) from the United States. The EAR regulate the export of items that have a predominantly civilian application but could also have military or strategic (dual) use.
Defense-related items or services listed on the Munitions List in the International Traffic in Arms Regulations (ITAR) are governed by the Office of Defense Trade Controls (DTC) in the Department of State.
Embargoed and Restricted Countries
All U.S. exporters have to assess whether their destination country and end-user triggers export restrictions or additional requirements. A wide variety of exports are prohibited if the destination is in Cuba, Iran, or Sudan. Specific items may be authorized for export to these countries under a license. In addition, various U.S. government sanctions programs and orders affect transactions with individuals or entities in Burma, North Korea, and Syria. The sanctions and embargoes continue to evolve and change with the political climate; for example, numerous restrictions on exports to Iraq and Libya were lifted in 2004. Exporters should stay informed regarding the most current U.S. embargo and sanction programs and continue to incorporate the latest restrictions and allowances into their export management systems.
Restricted Individuals and Entities
U.S. exporters must check a number of lists to confirm that they are not exporting products to individuals or entities who are specifically prohibited from receiving exports or otherwise engaging in trade with U.S. parties. These include the Denied Persons List, individuals (many in the U.S.) whose export privileges have been denied, maintained by the BIS ; the Entity List, organizations deemed to be involved in the proliferation of weapons of mass destruction or likely to create a risk of use in or diversion to proliferation activities, maintained by the BIS; the Specially Designated Nationals and Blocked Persons List, individuals and organizations that are blocked pursuant to various sanctions programs administered by OFAC; and the Debarred List, blocked individuals and entities, maintained by the DTC. The BIS also maintains a short "Unverified List" of parties who are not restricted but will raise a red flag and potentially delay transactions.
In addition, exports are restricted if the exporter is aware that the end-user will engage in prohibited activity, especially in relation to nuclear, missile, chemical, or biological weapons. This includes both actual knowledge and an awareness of a high probability of occurrence. Exporters have a duty to not cut themselves off from information that would typically come to them in the course of a transaction and to watch for "red flags" (many identified by the BIS).
Transaction-specific analysis under EAR
Any time software or technology is exported, exporters must analyze whether the transaction is permitted under the EAR and whether a license or other authorization requirement is triggered. A very small percentage of total U.S. exports actually require such a license. However, exporters must assess each product and its technical capabilities (e.g. encryption capability) and how it is classified under the EAR, where it is being sent, who the end-users will be, how end-users will use the product, and whether it will be re-exported. Products or applications with specific military capabilities that appear on the Munitions List are subject to the higher scrutiny of the DTC (including a requirement to register the company with the DTC) and the license requirements of the ITAR.
The EAR define exports very broadly to capture shipments, transfers, and transmissions (including via e-mail, fax, or telephone) of items or data outside of the United States. This includes releases of technology or software to foreign embassies or consulates within the United States and all foreign nationals. (The definition of foreign national excludes naturalized U.S. citizens, U.S. permanent residents, and certain "protected individuals" under the Immigration and Naturalization Act (8 U.S.C. 1324b(a)(3)), such as certain eligible refugees and asylees.
The EAR includes categories and descriptions of technology products on its Commerce Control List. These are:
0 -- Nuclear Materials, facilities, and equipment
1 -- Materials, Chemicals, Microorganisms, and Toxins
2 -- Materials Processing
3 -- Electronics
4 -- Computers
5 -- Telecommunications and Information Security
6 -- Sensors and lasers
7 -- Navigation and avionics
8 -- Marine
9 -- Propulsion Systems, Space Vehicles, and related Equipment
Each category includes a number of specific entries under Export Control Classification Numbers (ECCNs). U.S. exporters must determine if a product falls on the Commerce Control List and, if it does, determine its ECCN. The ECCN listing provides cross-references to a Commerce Country Chart in the EAR, notes about any special restrictions for the item, and information to help determine whether a license or other action is required prior to export. Note that in many cases, a license exception may be available. However, this typically requires a case-by-case analysis of categories of license exceptions under the EAR.
Requirements under ITAR
If the BIS determines that a product is primarily military in scope, it will send the information on to the DTC. The DTC also independently searches, seeks out, and regulates companies that manufacture, export, or broker defense items. Such companies are required to register with the DTC before applying for any export licenses.
Certain 'technical data' and classified items not on the Munitions List also are subject to regulation by the DTC.
Companies that frequently export products and technology should create and implement export management systems consisting of internal processes to assess and ensure compliance on a transactional basis and to substantially reduce liabilities for U.S. export law violations.