Export Controls 2007 in Review: Practical Advice for Updating Your Export Compliance Program

This article flags the major changes in U.S. export controls to assist export compliance personnel in keeping their export compliance manuals and training up-to-date. Looking back at 2007, there were changes in laws, regulations and policies affecting the Export Administration Regulations (EAR), the International Traffic in Arms Regulations (ITAR) and the Foreign Assets Control Regulations (FACR). As discussed below, the biggest changes appear to be the significant increase in administrative and criminal penalties for export violations and the increasing criminal prosecution of export violations.

Enforcement and Penalty Increases

IEEPA Penalty Increases

On October 16, 2007, President Bush signed the International Emergency Economic Powers Enhancement Act. This law amends the International Emergency Economic Powers Act of 1977 (IEEPA) by substantially increasing penalties for violations of the EAR and most unilateral embargoes administered by the Office of Foreign Assets Control (OFAC).¹ The key points are:

• Maximum civil penalties increased fivefold to $250,000 per violation or twice the amount of the transaction value.
• Maximum criminal penalties increased to $1 million per violation.
• The law envisions retrospective application and both the Bureau of Industry and Security (BIS) and OFAC have indicated that in general these higher penalties will apply to violations occurring prior to October 16, 2007, except in limited circumstances (such as where a voluntary disclosure has already been submitted).²

Criminal Prosecutions

Criminal prosecutions for export violations increased from 60 in fiscal year 2006 to 100 in fiscal year 2007. The Department of Justice appointed a National Export Enforcement Coordinator and it is reported that dozens of the Federal Bureau of Investigation (FBI) agents have been trained on export controls and that the FBI currently has about 125 open economic espionage cases. In addition, the Bureau of Customs and Border Protection made 149 export-related arrests in fiscal year 2006 and BIS enforcement was involved in 33 criminal convictions related to BIS export violations.³

$100 Million ITAR Penalty

In March 2007, ITT Corporation entered into a plea agreement that resolved charges dating back to 2001 relating to exports of night vision technology to China, Singapore and the United Kingdom. Half of the $100 million penalty will be suspended under an unusual agreement whereby ITT will invest the $50 million in developing new military technology with certain intellectual property rights that will be extended to the government.

Not only was this one of the largest criminal export penalties ever assessed, but ITT may be the first major defense contractor to plead guilty to criminal charges. Reading the documents related to this case provides some insight on how to avoid or mitigate against this kind of penalty. For example, the government alleged there was a culture of noncompliance and that ITT and its counsel made material omissions and misleading statements in a voluntary disclosure, including statements that violations were “recently discovered” and that “immediate corrective action” had been taken.

Automated Export System (AES) and Enforcement

AES filing not only provides a tool for other agencies to review exports for possible violations, but now the Census Bureau appears to be stepping up enforcement on improper filings and making visits to noncompliant companies. A 2007AES Newsletter provides guidance on correcting prior filings and making voluntary disclosures with respect to improper filings, as well as links to AES “Best Practice.”⁴

Defense Exports Under the ITAR

Third Country/Dual Nationals of a Licensee

In December 2007, the Directorate of Defense Trade Controls (DDTC) revised licensing procedures by adding ITAR § 124.16 for special retransfer authorizations for unclassified technical data and defense services under Technical Assistance Agreements (TAA) and Manufacturing License Agreements (MLA).⁵ This change allows third country national/dual national employees of a licensee/sublicensee to have access to the technical data/defense services subject to the agreement, without requiring additional authorizations or execution of a non-disclosure agreement, provided that:

• The individual is an employee of the licensee or foreign subcontractor (sublicensee) authorized under the
  agreement.
• The individual is a national/dual national exclusively of countries that are members of NATO, the EU, Australia, New Zealand, Japan, or Switzerland (e.g., a dual citizen of the UK/India would be ineligible).
• The transfers must physically take place within one of the above countries (i.e., implicitly the rule requires that both the licensee and the third party/dual national be from one of the above countries).

Additional language is required to be inserted in the transmittal letter and agreement for new applications, and existing agreements must be amended to take advantage of this change.

(Note: Even if not requesting this authorization, new agreement submissions must include specific additional statements regarding Third Country/Dual Nationals).⁶ The major limitation is in the term “National,” as DDTC reiterates that it considers country of origin and country of birth in addition to citizenship in determining the nationality of a person.

D-Trade

• As of April 30, 2007, D-Trade is mandatory for filing of DSP-5, DSP-61, and DSP-73 license applications. Hardcopies will be returned without action (RWA).
• D-Trade now requires applicants to include the DDTC-approved name in all applications, and DDTC has posted guidance on this and other issues.⁷
• The rollout of D-Trade2 in 2007 was pushed back several times. Look for this in 2008. D-Trade2 will soon allow filing of DSP-6 (amendment to DSP-5), DSP-62 (amendment to DSP-61) and DSP-74 (amendment to DSP-73).

Sixty-Day Clock on Voluntary Disclosures

ITAR § 127.12 was revised in December 2007.⁸ Key
elements of the revision are:

• Initial notification should be made “immediately” after discovery of a violation.
• A full disclosure must be made within 60 days of the initial notification or the submitter may lose the benefit of having made the disclosure voluntarily, although extensions may be granted.
• The corrective action should include measures designed specifically to deter the violation from recurring.
• The Justice Department is not bound to consider the voluntary nature of the disclosure in a criminal
  proceeding.

Treaties and Agreements

• United Kingdom. The United Kingdom and the United States signed a treaty on defense cooperation that would create a broad exception for exports of defense articles, technical data and services for projects for the UK or U.S. governments. The treaty requires implementing arrangements to flesh out the details. Ratification of this treaty by the Senate is pending.⁹
• Australia. Australia and the United States signed a treaty on defense trade cooperation. It is similar in scope to the UK treaty and also requires implementing arrangements and ratification by the Senate.¹⁰
• Canada. In May 2007, DDTC announced it had reached an agreement with Canada whereby dual nationals employed by the Canadian Department of National Defense, the Canadian Communications Security Establishment, the Canadian Space Agency, or the National Research Council of Canada, who hold Secret level clearances issued by the Canadian government can have access to ITAR-controlled items without the need to be individually identified under a TAA/MLA or the execution of NDAs.¹¹

Commodity Jurisdiction Request Guidelines

Additional guidance on submitting these forms was posted by DDTC.¹²

Licensing Time/Statistics

DDTC was criticized in a 2007 U.S. Government Accountability Office (GAO) Report¹³ for delays in licensing stemming primarily from lack of manpower and inefficiencies in the system. The statistics are interesting because they largely confirm anecdotal experience among industry professionals. For fiscal year 2007, median time and other statistics were:

• 25 days for permanent export licenses (DSP-5)
• 71 days for technical assistance agreements
• 95 days for brokering agreements
• 126 days for commodity jurisdiction requests
• 0.5 percent of licenses denied
• 17.1 percent of applications returned without action
• 35.5 percent of licenses approved with proviso

For comparison purposes, in fiscal year 2006 BIS had 15 percent of applications returned without action, and a 1 percent rejection rate, with average processing time of 33 days.¹⁴

Commercial Exports Under the EAR

Penalty Increases

As detailed on page one of this article, maximum penalties for violations of the EAR increased substantially and BIS has issued guidance on how it intends to apply these both in the future and to past violations.

China Military End-Use Rule

This past summer, BIS published new rules that require a license to export items classified under certain ECCNs
previously uncontrolled to China, if the U.S. exporter knows or has reason to know that the item is intended for a military end-use in China.¹⁵ Affected companies will need to revise their “Know Your Customer” procedures/due diligence requirements and perhaps consider customer certifications when dealing with China. Read more comprehensive article on this subject. 

Validated End-User (VEU) Authorizations

The China End-Use Rule, discussed above, also contains provisions that would allow Chinese companies to become a VEU. A VEU would be pre-approved by BIS to receive certain products or technology that would otherwise require a license. In October 2007, BIS added provisions for Indian entities to apply for VEU status and approved five Chinese companies to receive goods/technology under this new program.¹⁶

Electronic Filing on New SNAP-R (Mandatory)

In October 2007, BIS published a proposed rule to make electronic filing of applications for export licenses, classification requests, encryption reviews and most other filings mandatory, with only limited exceptions. In advance of the final rule, the Office of Exporter Services has “encouraged” electronic filing by not providing the older carbon BIS 748P Multipurpose Application Form, making electronic filing the only practical option. SNAP-R has two big advantages over the previous electronic filing system:¹⁷

• The applicant can attach supporting documentation.
• A company can authorize third parties (e.g., lawyers, consultants) to file on their behalf, provided the company has or obtains a BIS Company Identification Number (CIN).

Changes to the Commerce Control List (CCL) and EAR

BIS made changes to all but one category of the CCL in 2007, as well as changes to applicable controls in a number of instances:

• Wassenaar Rule.¹⁸ BIS conformed certain ECCNs to agreed changes from the recent Wassenaar Plenary and modified policy controls for certain ECCNs including.
  • adding national security controls (NS Col. 1) to certain ECCNs in categories 1, 3, 7 and 9 of the CCL (which generally requires a license to all countries but Canada)
  • adding national security controls (NS Col. 2) to certain ECCNs in categories 1, 2, 3, 5 (part1),
    6 and 7
  • adding or amending a number of ECCNs in most categories to conform to agreed changes to the Wassenaar List of Dual-Use Goods and Technologies
  • providing a “Statement of Understanding” to part 744 – supp. 3 to clarify classification of source code controlled for national security reasons as software/technology
• Missile Technology. BIS replaced the term “missile” with “rockets, missiles, or unmanned aerial vehicles” in applicable sections of the EAR, amended certain definitions and modified certain ECCNs in categories 1, 6, 7 and 9, and added a new ECCN 7A107 to control certain three-axis magnetic heading sensors.¹⁹
• QRS-11. The unique rules on the QRS-11 Micromachined Angular Rate Sensor were modified.²⁰
• Australia Group (chemical/biological weapons). BIS implemented certain changes regarding animal pathogens, added Croatia to the Australia Group, and made other changes/clarifications as a result of a June 2007 plenary meeting of the Australia Group.²¹
• Radiation hardened microelectronic circuits. Jurisdiction for certain circuits was shifted from the EAR to ITAR.²²

Other Items of Interest

• Temporary Export of Technology. BIS issued a rule allowing U.S. persons traveling abroad to carry “technology” under license exemption TMP (i.e., tools of the trade) and BAG (personal baggage), subject to certain
  limitations.²³
• Expansion of Authority for “Entity List.” BIS has proposed rules to expand the criteria for placing entities on the Entity List. This list was established primarily to restrict exports to entities engaged in programs related to weapons of mass destruction. BIS now proposes to allow additions for a variety of national security and foreign policy reasons.²⁴ While the expansion may lead to more entities being listed, it may help avoid the one-off general orders that are sometimes overlooked or difficult to integrate into compliance systems.
• Deemed Export Advisory Committee (DEAC) Report. In December 2007, the DEAC released its report and recommendations regarding how dual-use deemed export issues should be handled.²⁵ The DEAC recommends that existing policies be revised to:
  • require companies/BIS to consider place of birth/national origin in addition to citizenship for purposes of determining the country of a foreign person
  • broaden the definition of “use” technology
  • create “trusted” institutions subject to streamlined processes for export controls
  • add annual sunset reviews of technologies subject to the Commerce Control List (CCL)
• Group C Countries: Destinations of Diversion Concern. In early 2007, BIS issued a notice that it was considering creating a new category of countries subject to additional controls because of the risk of diversion. This may have been intended to curb UAE-to-Iran transshipment of U.S. origin goods. The UAE subsequently amended their export laws.²⁶

Embargo Regulations

This section includes OFAC and other agency actions relating to countries subject to U.S. economic embargoes.

Penalty Increases

As detailed on page one of this article, maximum penalties for violations of most embargo regimes administered by OFAC have increased substantially.

Comprehensive Embargoes

• Iran. The U.S. continued tightening the embargo on Iran. OFAC and the State Department have put pressure on companies in the energy and finance sectors in particular to terminate their subsidiary activities in Iran. In October 2007, OFAC expanded prohibitions relating to certain Iranian entities connected to Iran’s nuclear energy program and Islamic Revolutionary Guard Corps (IRGC), including blocking certain banks owned by the Iranian government from access to the U.S. banking system, as well as sanctioning several large Iranian companies.²⁷
• North Korea. In January 2007, BIS issued regulations implementing UN Security Council Resolution 1718, which among other things barred sale of luxury goods to North Korea. BIS regulations go further than “luxury goods” and essentially now require a license to export any item controlled under the EAR (including EAR99 goods formerly not requiring a license), except for food and medicine, with a policy of denial for any item that is considered a luxury.²⁸
• Sudan. In October 2007, OFAC codified its policies toward Sudan and the exceptions relating to Darfur and Southern Sudan. Goods that transit through nonexempt regions of Sudan, and agricultural products, medicine and medical supplies remain subject to licensing requirements. This rule also prohibits U.S. persons from engaging in transaction or brokering transactions related to Sudan’s petroleum or petrochemical
  industries.²⁹

Limited Embargoes

The following are changes affecting limited embargoes. In general, these changes expanded OFAC’s authority to designate Specially Designated Nationals (SDNs) and block property of designated individuals and entities:

• Belarus. OFAC has designated a number of Belarus government officials and several entities, including the Belarusian State Petroleum and Chemical Concern, on the SDN list.
• Iraq. In Executive Order 13438 issued in July 2007, the President expanded the power to block funds and prohibit transactions with designated individuals threatening peace and stability in Iraq.
• Lebanon. In August 2007, the President issued Executive Order 13441 blocking property of certain persons undermining the sovereignty and democratic process in Lebanon. To date, there are only a few individuals sanctioned under this executive order
• Liberia. In May 2007, OFAC published new regulations blocking assets and prohibiting certain transactions with persons associated with the former Charles Taylor Regime.³⁰ This does not affect most transactions with Liberia and the Liberian government.
• West Bank and Gaza. In October 2007, OFAC amended its rules to clarify that transactions with the Palestinian Authority (i.e., the Abbas government) are generally authorized. Because HAMAS is a designated terrorist organization, transactions with HAMAS or property in which HAMAS has an interest are still blocked. As a practical matter, transaction into these areas remain difficult.³¹

SEC Lists Companies Doing Business in Embargoed Countries

In June 2007, the Securities and Exchange Commission (SEC) listed on its Web site, in a fairly prominent way, companies that do business with embargoed countries under the heading: “Countries known to sponsor terrorism.” This included foreign companies listed on U.S. stock exchanges as well as U.S. publicly-traded companies with foreign subsidiaries that engage in presumably legal activities with embargoed countries. Prior to establishing this list, the SEC has hounded companies to report any activity in embargoed countries as “material,” regardless of the minimal nature of such activity. Under a clamor of industry concern, the list was removed in August 2007. However, in November 2007, the SEC published a proposed rule to re-list such
information.³²

House Cleaning Issues

As a reminder, certain mandatory reports are due in January. In general, the beginning of the new year is a good time to update export compliance documentation.

Recurrent Reports to BIS/DDTC

If you haven’t already reported, now is the time to start gathering information for required annual/semi-annual reports. These may include:

• semi-annual reports to DDTC of exports under the Canadian Exemption
• semi-annual reports to BIS regarding certain encryption product exports
• annual reports to DDTC for brokering activity

Update DDTC Registration

Has your company changed officers or directors, or acquired other companies? Have empowered officials left the company? Now is the time to update/amend your registration statement with DDTC.

Review Calendar of License/Registration Expiration Dates

Review expiration dates so extensions or new licenses can be started with plenty of time. Remember that TAAs expire during the calendar month corresponding to the first letter in the registrant’s name per a 2006 DDTC Notice.³³

Updating Copies of the Regulations

January is a good time to ensure that you have the most current versions of the ITAR, EAR and embargo regulations.

1 A more detailed article on the increased penalties is available at: Holland & Knight International Trade Alert (Oct. 29, 2007)

2 See OFAC Civil Penalties – Interim Policy, Nov. 27, 2007; BIS Charging and Penalty Practices – Fact Sheet, Nov. 1, 2007.

3 Pedro Ruz Gutierrez, DOJ Revs Up Export Prosecutions, Legal Times, pp. 1, 13, Dec. 17, 2007.

4 AES Newsletter, Issue 31, Oct. 2007, available at: http://www.census.gov/foreign-trade/aes/aesnewsletter102007.pdf

5 Final Rule, Amendment to ITAR: Regarding Dual and Third Country Nationals, 72 Fed. Reg. 71785 (Dec. 19, 2007).

6 Original website reference no longer available (8/22/2012)

7 See www.pmddtc.state.gov

8 Final Rule, Voluntary Disclosures, 72 Fed. Reg. 70777 (Dec. 13, 2007).

9 The treaty text as transmitted to the Senate can be found at: http://www.fas.org/asmp/resources/110th/UKDTCTtransmittalpackage.pdf

10 The treaty text can be found at: http://www.defence.gov.au

11 See notices posted on the DDTC Web site: www.pmddtc.state.gov

12 See http://www.pmddtc.state.gov

13 GAO Report, “Defense Trade: State Department Needs to Conduct Assessments to Identify and Address Inefficiencies and Challenges in the Arms Export Process,” p. 20, GAO 08-89, Nov. 2007 (report period is through April 2007). DDTC states its statistics have improved since the report period.

14 BIS Annual Report for FY 2006, Executive Summary, p. viii.

15 Final Rule, Revisions and Clarifications of Export and Reexport Controls for the People’s Republic of China (PRC), 72 Fed. Reg. 33646 (June 19, 2007).

16 Final Rule, Approved End-Users and Respective Eligible Items for PRC under Authorization VEU, 72 Fed. Reg. 59164 (Oct. 19, 2007) (this was subsequently corrected in several notices); Final Rule Authorization VEU Addition of India as Eligible Destination, 72 Fed. Reg. 56010 (Oct. 2, 2007).

17 SNAP-R Home page is: http://www.bis.doc.gov

18 Final Rule, December 2006 Wassenaar Arrangement Plenary Agreement Implementation, 72 Fed. Reg. 62524 (Nov. 5, 2007).

19 Final Rule, Revision to the EAR Based on 2006 MTCR Plenary Agreements, 72 Fed. Reg. 25680 (May 7, 2007).

20 Final Rule, Expanded Licensing Jurisdiction for QRS 11 Micromachined Angular Rate Sensors, 72 Fed. Reg. 62768 (Nov. 7, 2007).

21 Final Rule, Implementation of Understandings Reached at the June 2007 Australia Group Plenary Meeting, 72 Fed. Reg. 52000 (Sep. 12, 2007).

22 Final Rule, Export License Jurisdiction for Microelectronic Circuits, 72 Fed. Reg. 39009 (July 17, 2007).

23 Final Rule, Revision to License Exceptions TMP and BAG: Expansion of Eligible Items, 72 Fed. Reg. 70509. (Dec. 12, 2007).

24 Proposed Rule, Authorization to Impose License Requirements for Entities Acting Contrary to National Security or Foreign Policy Interests of the U.S., 72 Fed. Reg. 31005 (June 5, 2007).

25 The Deemed Export Rule in the Era of Globalization, Dec. 20, 2007, See http://tac.bis.doc.gov/2007/deacreport.pdf

26 Notice, Country Group C: Destinations of Diversion Concern, 72 Fed. Reg. 8315 (Fe. 26, 2007); Gary Yerkey, United States Welcomes New UAE Law Controlling Exports of Sensitive Technology, Int’l Trade Rept., Vol. 24. No. 11at 395.

27 A more detailed article on this is available at: Holland & Knight International Trade Alert (Nov. 13, 2007)

28 Final Rule, North Korea: Imposition of New Foreign Policy Controls, 72 Fed. Reg. 3722 (Jan. 26, 2007).

29 Final Rule, Sudanese Sanction Regulations, 72 Fed. Reg. 61513 (Oct. 31, 2007).

30 Final Rule, Former Liberian Regime of Charles Taylor Sanctions Regulations, 72 Fed. Reg. 28855 (May 23, 2007).

31 Final Rule, Global Terrorism Sanction Regulations, 72 Fed. Reg. 61517 (Oct. 31, 2007).

32 Proposed Rule, Concept Release on Mechanism to Access Disclosures Relating to Business Activities in or with Countries Designated as State Sponsors of Terrorism Concept Release, 72 Fed. Reg. 65861 (Nov. 23, 2007).

33 See http://pmddtc.state.gov