Abbey E. Baker contributed to this article.
Classification plays separate but fundamental roles in both the U.S. export and import systems. When importing, classification refers to categorizing an item on the Harmonized Tariff System (HTS) for entry into the U.S. When exporting, classification refers to categorizing an item under the proper export control regulations.
In both cases, an improper classification can have severe repercussions including civil and criminal fines and penalties. To shed some light on both of these processes, this month and next I will be providing an overview of both types of classifications, starting with exports. I think this is important as more and more companies are sending goods, services, and information around the world and this area of compliance is a big black hole to many companies.
If your company exports anything, and I mean anything – paperclips, technology, software, helicopters, phones, or financial services – the first step to complying with U.S. export controls is proper classification. Proper classification is the key to 1) ensuring you know which agency’s regulations control your export, and 2) identifying whether the export requires a license, or is prohibited based on destination, end-user, or end-use. Even if you are exporting pencils to Canada, you cannot rely on your own inclinations as to what is controlled.
Because there are many different reasons for control – such as nuclear non-proliferation, the opposition of hostile government regimes, the protection of U.S. defense technologies, and the prevention of human rights issues – many seemingly harmless products require a license for export to certain destinations. Depending on the product, some classifications can be highly complex and difficult, but fortunately many are fairly straightforward.
The U.S. export control system is a matrix of interagency regulations that exist to address various national concerns. The trick is to understand which regulations and agencies govern the item you intend to export – it could be one agency or multiple. Then, you must classify the item within the relevant regulatory regime. Misclassifying an item can lead to delays, unhappy customers, and export violations.
There are three major sets of regulations that govern U.S. exports. The Department of State’s Directorate of Defense Trade Controls (DDTC) administers the International Traffic in Arms Regulations (ITAR), which govern the export of defense articles and services. The Department of Commerce’s Bureau of Industry and Security (BIS) administers the Export Administration Regulations (EAR), which govern the export of commercial and dual-use items. The Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers all U.S. embargo and sanction programs. Together, these three offices administer the bulk of export regulations that U.S. exporters deal with on a daily basis.
Simultaneously, a variety of other miscellaneous agencies govern particular exports or are involved in export controls. For example, the Nuclear Regulatory Commission (NRC) regulates the export and import of “nuclear materials and equipment.” However, nuclear technology, technical data for nuclear power, and “special nuclear materials” are controlled by the Department of Energy. Other agencies involved in controlling exports include the:
So how do you make sure that your product is not subject to any of the “boutique” export controls? Classification! As a practical starting point, you can consult other entities that may have already classified the item in question. If you are a reseller, check the manufacturer’s website. If you are the manufacturer or a service provider, you probably need to self-classify or ask the government for help by filing a classification request, which we will discuss in a moment.
Classification is serious business. Do not rely on what others tell you without conducting your own analysis, and document how you make your decision. Export violations occur all the time. Just open a newspaper. While another company or informal source may provide ideas, these outside sources may be wrong and provide no protection in the case of a misclassification or violation. There is no substitute for a careful review of the regulations. If you are not comfortable doing this, you need to enlist the help of an experienced person who is. That being said, let’s move on to an overview of the two export regimes that require classification, the ITAR and the EAR.
Doreen M. Edelman is a shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz P.C. in Washington, D.C., where she helps clients create business solutions for international trade compliance. She has more than 20 years of experience developing compliance programs and counseling clients on export licensing, export controls, FCPA and Office of Foreign Assets Control (OFAC) sanction laws. Ms. Edelman also helps companies prepare global business plans and work through foreign government market regulations.
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