Jan. 17, 2018 -- The first five rounds of the scheduled seven rounds of the modernization and renegotiation of the North American Free Trade Agreement (NAFTA) have drawn to a close.
Although the current administration has made reducing the U.S. bilateral trade deficits with its trading partners the benchmark for measuring success,1 exports of U.S. made products to unauthorized end-user, end-use, or destination country without the required export license can lead unaware U.S. exporters into legal trouble.
Ngosong Fonkem, West Virginia University College of Law 2011 (JD, MBA) and Tulane Law School 2012 (LLM), is a senior advisor at Addison-Clifton LLC, Milwaukee, where he assists U.S. and foreign companies with day-to-day compliance with U.S. trade laws and related audits, investigations, intervention, and civil enforcement proceedings, and with conducting business in Asia.
This is of particular concern to small and medium-sized businesses (SME), who often lack resources to employ necessary staff or counsel to assist them in navigating the very complex and cumbersome U.S. export control regulations.
The U.S. International Trade Administration (ITA) reports that SME account for 98 percent of all U.S. exporters,2 and three-fourths of the exported items are controlled under U.S. export control regulations.3
Thus, an elementary understanding of U.S. export regulation is vital to any small business looking to expand and benefit from new markets abroad.
What Is an Export?
The starting point for any export control compliance analysis is to understand how an export is defined under U.S. law.
Specifically, if an item leaves the U.S. border via carried mail, email, fax, upload or download, mentioned in a phone conversation, or if a U.S. exporter accepts a foreign client visit to its facility or permits visual inspection of plans or blueprints, such items or actions are considered an export and are thus subject to U.S. export license requirements.4 Further, all foreign-origin items shipped or transmitted through the U.S. are also considered exports.5
Which Federal Agencies Regulate Exports?
All U.S. exporters must fully comply with all applicable U.S. export regulations. Because these laws are administered by several different federal agencies, navigating through the myriad of applicable regulations is a daunting task.
Although numerous federal agencies administer exports control regulations,6 three agencies are of significance:
1) The Department of Commerce houses the Bureau of Industry and Security (BIS), which enforces the Export Administration Regulations (EAR). The EAR regulates the export and re-export of nonmilitary and “dual use” commodities, software, and technology. The EAR also contains the Commerce Control List (CCL), which requires licenses for certain exports.
2) The Department of State houses the Directorate of Defense Trade Controls (DDTC), which administers the International Traffic in Arms Regulations (ITAR). ITAR contains the U.S. Munitions List (USML) and controls defense articles, defense services, and related technical data as these terms are defined by the USML and the Arms Export Control Act.
3) The Department of Treasury contains the Office of Foreign Assets Control (OFAC), which administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals.
Note that in 2009, the U.S. government began implementing the Export Control Reform Initiative (ECRI), which will make significant changes to the existing export control system. As of August 2015, Phase Two of the planned three phases is nearly complete.7 When fully implemented, the ECRI will create a single control list, a single licensing agency, and a unified information technology system and enforcement coordination center.
What Are the Penalties for Noncompliance?
On June 22, 2016, the BIS published new Administrative Enforcement Guidelines to promote greater transparency and predictability for the administrative enforcement process.
The BIS guideline penalties include fines for export violations that can reach $1 million and up to 20 years in prison per violation in criminal cases, and penalties up to $250,000 and a denial of export privileges for administrative cases.
As demonstrated by enforcement actions carried out so far by the various agencies, it appears these penalties are applied indiscriminately for each export violation.
What Are the Processes for Determining Whether an Export License is Warranted?
First, determine whether the product at issue has an Export Control Classification Number (ECCN) by checking the product against the EAR. The EAR will list reasons why that particular product falls under BIS control. Use this information to determine whether an export license is required, based on where the product is being exported to.
Any product that does not have an ECCN is designated as EAR99, which usually does not need an export license unless it is exported to an embargoed country or in support of a prohibited end-use.
If the product is controlled, compare the ECCN against the Commerce Country Chart in the EAR to determine whether or not a license is required.
Lastly, the U.S. maintains a list of restricted parties – persons or entities that U.S. exporters may not export to without a license. This may include EAR99 items that otherwise do not require a license, based on the country of export.
It is important to note that even the most harmless product might be intended for uses not envisioned by the U.S. exporter.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Addison-Clifton.
This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.
1 See USTR Releases NAFTA Negotiating Objectives, and Summary of Objectives for the NAFTA Renegotiation.
2 Profile of U.S. Exporters Highlights Contributions of Small- and Medium-Sized Businesses, International Trade Administration, April 8, 2015.
3 2013 Small Business Exporting Survey, National Small Business Association and Small Business Exporters Association, p. 13.
4 15 CFR §734.2(b)(1) and(4).
6 Some of these federal departments and agencies include Department of Energy, Department of Agriculture, the Drug Enforcement Administration, Food and Drug Administration, Nuclear Regulatory Commission, etc.
7 See About Export Control Reform, on the export.gov website.