Export Control Regulations in an Age of Worldwide Terrorism
By Michael C. Dennis M.B.A., C.B.F., L.C.M.

Most export transactions do not require specific approval from the U.S. Government, but for certain export transactions to take place lawfully an export license is required. Generally speaking, licenses are required when the product intended for export affects or could affect:

• National security,

• Foreign policy,

• Nuclear non-proliferation,

• Missile development,

• Aid in the development of chemical and biological weapons,

• Regional stability,

• Crime control, or

• Control of international terrorism

Four U.S. Government agencies have primary export licensing responsibilities. They are: [1] the Department of Commerce, [2] the Department of Energy, [3] the State Department, and [4] the U.S. Treasury Department.

The majority of exports that require a license are either on the Commerce Control List (CCL) administered by the Commerce Department, or the U.S. Munitions List (USML) administered by the State Department. The CCL is used to regulate the export and re-export of dual use items. These are items that have legitimate commercial uses as well as possible military applications. The USML is used to control the export of defense articles [e.g. guns and grenades] as well as certain services and related technologies.

The U.S. Defense Department is actively involved in the inter-agency review of those items controlled on both the CCL and the USML. The agencies work together when there is a question about whether a proposed export is controlled on the CCL or the USML. The Energy Department controls exports of nuclear technology, nuclear materials and technical data.

The Treasury Department is responsible for economic and trade sanctions against targeted foreign countries and their agents, as well as terrorists and terrorism-sponsoring organizations, and international narcotics traffickers.

The federal government controls exports [and re-exports] on a case-by-case basisreviewing the following factors:

• The country of ultimate destination,

• The ultimate end-user,

• The type of product intended to be exported

• Its ultimate end-use, and

• The persons or entities arranging for the export to be made including banks, brokers, buyers, expediters, freight forwarders, shippers, etc.

The key to classifying an item for export is the Export Control Classification Number [the ECCN]. ECCNs are found in the Commercial Control List. The ECCN is an alphanumeric code that describes a particular item and lists the export controls placed on it.

ECCNs are based on ten broad categories of exports, which are:

1. Nuclear materials, facilities and equipment

2. Materials, chemicals, microorganism and toxins

3. Materials processing

4. Electronics

5. Computers

6. Telecommunications and information security

7. Sensors and lasers

8. Navigation and avionics

9. Marine

10. Propulsion systems, space vehicles, and related equipment

Currently, exports and re-exports are generally prohibited to Cuba, Iran, Iraq, Libya, Sudan, or to the Unita faction in Angola. [This list is subject to change without notice]. In some cases, special licenses will be issued for exports of agricultural goods, medicines, and medical equipment to countries under U.S. sanction on humanitarian grounds.

Exporters are required to screen all parties involved in an international transaction against the "Prohibited Parties Lists." This is a term used to describe the four lists of entities with which an exporter is prohibited from doing business under most circumstances. Those lists are:

• The Specially Designated Nationals List. SDNs are individuals and entities throughout the world that are barred from receiving U.S. exports as a result of various sanctions. U.S. persons are prohibited from engaging in any transactions with SDNs.

• In the aftermath of the September 11 terrorist attacks, the federal government created a new category of SDNs called "Specially Designated Global Terrorists" (SDGTs) resulting in a significant expansion of the SDN list.

• The Denied Persons List contains the names of persons who have been issued a denial order by the Commerce Department's Bureau of Industry and Security (B.I.S.) either because they have violated export controls in the past, or pose a serious risk of doing so. U.S. exporters are prohibited from dealing with denied parties in transactions involving U.S. items. [Generally speaking there are no exceptions to the prohibitions concerning denied persons export privileges.]

• The B.I.S. also maintains a Denied Entities List comprised of foreign end-users engaged in proliferation activities. Since these entities pose proliferation concerns, exports to them are usually prohibited - and if not will almost certainly will require a specific export license.

• A Debarred Parties List is maintained by the State Department. It lists the names of individuals denied export privileges under the International Traffic in Arms Regulations (ITAR).

If a party is not a prohibited entity falling into any of these four categories, the ultimate end-user will become an important factor in determining if an export license is required. The licensing body will need to review the foreign customer's history, and examine any prior violations of U.S. laws or placement on any of the lists mentioned above.

Exporters must also screen the parties involved in facilitating the sale. For example, an otherwise legitimate trade transaction may be a violation of sanctions if one of the banks involved in the financing is on the SDN List. Since the SDN List contains the names of banks, insurance companies, shipping lines, and freight forwarders throughout the world, exporters must remember to examine all parties to an export transaction, not just the buyer or the end user.

If you remember nothing else, remember this: It is up to the exporter to determine whether its products [or which of its products] require an export license. The first step is to determine which federal department or agency has jurisdiction over the item the company wants to export in order to find out if a license is required. In general, the Commerce Department focuses primarily on dual-use items, i.e., items that have both military/strategic uses as well as commercial applications. Exporters should consult the Commerce Department's B.I.S. and find out if the items or services they are planning to export are classified on the Commerce Control List (CCL). If a product appears on this list, it may require a license.

When in doubt, an exporter can request a "commodity jurisdiction" determination to resolve any uncertainty regarding the export licensing requirements for an item or service. One common question is this: With all of these rules, how do we ensure that we are in compliance with federal export control laws and regulations? Here is an overview of the process

• Start by considering the country to which a product is to be exported. Potential transactions should be checked for compliance with the sanctions [including embargoes] administered by the U.S. Treasury and Commerce Departments. Generally, embargoes prohibit the export of all items, including items listed on the CCL and other goods and services that would otherwise not require an export license.

• Obtain information about the customer and how that customer will use your product. Information about the customer's location, including complete street address and phone number, the nature of its business, ownership and control, and information with regard to the final destination and use of the product is necessary for determining if the export requires a license or is lawful.

• Check all parties against the Prohibited Parties Lists, including Treasury, Commerce, and State Department lists. Don't forget freight forwarders, consignees, banks, shipping lines, brokers, etc.

• Determine whether a license is needed to export a particular product or service by classifying the item using an Export Control Classification Number, a five digit alphanumeric code.

• When in doubt about agency jurisdiction, the exporter can contact the B.I.S. The B.I.S. will route the inquiry/application to other agencies for a determination of its licensing requirements.

• Remember that even if the intended export item does not appear on the CCL, it could be controlled for export purposes by another federal agency.

Exporters should keep in mind that millions of dollars in civil penalties are imposed each year for violations of export control laws. In cases where there is criminal intent to violate export control laws, criminal penalties can be imposed, resulting in significant corporate or personal fines and/or imprisonment.

Tips for Exporters:

• Recognize that any item that is sent from the United States to a foreign destination is an export. How an item is "transported" outside of the U.S. does not matter. This means an export could be a file attached to an email message, or an item sent by fax, regular mail or overnight delivery, by plane or by sea.

• Properly classify the item you intend to export using the CCL. [This may be done with or without the assistance of the B.I.S., but the exporter is responsible if it fails to properly classify the export].

• If you find that the item intended for export is on the CCL, using the Export Control Classification number in combination with the country chart, you can determine if a license is required. [One note of caution: Items controlled on the basis of short supply are not governed by the country chart. Another section of the EAR contains license requirements relating to items subject to short supply controls].

• If you find a license is required, apply for it as soon as you have an order. Don't delay the application process, or you may have to delay the shipment.

• Whenever possible, apply for licenses and classifications electronically rather than by mail.

• Fill out the application form completely, sign it, and attach all required supporting documentation including complete technical information about the product in question.

• If a license is required and is issued, the license number and expiration date must appear on all applicable shipping documents. [Licenses are usually, but not necessarily, valid for two years.]

• Be alert for red flagsabnormal circumstances associated with an export transaction. One example would be an order from a foreign buyer that is inconsistent with the purchaser's stated line of business. [An example would be an order for precision machine tools received from a foreign garment manufacturing company].

• Instruct every employee of their affirmative obligation not to ignore red flags. For example, it would be a violation of the EAR to instruct your sales department not to ask about the ultimate destination or intended use of the item you intend to export.

• Attend Export Administration seminars and workshops to make certain someone understands the Export Administration Regulations [the EAR] governing exports of your company's goods and services.

• Remember that records concerning exports and re-exports must be maintained for five years.

• When in doubt, use the Decision Tree [Supplement No. 1 to Part 732 of the Export Administration Regulations] published by the Department of Commerce to determine the license requirements for your proposed export.

Companies have an important role to play in preventing exports that are contrary to the national security and foreign policy interests of the United States. Exporters are not required to implement any specific export management system in order to comply with U.S. export control lawsbut exporting companies should have in place some process or system to ensure compliance with all federal laws and regulations controlling exports.

Disclaimer: The information provided is not legal advice and is not a substitute for legal advise. Readers are encouraged research these issues carefully, and to contact their attorney to clarify any of the issues raised in this article.

Reprinted in the April 2003 Edition of Business Credit Magazine