Consider the following scenario: A client hires you to look over a contract. A foreign company is interested in a product developed by one of the client’s employees, a British citizen. The foreign company has requested both an emailed file showing the product’s design and delivery of a sample product to their overseas headquarters for testing. If the foreign company likes the product, it will proceed with a large sale outlined in the contract you are reviewing.
Most lawyers would focus on the contract terms without necessarily considering the actions of transfer involved. To do so, however, would be missing some potentially damaging issues that could result in enormous legal and financial consequences. This is because the client has presented several export control issues.
If you have clients that ship items overseas, work with foreign companies, manufacture scientific or military equipment, travel overseas, or employ non-U.S. citizens, then you should incorporate an export control analysis into your practice.
Export Control and Exports
Export control is a series of federal laws and regulations implemented by the U.S. government to protect exports that have potential military applications. These laws apply to all persons and companies that do business within the United States.
Bethany Nelson, U.W. 2010, is the export control coordinator for U.W.-Madison. Additionally, she runs her own consulting firm, Bethany Nelson JD LLC, focusing on helping companies navigate export control issues.
The term “export” covers a much broader group of actions than one might expect. It includes not only shipping items overseas but also sending information or data to foreign persons. Actions such as sending faxes and emails to people overseas, making calls to foreign persons, and transporting items in carry-on luggage all fall under the category of exports.
Additionally, export-controlled information, technology, or data within the United States to which a foreign citizen has access is deemed to have been exported.1 This means that providing any non-U.S. person working in the United States with access to controlled technology and information has potential export control implications. This is known as a deemed export and is, by far, the most often overlooked export.
The deemed export rule applies to anyone who is not one of the following: a U.S. citizen, a permanent resident, a green card holder, or a refugee with asylum status. Being granted a visa does not mean a person is exempt from export laws.
In the opening example, there would be several exports to consider: sending plans via email, transporting an item overseas, and eventual shipping of items. Additionally, the fact that the person who developed the item is not a U.S. citizen means there are potential deemed export issues to review.
Federal Regulations
Export control laws are administered by many agencies in the federal government, but the two agencies that have the greatest responsibility are the Department of State (DOS) and the Department of Commerce (DOC).
The DOS oversees the international Traffic in Arms Regulations (ITAR).2 This includes a list of items that are used for military purposes, such as firearms and chemical weapons.
The DOC’s counterpart to ITAR is the Export Administration Regulations (EAR).3 The EAR list is significantly longer and more comprehensive than the ITAR list and contains items that could be used for a military purpose (referred to as dual-use items). Chemicals, lasers, centrifuges, laptops, encryption software, and telecommunications equipment are only a small sampling of controlled items. If an item is on either of these two lists, it is considered controlled.
Unknowingly violating any of the regulations can lead to fines of up to $500,000, and willfully violating the regulations carries fines of up to $1 million per violation.
If the item is not specifically listed on either the ITAR or EAR list, then it likely is classified as EAR99. This is the lowest control level; ordinary items such as pencils and toothbrushes are classified as EAR99. Items with this classification are restricted only for Cuba, Iran, North Korea, Sudan, and Syria.
Determining whether an item is on the ITAR or EAR list can be a lengthy process. There are more than 3,000 controlled items on the lists, divided over 551 designations.
Because the items on these lists are so wide ranging and detailed, there is simply no short list of items to consult and no fast way to determine something’s status. There are, however, some general rules to guide making a basic determination:
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Items that have a military purpose are likely controlled.
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Items that could have a military purpose may be controlled.
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Major pieces of scientific equipment may be controlled.
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Basic scientific equipment like test tubes and pipettes are designated EAR99.
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Most household items like furniture and clothing are designated EAR99.
One common mistake is to assume that being able to purchase an item from a major retail chain means it is not controlled. While some controlled items (for example, chemical weapons and uranium) have restrictions on their sale and distribution, the vast majority can be purchased freely (for example, laptops and firearm sights). Merely because something is easy to purchase does not mean it is not controlled.
Sanctions and Restricted Parties
Even if a client is not working with export-controlled equipment, other restrictions should be considered: sanctions and restricted parties.
The U.S. Department of Treasury (Treasury) and the DOS have issued a range of sanctions against several countries. These sanctions limit transactions with certain countries; the most restrictive apply to Cuba, Iran, North Korea, Sudan, and Syria. There are less comprehensive sanctions against other countries, including China, Russia, and Venezuela.
In addition to broad sanctions against specific countries, the U.S. government also maintains several lists of individuals, companies, and organizations that U.S. citizens and companies are limited or prohibited from doing business with. These often are collectively referred to as the restricted party lists.
Foreign persons accessing controlled data in the United States is an export.
Restricted party lists contain criminals, spies, and terrorists, along with several seemingly benign organizations that are actually fronts for illegal operations, such as Tsunami Relief Fund in Sri Lanka, which has terrorist ties. While foreign entities make up large portions of these lists, there are some U.S. companies and individuals on them. An example is the Benevolence International Foundation, in Illinois, which has also been linked to terrorists.
It is prudent to do a restricted party screening on any foreign companies or persons a client may interact with by running their names through these lists. The U.S. government provides a free tool, the Consolidated Screening List, that allows for easy restricted party screenings.4
Staying Compliant Without Interrupting Work
Lawyers must advise clients as to how to best proceed while complying with export control laws when clients want to do any of the following:
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Work with a controlled item;
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Ship a controlled item;
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Allow a foreign person access to a controlled item; or
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Do business with a restricted party or sanctioned country.
If clients want to move forward with any of these actions, lawyers must develop formal plans using legal authorizations from the government. The three main paths to pursue are exceptions, exemptions, and licenses.
Exceptions and exemptions provide authorization for specific activities involving controlled items without requiring a license. They are listed, respectively, in ITAR and EAR and are wide ranging in their scope.5 They can be item specific, country specific, value dependent, or depend on the activity itself.
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As an example, EAR has a temporary exception (TMP) that can be used for “tools of the trade.”6 This allows for the shipment of goods overseas for a short period of time to be used by employees of a company, so long as the goods remain under their control and are not shipped to a high-risk country.7 This exception is particularly helpful to any client who needs to take abroad equipment that may otherwise require a license.
There are, however, many other exemptions and exceptions that should be explored to determine if they apply to a client’s situation. Each one has a narrow set of circumstances which must be in order to claim, but it will usually not require any specific government authorization to proceed.
Lawyers should ensure that there is proper documentation explaining why an exception or exemption was used in a particular situation. Certain exceptions and exemptions must be listed on shipping documentation.
If an exception or exemption is not applicable, a license must be obtained from the proper agency. Licenses can be issued for a variety of situations including shipping controlled items, interactions with restricted parties, dealings with sanctioned countries, and deemed export licenses for foreign persons working with controlled items, technology, or data.
Applications for a specific activity (for example, shipment of a specific item to a particular company or a foreign person working with a certain item) must be submitted to the appropriate agency for review. Agencies will not issue licenses that cover a wide variety of activities or shipments, so each event must be submitted separately. Different information may be required for different licenses, so it is important to pay attention to what an agency requires.
Because response times can vary from a few days to several months, make sure to submit applications as soon as possible and keep in mind that there is no guarantee that a license will be granted.
Consequences for Violations
The consequences for violating export control laws can be severe. Unknowingly violating any of the regulations can lead to fines of up to $500,000, and willfully violating the regulations carries fines of up to $1 million dollars per violation.8 Jail time of up to 20 years is possible for each violation depending on which agency is overseeing the matter.9 Violators may also lose their export privileges.
There are no hard and fast rules regarding how agencies mete out punishment. Ignorance of the law is not a valid excuse, and fines have been levied without a company having any knowledge of wrongdoing.
Individuals as well as companies and organizations can be held responsible. There is nothing to shield a person who committed a violation on behalf of a company from being punished along with the company.
Violation Examples
Numerous fines have been handed out by multiple agencies for violations of export control laws. Violations can happen without a company even being aware it is doing something illegal.
Humane Restraint Inc.10 Humane Restraint Inc. in Waunakee, Wis., makes restraining devices used in hospitals and correctional facilities. These items are controlled, but the company shipped less than $17,000 of items overseas without the required license.
The company was convicted of 32 violations, 27 of which were done without knowing they were violating the regulations, and was fined $465,000 (reduced to $50,000 if there were no additional violations for two years).
Teledyne LeCroy Inc.11 Teledyne LeCroy makes controlled oscilloscopes. They shipped some to Beihang University of Aeronautics and Astronautics in China. This university is on a restricted-party list, and the oscilloscopes require a license to be shipped to China, which was not obtained. Teledyne was fined $75,000 for oscilloscopes sold at retail for around $16,000.
J. Reece Roth.12 J. Reece Roth was an emeritus professor of physics at the University of Tennessee. His research to improve drone performance included export-controlled information.
Roth committed several violations, including having a Chinese graduate student work on the project, taking files overseas to China, and having a student email a Chinese colleague export-controlled information. These actions were all done without the required license, and Roth ultimately spent four years in prison for these violations
FLIR Sys. Inc.13 FLIR, which makes infrared and sensing technology, committed 347 violations, including transferring technology to Iranian and Cuban nationals. The company was fined $30 million, one-half of which will be suspended if the company completes all DOS-imposed remedial conditions.
Spotting Potential Export Control Issues
Because export control often does not receive a dedicated review, lawyers should familiarize themselves with potential red flags and make sure to inform clients of the potential compliance issues that may arise when they engage in the following activities.
Traveling Overseas. Anytime overseas travel occurs, consider the destination, the reason for travel, who the traveler is meeting, and items being carried.
If the client is traveling to an embargoed country, special consideration should be given to the reasons for the trip to ensure that no laws are inadvertently broken.
Additionally, regardless of country of travel, a restricted party screening should be done for persons and companies a traveler is visiting.
Licenses should be obtained as necessary, and exceptions and exemptions noted and documented for any controlled items, technology, or information that qualifies.
Working with Controlled Items, Technology, and Data. Any time a client has controlled items, technology, or data, proper measures must be taken to ensure that any foreign persons’ access is authorized by law. This extends to any company visitors or customers.
Additionally, the client should have procedures in place for shipping, transfer, and destruction of controlled items as well as a policy on access to controlled electronic data. These policies need to safeguard these items and data from unauthorized releases to foreign persons.
Selling Controlled Items. When selling controlled items, check to see whether the item is going abroad. Some overseas destinations may require a license.
Additionally, it is good practice to do a restricted party screening of buyers of the controlled items in case a license is needed to send them to certain buyers.
Shipping Items Overseas. Three things should be considered with overseas shipments: what is being shipped, who it is being shipped to, and the destination.
Check whether any controlled items are being shipped and if a license is required to ship them to the destination country. Check for embargoes on the destination country, and complete a restricted party screening for the organization or person who is receiving the item.
Employing Foreign Persons. Employing citizens of foreign countries should trigger an analysis to see if they are working with any controlled information, technology, or data. If the answer is yes, an attorney must determine if the foreign person qualifies for an exception or exemption or must obtain a license so work can continue.
Working with Foreign Collaborators. Working with collaborators either in the United States or abroad will require an attorney to do the same analysis as for items being shipped overseas to ensure compliance with deemed export requirements.
Business, Shipments, or Travel to Iran, Syria, Sudan, North Korea, or Cuba. These countries have the most restrictions of any foreign countries for export control purposes and any export actions will require a more thorough and detailed analysis to ensure compliance with the regulations.
Conclusion
Export control is often overlooked but can have major effects on companies of all sizes. While these regulations can seem intimidating, lawyers should learn and incorporate export control analyses in interactions with clients to help minimize risk. After a few interactions with these laws, attorneys will soon find export control reviews to be an ingrained habit of their practices that will result in better compliance for their clients.
Meet Our Contributors
What drew you to your practice area of export control?
I kind of fell into it. My undergraduate degree is in physics. When I went to law school I wanted to do something that would combine my love of science with what I was learning, but I didn’t find anything that was a good fit for me.
I had worked a series of legal jobs for a few years after law school before someone pointed out the listing for the new position of Export Control Coordinator at U.W.-Madison. The listing said the ideal candidate would have a mix of scientific knowledge and legal training as well as be very self-starting. The position had not been offered before so the person who accepted it would have to work hard to ensure its success.
I distinctly remember not having any idea how to answer the first question I was asked in the interview and so I thought I was done for, but my answers on the rest of the questions impressed the interviewers enough that I was hired.
Within a month of starting the job, I realized that it was exactly what I had been looking for. I get to use the legal skills I gained in law school to spot issues in complex situations, often many times per day, and I combined that with my love of science by understanding the underlying technology that makes up export control.
As to the best work advice I’ve received? I was once in the middle of a difficult project. There were a lot of people involved, but no one was doing a good job of communicating. I asked my boss for advice on how to sort things out, and he asked me, “Have you seen the movie This is Spinal Tap?”
I said yes, and he continued, “Do you remember the scene in which the band is discussing the fact the dancer kept running into the replica of Stonehenge that was accidentally made 18 inches tall instead of 18 feet?” I confirmed that I did. “The bassist says that to fix the issue they could just have the dancer do different choreography. The choreography wasn’t the problem.”
The point being, you have to fix the underlying issue, not just try to work around it. You can come up with a million solutions that incorporate the problem, but until you fix the problem itself, you will never actually make the system work. It was said in such a clever way, I just hold onto it.
Bethany Nelson, Bethany Nelson JD LLC, Madison.
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Endnotes
1 15 C.F.R. § 734.13.
2 22 C.F.R. pt. 122.
3 15 C.F.R. pt. 774.
4 www.export.gov/csl-search.
5 15 C.F.R. pt. 740; 22 C.F.R. pt. 125.
6 15 C.F.R. § 740.9.
7 Cuba, Iran, North Korea, Sudan, and Syria.
8 www.bis.doc.gov/index.php/enforcement/oee/penalties; 22 C.F.R. pt. 127; 31 C.F.R. pt. 501.
9 www.bis.doc.gov/index.php/enforcement/oee/penalties; 22 U.S.C. § 2778(c).
10 In the matter of Humane Restraint Inc., 912 Bethel Circle, Waunakee, WI 53597.
11 Teledyne Lecroy Settlement Agreement, June 16, 2015.
12 U.S. v. Roth, 628 F.3d 827 (6th Cir. 2011).
13 In the matter of FLIR Systems Inc., Consent Agreement with the Department of State.
