Export Controls: Enabling Trade and Ensuring Security
by Dana Townsend and Mike Turner

Consider this not-so-hypothetical intersection of trade and security: a U.S. company has a new, state-of-the-art technological gizmo that every consumer in the world wants to buy. But the gizmo can also be used to build Weapons of Mass Destruction (WMD) and by terrorists to attack U.S. interests at home and abroad. Both the U.S. company and the U.S. Government have an interest in promoting the former and preventing the latter. How to achieve both ends?

The answer is found in export controls that are intended to promote U.S. technological leadership in global markets while keeping the most sensitive items out of dangerous hands. Industry compliance with those controls makes a key contribution to both commercial prosperity and national security.

Under the U.S. system, exports (including not just physical products but also technical know-how), international financial transactions and certain activities of U.S. persons (such as providing defense services and activities related to WMD proliferation) are regulated on the basis of several factors: the nature of the item, transaction or service; the country of ultimate destination; the end-use; and the end-user. Each of these factors is a key consideration in balancing the trade and security implications of a given transaction - the Government determines, based on these factors, which transactions may proceed without review, which may proceed after review, under specific authorization, and which should not proceed because the national security implications outweigh the commercial benefits. The vast majority of exports, transactions and other activities are generally allowed, subject to case-specific prohibitions or restrictions that may apply.

Export controls are principally administered by three Federal regulatory agencies. The State Department's Directorate of Defense Trade Controls (DDTC) administers the International Traffic in Arms Regulations (ITAR), which regulate the export of munitions, satellites, other items found on the U.S. Munitions List (USML) and defense services. The Commerce Department's Bureau of Industry and Security (BIS) administers the Export Administration Regulations (EAR), which regulate the export of dual-use commercial items found on the Commerce Control List (CCL). The Treasury Department's Office of Foreign Assets Control (OFAC) administers various regulations that govern financial transactions with designated countries, groups and individuals.1

These controls are supported by government enforcement efforts. Criminal enforcement is pursued by the U.S. Department of Justice, which has designated export cases as a top national security priority and appointed a senior attorney to coordinate export prosecutions nation-wide; the Federal Bureau of Investigation (FBI), which focuses on WMD proliferation and terrorism; U.S. Immigration and Customs Enforcement (ICE), which investigates criminal violations of ITAR, EAR and OFAC requirements; and BIS's Office of Export Enforcement (OEE), which investigates violations of the EAR. The export regulatory agencies - DDTC, BIS and OFAC - can also impose civil penalties for export offenses, including both monetary fines and denials of export privileges.

Criminal and civil penalties for export violations can be substantial. Criminal conviction for violation of the Arms Export Control Act, International Emergency Economic Powers Act and other applicable statutes, including conspiracy, false statements and the Economic Espionage Act (now being used by the FBI in export cases), can carry terms of imprisonment of up to 15 years and monetary fines of up to $10 million. Civil penalties of as high as $50,000 per violation may be imposed by DDTC, BIS and OFAC. Penalties for EAR violations would further increase with passage of the Export Enforcement Act, to up to $5 million or ten times the value of exports for criminal violations and $500,000 per violation for civil offenses. One transaction can involve several violations, such as export without the required license, false statements on shipping paperwork, and other related actions.

Criminal and civil enforcement actions have increased in recent years. In Fiscal Year 2006 BIS achieved record penalty levels, with 34 criminal convictions, $3 million in criminal fines and $13.1 million in civil penalties. This trend will likely continue given the priority DOJ and the regulatory agencies are placing on export enforcement. So far in 2007 we have seen major criminal and civil export cases, including ITT's criminal fine of $100 million for ITAR violations, Chiquita International's criminal fine of $25 million for providing financial support to Colombian terrorists, and Armor Holding's $1.1 million civil fine for unlicensed exports of equipment used for crime control and subject to the EAR.

The commercial benefits of U.S. international trade, the dangers of U.S. technology falling into the wrong hands, and the penalties that may result from export offenses make clear the importance of compliance with U.S. export controls. Your company can assure it complies by following these basic steps:

• Establish a corporate commitment to compliance - A company's commitment to compliance is demonstrated by the assignment of senior-level corporate executive responsible for compliance, issuing statements and sets of principles of commitment and maintaining a proactive compliance program.
  
  
• Know the rules that apply to your company, products and activities - If your company's products could be subject to the ITAR, you may wish to obtain a commodity jurisdiction determination from DDTC. If you have questions about the correct USML/CCL classification of your product, you may obtain a ruling from DDTC or BIS.
  
  
• Know your customer, know your transaction, and watch for "red flags" - Screen your customers and other parties to transactions against the various lists of restricted and prohibited parties. Various companies provide this screening service on a commercial basis. Know the countries your products will pass through and ultimately reside in, and determine the controls in place for those locations. Monitor your transactions for unusual circumstances that may be "red flags" of illicit activities, and exercise appropriate due diligence.
  
  
• Give your employees the training they need to comply - Ensure your employees can recognize the compliance implications of their activities. Train them in identifying transactions subject to export controls and "red flags." For your compliance staff, provide training on applying the controls imposed by the regulatory agencies. Put internal procedures in place to ensure your employees involve your internal compliance staff in transactions when appropriate. Pay particular attention to sales and technical personnel who are in direct contact with foreign customers and may be the first to see "red flags" of potential problems.
  
  
• Keep your program up-to-date - Keep up with changes to export control requirements. Update your commodity jurisdiction and classification guidance, particularly as you introduce updated or new products/services. Revise your internal procedures to keep pace with changes to your business. Conduct periodic program reviews to make sure your policies and procedures are being followed and are attaining the intended ends, and to identify program deficiencies that need to be corrected.
  
  
• Take prompt corrective action when needed - If you find deficiencies in your internal program, through periodic reviews or other means, revise your policies and procedures to ensure future compliance. If you find your company has committed a violation, a voluntary disclosure to the appropriate regulatory agency can help to limit your potential liability to penalties. Provide remedial training, and, where appropriate, counseling or discipline, to employees responsible for violations.
  
  
• Document your compliance activities - Document all aspects of your compliance program with organizational charts, written policies and directives, records documenting screening and classification, training materials, and results of periodic and due diligence reviews and corrective actions. Use this documentation to monitor the effectiveness of your program, and, if necessary, to respond to government inquiries and penalty actions,

To return to the case of the cutting-edge gizmo, the company should carefully review which government agency governs its export (its jurisdiction) and where it is listed on a control list (its classification). The company should check the destination and end-use of its exports to determine whether a license is required on that basis. Regardless of the classification, the company should screen its customers and any other parties involved in a sale to confirm that none of them appear on one of the government list of restricted or prohibited parties. Through regular training, the company should sensitize its personnel to be alert for "red flags" such as end-use information inconsistent with the product or quantity ordered, or requests for unusual shipping routes or labeling. The company should also periodically review its compliance program to keep it up to date, take prompt corrective action where needed and fully document its compliance activities.

Managing your export compliance based on these steps will help reinforce a "culture of compliance" within your company, help ensure you comply with export rules and requirements, help you prevent illicit acquisitions by parties of concern, avoid penalties and reap the benefits of international trade.

Notes
1 Other regulatory agencies play a role in more specialized exports, such as the Department of Energy and the Nuclear Regulatory Commission, which regulate exports of items and technologies specifically related to nuclear power and weapons; and the Drug Enforcement Administration and Food and Drug Administration regulate exports of chemicals, pharmaceuticals and medical devices. Exporters in specialized fields should be aware of agencies that may regulate their particular industry sector, product or activity.

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Dana Townsend is a partner with MK Technology LLC, a trade controls management consulting firm in Washington, DC and a member of WIIT. She may be contacted at dtownsend@mktechnology.com.

Mike Turner is the former director of the Office of Export Enforcement and a Senior Advisor with MK Technology. He may be contacted at mturner@mktechnology.com.

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