U.S. Trade Controls: Key Compliance Challenges

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1 U.S. Trade Controls: Key Compliance Challenges Prepared for: Presented By: Peter Flanagan and John Pisa-Relli, Accenture October 16, What Are Trade Controls? Export controls: Restrictions on the supply of products, software, technology and, in some cases, services: To identified markets due to national security, foreign policy, nonproliferation, or other concerns; To identified parties subject to particular restrictions; and/or For end-uses that raise policy/security concerns. Sanctions: Prohibitions on involvement in trade, financial, and investment dealings with sanctioned markets, entities, or persons. Export controls and sanctions may be multilateral or unilateral. 2 Impact of U.S. Trade Controls on Global Companies Trade controls regulate dealings by U.S. persons worldwide; U.S. government aggressively enforces its trade control laws. Trade controls can restrict access to some U.S. products and technology, from affiliated U.S. companies and third parties, and can therefore have a significant impact on cross-border business. U.S. law prohibits export, reexport or transfer -- even by non-u.s. persons -- of U.S. goods, software, and technology without U.S. government approval in some circumstances. 3 1

2 U.S. Trade Controls: Key Programs EAR: Commercial, dual-use, and less sensitive military goods and technology are controlled by the Export Administration Regulations ( EAR ) administered by the Department of Commerce, Bureau of Industry and Security ( BIS ). ITAR: Defense articles and defense services are controlled by the International Traffic in Arms Regulations ( ITAR ) administered by the Department of State, Directorate of Defense Trade Controls ( DDTC ). Economic Sanctions: Various regulations administered by the Treasury Department, Office of Foreign Assets Control ( OFAC ). Antiboycott Measures: Two regimes, enforced by the Commerce Department through the EAR and the Treasury Department through the tax code. 4 Enforcement of U.S. Trade Control Laws Violations of trade control laws can result in civil or criminal penalties. Civil penalties are imposed on a strict liability basis; criminal penalties are also possible for knowing/willful violations. Other potential consequences: remedial measures, denial of export privileges, debarment, negative publicity, and reputational damage. Millions of dollars in penalties imposed each year by agencies enforcement arms. Active enforcement environment, increasing cooperation among trade control agencies and with the U.S. Department of Justice. 5 U.S. Export Controls: Exports and Reexports Export Broad concept. Physical shipment or transfer of an item out of the U.S. Cross-border electronic transmission of software or technology, such as by or downloading from a remote computer server. Does not have to be a sale or permanent. Deemed Export Disclosure of controlled technology in the U.S. to someone other than a U.S. citizen or permanent resident. Reexport Transfer of an item from one non-u.s. jurisdiction to another. Deemed Reexport Disclosure of technology in one non-u.s. country to an individual who is a citizen or permanent resident of a third country. 6 2

3 U.S. Export Controls: What is the Export Jurisdiction? ITAR vs. EAR Export Administration Regulations ( EAR ) Administered by BIS (Commerce Department). Control the export, reexport, and transfer of commercial, dual-use, and some military goods, software, and technology. International Traffic in Arms Regulations ( ITAR ) Administered by DDTC (State Department). Control the export, reexport, and retransfer of defense articles and services. The U.S. maintains two export control lists: one is dedicated to defense articles and defense services (ITAR) and the other has a broader scope (EAR). 7 U.S. Export Controls: What is the Export Jurisdiction? Items Subject to the EAR U.S.-origin commodities, software, and technology. Goods, software, or technology that contain more than de minimis controlled U.S. content (by value). 10% for Iran, Sudan, Syria, and North Korea. 25% for all other countries. 0% for certain sensitive items Certain direct products of sensitive U.S. technology or software. Items Subject to the ITAR Defense articles (including technical data) specified on U.S. Munitions List ( USML ) and defense services. Nuclear Items and Technology May be subject to export controls administered by Nuclear Regulatory Commission or Department of Energy. 8 U.S. Export Controls: Is a License Required? EAR Key factors are export classification, destination, and intended end-user and end-use. EAR99 items No license required for most destinations. But license required (and unavailable) for U.S.-sanctioned countries and sanctioned parties under many circumstances. License may also be required based on end-use or end-user. If a license is required, check if a license exception is available. Part 746 governs exports to sanctioned countries and territories (Cuba, Iran, North Korea, Syria, Crimea, and Russia) ITAR DDTC license is required for virtually any export/reexport. 9 3

4 Overview of U.S. Sanctions The U.S. government, principally through the Treasury Department, Office of Foreign Assets Control ( OFAC ), enforces a broad range of economic sanctions measures: Comprehensive sanctions programs targeting Cuba, Iran, Syria, North Korea, and the Crimea region of Ukraine. Targeted sanctions against Russia, focusing on the financial, defense, and oil and gas sectors. List-based sanctions that target particular individuals, entities, and vessels in many countries around the world. Examples: Narcotics traffickers, terrorists, weapons proliferators, individuals who destabilize governments, transnational criminal organizations. 10 Overview of U.S. Sanctions Comprehensive, country-based sanctions: No export/import trade with targeted country or territory. No investments in targeted country or territory. No financial or other dealings with targeted country or territory. No dealings in goods/services from the targeted country or territory. List-based sanctions: Virtually no dealings of any kind with designated parties or parties 50% or more owned by one or more designated parties. In some cases, property of sanctioned country government or sanctioned person must be blocked when it comes into the United States or possession/control of a U.S. person. Blocked funds held in segregated accounts and reported to OFAC. 11 Who Must Comply with U.S. Sanctions? Any U.S. Person List-Based Sanctions and Most Country/Territory- Based Sanctions Any entity organized under the laws of a U.S. jurisdiction, including a foreign branch/office of a U.S. entity Any individual who is a U.S. citizen or permanent resident, wherever located or employed Any person or entity physically present in the United States, including a U.S. branch of a non- U.S. entity CUBA: Special Rules for Cuba and Iran Any U.S. person plus Any subsidiary, i.e., any entity owned or controlled, directly or indirectly, by a U.S. person IRAN: Any U.S. person plus U.S. persons are also subject to civil liability for transactions by their non-u.s. subsidiaries that would be prohibited if undertaken from the United States or by a U.S. person 12 4

5 No Facilitation U.S. persons cannot facilitate transactions by non-u.s. companies/persons that the U.S. person could not do himself or herself. OFAC interprets this prohibition broadly. Commercial and legal advice on the business aspects of sanctioned country dealings is prohibited. But advice on compliance with sanctions laws is allowed. 13 Examples of Prohibited Facilitation Approvals U.S. officer approving high-value transaction U.S. person approving new staffing for sanctioned market Processing Using U.S. data system to process orders or access technical information Processing payments through the United States Support Advice Referrals Policy Providing U.S. financial guarantee for sanctioned country contract Arranging insurance or transportation for sanctioned country transaction U.S. person advising how to structure transaction or execute business U.S. attorney drafting commercial clause for contract with sanctioned country U.S. person referring sanctioned country business to non-u.s. entity U.S. entity finding alternate supplier for non-u.s. entity with sanctioned country contract U.S. parent changing policy so non-u.s. subsidiary can pursue business that U.S. person can t perform U.S. person allowing policy exception for non-u.s. subsidiary to perform contract that would otherwise be prohibited by the policy