Export Control Violations.

The Export Control Reform Act of 2018 (ECRA), the International Emergency Economic Powers Act (IEEPA), and the various other provisions of U.S. Law (or the relevant enforcement agency’s regulations) impose extensive export- and import-related restrictions. Because they are so vast and detailed, it is not easy to distill a straightforward definition of what constitutes an export-control violation. When assessing liability in export-control cases, we think about four key prongs:

• (a) Are the goods, technology, money, or other interests involved in the transaction subject to U.S. Jurisdiction?
• (b) Are the goods, technology, money, or other interests subject to export- and import-related restrictions?
• (c) Do the goods, technology, money, or other interests cross an international boundary? Is there a specific license or other authorization from the relevant U.S. Authorities?
• (d) Did the transaction involve fraudulent intent or a knowing or willful violation of export-control regulations?

In terms of practical risks, this four-pronged analysis explains why classification, screening, documentation, and disclosure are so critical:

• If a transaction is subject to export-control regulations, the transaction will be subject to the appropriate agency’s licensing and screening requirements.
• If the transaction is exempt from licensing requirements and documentation requirements, but the U.S. Authorities pursue the transaction for other alleged reasons, demonstrating that the transaction was conducted with proper authorization (if required) or an appropriate understanding of the relevant restrictions will be key to defending against an enforcement action.
• If the transaction was conducted without proper authorization, showing that it was done voluntarily, and taking affirmative steps to remedy the transaction, may avoid unnecessary scrutiny.

What Are the Key Export-Control Agencies, Regulations, and Statutes?

At this time, there are five key federal agencies (or offices within the federal executive branch) that administer export controls. The most pertinent of these are:

• The Bureau of Industry and Security (BIS), which is part of the U.S. Department of Commerce, administers the Export Administration Regulations (EAR), and it provides the primary statutory authority for commercial controls.
• The Directorate of Defense Trade Controls (DDTC), which is part of the U.S. Department of State, administers and enforces the International Traffic in Arms Regulations (ITAR).
• The Office of Foreign Assets Control (OFAC), which is part of the U.S. Department of the Treasury, administers and enforces U.S. Economic-sanctions programs, such as the sanctions against Iran, Russia, Venezuela, and others. OFAC also provides for significant transaction restrictions under IEEPA and other statutes.
• The Nuclear Regulatory Commission (NRC), which administers certain nuclear exports under its own set of authorities.

The U.S. Department of the Treasury also administers transactions involving U.S. Persons (and transactions involving certain foreign parties that touch U.S. Money or financial mechanisms) that otherwise may not involve the physical export of a good or transfer of technology.

Along with these five agencies, the Export Control Reform Act of 2018 (ECRA) and the International Emergency Economic Powers Act (IEEPA) provide the principal statutory foundations for the various export-related restrictions, prohibitions, and sanctions. However, the TARIFF Act of 1930, the Cuban Assets Control Regulations (CACR), the Countering America’s Adversaries Through Sanctions Act (CAATSA), and various other federal laws and regulations also play key roles.

Which Jurisdiction and Restrictions Control an Item, Recipient, Destination, or Data Transfer?

When seeking to address potential civil or criminal liability for an export-control transaction, a party’s first step must be to determine which jurisdiction’s rules apply. With items, technology, money, or other interests crossing international borders, it can be difficult to say what governs the relevant transaction, and even more so if the item has both commercial and defense-related attributes. Because of this, the United States lists “dual-use” and defense items separately.

• The Export Administration Regulations (EAR) use the Commerce Control List (CCL) to describe items subject to various commercial export restrictions.
• The International Traffic in Arms Regulations (ITAR) use the United States Munitions List (USML) to describe defense articles and related items subject to specific defense trade restrictions.
• The Department of Energy’s regulations include Part 810 (governing certain transfers of unclassified nuclear technology and assistance), while the Nuclear Regulatory Commission’s regulations include Part 110 (governing exports and imports of nuclear equipment and material).

What Happens if a Recipient or Destination Applies to Both the EAR and ITAR?

This is a significant question and a complex one. In some cases, this will be the focus of the investigation, while in others, parties will be able to determine whether they had the appropriate authorization to proceed with a transaction. When a party is not sure whether an item or activity is subject to the EAR or the ITAR, it may seek a commodity-classification determination or advisory opinion from BIS for EAR matters, or a formal jurisdictional determination from DDTC for ITAR matters. If the relevant authorities have determined that a transaction was subject to the EAR, not the ITAR, then the transaction must be authorized (if needed) under the relevant part of the EAR or the applicable exception.

What about End-Use and End-User Restrictions?

In addition to requirements governing items and technology crossing international boundaries, the EAR also lists certain “end-use” and “end-user” restrictions. These restrictions may apply independently of classification. For example, the parties in a transaction may be able to send an unlicensed good to a U.S. Party located abroad, but the EAR could list specific restrictions for the same good sent to a certain type of end-user (e.g., a terrorist organization or a government). In these cases, parties who attempt to circumvent these end-use or end-user restrictions by shipping goods to a party who intends to transfer the goods to the restricted end-user or end-user, could be at risk of enforcement liability.

How Can a Company Document Authorization Before a Controlled Export Occurs?

If your company (or another entity in your supply chain) is responsible for export, classification is the first step in determining if a transaction requires authorization. To establish a clear record of authorization, an exporter should (i) seek formal classification from the Bureau of Industry and Security (BIS), (ii) seek a formal jurisdictional determination from the Directorate of Defense Trade Controls (DDTC), or (iii) self-classify the product. The last option, self-classification, involves an examination and interpretation of the applicable export-control rules and guidelines and involves documentation of the company’s (or a third party’s) conclusion as to the classification of the transaction. Self-classification is a valid option, but it requires that the company be confident in its assessment. If it makes a mistake, the company may be subject to enforcement scrutiny (or prosecution) for the shipment of an unlicensed export. In addition, the export of items that do not require a license can carry documentation and recordkeeping requirements that companies must be able to meet.

If a transaction does not require formal authorization, how can a company demonstrate compliance in light of U.S. Export-control laws? This depends on the specifics of the transaction, but this can include documenting the use of an applicable license exception. In contrast, if a transaction requires authorization, a party’s ability to demonstrate compliance depends on (i) obtaining the appropriate export license (or other relevant authorization) from the appropriate agency, (ii) ensuring that the transaction is conducted in accordance with the terms and conditions of the authorization, and (iii) providing documentation demonstrating adherence to the authorization. With respect to export licenses, these licenses can authorize:

• controlled products;
• technology;
• services;
• technical data; and
• other subject matter.

Another authorization mechanism is the Technical Assistance Agreement. With TAA’s, the parties in a transaction can obtain authorization to transfer specific controlled items and data, as long as the transfer is conducted pursuant to the terms of the Technical Assistance Agreement.

Spodek Law Group works out of offices in Manhattan, Brooklyn, Queens and Los Angeles.

When Can an Agency Inquiry Become a Criminal Export-Control Case?

Export investigations can take many forms. They can begin as an audit, an inquiry, or a targeted investigation. Depending on the nature of the transaction and the specific export control in question, the agency involved can range from the Bureau of Industry and Security (BIS), FBI, DHS, ICE, or the DOJ to OFAC. Even if the matter is civil at this stage, it can quickly evolve into a criminal investigation. The coordinating agency may seek to launch parallel criminal and civil export investigations or share its investigative findings with other relevant agencies.

What is the Difference Between a Civil Export Case and a Criminal Export Case?

In federal criminal cases, if the inquiry leads to a grand-jury proceeding, the prosecutor will look for the evidence needed to establish a basis for seeking a criminal indictment. In many cases, this involves a grand-jury proceeding that generally occurs before the prosecutor’s decision to seek an indictment. In criminal export control cases, the federal government must prove the defendant’s guilt beyond a reasonable doubt. If the defendant is found guilty, penalties can include fines, forfeitures, and prison time.

Depending on the circumstances, civil liability can provide a different set of penalties. Civil liability can arise from an “unintentional” violation, and can include monetary penalties, forfeitures, and prohibitions from doing business with foreign parties.

What Are the Potential Defenses to a Charge of Export-Control Liability?

While it is difficult to make mistakes with export controls, a defendant in an export-control case has various defenses and opportunities to present mitigating evidence. If the government’s case is built on circumstantial evidence, the defendant may be able to raise doubts as to the existence of a violation. Defendants can also raise other defenses that require evidence and an argument from the government. For example, the government may need to prove its classification of the exported item, or show that the defendant knowingly exported a good without an export license. Defendants can also challenge:

• the validity of the evidence used by the government;
• the statutory or regulatory interpretation by the relevant agency; and,
• the legality of the government’s enforcement action.

Can I Mitigate Exposure to Civil or Criminal Liability?

Finally, to fight criminal export allegations, defendants may be able to mount good-faith compliance defenses. The government has acknowledged the importance of voluntary disclosures, and good-faith efforts to mitigate an export violation may also support a defense or support arguments for mitigation during sentencing. Under the Voluntary Self-Disclosure Policy (or similar programs for other agencies), companies that voluntarily disclose an export-control violation may avoid criminal charges by ensuring they have identified the appropriate scope of their violations, made an effective disclosure, and are prepared to cooperate in an investigative process. These disclosures will also need to address potential BIS, DDTC, and OFAC violations.

What Changes When a Foreign Buyer Acquires an Export-Controlled Business?

Export compliance audits can reveal violations in the company’s past dealings with foreign counterparties, or they can reveal weaknesses in the company’s internal controls and oversight mechanisms. For businesses that frequently deal with controlled items, data, technology, and services, the maintenance of a thorough and enforceable compliance program is key. These programs typically include (i) screening policies, (ii) training programs for employees and agents, (iii) monitoring and oversight protocols, and (iv) detailed written procedures and control guidelines. With respect to screening policies, companies will need to monitor its transactions against the government’s restricted-party lists.

In a merger or acquisition transaction involving a domestic or foreign buyer, parties’ need to address export-control compliance as well. In some instances, a foreign buyer’s acquisition will require a filing under the Foreign Investment Risk Review Modernization Act (FIRRMA) with the Committee on Foreign Investment in the United States (CFIUS) to assess the risks involved with a foreign entity acquiring controlled assets. For potential buyers, this will be in addition to conducting an export compliance audit to identify any potential violations the seller has committed in the past. For sellers, the sale may require agency-specific review and, where applicable, amendment or approval of registrations, licenses, Technical Assistance Agreements (TAAs), and Manufacturing License Agreements (MLAs) issued by DDTC, the Department of Commerce, or other agencies.

Along with these matters, acquirers must be able to demonstrate that they have established a thorough and effective export-compliance program moving forward. This may include establishing new screening policies and procedures, training, and internal control systems.

When is Export Documentation Disclosed During U.S. Government Procurement?

When seeking to do business with the U.S. Government, companies must provide documentation verifying that they are compliant with export controls, and in some cases, that their personnel are U.S. Citizens. U.S. Export controls restrict the transfer of certain sensitive data (including controlled-technical data) to foreign parties, and companies seeking to compete for U.S. Government contracts for goods, technology, services, or technical data must demonstrate that their employees, subcontractors, and other third parties can be trusted to protect the information entrusted to them under the contract. When seeking a U.S. Government contract, this includes ensuring that the U.S. Government does not feel threatened by the foreign parties involved in the company’s workforce, supply chain, or corporate structure.

Where to Go From Here

If any of this describes your situation, the next step is a conversation rather than more reading. Spodek Law Group runs a fully online client portal and represents clients coast to coast, with offices in New York, Brooklyn, Queens and Los Angeles. The number is 888 348 8028.