By: David S. Gallacher
2011 was a banner year for U.S. export control laws. The Obama administration has vowed to streamline and reform the bloated U.S. export control system – promising to build "higher walls" around a narrower universe of goods and technologies requiring export licenses. Following is a summary of ten of the key reforms to U.S. export laws that took place (or were proposed) in 2011.
By: David S. Gallacher
OFAC, BIS Double Up Flow Serve: What the Flowserve Settlement Says About Corporate Compliance Programs
By Thaddeus McBride, Mark Jensen, & Corey Phelps
In late September, Flowserve Corporation (“Flowserve”) and a number of its subsidiaries agreed to settle alleged export violations with the Department of Commerce, Bureau of Industry of Security (“BIS”) for $2.5 million, and to remit $502,408 to the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) to settle alleged U.S. sanctions violations. Flowserve, including its subsidiaries, is an oil, gas, and chemical services company with operations around the world. The settlement underscores the value of compliance measures specifically tailored to a company's operations, and provides yet another example of the U.S. government vigorously enforcing U.S. law overseas.
Prison Time and Export Controls: University Professor's Case Illustrates Dangers of Ignoring Export Compliance
By Thaddeus McBride & Reid Whitten
On Monday, October 3, the U.S. Supreme Court declined to hear the appeal of retired University of Tennessee professor John Reece Roth. In July 2009, Roth received a four year prison sentence for illegally exporting military technology, in large part due to his work with graduate students from Iran and China. Professor Roth’s conviction and prison sentence forcefully remind the research community, commercial as well as academic, of the potentially severe consequences that may arise from ignoring technology export controls.
By Thaddeus McBride, Mark L. Jensen and Corey Phelps
Beginning on February 20, 2011, the U.S. Bureau of Citizenship and Immigration Services (“CIS”) assumed a role in the U.S. Government's increasing regulation of technology exports. The new role for CIS relates to the transfer of controlled technology or source code, sometimes referred to as “deemed exports," to non-U.S. nationals.
New ITAR Rule on Transfer of Defense Articles to Dual and Third-Country Nationals Creates Substantial New Compliance Obligations
By John M. Hynes
On May 16, 2011, the Department of State (“Department”) published its final rule in the Federal Register amending provisions of the International Traffic in Arms Regulations (“ITAR”) regarding the transfer of ITAR controlled defense articles (including technical data) to dual and third-country nationals employed by approved foreign end-users. See 76 Fed. Reg. 28174-78 (amending 22 C.F.R. pts. 120, 124 and 126).
By John M. Hynes
On April 13, 2011, the Department of State (the “Department”) issued proposed amendments to various sections of the International Traffic in Arms Regulations (“ITAR”) regarding the definition of “defense service.” See International Traffic in Arms Regulations: Defense Services, 76 Fed. Reg. 20590-93 (amending 22 C.F.R. Parts 120 and 124).
By Curtis M. Dombek
On March 15, 2011, the State Department Directorate of Defense Trade Controls published a proposed new rule that marks a significant change in the approach to ITAR regulation. Historically, ITAR controls have always applied to commercial end products incorporating any ITAR controlled components. This was the basis of the highly publicized QRS chip case, in which the State Department asserted continuing ITAR control over avionics chips that had originated on a military program but had come to be widely used in civilian jet aircraft. That case resulted eventually in a special exception to allow jet aircraft to remain in production and passenger service with the QRS chip and without ITAR licensing.
New Sanctions Block Continuing Performance Of Libyan Government Contracts In Addition To Targeting Col. Qadhafi's Assets
By Curtis M. Dombek
On February 25, 2011, the President issued an Executive Order blocking not only the assets of Muammar Qadhafi, Ayesha Qadhafi, Khamis Qadhafi, Mutassim Qadhafi, and Saif Al Islam Al Qadhafi, but also blocking all assets of the Government of Libya, as follows:
“All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, including any overseas branch, of the Government of Libya, its agencies, instrumentalities, and controlled entities, and the Central Bank of Libya, are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.”
Sheppard Mullin Partner Curt Dombek Appointed To The President's Export Council Subcommittee On Export Administration
On February 23, 2011, Commerce Secretary Gary Locke announced the appointment of Sheppard Mullin partner Curt Dombek to the President’s Export Council Subcommittee on Export Administration (“PECSEA”), which will advise the Commerce Department on the administration’s export control reform initiative.
By Jessica M. Madon
Effective September 29, 2010, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (“FAR Councils”) issued an interim rule amending the FAR to implement sections of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”), signed into law on July 1, 2010. 75 Fed. Reg. 60254 (Sept. 29, 2010).
Comprehensive Iran Sanctions, Accountability, And Divestment Act Of 2010 - The Expanded Categories Of Sanctionable Activities
By John W. Chierichella and Jessica M. Madon
As a follow-up to our previous blog article, available here, we provide this month a more in depth analysis of some of the key features of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”) passed July 1, 2010. Our focus this month is on the expansion of the types of activities and persons that may be sanctioned. We also address the new mandatory representation and certification for government contractors. Finally, we note that the EU and Canada have imposed similar sanctions against Iranian transactions and we provide a brief synopsis of those sanctions.
By John W. Chierichella and Jessica M. Madon
On July 1, 2010, President Obama signed the Comprehensive Iran Sanction, Accountability, and Divestment Act of 2010 (“CISADA”). CISADA expands many existing restrictions and includes many new provisions designed to reach foreign firms currently doing business with Iran. More details into the impact of this legislation will emerge as the agencies charged with implementing this legislation issue their regulations.
New Encryption Export Rules Relax Regulatory Burden For Many End-Products But Also Raise Many New Questions
By Curtis M. Dombek
On June 25, 2010, the Administration issued the long-awaited regulations implementing the changes from the last Wassenaar Plenary Session and seeking to reduce the regulatory burden on exporters of encryption products under the ENC license exception. See Encryption Export Controls: Revision of License Exception ENC and Mass Market Eligibility, Submission Procedures, Reporting Requirements, License Application Requirements, and Addition of Note 4 to Category 5, Part 2; Interim Final Rule, 75 Fed. Reg. 36482 (June 25, 2010).
By Curtis M. Dombek
On March 25, 2010, the Bureau of Industry and Security ("BIS") created three new Export Control Classification Numbers ("ECCNs") to control security equipment using specified types of millimeter wave technology, including related software and technology, for regional stability and anti-terrorist reasons. New ECCN 2A984 has been added to the Commerce Control List to control concealed object detection equipment operating in the frequency range from 30 GHz to 3000 GHz and having a spatial resolution of 0.5 milliradian up to and including 1 milliradian at a standoff distance of 100 meters. A Technical Note to the new ECCN indicates that the range of frequencies covered is what is generally referred to as the millimeter-wave, submillimeter-wave and terahertz frequency regions.
In comments released on March 12, 2010, the Administration announced that it will be shifting the current encryption review request process under 15 C.F.R. section 740.17 to an on-line system, with the objective of reducing review times from 30-60 days to 30 minutes. While industry will welcome the shortening of the review waiting period, the current regulations already allow many encryption exports to our largest trading partners, those listed in Part 740, Supplement 3, as well as exports to other countries of items described in section 740.17(b)(1)(ii), to occur during the waiting period. There is no indication that the change would add countries like China or India to Supplement 3. As described, it also would not alter the technical definition of encryption products requiring review or result in any expansion of the existing exception for "ancillary cryptography." Without more fundamental changes along these lines, the ultimate impact of the review request change will probably be minimal.
Stay Tuned for Implementation of Ancillary Cryptography Changes Adopted by December 2009 Wassenaar Plenary Session
At their December 2009 Plenary Session, the member countries of the Wassenaar Arrangement on dual-use export controls adopted a new Note 4 to Category 5 - Part 2 of the Dual-Use List covering information security and encryption.
Treasury Issues Final Rules Describing Procedures For Reviewing Foreign Investment In U.S. Companies
Effective December 22, 2008, the U.S. Department of the Treasury (“Treasury”) issued new rules relating to the procedures that the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) will use in reviewing foreign investments in U.S. companies. See 73 Fed. Reg. 70702. The revised, final rules continue to focus on the potential impact that a particular transaction may have on U.S. national security and retain many of the features of the proposed rules, which we have previously discussed here and here.Continue Reading...
On October 3, 2008, the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") published a proposed rule on a new export license exception authorizing intra-company transfers ("ICT") of products, software and technology restricted under the Export Administration Regulations ("EAR") (15 CFR Parts 730-772). 73 Federal Register 57554. The proposed rule is similar, in effect, to the current policy permitting special comprehensive licenses (15 C.F.R. Part 752); BIS hopes, however, that the new proposed rule will be better able to streamline the export licensing process for internal company exchanges of hardware and technology. If adopted, the proposed ICT rule would significantly reduce existing barriers to the unlicensed, world-wide, intra-company transfer of large categories of controlled products and technology. The freedom that would accompany the rule, however, comes with a heavy administrative burden.Continue Reading...
Encryption Export Restrictions Loosened Under New Rules That Reduce Pre-Review And Reporting Requirements
On October 3, 2008, the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") published new interim rules, effective immediately, rewriting and altering the export regulations on encryption items (specifically, the encryption restrictions at EAR 742.15 and the ENC license exception at EAR 740.17). 73 Federal Register 54795. BIS hopes that the new rules will streamline the existing encryption review process, expand the availability of the ENC license exception, and more fully harmonize the encryption restrictions with the rest of the Export Administration Regulations ("EAR").Continue Reading...
New Export Rules Revise De Minimis Provisions, Allowing Bundled Software To Be Included In Commodity Valuation, Clarifying Terms, And Reducing Reporting Requirements
On October 1, 2008, the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") published a new interim rule, effective immediately, modifying the provisions by which companies calculate the de minimis value of U.S. components, materials, or technologies incorporated in foreign-manufactured products. 73 Federal Register 56964. While the new rules do not substantively modify current export policy, they do effect some changes that could benefit foreign companies in determining whether their foreign-manufactured products are beyond the scope of the Export Administration Regulations ("EAR") (15 CFR Parts 730-772).Continue Reading...
Export Licenses Are Now C.O.D. - Department Of State Modifies ITAR Registration Fee Structure To Increase Fees And Provide For More Consistent Revenue Stream
Effective September 25, 2008, the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC") – the agency that administers export control regulations under the International Traffic in Arms Regulations ("ITAR") (22 C.F.R. Parts 120-130) – issued a final rule modifying the ITAR registration procedures and increasing the registration fees based on a company's need for licenses. See 73 Federal Register 55349 (amending ITAR § 122.2, 122.3, and 129.4). The goal of these changes is to try to self-finance DDTC licensing requirements.Continue Reading...
Effective July 21, 2008, the U.S. Department of Defense ("DOD") issued an interim rule with a request for comments that creates a contractual obligation for all DOD contractors to comply with U.S. export control laws. See 73 Federal Register 42274. While, technically, the interim rule does not impose any new requirement on U.S. businesses, because all are already required to comply with U.S. export requirements, the interim rule does impose additional risks and liabilities on defense contractors because a violation of U.S. export laws could now also result in a breach of contract. Given the fact that many companies do not fully understand the scope or intricacies of U.S. export laws, inadvertent export violations are a common occurrence. Accordingly, this new rule could easily increase contractual (and related) risks for DOD contractors.Continue Reading...
As discussed in a prior posting on this blog, the U.S. Department of the Treasury published on April 21, 2008 proposed rules designed to strengthen the process by which the Committee on Foreign Investment in the United States ("CFIUS") reviews and approves certain business transactions involving foreign investment. The proposed rules were issued under the Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49 (“FINSA”), which requires a more intense CFIUS process that allows the government more discretion in investigating and altering business transactions that may impact national security. The U.S. Department of the Treasury invited comments on the proposed rules through June 9, 2008. Now that the comment period is over, we thought it might be worthwhile to see what types of comments were received. Not surprisingly, it is a mixed bag.Continue Reading...
On April 21, 2008, the U.S. Department of the Treasury ("Treasury") proposed new rules relating to the procedures that the Committee on Foreign Investment in the United States (“CFIUS”) should use in reviewing (and potentially halting) foreign investments in U.S. companies based on a potential impact on national security. See 79 Fed. Reg. 21861. While Congress previously mandated that changes be made to the CFIUS process following the much ballyhooed Dubai Ports World controversy in 2006, the current rules are merely proposed, and are not yet final. Treasury is accepting comments on the proposed rules until June 9, 2008.Continue Reading...
Pending Legislation Would Expand Extraterritorial Prohibition On Doing Business With Iran, Even For Foreign Companies; U.S. Companies With Foreign Subsidiaries Should Be Warned
Background on U.S. Trade Regulations and Export Laws
Many people say that U.S. foreign policy is a mess. While this point is clearly debatable, it seems clear that the U.S. laws, regulations, and executive orders attempting to implement U.S. foreign policy certainly are a mess. Nowhere is this "mess" more clearly evident in the U.S. regulatory scheme than with the U.S. export laws, which are a veritable maze of statutes, regulatory schemes, and inter- and intra-agency enforcement regimes. For U.S. companies selling in international markets, it is not always easy to figure out what is "right."
An effective export control policy – one that addresses all of the applicable export regimes, effectively trains company personnel with respect to the companies’ obligations, and monitors adherence to the requirements set forth in the policy – is an essential element of a comprehensive corporate compliance program. Although the need for such policies may appear to be most obvious with respect to goods and services of a military character, the need is far more pervasive, applying generally to virtually any goods or technology that originate or are modified in the United States. Depending on the regulatory regime, restrictions can apply based on the character of the goods or services, the immediate or ultimate destinations, the uses to which the exports can be put, and, when overseas entities are involved, the extent to which United States persons may have been involved in the transaction. For an overview of the principal export control regulatory regimes, see Export Control Booklet.
- Exporting products and technology from the United States is a privilege, not a right.
- U.S. export laws have a broad reach -- they govern U.S. products and technology, foreign products and technology that reside in the U.S., and foreign products and technology that has any U.S. content, even if overseas.
- Classify your products -- "defense articles" are controlled by State under the ITAR; "dual use" products are generally controlled by Commerce under the EAR.
- Providing a controlled item to a "foreign person" inside the U.S. is an export.
- Know your employees -- "foreign persons" must not be given access to controlled information.
- Permanent resident aliens ("green card" holders) are "U.S. persons" for export purposes.
- Exports can occur through oral and written communication or via access to data and technology -- control your e-mail, control access to your server, and control visits to your facilities.
- Have -- and monitor and enforce -- an export compliance plan that includes training of all employees.
- Perform basic due diligence on new customers to see if they are problematic -- US Government web sites can help.
- Violations have consequences -- revocation of export privileges and civil and/or criminal penalties.
On June 20, 2007, the U.S. Department of Justice announced the appointment of Steven W. Pelak as the first-ever National Export Control Coordinator. Mr. Pelak's job is "to improve the investigation and prosecution of illegal exports of U.S. arms and sensitive technology." The creation of this position follows on a number of recent high profile enforcement actions in which companies and individuals have sold high-end military technology to foreign companies. Most notable among these recent enforcement actions is the guilty plea entered by ITT Corp. earlier this year, in connection with which ITT may be fined up to $100 million for the illegal export of night vision technology to China. While most enforcement actions for export violations involve administrative fines, with a maximum of $50,000 per violation, criminal convictions can add a $1 million penalty and up to 20 years in prison. Increasingly, the Government is pursuing actions against both the offending company and its management.