So You Think You Don’t Need To Worry About Export Regulations? Think Again.

April 30, 2007

Quick quiz. Which of the following scenarios is most likely to run afoul of a United States government export regulation?

A. You own a chemical company and have a subsidiary in South Africa. This South African subsidiary has made sales of cyanide to a number of customers in South Africa.

B. You own a lumberyard with a store of Western red cedar. You send a portion of this to a company in Canada to be treated with preservatives.

C. You own a power company that is building a new plant. While at an industry conference, one of your engineers shares blue prints for the new plant with a peer from a power company in India.

D. You are the director of an engineering company in the United Arab Emirates. You sell oil field testing equipment to an oil company in Libya.

E. You own a sports-outfitting business that sells a range of hunting and fishing equipment. You send mounts for gun scopes to customers in Finland.

It is, of course, a trick question - in recent years the United States Department of Commerce settled with both domestic and foreign companies based on each of the above scenarios. Relying on alleged violations of the Export Administration Act, the settlement amounts ranged from just over $10,000 to over $1,500,000.

While companies with extensive experience exporting may not be surprised at the reach of U.S. export regulations, those newer to the game face risks that they may not have imagined. The regulatory scheme that establishes what are generally considered "export regulations," includes those acts within the reach of the Export Administration Regulations, as set forth by the United States Department of Commerce. Other government agencies, including the Office of Defense Trade Controls at the Department of State and the Office of Foreign Assets at the Department of the Treasury, have similarly enacted regulations that an exporter must also consider.

What follows are some basic, but not exhaustive, words of caution.

1. Export regulations are extra-territorial.

This is unsettling to attorneys schooled in notions of national sovereignty. It can be shocking to foreign companies or U.S. companies with foreign subsidiaries. But it is true. As written, the regulations prohibit two types of transactions that one might not expect to be within the reach of regulations enforced by agencies of the United States.

The first type of prohibited transaction relates specifically to subsidiaries. Foreign companies that are owned or controlled by what the regulations consider a "U.S. person," can face enforcement actions for doing business with countries against which the United States maintains embargoes, even if the transaction is perfectly permissible by the subsidiary's country of residence.[1] Such a regulatory scheme allows government agencies to control and penalize foreign companies and their U.S. parents for transactions arguably unconnected to U.S. soil.

A second type of prohibited transaction involves "re-export" of items that are of U.S. origin or that contain U.S. content. Such regulations forbid non-U.S. persons from re-exporting U.S.-origin items from third countries to certain destinations.[2] Individuals and entities considered U.S. persons, on the other hand, have to worry about whether they might be deemed to know (or whether the government may think that they should have known) that there was a re-export risk.[3]

2. Exportable items need not be tangible, and the items do not have to leave the United States.

Non-tangible items, including technical information and certain types of services, are encompassed by various export regulations.[4] Consequently, providing training and support services to the wrong entities can create as many problems for a company as a traditional tangible export. Financial support also falls within the scope of the Office of Asset Controls and can create great difficulties if those under the purported jurisdiction of the export regulations do not vigilantly monitor with whom they are doing business.[5]

Additional definitional breadth can be found in the Department of Commerce's "deemed export" rule. Under this rule, the Department of Commerce deems that the export of some information, like technology or source code, to take place when it is released to a foreign national within the United States.[6] Such information is considered released for export under a number of circumstances, including: (1) when it is available to foreign nationals for visual inspection; (2) when it is exchanged orally; or (3) when it is made available by practice or application under the guidance of persons with knowledge of the information.[7] So, even the sharing of the wrong information with the wrong person on United States soil can, in fact, get you in trouble with the export regulations.

3. Certain "catch-all" provisions put companies and individuals at a distinct disadvantage.

Perhaps the most astonishing and unsettling aspect of the regulations for those trying to defend seemingly innocent behavior are regulations that, as written, are so broad and all-encompassing as to draw in the most seemingly benign behavior.

For example, the Directorate of Defense Controls at the Department of State has a broad regulation that controls the export and use of technical data and services related to defense articles.[8] The Department of State's definition of data and services related to defense articles includes "[t]he furnishing of assistance (including training) to foreign persons, whether in the U.S. or abroad, in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles [ . . . ]"[9] The possible definitional range of "assistance" in "testing" or "repair" is just one illustration of the ways in which export regulations are open to broad interpretation. Similarly, the Department of Commerce's notion of "dual use" exports forces individuals and companies who manufacture seemingly benign products to consider an imaginative range of potential after-sale applications for which a purchaser might use an exported item.[10]

In addition, other sections of the Department of Commerce's regulations establish an exhaustive range of conduct and omissions for which one might be found liable with regard to the export regulations. The aiding and abetting provision, just by way of example, sets forth that "[n]o person may cause or aid, abet, counsel, command, induce, procure, or permit the doing of any act prohibited, or omission of any act required, by the Export Administration Act, the Export Administration Regulations, or any order, license or authorization issued thereunder."[11]

The real answer to the quiz: there are many ways to run afoul of U.S. export regulations, and what you do not know can in fact hurt you. Be careful, and if you think you might be in treading into the murky world of export controls, seek legal advice.

[1]15 C.F.R. § 500.201. As defined by Part 772 of the Export Administration Act, a U.S. person is: 1) any individual who is a citizen of the United States, a permanent resident alien of the United States, or a protected individual as defined by 8 U.S.C. 1324b(a)(3); 2) any juridical person organized under the laws of the United States or any jurisdiction within the United States, including foreign branches; and 3) any person in the United States.
[2]  See, e.g., 15 C.F.R. §§ 736.2(b)(5)-(10).
[3]  http://www.bis.doc.gov/Enforcement/knowcust.htm
[4] 22 C.F.R. § 120.17(4)-(5); 15 C.F.R. § 734.
[5]  See generally, 31 C.F.R. § 500.
[6]  See 15 C.F.R. §734.2(b)(2)(ii).
[7]  See 15 C.F.R. §734.2(b)(3).
[8]  22 C.F.R. § 121.1.
[9]  22 C.F.R. § 120.9.
[10]15 C.F.R. § 730.3.
[11]15 C.F.R. § 764.2 (b).

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