with contributing author Thomas Scott III
The Export Control Reform Initiative (ECRI) continued to dominate the trade compliance arena in 2013 and will continue to do so in 2014. Significant ECRI-related changes to both the Export Administration Regulations and the International Traffic in Arms Regulations will present important compliance challenges, as will the complexities of U.S. sanctions and embargo programs.
The key areas addressed in this article are:
Transfer of Lower-Level Defense Articles to Commerce Department Jurisdiction
After several years of preparatory work, the ECRI made concrete changes in late 2013 to the U.S. export control system. On October 15, export control responsibility for numerous lower-level defense articles was transferred from the State Department to the Commerce Department. Historically, the Commerce Department was responsible only for regulating the export of dual-use articles (items with both commercial and military utility), while the State Department was responsible for regulating the export of defense articles. With the recent transfer of certain less sensitive defense articles to the Commerce Control List, the Commerce Department now has jurisdiction over both dual-use articles and certain lower-level defense articles.
The ECRI changes offer more licensing flexibility for those items transferred to Commerce Department jurisdiction, but they also present new compliance challenges:
In order to deal with these challenges, exporters should focus on several key areas. First, there is no substitute for knowledge of the regulations. A strong understanding of the revised regulations is essential to compliance, and companies should ensure that compliance staff is provided with appropriate training and resources to address the jurisdictional, classification and export clearance issues presented by export reform.
Second, companies should establish and document a process for reviewing products to determine if and how they are affected by export control reform. Since classification under the Commerce regulations generally requires an assessment of technical specifications and capabilities, it is important to involve engineers in the jurisdiction/classification review process.
Third, it is important to involve IT early in the process. Changes to internal systems will likely need to be made so as to accommodate new classifications and revised documentation requirements.
OFAC Embargo and Sanctions Programs
The Office of Foreign Assets Control (OFAC) at the Treasury Department administers a variety of economic and trade sanctions programs intended to impose restrictions on trade by U.S. citizens with countries, organizations or individuals that the U.S. government has determined pose foreign policy or national security concerns. While many of those programs see frequent changes, the U.S. embargo against Iran continues to be the most dynamic and presents perhaps the greatest risk to U.S. exporters.
In July 2013, additional sanctions were imposed by the U.S. against Iran pursuant to the Iran Freedom and Counter-Proliferation Act of 2012. These additional sanctions were aimed primarily at the Iranian shipping, shipbuilding and energy sectors. They included the potential for penalties to be levied against persons and foreign financial institutions that engage in certain transactions involving the Iranian automotive sector, the Iranian Rial or the sale, transport or marketing of Iranian petroleum, petroleum products or petrochemicals.
These additional sanctions added further complexity to what was already a bewildering array of layered sanctions. Compliance with the sanctions against Iran demands careful scrutiny of business dealings not only to ensure that none of the parties to a transaction are Iranian entities or specially designated nationals of Iran, but also to verify that transactions purportedly with parties in locations such as the UAE are not actually intended for Iran. U.S. export enforcement agencies, including the Office of Export Enforcement (OEE), the FBI and the Department of Homeland Security have robust intelligence and enforcement efforts targeting potential diversions to Iran. It is not unusual for companies to receive inquiries from those agencies about orders that might be intended for diversion to Iran. Should such an inquiry be received, it is important that it be referred promptly to the company’s compliance and legal departments to ensure the proper level of cooperation with law enforcement while protecting company interests.
The recent agreement between Iran, the U.S. and other nations to limit certain aspects of Iran’s nuclear program will not result in any dramatic short-term rollback of U.S. sanctions against Iran. Companies should not expect significant changes at least until a follow-on agreement is reached at the end of the initial six-month agreement.
It is important to remember that, in addition to the well-publicized embargo of Iran, the OFAC also maintains nearly total embargoes on trade with Cuba and Sudan. No significant changes were made to either of those embargoes in 2013, and both continue to be comprehensive in their coverage, with only very limited opportunities for the licensing of trade in agricultural products and/or medicine.
The OFAC maintains less comprehensive, targeted sanctions on Belarus, Burma, the Democratic Republic of the Congo, Iraq, Ivory Coast (Côte d’Ivoire), Lebanon, Libya, North Korea, Somalia, Syria, Yemen and Zimbabwe. Sanctions are also in place targeting persons or entities engaged in activities threatening international stabilization efforts in the Balkans, narcotics trafficking, terrorism, undermining Lebanese sovereignty or democratic processes or institutions in Lebanon, the former Liberian regime of Charles Taylor, proliferation of weapons of mass destruction, trade in rough diamonds and transnational criminal organizations. The only 2013 addition to the OFAC’s roster of sanctions programs was the implementation of the Magnitsky Sanctions pursuant to the Sergei Magnitsky Rule of Law Accountability Act of 2012. The Magnitsky Sanctions were implemented to punish Russian officials considered to be complicit in human rights abuses. There are currently 18 named individuals who are subject to restrictions under the Magnitsky Sanctions.
Export Enforcement Priorities
The OEE at the Commerce Department continues to focus on three primary areas of concern with respect to export compliance violations:
A fourth enforcement priority has been added as a result of export control reform. As the reform initiative moves forward, the OEE will be looking closely at the export of items transferred from State Department to Commerce Department jurisdiction to ensure that they are being exported pursuant to proper export authorization.
Exporters should be mindful of these priorities and ensure adequate internal focus of compliance resources on areas that present higher risk of export control violations. Exporters need to understand if and how their exported products might be used in chemical/biological/nuclear weapons, terrorism or foreign military activities. They should implement appropriate screening and due diligence procedures to review proposed transactions and business partners, as well as to ensure that there are no apparent risks of diversion of products to prohibited activities or parties. While there is no guarantee that products will not be diverted to proscribed activities—even with appropriate screening and due diligence efforts performed by the seller/exporter—the implementation and use of thorough due diligence over the transaction will help reduce risk and provide important mitigation of any potential penalties should such a diversion occur.
Continued Vigilance Is Essential in a Changing Regulatory Landscape
The regulation of exports in the U.S. has changed significantly over the past 20 years. U.S. export controls will continue to be dynamic and present compliance challenges for exporters. Commerce Department controls rely more extensively on self-regulation than do the State Department controls, and as more items are shifted from State Department control to Commerce Department control, the level of required self-regulation will only increase. Sound export compliance in a largely self-regulated export control system demands well-trained and conscientious compliance staff. One benefit of investing in a top-notch compliance program is a higher degree of flexibility in exporting company products; another is decreased company risk of non-compliance with its resultant imposition of monetary penalties, disruption of export business or incarceration.
The full LRN Risk Forecast Report can be accessed at: http://pages.lrn.com/risk-forecast-report-2014
About the Authors
Thomas Scott III is Of Counsel in Ladner & Associates PC’s Washington, D.C. office, where he focuses on U.S. trade law and regulation, with a particular emphasis on export controls and embargoes. After beginning his legal career in Europe, Thomas has practiced law in Washington, D.C. for the past twenty-five years, focusing on international trade, export compliance and regulation, and customs law. He teaches export control courses for the District of Columbia Bar’s Continuing Legal Edcontinueducation Program.
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Marian E. Ladner is a leading expert in the areas of trade compliance, exports, and supply chain management. Marian is managing partner in Ladner & Associates PC’s Houston office and is the leader of its International Trade Practice, where she focuses on regulatory compliance with import and export requirements. Before practicing law, Marian earned a B.A. from Tufts University in 1981, a J.D. from the University of Miami School of Law in 1985, and an LL.M. from the American University Washington School of Law in 1986. She is licensed to practice in Florida, Texas, and the District of Columbia.