End User Verification Best Practices. Jennifer Horvath and Bruce Leeds

Transcription

1 End User Verification Best Practices Jennifer Horvath and Bruce Leeds

2 Agenda 1. Export Administration Regulations the EAR 2. Compliance standard and penalties for noncompliance 3. EAR prohibition #5: end-users and end-uses 4. Best practices

3 Why Is End-User Compliance Important? Potential civil and criminal penalties, for the individual and the company Loss of business Loss of export privileges Risk to reputation; bad publicity National and economic security implications

4 Compliance Matrix Commercial and Duel Use Exports Defense Articles Exports Government Agency with Jurisdiction Department of Commerce s Bureau of Industry and Security Department of State s Directorate of Defense Trade Controls Regulatory Authorization Export Administration Regulations (EAR) International Traffic in Arms Regulations (ITAR) Enforcement Mechanism End-user verifications Blue Lantern Program

5 The EAR: Export Administration Regulations Regulates the export of commercial and dual use commodities, software and technology General rule: A person may transact without a license or other authorization unless their export, reexport or activity requires such by the export regulations (15 CFR 736.1)

6 What the EAR Prohibits Under 15 CFR Part 736: Transactions involving items subject to the EAR must abide by the 10 general prohibitions Obligations under the ten general prohibitions rely largely on five types of information: 736.2(a)(1): Classification of the item; 736.2(a)(2): Destination; 736.2(a)(3): End-user; 736.2(a)(4): End-use; and 736.2(a)(5): Conduct

7 EAR: The 10 Prohibitions Prohibition 1: You may not export items subject to the EAR to destinations in violation of the item s reason for control Prohibition 2: You may not export or reexport foreign made products incorporating more than de minimis amount of controlled US content in violation of EAR Prohibition 3: You may not reexport any item that is a direct product of US technology or a US plant in violation of EAR Prohibition 4: You may not engage in actions prohibited by a denial order Prohibition 5: You may not knowingly export or reexport items subject to the EAR to an end-user or for an end-use that is prohibited by EAR

8 The 10 EAR Prohibitions Cont. Prohibition 6: You may not export or reexport an item subject to the EAR to a destination embargoed by the US Prohibition 7: You may not support or assist proliferation activities Prohibition 8: You may not export or reexport an item through or transit through certain countries if a license would be required to export to that country Prohibition 9: You may not violate terms or conditions of a license or license exception Prohibition 10: You may not proceed with transactions with knowledge that a violation of the EAR has occurred or is about to occur

9 Knowledge under the EAR Under 15 CFR 772 the knowledge requirement is defined to include more than positive knowledge. It includes an awareness of a high probability that circumstances exist or will occur in the future. Such awareness can be inferred from a person s willful avoidance of facts This creates an affirmative obligation to conduct due diligence for products subject to export controls Severe penalties for proceeding with a transaction with knowledge that a violation of the EAR is occurring or is about to occur

10 Penalties EAR: Civil: Up to $289,238 per violation, denial of export privileges, seizure/forfeiture of goods Criminal: Up to $1,000,000 per violation, 10 years in prison, denial of export privileges. (Federal Register, Volume 81, No. 249) ITAR: Civil: Up to $1,111,908 per violation, denial of export privileges, seizure/forfeiture of goods Criminal: Up to $1,000,000 per violation, 10 years in prison, denial of export privileges. (Federal Register, Volume 82, No. 7) OFAC Civil penalties: $289,238 or twice the amount of each underlying transaction (Federal Register, Volume 81, No. 249) Criminal penalties for willful violations: $50,000- $10,000,000 Imprisonment ranging from years

11 Prohibition #5: End-Uses/End-Users : Categories of end-use restrictions 744.2: Restricts exports for nuclear end-uses 744.3: Restricts rocket system and unmanned air vehicle exports 744.4: Restricts chemical and biological weapon exports 744.5: Restricts maritime nuclear propulsion exports 744.7: Restricts exports for use by foreign vessels or aircraft

12 Prohibition # : Categories of end-user restrictions: : Restricts EAR exports to Russian entities : Imposes special requirements on entities sensitive to national security : Restricts exports to those persons Specially Designated Terrorists : creates special conditions for those on the Unverified List : Sets forth requirements and procedures for all parties on the Entity List : Procedures for exporting to sanctioned parties : Military exports to China, Russia or Venezuela : Restricts exports to persons whose property is blocked by Executive Order

13 What is an End-Use Check? An End-Use Check is a physical verification on location with a party of the transaction to determine if the party is a reliable recipient of U.S. goods and that items are or will be used in accordance with the EAR. BIS also conducts checks by requesting supporting documents for an export shipment As part of its licensing process and preventive enforcement efforts, BIS selectively conducts end-use checks on certain dual-use and munitions exports. Monitor license condition compliance. Monitor compliance of non-licensed transactions. Confirm the end-use. Determine if the company is a reliable end-user. Discover more information about the parties.

14 BIS Red Flags Customer reluctant to offer information about end-use Product s capabilities do not fit buyer s line of business Customer willing to pay cash for items when terms of sale would normally call for financing Customer has little or no business background Customer is unfamiliar with product s performance characteristics but still wants product Freight forwarding firm is listed as the product s final destination Shipping route is abnormal for the product and destination End-user declines customary associated services (installation, repair)

15 DDTC: Blue Lantern End-User Monitoring Conducts pre-license, post-license, and post-shipment inquiries or checks to: verify foreign consignees and end-users confirm receipt and disposition of exported articles confirm end-use and compliance with requirements If investigation identifies an end-use or end-user violation, DDTC could issue civil or criminal penalties, revoke export privileges

16 Best Practices 1. Organizational Commitment 2. Customer Due Diligence 3. Utilizing Government Resources and Programs

17 1. Organizational Commitment Establish a formal export compliance program with specific export clearance procedures/checklists for employees tasked with export responsibilities Designate a specific employee responsible for export compliance Institute an Order Review process to initiate regular customer evaluations along with Hold and Release mechanisms to prevent diversion to prohibited endusers when exports travel though known diversion hubs

18 Organizational Commitment Cont. Exporters using Freight Forwarders should confirm their operations comply with best practices for transshipment Avoid routed export transactions unless a trustworthy relationship has been built between the customer and the exporter Identify all domestic and foreign employees and facilities that have a role in your export transactions

19 Organizational Commitment Cont. Catalog your controlled technology and any foreign nationals working with your organization to prevent end-user violations Develop a technology control plan to protect against informal technical exchanges with foreign national employee Centralize hiring to ensure appropriate screening prior to giving controlled technology to foreign nationals

20 2. Customer Due Diligence - Screening Screen all parties against denied persons lists published by government A match indicates either: there is a strict export prohibition; a specific license requirement; or the presence of a "red flag" Prior to taking any further actions, consult the requirements of the specific list on which the company, entity or person is identified by reviewing the webpage of the agency responsible for the list.

21 Customer Due Diligence Cont. Unverified List: Alerts exporters about foreign persons whose bona fides could not be verified or foreign companies who decline end-user inspections. An export license or consignee statement may be required. Entity List: Imposes restrictions on exports, absent license approval, on foreign persons involved in activities contrary to the national security or foreign policy interests of the United States. Consolidated Screening List: Centralizes export screening lists into one spreadsheet to assist in screening potential parties to regulated transactions

22 Customer Due Diligence Cont. Use all forms of publicly available information to verify legitimacy of customer physical address, website, addresses, physical site visits Establish whether customer is a reseller or product integrator Add contract language committing parties to regulatory obligations Obtain an End-Use Statement or End-User Certificate

23 Customer Due Diligence Cont. Never assume that your EAR99 exports require no licenses know the country of ultimate destination Never assume that a domestic sale will not require a export license ( deemed export ) Proactively monitor customer conduct for potential red flags

24 3. Utilize Resources from BIS Voluntary Self-Disclosure Program will mitigate liability if full, immediate disclosure of a violation is made Contact BIS for help understanding restrictions/license requirements for your export Validated End-User Program

25 The Validated End-User (VEU) Program Available for end-users in India and China only Reduces the licensing burden on industry by allowing U.S. exporters to ship designated items to pre-approved entities under a general authorization instead of under multiple individual export licenses. VEUs may only: a) use the received items at their approved facilities as listed in Supplement No. 7 to Part 748; b) consume the items during use; and c) transfer or reexport the items only as authorized by BIS.

26 VEU continued For each VEU, the EAR lists eligible destinations, which are the specific facilities of each VEU that are authorized to receive specified exports. VEU status continues until U.S. Government revokes it End-users can apply or American exporters can apply on endusers behalf Requirements: 1. an internal compliance plan; 2. submit regular reports on their use of the items; 3. agree to allow the U.S. Government to review relevant records and conduct inspections of the facility

27 Summary Commit to it: Formal compliance programs with designated compliance employees Not all end-user violations are obvious: deemed exports and controlled technology sensitivity Know your buyers: Screen end customers against published lists and proactively monitor for red flags BIS as a compliance partner: Capitalize on BIS programs including VEU, training and disclosure programs

28 Jennifer Horvath Braumiller Law Group, PLLC 5220 Spring Valley Road, Suite 200 Dallas, TX Office: (214) Bruce Leeds Braumiller Law Group, PLLC 5220 Spring Valley Road, Suite 200 Dallas, TX Office: (214)