Export Controls: Compliance Challenges and Best Practices

Transcription

1 Export Controls: Compliance Challenges and Best Practices Society of Corporate Compliance & Ethics October 12, Topics to Cover Background Compliance Challenges Enforcement Best Practices Questions / Discussion 2 1

2 Background 3 Goals of Export Controls Protect national security Advance foreign policy Promote democracy 4 2

3 Dual Use Exports 5 Dual Use Export Controls Who? U.S. Department of Commerce, Bureau of Industry and Security (BIS) What? Commercial items and technology How? Export Administration Regulations (EAR) 6 3

4 Dual Use (cont d) When? Exports / re exports / transfers U.S. origin items or items in the United States De minimis rules 7 Dual Use (cont d) How? Commerce Control List (CCL) Export Control Classification Numbers (ECCNs) Controls: Destination (e.g., embargoes) End use (e.g., WMD proliferation) End user (e.g., Denied Persons List) 8 4

5 Dual Use Classification & Licensing Classification Generally self classify Can request an official BIS commodity classification Most U.S. commercial exports do not require a license 9 Defense Exports 10 5

6 Defense Export Controls Who? U.S. Department of State, Directorate of Defense Trade Controls (DDTC) What? Defense articles specifically/specially designed or modified for military or space application Technical data Defense services 11 Defense Articles *Item or technical data designated on USML * Technical data *Models, other items that reveal technical data * Unfinished products clearly identifiable as defense articles 12 6

7 Defense Services * Assistance (including training) to non U.S. persons in development, testing, repair, modification, operation etc. of a defense article * Furnishing technical data to a foreign person * Providing military training 13 Defense Services Beware! * Military training is a defense service even if the data provided is in the public domain at present * Servicing an EAR controlled article installed on a defense article is a defense service currently 14 7

8 Defense Export Authorizations Registration is required Nearly all exports require specific authorization License Technical Assistance Agreement Manufacturing License Agreement 15 Brokering Covers U.S. persons, and Any person in the United States, and Any person outside United States if owned or controlled by a U.S. person 16 8

9 Brokering (cont d) Covered person who is: Engaged in brokering activities such as Financing, insuring, transport, freight forwarding Negotiating or otherwise supporting purchase or transfer of defense article Registration / license requirements with some exceptions Employee of registrant need not individually register 17 Compliance Challenges 18 9

10 Technology Exports Controls on release / transfer of data and technology Oral or visual disclosure or transfer Including to non U.S. persons lawfully admitted to U.S. Regulations contain guidance on nationality considerations 19 Public Domain Information published / generally accessible to public: Through sales at newsstands and bookstores Through subscriptions available to any individual At public libraries Through patents available at any patent office At a conference, seminar, trade show, etc. in United States Through public release after approval by U.S. government Through fundamental research at U.S. universities where information is ordinarily published and shared broadly in the scientific community 20 10

11 Challenges Technology Exports Access controls Internal IT access Travel considerations VPN access, laptop policy s and FTP transfers Marking of technical information No regulatory requirement but industry best practice Exports in the cloud 21 Challenge: Third Parties Customer Business purchases product Direct contractual relationship Prohibited party? End use of concern? Transfer or re export? Replacement parts? Services? 22 11

12 Third Parties (cont d) Distributor Resells product to own customers Distributor is not end user of product Direct contractual relationship with distributor No contract with distributor s customer but Could have liability if customer violates law Warranty services? Replacement parts? 23 Third Parties (cont d) Agent / Representative Doesn t purchase product Acts on behalf of company Direct contractual relationship with representative Could have liability if agent violates law Ensure they understand law 24 12

13 Challenge: New Markets / Cuba Certain EAR99 items authorized: Building materials, equipment, and tools for use by the private sector Tools and equipment for private sector agricultural activity Tools, equipment, supplies, and instruments for use by private sector entrepreneurs 25 Cuba (cont d) Licenses may be available for other exports (e.g., for environmental protection) But no licenses for exports of non U.S. goods by non U.S. subsidiary of U.S. company In other words, Cuba remains complicated! 26 13

14 Challenge: Export Restrictions Russia / Ukraine License required Certain products for: Exploration for / production of oil or gas in Russia, or Russian military end use or enduser Embargo on exports to Crimearegion of Ukraine 27 Other Challenging Markets China Restrictions on exports to military end users Iran No US origin products with limited exceptions North Korea No US origin products with very limited exceptions Venezuela Restrictions on exports for military end use / end users 28 14

15 Compliance 29 Importance of Compliance Penalties Significant monetary fines: $250k per violation Prison for individuals: up to 20 years Designation as prohibited party Business risks Denial of export privileges Lost business opportunities/lost profits Adverse publicity/reputational damage Legal costs 30 15

16 Steps to Protect Against Export Violations 1 Properly Classify Your Products for Export Control 2 Know Who You are Doing Business With 3 Determine if the Destination Country Requires an Export License 4 Screen All Parties in Your Export Transaction 5 Watch for Red Flags 6 Document Compliance 31 Step 1 Classification 1 Properly Classify Your Products for Export Control Document Compliance 4 Determine if products are controlled for export Watch by the for Department Red Flags of Commerce or the 3 Department Screen of State All Parties in 2 Commerce controls the export of most commercial products Determine if State controls the Your Export the export of military products (license required) Know Who Transaction Destination You Technical are characteristics Country of the product, the destination country, the Doing end user, Requires and end an use dictate whether a license is required Business Export Must Withdetermine License if a product has a specific Export Control Classification Number (ECCN) Found in the Export Administration Regulations (EAR) Most products do NOT have specific ECCN (EAR 99, No License Required)

17 Step 2 Know Your Partners 1 Properly Classify Your Products for Export Control 2 Know Who You are Doing Business With Customer Document Compliance Individual/business 4purchases your Watch goods/services for Red Flags Either 3 the end Screen user of All the goods or incorporates the goods into their Parties own product in and resells Determine Your Export if You/Customer the have a direct contractual relationship Transaction Destination Distributor Country Requires Individual/business an purchases your goods/services Export Resells the goods to their own customers in materially the License same form in which they purchased from you Distributor is not the end user of the goods You/Distributor have a direct contractual relationship You have no relationship with Distributor s customers Step 3 Know your Destination 1 Properly Classify Your Products for Export Control 2 Know Who You are Doing Business With 3 Determine if the Destination Country Requires an Export License 4 Screen All Parties in Your Export Transaction 5 Watch for Red Flags Certain restrictions apply: 6 Document Compliance NO exports allowed into certain countries Exports allowed into certain countries only with a license No exports to certain third parties based on end use 34 17

18 Step 4 Screen 5 4 Watch for 3 Screen All Red Flags Parties in 2 Determine Your Export if the 1 Know Who Transaction Destination You are If company and/or Country Doing directly affiliated individuals are on the list(s) of Requires an restricted parties, Business you may Your Export be able to sell to them under certain With circumstances (must review License restrictions carefully) Properly Classify Products for Export Control 6 Document Compliance If company and/or directly affiliated individuals are on the list(s) of denied parties, you cannot sell to them directly or indirectly! 35 Step 5 Red Flags 1 Properly Classify Your Products for Export Control Screen All Parties in 2Customer Determine or distributor scenarios such as: Watch for Red Flags 6 Document Compliance Your Export Willing to pay if cash the for high value Know Who Transaction shipments Destination You are Appears unfamiliar with the product or its use Country Doing Orders products/quantities incompatible with the relevant business Requires an Business Export With The end user License requests: Performance/design specs incompatible with resources or environment End use at variance with standard practices Middleman from third country to place order Refuses to state whether goods are for domestic use, export, or re export 36 18

19 Step 6 Recordkeeping 1 Properly Classify Your Products for Export Control 2 Know Who You are Doing Business With Watch for Red Flags 3 Screen All Retain all export Parties due in diligence and shipping documentation Your for Export at least 5 years Determine if the Destination Country Requires an Export License Transaction Documentation is essential to demonstrate that you have a robust export compliance program and can help mitigate potential damages in the event of a noncompliance You can outsource responsibility but you can t outsource liability! Document Compliance 37 Compliance Best Practices Compliance policy and manual Commitment to compliance Implementation of best practices Screening of third parties Due diligence on transaction partners Personnel training Accurate recordkeeping Periodic compliance reviews 38 19

20 Enforcement 39 Chinese telecommunications company Total settlement amount of $1.19 billion Involved OFAC, Commerce, DOJ 3 year monitor 40 20

21 Company sought to avoid U.S. restrictions and trade with Iran and North Korea Codenames for embargoed countries Deleted references to embargoed customers Removed logo from shipments to Iran Commingled U.S. and non U.S. goods in shipments Esterline March 2014 consent agreement Settled nearly 300 ITAR violations Technology exported during facility visits and when shared with foreign manufacturers Improper temporary imports Recordkeeping 42 21

22 Esterline (cont d) Violations due to: Improper classifications Failure to comply with license terms Inadequate compliance across multiple entities Significant Penalties $20 million fine Engagement of Special Compliance Official 43 Milwaukee Electric Tool January 2017 Settlement 25 violations under the EAR Unauthorized exports of thermal imaging cameras Colombia, Hong Kong, Mexico, etc. $301,000 penalty; cameras valued at $130,000 No license until payment 44 22

23 Questions? 45 Thank You! Heather Smith Associate General Counsel & Secretary Lydall, Inc. O: (860) Thad McBride Partner Bass Berry & Sims W: (202) C: (202)