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Export regulations and compliance.

U.S. export laws and regulations are far-reaching and have become more so in recent years. Even large, sophisticated U.S. companies with substantial resources and compliance programs occasionally run afoul of the law and face time-consuming investigations and significant fines. In December 2003, Sun Microsystems and two of its subsidiaries agreed to pay $291,000 in fines to settle charges involving illegal exports of computers to military end-users in China and Egypt. In the same month, Honeywell International paid a penalty to settle changes that it illegally exported chemicals to Mexico. In February of this year, Morton International and its French and Japanese affiliates agreed to pay a $647,500 penalty to settle charges in connection with the export and reexport of chemical compounds in violation of U.S. regulations.

"The export control regime of the United States is one of the most complex in the world," says Barry A. Pupkin, Partner, Squire, Sanders & Dempsey LLP, Washington, De. Exports are regulated under several different statutes, including the Export Administration Act, the Arms Export Control Act, the International Emergency Economic Powers Act and the Trading with the Enemy Act. "At least ten federal government agencies are involved in export controls--issuing regulations, licenses and the like," he notes. "Given the complexity of the regulatory regime it is important that U.S. exporters take seriously the enforcement of export control laws."

Most U.S. export controls are administered by the Departments of Commerce and Treasury. The State Department regulates any product or technology considered a munitions item. The federal government can impose fines and suspend or revoke export privileges for any violation of export laws or regulations.

"U.S. exporters are required to comply with numerous regulation dealing with a wide range of topics," says Stephen D. Elison, a Partner in the Houston office of Gardere Wynne Sewell. "The Office of Foreign Assets Control, for example, enforces regulations affecting commerce between U.S. persons and certain embargoed countries. Not only does the list of embargoed countries change from time to time, but also the specific actions prohibited to U.S. persons are not uniform among the sanctioned countries. Consequently, any activity remotely connected to an embargoed country or national thereof must bc highly scrutinized to be certain that proper licensees have been obtained and that no U.S. person will be in violation of U.S. laws."

Common Violations

When assessed by the number of U.S. enforcement actions, the most common violations of export laws and regulations are direct and indirect shipments of equipment to embargoed destinations such as Cuba, Iran, Libya and Sudan. "For major multinationals, the most difficult compliance challenge is probably U.S. restrictions on 'deemed exports' of controlled software and technology to foreign nationals in the United States and 'deemed reexports' of software and technology within foreign countries," says Harry L. Clark, Partner in the International Trade Group of international law firm Dewey Ballantine LLP, Washington, DC.

Deemed export and deemed reexport controls are a particular challenge, even for large U.S. companies with experienced staff. "These restrictions impose a license requirement for releases of certain software and technology to foreign nationals other than permanent residents, even if the software or technology never crosses a national border," Clark reports. The transfer is "deemed" to be an export to the home country of the foreign national. "Deemed export/reexport controls are of most concern to technology-intensive firms in, for example, the microelectronics and computer sectors, such as Intel and IBM," he says. IBM maintains an extensive section on its web site to guide IBM partners through export compliance.

"Technology is 'released' for export when it is available to foreign nationals for visual inspection, such as reading technical specifications, plans or blueprints; is communicated orally; or is made available by practice or applications" Pupkin explains. Without obtaining the proper license, a technology company employing foreign workers with access to such technology could be in violation of export control laws.

In addition to violations involving deemed export and reexport issues, other common violations involve a wide range of transactions with prohibited parties. "All parties to an export transaction must be screened against certain lists of prohibited persons and organizations, such as the Denied Persons List, the Entity List, the List of Specially Designated Nationals, Terrorists, Narcotics Traffickers, Blocked Persons and Vessels, the Unverified List, and the List of Debarred Parties," Pupkin notes. He advises exporters to review carefully the complex licenses required for exporting high-performance computers and eneryption products. Also, exporters should remember that under the Export Administration Regulations, certain administrative and transactional records must be kept for five years.

Foreign Subsidiaries

Compliance with U.S. export laws and regulations becomes particularly complex for U.S.-based companies with foreign affiliates or subsidiaries. "Problems can arise between a U.S. parent corporation and its foreign subsidiary when the foreign subsidiary has a business opportunity that would be prohibited for the U.S. parent," warns Elison. "Under these circumstances, management of the foreign subsidiary may pressure the U.S. parent to authorize the business activity or may undertake the activity without consulting the U.S. parent. In either case, this can result in liability for any U.S. person involved with the decision to pursue the prohibited business activity, including any U.S. director, employee or agent who authorizes or facilitates the prohibited transaction." For U.S. exporters based in the U.S. with subsidiaries abroad, it is critical to determine who within the company will assume responsibility for compliance with export regulations. "It is generally optimal to have a chief export compliance official report to the company's general counsel," advises Clark. "U.S. agencies prefer that export compliance officials not report through the marketing structure of the company." The company should have an export compliance program that is designed to prevent and detect export control violations throughout the company, including both domestic and overseas operations and the applicable U.S. and non-U.S. legal requirements.

Clark advises companies to screen their export transaction procedures for:

1. Participation in the transaction by "blacklisted" parties, including parties against which U.S. sanctions have been issued

2. Indications that the exported item will be diverted to an end-use or end-user other than that which is intended ("diversion risk")

3. The need for an export license by virtue of the planned destination of the export and the exported item's placement on an export control list

4. Indications that the export is going to an end-user involved in or an end-use relating to weapons of mass destruction (nuclear, missile, chemical/ biological weapons)

"U.S.-based multinationals often struggle with two particularly difficult export control challenges in connection with their overseas operations," Clark says. First, U.S. export controls have a famously broad "extraterritorial" scope. For example, U.S. controls extend to reexports of U.S.-origin items and items that incorporate U.S.-origin content even if the parties to the transaction are not U.S. companies or individuals. Second, the European Union, Canada and Mexico have established "blocking" policies intended to prevent EU, Canadian and Mexican companies--including subsidiaries of U.S. firms--from complying with certain extraterritorial U.S. restrictions. "Foreign subsidiaries of U.S. companies, then, can become subject to conflicting legal requirements," he warns.

Also, the Bureau of Industry and Security has launched a Transshipment Country Export Control Initiative to combat the illicit trans-shipment, reexport and diversion of goods. "As part of this initiative, the Bureau has issued best practices," Pupkin says. "These practices provide that if the end destination is a 'global transshipment hub'--countries or areas that function as major hubs for the trading and shipment of cargo--that should raise a 'red flag' for the exporter."

Compliance Programs

The key to successfully operating in this heightened regulatory environment is for U.S. businesses to implement effective compliance programs. "Such programs require the full support of management and must become a part of the company's culture," Elison says. By implementing an effective compliance program a U.S. business may be alerted before a violation of U.S. law occurs or may bc able to reduce its liability if a violation occurs despite the existence of the compliance program.

Because the regulatory and enforcement regime for export control is so complex, there is no single export compliance program that will work for all companies. "Every company handles its sales, order entry, accounting and shipping functions differently," Pupkin notes. "A solid and workable export compliance program is one that is tailored to an individual company's procedures. For a compliance program to work, it must be practical. The employees implementing the program need to understand why it is necessary, and must take an active and responsible role in implementing it. An unworkable, paper-only program is worse than no program at all."

At a minimum, Pupkin advises, an export compliance program should include the following elements:

1. A person responsible for ensuring export compliance at the company, possibly a dedicated lawyer from the company's office of general counsel

2. A statement of corporate compliance signed by the company president and distributed to the staff

3. An understandable export compliance manual or handbook that can be used by employees to identify problems and provide preliminary advice concerning compliance

According to Clark, the current standard for best practices for export control compliance is the Nunn-Wolfowitz best practices guidance, which was issued in 2000 by a task force led by former Senator Sam Norm and current Deputy Secretary of Defense Paul Wolfowitz. "In my view, the two aspects of export compliance programs that are most critical to maintaining compliance are a clear, credible message from senior management that export compliance is a top priority, and effective compliance training," he says.

Tighter Enforcement

In recent months, a growing number of U.S. companies have been charged with export law violations. "These cases reflect tougher enforcement of U.S. export control laws and a reported 23 percent increase in the budget of the Office of Export Enforcement of the Bureau of Industry Security of the Department of Commerce," Pupkin says. "This enforcement trend is likely to continue, especially for products that have a potential military use." Additional enforcement is likely to come out of the Office of Foreign Assets Control of the Department of Treasury. This office has launched a publicized campaign of enforcement involving transactions with countries such as Cuba and Iran.

The U.S. government's top export enforcement priorities relate to military items and items that contribute to development and production of weapons of mass destruction. Overwhelmingly, the destination of most concern is China. "It is virtually unique in being both a market that is critical to U.S. industry and the target of unusually restrictive export controls," Clark says. He foresees more vigorous enforcement of U.S. export controls in the coming years. "Congress is appropriating increasing funds for this purpose," he notes. "The principal drivers of intensified export control enforcement are the war on terrorism and the general crackdown on corporate malfeasance." U.S. executives will have to tighten compliance or risk violations with substantial penalties.

RELATED ARTICLE: Compliance programs: standard elements.

Harry L. Clark, Dewey Ballantine LLP, advises executives to review their export compliance program for these basic elements:

1. Policy statement issued by a senior official. The statement should note that the company is committed to compliance with all legal requirements, and to this end it has established a compliance program designed to deter and detect violations. It should also make it clear that compliance with program requirements is mandatory and instruct employees to secure guidance if there are any questions, The statement should identify the official that has ultimate responsibility for the compliance program and describe the implications of legal violations (legal and employment sanctions) and of noncompliance with compliance program requirements (employment sanctions). The statement must be disseminated to all employees.

2. Overall responsibility for the compliance program. A compliance committee or other official or body with responsibility for the compliance program should be charged with continually reviewing the effectiveness of the program and making improvements as and when appropriate, for example, after detection of noncompliance.

3. Allocation of particular compliance responsibilities among company officers and employees.

4. Compliance procedures and safeguards. For example, the company should develop a procedure for screening in the context of transaction processing.

5. Compliance manual or other documentation informing employees about compliance program requirements.

6. Training, education and updating regarding legal requirements and compliance program requirements.

7. Processes for employees to secure compliance guidance and to report suspected violations. Employees need an anonymous avenue for reporting suspected noncompliance.

8. Recordkeeping procedures.

9. Internal compliance audits/reviews.

10. Written employee compliance commitments. These should be updated annually.

RELATED ARTICLE: Red flags in export transactions.

The U.S. Commerce Department provides this checklist of "red flags" that may indicate possible violations of the Export Administration Regulations:

* The customer or its address is similar to one of the parties found on the Commerce Department's list of denied persons.

* The customer or purchasing agent is reluctant to offer information about the end-use of the item.

* The product's capabilities do not fit the buyer's line of business, such as an order for sophisticated computers for a small bakery.

* The item ordered is incompatible with the technical level of the country to which it is being shipped, such as semiconductor manufacturing equipment being shipped to a country that has no electronics industry.

* The customer is willing to pay cash for a very expensive item when the terms of sale would normally call for financing.

* The customer has little or no business background.

* The customer is unfamiliar with the product's performance characteristics but still wants the product.

* Routine installation, training or maintenance services are declined by the customer.

* Delivery dates are vague, or deliveries are planned for out of the way destinations.

* A freight-forwarding firm is listed as the product's final destination.

* The shipping route is abnormal for the product and destination.

* Packaging is inconsistent with the stated method of shipment or destination.

* When questioned, the buyer is evasive and especially unclear about whether the purchased product is for domestic use, for export, or for reexport.

Source: U.S. Bureau of Industry and Security, U.S. Department of Commerce

Guidance on the Web

For detailed information on export laws and regulations, visit these web sites:

U.S. Department of Commerce

Bureau of Industry and Security

Entities List

Denials List

U.S. Department of State

U.S. Treasury Department

Fay Hansen is a business and finance writer based in Cresskill, NJ.
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Title Annotation:International Section
Author:Hansen, Fay
Publication:Business Credit
Geographic Code:1USA
Date:Jun 1, 2004
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