Failure to Consider U.S. Export Control Regulations Can be Costly
Written by: Brett J. Rosen
This article first appeared in the May 29, 2018 edition of the Legal Intelligencer.
Export controls are laws and regulations that regulate and restrict the release of sensitive technologies and information to foreign countries and foreigners, both within and outside of the United States, for reasons of national security and foreign policy. U.S. export control laws are often overlooked by companies of all sizes despite the serious repercussions for noncompliance, including hefty fines, criminal penalties and the revocation of export privileges.
A complicated network of federal agencies and inter-related regulations governs exports. To name just a few, the Export Administration Regulations (EAR) is a set of government regulations enforced by the Department of Commerce on the export and import of most commercial items. The International Traffic in Arms Regulations (ITAR) is a set of regulations on the export and import of defense related articles and services that is enforced by the Department of State. The Office of Foreign Assets Control (OFAC) of the Treasury Department administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes. The Arms Export Control Act (AECA) gives the President of the United States the authority to control the import and export of defense articles and defense services.
Some corporations have designated export control personnel who are tasked with detecting and preventing export control violations before they occur. Other corporations have not engaged in these preventative measures. Attorneys and others representing corporations of all sizes should be cognizant of the U.S. government’s export control restrictions. Failure to consider those restrictions can be costly. What follows are a few cautionary tales.
ZTE, the fourth largest telecommunications network equipment in the world, recently agreed to pay a record penalty of over $1 billion for exporting telecommunications equipment to Iran and North Korea in violation of the U.S. export control regulations (as well as making false claims in connection with the violation). A small New Jersey defense manufacturer was fined $400,000 for sending drawings (not actual product) of defense components to foreign suppliers for the purpose of obtaining quotations without obtaining the requisite export licenses. The University of Massachusetts agreed to pay a $100,000 fine in connection with its unlicensed export of an atmospheric sensing device to the Pakistan Space and Upper Atmosphere Research Commission.
Lastly, a university professor of engineering served a four year prison sentence for exporting defense articles and services without an export control license. The professor had obtained a U.S. Air Force (USAF) contract to develop plasma actuators to control the flight of military drone aircraft. During the course of that contract, the professor allowed two foreign national students to access export controlled data and equipment, and export some of the data on a trip to China. In doing so, the professor violated the Arms Export Control Act, which prohibits the export of defense-related materials, including technical data, to a foreign national or a foreign nation.
Generally speaking, export controls are implicated any time technical data/products are shared with persons outside of the U.S. or foreigners within the U.S., especially if that data or product relates to high performance computing, encryption technology, dual use technologies (technologies with both a military and commercial application), select chemical agents, military or defense articles and services, space technology and satellite, or any other area that would be considered to be strategically important to the U.S. in the interest of national security, economic and/or foreign policy concerns.
While it may be easy to determine that some export related activities can run afoul of export controls, like the shipment of arms to Iran, it is not so easy to identify other less obvious activities that require export control licenses. Consider, for example, the following hypothetical situation which raises a host of export control concerns.
An Israeli semiconductor manufacturer opens a new technical innovation center in California to position itself closer to Silicon Valley’s digital hub. The innovation center will be staffed by American and Israeli engineers. Some of the Israeli engineers have a green card, while others are briefly visiting before returning to headquarters in Israel. The American and Israeli engineers at the U.S. innovation center share technical ideas by way of personal meetings, e-mail and telephone calls with other employees in Israel.
Any technical discussions between the American and Israeli staff could require an export control license under, at least, the Export Administration Regulations (“EAR”). When considering whether a communication will require a license under the EAR, for example, it is necessary to consider at least (i) the underlying product that is the subject of the communication, and (ii) the destination of the communication.
With regard to the underlying product, the Commerce Department provides a list of controlled commodities, technology, and software known as the CCL, and the licensing requirements for each. The underlying product must first be identified on the CCL. If an item is not listed on the CCL, then that item is designated as EAR 99. EAR 99 items generally consist of low-technology consumer goods and do not require a license in most situations. Various types of semiconductors and semiconductor manufacturing processes appear on the CCL.
Let’s suppose that the underlying product, which is the subject of the communication, is listed on the CCL. Then, it is necessary to consider the destination of the communication (i.e., Israel). The U.S. government will permit the release of controlled product and related information to certain countries, but not others. To determine if an export license is required for sharing the technical details of the controlled product (or the product itself) with Israel, the licensing requirements set forth in the CCL for the underlying product must be cross-referenced against the Commerce Department’s Country Chart. If an export license is required before sharing the product or its technical details with Israel, then an export license will be required regardless of whether the Israeli recipient is located within the U.S. at the time of receiving the product or information. The U.S. government restricts the release of controlled information and product to foreign nationals here in the U.S. (referred to as a “Deemed Export”). Persons with permanent residence status (e.g., green card), U.S. citizenship, and persons granted status as “protected individuals” are exempt from the Deemed Export rule.
Continuing with the above hypothetical scenario, inventions generated at the U.S. innovation center eventually find their way into the products of the Israeli manufacturer, and those products will eventually be sold in a host of countries including Cuba. Shipping a product incorporating U.S. technology to Cuba could require an export control license under, at least, EAR depending upon whether the U.S. origin controlled content in that product exceeds a threshold value. Under the Commerce Department’s de minimus rule, when a non U.S. made product incorporates controlled U.S. original commodities (such as parts or software), the product is subject to EAR if the U.S. origin controlled content exceeds 25% of the value of the product for many foreign countries, including Cuba. Thus, a product that is subject to EAR and has a U.S. origin controlled content exceeding 25% of the value of the product requires an export license before shipping the same to Cuba.
Export control compliance can be confusing, tedious, and time consuming, especially since the rules and classifications are always changing as technology evolves. Many corporations lack the personnel or know-how to appropriately address export control, and this is the reason why export controls are often overlooked or ignored entirely. To avoid hefty fines, criminal penalties and the revocation of export privileges, however, corporations would benefit from preventative planning, e.g., identifying when their activities trigger export controls. When export controls apply, corporations should consider taking the appropriate steps to obtain any required governmental licenses, monitor and control access to restricted information, and safeguard all controlled materials.