Consider the following: On October 25, 2004, ITT Industries was ordered to pay $8 million for unauthorized export of night vision products, technical data, and defense services, $5 million of which was assessed for the company's "remedial compliance enhancements" specified in the order. Among other things, the General Counsel was ordered to appoint a Director of International Trade and Compliance and oversee that person's performance.
On November 1, 2004, General Motors and General Dynamics were assessed a $20 million penalty, including $10 million for "enhanced remedial compliance measures" on account of unauthorized export of technical data, defense services, and defense articles to foreign person employees, including those of proscribed countries. The "Consent Agreement on Compliance Measures" specified, among other things, that at the conclusion of the five year term of the Agreement, the General Counsel and others would certify the adequacy of the company's export compliance program.
On January 19, 2005, Hughes Network Systems agreed to pay a civil penalty of $5 million, including $1 million for export compliance enhancements, and accept a one year debarment from any export activity also as the result of its unauthorized export of technical data, defense services, and defense articles to foreign person employees.
Regarding non-defense related export violations, recent determinations include the following. Teledyne Energy Systems agreed to pay substantial civil penalties for exporting power plant technical data (not the plant itself) to an end user in India that was not authorized to receive it. A California exporter, Metric Equipment Sales, agreed to settle criminal charges that it exported oscilloscopes to Israel for a $50,000 criminal fine, three years probation, and 250 hours of community service. In separate cases, Fujitsu Network Communications and Pratt & Whitney agreed to pay, respectively, $125,000 and $150,000 for the unauthorized release of controlled technical data to foreign national employees in the United States.
Despite the fact that less than three percent of U.S. non-military exports are subject to a license requirement, the level of "preventive" export interdiction and post-export enforcement for both military and non-military export violations is on the upswing in terms of both the number of proceedings and the magnitude of administrative, civil, and criminal penalties. During fiscal year 2004, the Bureau of Industry and Security ("BIS") of the Department of Commerce increased the number or criminal convictions and administrative enforcement determinations for non-military export violations by over 50 percent. Several companies that voluntarily disclosed their wrongdoing to BIS were nonetheless hit with hefty six-figure fines.
Electronic Interface And Interagency Cooperation
The government is investing more electronic resources in its export enforcement efforts. Information the exporter files with the government just prior to exportation in order to obtain export clearance is now processed electronically through the Automated Export System ("AES") rather than manually with the paper form called the "Shipper's Export Declaration." Mandatory AES filings are the subject of a proposed rule published on February 5, 2005 (70 F.R. 8200) that also would make significant changes in substantive filing requirements and substantially increase civil penalties. By the fall of 2005, the proposal is expected to be published as a final rule, which means that electronic filings will soon completely replace paper filings.
AES filings include both statistical information about the item to be exported and "control" information such as the item's classification under U.S. export control laws and whether or not the item requires an export license. In filing an export clearance, the exporter involves the authority of the Census Bureau, which collects export statistics, and even more importantly that of the U.S. government department - usually Commerce, Homeland Security, Treasury, or State - which controls the conditions under which the item may be exported. Each of these agencies has export requirements and enforcement authority in addition to those of the Justice Department, which is also increasingly active in export enforcement. In order to complete an export clearance properly, the exporter and its agent must understand U.S. export control requirements.
As a result of electronic data collection, government officials at the point of export - the Department of Homeland Security's Bureau of Customs and Border Protection ("CBP") and Bureau of Immigration and Customs Enforcement ("ICE") - have instant access to all export control information prior to shipment. They monitor export, targets, trends, and anomalies and frequently share this information with other government agencies. Thus, it is more likely that no export shipment will slip out of the country without a properly filed export clearance and that non-conforming declarations will lead to detention and, possibly, seizure of the shipment.
The level of interagency cooperation is higher than ever. For example, the State Department Office of Consular Affairs now shares visa information with the FBI and the other agencies, as necessary or appropriate. If a sponsor letter for a visiting Chinese national or prospective employee describes the access the foreign national will have to what appears to be sensitive technology located in the United States, the State Department likely will consult with the Commerce Department's export control office, which is the Bureau of Industry and Security ("BIS"). A "deemed export" is the transfer to a foreign national in the United States any information or technology that is subject to the U.S. Export Administration Regulations ("EAR"), and it is subject to government review and approval to the same extent as any commodity export. Thus whenever a foreign national is involved in engineering, production, management, audit, IT, or any other "data rich" corporate environment, the U.S. sponsor must ensure that no illegal transfer will occur and obtain any required government license for release of controlled information. The company which invited the Chinese national to visit its U.S. facility for a sales meeting or technical consultations might receive a visit from U.S. export enforcement officials before or in place of a visit from the Chinese national if it has not taken adequate steps to clear the visit in advance.
Some companies expect to avoid dealing with export control requirements by making only domestic "ex factory" or "ex warehouse" sales, aware that their buyer will immediately export the product or technology. Unfortunately, transfer of title and risk of loss at the U.S. factory or warehouse does not ensure that Uncle Sam will let the seller off the hook for export control or clearance requirements. Terms of sale or shipment ("INCOTERMS") are not controlling for export clearance. The party responsible for export clearance - the "principal party in interest" - is almost always the U.S. producer or seller. To make a foreign buyer the "principal party in interest," the U.S. producer or seller must ensure that the buyer has given a power of attorney for export clearance to its agent in the United States (usually a freight forwarder) and that the agent has all information necessary to file the export clearance on behalf of the buyer.
In effect, the new export clearance rules require the agent acting for the foreign buyer to understand U.S. export control laws, and ensure that the seller has provided accurate information about the export clearance requirements applicable to the product to be exported. Unfortunately, very few freight forwarders or other designated agents adequately understand these requirements or safeguard the interests of their principals in filing export clearances. Recently, BIS has begun to impose civil penalties against the freight forwarder as export agent as well as against the principal party in interest - the seller or buyer. The March 25, 2005 settlement for $49,500 of claims against Air Tiger for "aiding and abetting unlicensed exports" is an example.
Complex U.S. Export Control Structure
The U.S. export control structure is complex, which makes the compliance risks even greater. There are several agencies involved, as noted above. Under the authority of the International Emergency Economic Powers Act ("IEEPA") and presidential proclamations, BIS controls export and re-export of a very wide range of "dual use" items, meaning commodities, technology and software which have primarily commercial applications. Even though they might also have a military or strategic use, items subject to BIS jurisdiction have not been specifically designed or modified for military use and are not classified as defense articles or services. Activities subject to BIS controls include export of any item subject to the EAR from the United States, re-export to a third country of any U.S.-origin item located abroad, export to a third country of an item manufactured abroad containing more than de minimis U.S. content by value, and the deemed export and re-export of controlled technology, as illustrated above. BIS offers helpful preliminary guidance about the scope of its authority on its website, www.bis.doc.gov .
The Office of Foreign Assets Control ("OFAC") of the Treasury Department administers U.S. embargoes of trade, business and financial relations with countries such as Cuba, Iran, North Korea, Sudan, and Syria . See www.treas.gov/ofac. The embargoes and economic sanctions are usually based on authority in the International Economic Powers Act, the Trading with the Enemy Act, or more recent legislation. The scope of the embargoes is constantly changing, as it has recently with respect to Iraq, Libya, and Syria.
An important and difficult issue in navigating OFAC requirements is the concept of "facilitation." A U.S. company might expect its foreign affiliate to be able to engage in business with countries that are embargoed by the United States but not - or not to the same extent - as they are by the foreign country in which the foreign affiliate is incorporated. The line under U.S. law between avoidance and evasion is often thin and difficult to discern, however, for it depends on many factors that collectively add up to involvement, control, and/or intent to evade. It is especially difficult to identify in advance the point at which a U.S. entity might cross the line by "facilitating" the business with an embargoed country of its foreign affiliate. The issue often is the extent, nature, and timing of changes in the business practices or procedures at issue, and a simple change of business routine or a change of office personnel can shift the activity from one side of the line to the other.
"Defense articles" and "defense services" are controlled by the Directorate of Defense Trade Controls ("DDTC") of the Department of State under the Arms Export Control Act and the International Traffic in Arms Regulations ("ITAR"). See www.pmdtc.org. DDTC controls cover production, sale, and any other activity or service that is primarily but not exclusively related to an item or service listed on the Munitions List of the ITAR. Generally these are items and services specially designed or modified for military use. Any entity dealing with a defense article or providing a defense service, in the broadest sense, must register with the DDTC even if no license is otherwise required. This registration requirement has created problems where, for example, elements of a defense contract are awarded to unregistered (and unlicensed) subcontractors who otherwise have no defense-related business and have had no involvement with DDTC. Unfortunately, defense contractors have not always provided adequate advance notice of DDTC registration and licensing requirements to their subcontractors.
After determining that BIS has jurisdiction over an export or re-export transaction, the first step is to gather sufficient information about the item to be exported or re-exported to permit its classification in the Commerce Control List ("CCL"). Some export and re-export controls are based on the physical characteristics, uses, and specifications of the commodity, technology, or software. (The CCL only controls technology and software that is related to listed equipment or materials.) The exporter may classify the item using the CCL or may write to BIS for a commodity classification ruling. If a particular item is classifiable on the CCL, it likely will require a license for export or re-export only to certain designated countries. Moreover, the regulations contain several specific value- or use-based exceptions that may eliminate the need for a license.
Even if there is no license requirement based on the CCL classification of an item, its export or re-export may be subject to licensing based on the nature of the end use or identity of the end user. Thus, each potential export must also be "screened" against several lists of persons and entities to whom the item cannot be exported or with whom the U.S. person can have no business relations. These lists are maintained on the DDTC, OFAC, and BIS websites and are updated frequently.
In order to meet export compliance requirements today, even the occasional exporter must have a clearly stated export compliance policy, an export management system, and a trained export compliance officer to manage it. Screening for prohibited end uses and end users is absolutely essential in every case. How extensive the system is otherwise depends on the nature and extent of the export activity and the size of the company.
BIS enforces its laws through its Office of Export Enforcement and all export-related agencies enforce their laws through Homeland Security's CBP and ICE. In fact, ICE views the enforcement of export control laws as one of its primary missions. The U.S. intelligence community and the Justice Department, including the FBI, are also actively cooperating in the enforcement effort. Justice has recently increased its criminal investigations and prosecutions staff significantly to deal with export control violations.
It is important that any settlement of an export enforcement case encompass all relevant agencies and potential violations. The only aspect of enforcement that is not negotiable is the potential for significant negative publicity.
Robert F. Seely is Of Counsel, Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP. Mr. Seely wishes to thank Paul DiVecchio of DiVecchio & Associates, 22 Thayer Street, Northboro, MA 01532 for his significant contribution to this article.