U.S. EXPORT CONTROL LAWS AND INTERNATIONAL OPERATIONS: A QUICK REFERENCE GUIDE FOR CORPORATE COUNSEL

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1 U.S. EXPORT CONTROL LAWS AND INTERNATIONAL OPERATIONS: A QUICK REFERENCE GUIDE FOR CORPORATE COUNSEL Nelson Dong and Larry Ward Dorsey & Whitney LLP Seattle, Washington June 2015 This paper covers three areas of legal compliance for international sales activity under the U.S. export control laws. Put into non-legal terms, this paper addresses one basic question often asked by a company s executives, managers, sales staff, agents and resellers: Does the company need any prior U.S. Government approval to sell, distribute or transfer its U.S.-origin products, software technology, technical data or services (collectively, U.S. Items ) outside the United States? 1. U.S. EXPORT CONTROL LAWS. 1.1 General Background. In their broadest terms, the U.S. export control laws are intended to control the spread of U.S. Items that either affect U.S. national security or U.S. foreign policy interests. Some of these controls are aimed at purely military Items and other controls are directed toward socalled dual use Items that can be used in either civilian or military applications. Other legal controls focus solely on the nationality of the proposed end-user and affect all U.S. Items and U.S. persons, regardless of the technological content of those items because of foreign policy differences between the United States and those countries, irrespective of whether they pose any actual or likely national security threat. In other words, these latter controls might be properly labeled as total trade embargoes against certain countries, persons or groups. As such, the precise nature or degree of technical content in the U.S. Items is irrelevant. In most industrialized nations, the export control laws are consolidiated into a single set of regulations administered and enforced by a single agency. However, as will be explained below in this paper, for historical reasons, the United States has a more fragmented system and, for its main export controls, uses three different sets of regulations administered and enforced by three different agencies in three different departments (ministries) of the U.S. Government. This sharp division of authority creates considerably more complexity in the U.S. legal approach to export controls. Note: Since 2009, the Obama Administration has been engaged in a massive revision of its export control system through what it has called its Export Control Reform ( ECR ) initiative. Under ECR, as will be explained in more detail below, the number of U.S. Items subject to the more stringent munitions -type controls under U.S. law have been sharply reduced. Moreover, those munitions control regulations have also been rewritten into a positive list format where goods subject to such controls are explicitly described and listed. ECR is easily the largest and most complicated revision of U.S. export control laws in over half a century and will profoundly affect many multinational corporations ( MNCs ), especially those involved in the defense and aerospace and satellite industries. The deepest effects of ECR,

2 once it is fully implemented, will likely be felt by MNCs that provide, sell or service parts, components, accessories and attachments for military systems. 1.2 Citizenship & Nationality At the outset, it is useful to understand that one common feature to all the systems of U.S. export control laws (including its post-ecr rules) is a clear distinction between individuals who are U.S. persons and those who are foreign persons. In general, under any of the U.S. export control laws: A U.S. person is any U.S. citizen, permanent resident alien or person admitted on an asylum status to the United States or a legal entity organized under U.S. law; and By the process of elimination, a foreign person (or foreign national ) is any other individual or legal entity. For MNCs, this definition of foreign person will likely apply to every non-u.s. affiliate (e.g., a non-u.s. subsidiary) or non-u.s. employee and every non-u.s. distributor, reseller, sales agent, supplier or service entity. That, in turn, means that almost every kind of transaction between a U.S. company and any of these non-u.s. persons (even the U.S. company s own subidiary or the employees of that subsidiary) needs to be viewed as an export transaction under U.S. export control laws. 1.3 Munitions List Items. U.S. Items that are intended mainly or exclusively for military purposes or that may have direct use in military applications are controlled by the International Traffic in Arms Regulations ( ITAR ). The U.S. State Department s Directorate of Defense Trade Controls ( DDTC ) administers the ITAR, which are codified at 22 C.F.R. Part 120 et seq. The ITAR list of controlled military Items is known as the United States Munitions List ( USML ). The ITAR system is intentionally strict and intrusive upon international business transactions involving military goods. Generally speaking, if a company is seeking to export to any foreign person a U.S. Item that is controlled under the ITAR, it must first seek an export license from DDTC. (This general rule is sometimes relaxed slightly for exports to Canada, but otherwise the ITAR draws a sharp distinction between U.S. persons and all other nationalities. Prior to the Obama Administraton s ECR changes that initially began in 2009, the USML was only a very generalized list of defense articles and defense services with almost no precision or detail to describe what U.S. Items were considered to be subject to the ITAR. However, because of ECR, as of June 2015, the U.S. Government has almost completely rewritten the USML into a positive list format. Under that new positive list approach, to be controlled under the ITAR, a U.S. Item must be expressly listed (or enumerated ) within one of the USML categories. As a consequence of this change, hundreds of thousands of U.S. Items formerly under ITAR control have been removed from the jurisdiction of the ITAR, mainly parts, components, accessories and attachments for defense systems. Most of these removed U.S. Items have been transferred to the jurisdiction of the Export Administration Regulations (see Section 1.3 below). 2

3 As of June 2015, most of the USML categories have been revised into the new positive list format, but a few more USML categories still remain to be amended. The most current version of the ITAR and its USML can be found at this official DDTC website: The official DDTC website is located at and contains the current version of the ITAR. The Department of the State also maintains a list of parties who are barred by ITAR Section from participating directly or indirectly in the export of defense articles, including technical data, or in furnishing of defense services for which a license or approval is required by the ITAR. That list of statutorily debarred parties is located at: The ITAR sharply affects the procedure for selling or transferring ITAR-controlled Items overseas, and that procedure is quite distinct from the process outlined below for dual use U.S. Items. Affected exporters who come within the DDTC s jurisdiction must register with the DDTC after payment of a registration fee and must obtain a DDTC registration code. Under the ITAR, the DDTC must also approve in advance any contracts for technology transfers involving ITAR-controlled technology. There are very few license exceptions under the ITAR. As a general rule, if a U.S. Item is subject to the ITAR, then every international transaction involving such U.S. Item will require DDTC export licensing. In summary, the export control compliance procedures under the ITAR contrast sharply with the generally more liberal procedures of the EAR for dual use Items described below. Thus, it is vital that a company identifies correctly whether the U.S. Items that it wishes to sell or transfer internationally are or are not subject to ITAR controls. That determination requires close attention to the current USML and the appropriate category or categories within the USML that may apply to the U.S. Item in question. It is also critical to be aware of the ongoing changes still being made to the USML through the ECR process. 1.4 Dual Use Items. The vast majority of U.S. Items are not meant for military uses and are purely commercial or civilian in nature. However, a limited set of U.S. Items are dual use in nature because, although originally intended for commercial or civilian use, they also have the potential to be applied in military applications. Such dual use items are covered under the Export Administration Regulations ( EAR ) administered by the U.S. Commerce Department s Bureau of Industry and Security ( BIS ). The BIS has published a detailed list of Items that are considered EAR-controlled. This list is known as the Commerce Control List ( CCL ) and is found in Supplement No. 1 to EAR Part 774. Using the CCL and the EAR s Country Chart (found in Supplement No. 1 to EAR Part 738), one can determine whether a BIS export license is required to export a controlled Item to a particular end-user in a particular country. The official BIS website contains the current EAR and various lists that an exporter should check before exporting Items. The official BIS website is located at The Denied Persons List identifies those persons who have been officially denied export privileges by the BIS under punitive orders and is located at The Entity List is a list that sets forth foreign end-users known to be involved in proliferation activities and the development of weapons of mass destruction or missiles to deliver those weapons. The Entity List is located at There is 3

4 also a BIS Unverified List in which the BIS has named certain companies about which it has suspicions. U.S. exporters are not forbidden, as such, to deal with any of the persons or entities listed on the Unverified List, but such exporters and their international resellers should proceed quite cautiously in any transaction with a person or entity on that list. In the language of the BIS, being included on the Unverified List should raise a red flag, as further explained here: In essence, an exporter needs to make three determinations in applying the EAR: Is the type of U.S. Item on the CCL? If so, above what functional level of power, performance, size or other parameter must the BIS issue an export license before the sale can be made, and, conversely, below what level might a U.S. exporter provide the U.S. Item to a foreign person under a license exception even if a license is nominally required by the CCL (as explained below)? Are there specific end-uses, end-users or destinations that require any different treatment in terms of licensing or handling? The BIS draws a fundamental distinction between export license situations and situations in which an exporter would be qualified to use a license exception. License exceptions are broad categories that allow, within certain stated limits, exports of certain Items (e.g., computer software) to certain trusted destinations (e.g., western Europe or Japan) without any formal BIS license application. If no license exception is applicable, then a U.S. exporter must file a BIS license application and justify the individual transaction to the BIS. Because the BIS can take weeks or even months to issue an export license, a company should allow sufficient time and opportunity to make the above assessments and, if necessary, to secure appropriate export licenses from the BIS before final sales are made if the U.S. Items involved in a sale are subject to the EAR. 1.4 Trade Embargoes. The Treasury Department s Office of Foreign Assets Control ( OFAC ) administers a range of regulations that impose partial or total trade embargoes against certain designated countries, groups and individuals. The OFAC regulations are found at 31 C.F.R. Part 500 et seq. These regulations are foreign policy -driven controls and can come into effect and be terminated or changed quite quickly by the U.S. Government in response to evolving geopolitical events. The OFAC embargo regulations are exceptionally complex and unfortunately differ in wording and scope from one country to another, so what may be prohibited under one set of regulations might actually be allowed under another set. For instance, most of the OFAC embargo rules apply only to U.S. persons, but the OFAC embargoes for Cuba and Iran also apply to any non-u.s. subsidiaries owned or controlled by a U.S. company. It is thus critical to focus upon the correct set of OFAC regulations to ensure whether a transaction involving a U.S. person or a U.S. Item will be lawful. Although complex, there are only a very limited number of countries subject to such OFAC regulations. As of June 2015, the nations subject to broad U.S. economic sanctions 4

5 include only Cuba, Iran, Sudan and Syria. There are also varying degrees of economic sanctions imposed on parts of the Balkans, Belarus, Central African Republic, Congo, Côte d Ivoire, Iraq, Lebanon, Liberia, Libya, Myanmar, North Korea, Russia, Somalia, South Sudan, Ukraine, Yemen, and Zimbabwe. Moreover, for a variety of geopolitical reasons, the OFAC embargo regulations are often changed. For example, the Obama Administration has worked extensively in recent years to reduce some of the economic sanctions directed against Cuba and Iran. At the same, due to the violence and warfare in the eastern parts the Ukraine, the Obama Administration has also imposed vigorous new economic sanctions against Russia, particularly certain state-owned enterprises in the Russian oil and gas sectors, usually in coordination with the European Union and other countries. Because the OFAC economic sanctions can be imposed (or taken away) so quickly, they are often among the first and most flexible tools used by an American President to respond to difficult situations without reliance upon military force. As a general rule, the United States would usually prefer to impose such sanctions on a multilateral basis (e.g., in conformity to a sanctions resolution of the United Nations Security Council), but the United States has always stated that, in principle, it is prepared to apply such sanctions on a unilateral basis when deemed appropriate and necessary. The OFAC website contains country-by-country explanations for each of the current OFAC embargoes, written in plain English. The OFAC website is found at The OFAC site also includes published lists of Specially Designated Nationals ( SDNs ) and so-called blocked persons with whom it is illegal for U.S. persons to trade or do business. Those official lists can be found at 2. DEEMED EXPORTS Under both the ITAR and the EAR, U.S. law treats the disclosure or transfer of any ITAR or EAR-controlled technical data (e.g., designs, drawings or chemical fomulae) or computer software to a foreign person within the United States as if that technical data had been exported to the home country of that foreign person. For example, if a U.S. parent company has a subsidiary in country X and asks for scientists and engineers from the country X subsidiary to travel to its American headquarters offices for technical meetings and collaborations, if the U.S. parent company s products involve EAR-controlled technical data, then the technology transfer that would occur during such meetings and collaborations would be said to include deemed exports to country X. Almost by definition, MNCs present many internal as well as external opportunities for such deemed exports to occur. Accordingly, legal counsel serving MNCs should be especially vigilant for the potential of such deemed exports and to ensure that any interactions between the MNC s U.S. and non-u.s. personnel or the operation of the MNC s global information systems will comply with such U.S. deemed export laws and regulations. 3. U.S. CONTROL LISTS. As discussed in more detail above, the U.S. State Department, the U.S. Commerce Department and U.S. Treasury Department each maintain certain lists of individuals, entities and organizations that are restricted in some way from participating in business transactions 5

6 with U.S. persons or, in some cases, with non-u.s. companies that are owned or controlled by U.S. persons. (Collectively, these lists are referred to in this guidance document as the U.S. Control Lists. ) As an initial step in its ECR Initiative, the Obama Administration deployed a new website in December The website contains a tool to facilitate reviews of the U.S. Control Lists by bringing together, for the first time, all the various U.S. Control Lists in a single consolidated online computerized database found at ( Consolidated Database ). The Consolidated Database should make it unnecessary to go to each individual agency site to perform the required U.S. Control Lists checks that are advisable for proper export control compliance. Before a company enters into any serious sales discussion with any non-u.s. customer, exports any product or technology to any non-u.s. customer or contracts with a new non-u.s. agent, reseller, supplier or vendor, as a best practice to avoid U.S. legal problems, its personnel should ensure that such customer, agent, reseller, supplier or vendor (collectively, Proposed Party ) does not appear on any of the U.S. Control Lists. To do so, personnel should review the Consolidated Database to determine if the Proposed Party matches an entry on any of the U.S. Control Lists. However, because the U.S. Control Lists are frequently but not regularly updated to add or delete names of restricted persons, it is important that any such check of a Proposed Party should be made on the most current Consolidated Database that appears on the website listed above. Using only archived or stored copies of the Consolidated Database or of the U.S. Control Lists may provide invalid results. 4. PENALTIES. The regulatory penalties in these different U.S. or other local export control laws are varied but substantial, including administrative and civil penalties, criminal prosecution and potential loss of the privilege of exporting, importing or buying certain goods or services. U.S. law also permits the U.S. Government to block serious violators of its U.S. export control laws from being suppliers to the U.S. Government, a process known as debarment. Loss of such a large potential American customer through debarment could ultimately be more costly than a fine, and there could be additional reputational damage to such a violator. Each of the U.S. export control agencies may also conduct unannounced audits or inspections to check on an exporter s compliance records. Investigations launched from such audits or checks can themselves be intrusive, time-consuming and expensive. In some instances, these U.S. inspections and audits may extend to persons outside the United States. Of course, a non-u.s. company may also be subject to the scrutiny and penalities of its own national export control authorities and law enforcement agencies. MNCs therefore need to consider carefully all such applicable export control laws, both those of the United States and of any other relevant jurisdictions. Proper compliance with such complex and changing laws and regulations may require, in certain circumstances, consultation with legal counsel experienced in the application of such laws in international business transactions. # # # # # 6

7 Nelson Dong and Larry Ward are partners with the Dorsey & Whitney LLP law firm in its Seattle, Washington, USA office. Mr. Dong is head of Dorsey s National Security Law Group. Both Mr. Dong and Mr. Ward regularly consult with clients on export control issues in international technology transactions, and both regularly teach and write on topics concerning U.S. national security and U.S. technology law. Mr. Dong may be reached by at dong.nelson@dorsey.com and by telephone at Mr. Ward may be reached by at ward.lawrence@dorsey.com and by telephone at DORSEY & WHITNEY LLP. This paper is for general information purposes only. Views herein are deemed of general interest and should not necessarily be attributed to Dorsey & Whitney LLP or its clients. The contents of this paper should not be construed as legal advice or opinion. Consultation with a qualified lawyer concerning any specific legal situation is recommended. 7