By David J. Glynn and Lizabeth C. Rodriguez
(originally published in @Law – Winter 2009-2010)
In today’s uncertain economic times, businesses are grappling with an abundance of issues that could potentially “break” the company. On top of the many day-to-day financial concerns businesses face, government regulators impose a host of requirements that tend to drive up expenses with a negative impact to a company’s bottom line. Depending on the industry, compliance with U.S. Government regulations – everything from employment and safety to environmental, accounting and trade controls – can consume valuable corporate resources (time and money) and present risk of fines, penalties and negative publicity that may be too great to ignore. One such area of business regulation is export control.
Many companies, especially professional services companies (even law firms), are unaware of the existence of these regulations or their applicability to their business activities. Unfortunately, this area of the law is a mine field and a failure to comply may have severe consequences for a company. One particularly insidious provision in the law is the requirement to obtain export authorization before transferring U.S. origin technology to foreign persons, whether located in the United States or overseas. This requirement is known as the “Deemed Export Rule.” This article discusses what the “Deemed Export Rule” is, explains why understanding it and complying with it is important for you and your organization, and provides some examples that may help spot potential areas of concern in your organization.
Why Are U.S. Export Control Laws Important?
The term “U.S. export control laws” refers to a set of regulations promulgated principally by the Departments of Commerce and State. Although these laws are designed to advance U.S. foreign policy and national security imperatives, their impact extends beyond traditional commercial trade transactions. U.S. export control laws control not only physical exports of goods from the United States, but also the provision of services or technical information to non-U.S. persons – even if the exchange occurs in the United States. In other words, anyone who is in the United States pursuant to a visa is considered a foreign person under U.S. export control laws.
Keep in mind that there is a strict liability standard for compliance with these regulations, so it is critical for all U.S. organizations and individuals to be aware of their responsibilities to avoid inadvertent non-compliance.
Exporting Without Leaving the Country
How can an export occur when all activities are conducted in the United States? Suppose you work for a company that designs and manufactures components for a commercial satellite. Your company hires a graduate student from a local university. The new hire is a top-notch engineering graduate and a citizen of China. On his first day of work, the company provides the new engineer access to the computer-aided design software system that contains export controlled drawings. Under U.S. export control laws, providing the Chinese student with access to the drawing is considered a deemed export of the drawing to China.
Or a paralegal in your company’s legal department provides a draft patent filing to a foreign exchange student intern in the department to check citations. The draft contains an attachment that provides information required for the production of a sophisticated laser. Under U.S. export controls, this scenario would also constitute an export of technology.
How can you and your company ensure that these transfers are made in compliance with U.S. export control laws? If your company fails to comply with the regulations, what are the penalties and what steps can be taken to help avoid a violation of these laws?
Overview of U.S. Export Control Laws
An overview of the pertinent export control laws and the regulations promulgated pursuant to them may be helpful in providing clarity. The Department of Commerce, Bureau of Industry and Security, regulates the export of dual-use items and technology through a set of regulations called the Export Administration Regulations (EAR).1 The statutory authority for the EAR is the Export Administration Act of 1979.2 Dual-use items are those that can be used in both commercial and military applications. For example, certain Global Positioning Systems (GPS) are considered dual-use items because they can be used for commercial and military applications. The term dual-use also applies to “technology” – technical knowledge or technical know-how, such as the design schematic for a general purpose integrated circuit.
Items and technology for military applications, including most firearms and weapons, are regulated by the Department of State, Directorate of Defense Trade Controls, under the International Traffic in Arms Regulations (ITAR). The statutory authority for the ITAR is the Arms Export Control Act.3 The term “munitions items” extends beyond traditional military items and includes, but is not limited to, spacecraft (e.g., the Space Shuttle and rockets), certain chemical agents, protective personnel equipment (e.g., body armor) and optical devices (e.g., some night vision goggles). The ITAR also regulate “defense services,” which consist of furnishing either training or technical data related to ITAR-controlled items to foreign persons either in the United States or abroad.4
What is a U.S. Export?
Understanding what is an export is pretty straightforward. The ending or transferring of physical items and technology as well as certain services to another country is an export. More specifically, the Export Administration Regulations define “export” as any oral, written, electronic or visual disclosure, shipment, transfer or transmission outside the United States to anyone, including a U.S. citizen, of any commodity (including software or technology information, technical data or service (e.g., training or assistance). However, under U.S. export control laws, an export may also take place inside the boundaries of the United States.
The Deemed Export Rule
The disclosure of U.S. export controlled technical information and the provision of services to foreign persons inside the United States are termed “deemed exports” and subject to licensing requirements under the U.S. export control laws. Specifically, the Export Administration Regulations define deemed exports as the transfer or disclosure (visually, electronically, or in any other medium) of technologies or technical data, as well as consulting, instruction, training, or lectures, concerning export-controlled equipment, materials, or items to a foreign entity or individual in the U.S.5 Interestingly, the term “deemed export” is used only in the EAR – it is not found in the ITAR. The Department of State chose to use the phrase “transfer of technical data,” which embodies the same concept as the EAR’s deemed exports.
Who is a Foreign person?
Under both the EAR and ITAR, a foreign person is any person who is not a United States citizen (including naturalized citizens), Legal Permanent Resident (“Green Card” holder), or a person issued political asylum status.6 The term also includes companies not authorized to conduct business in the United States (i.e., not incorporated under the laws of any U.S. state). If the company’s activities do involve interactions with foreign persons, controls must be put in place to ensure compliance with the deemed export rule.
When Would an Export License be Needed?
It is apparent from the far-reaching definitions that many items and day to day dealings conducted by U.S. companies may fall under the definition of “export” or “deemed export.” When an item is export controlled, a license is likely required before the item can be exported. The export licensing process, either through the Department of Commerce or Department of State, involves submission of an application describing the transaction, the items involved, the parties involved and the final destination country. Most license applications are approved, however, certain countries are subject to special restrictions and a presumption of denial of a license application is in place for those destinations.7
Licenses are also issued for deemed export transactions – for example, when an American company plans to hire a foreign person to work on an export controlled project. Barring such authorization being in place before the transfer or access to export controlled information is provided, the proposed transaction may lead to a chargeable violation of U.S. export control laws.
Is the Deemed Export Rule Enforced by the Regulators?
Enforcement of the deemed export rule by the Department of Commerce has been stepped up in recent years. Due to growing national security concerns regarding release of sensitive technical information to foreign adversaries, continued emphasis on enforcement of these laws is expected.
Prior to 2002, the Department of Commerce treated violations of the deemed export rule as a civil enforcement matter. In practice, the agency rarely charged companies with violation of this part of U.S. export control law. In October 2002, that practice changed when a Silicon Valley company, Suntek Microwave, and several employees were charged criminally with violation of the deemed export rule.8 Suntek Microwave was charged with training foreign person employees in controlled manufacturing technology at its location in California. The company was assessed over $600,000 in both criminal and civil fines and given a twenty (20) year denial of export privileges sanction.
As demonstrated in the Suntek case, violation of these regulations may result in criminal penalties, including fines and or prison sentences for individuals, and civil sanctions. For example, willful violation of any provision of the EAR, with the knowledge that the exports involved will be used for the benefit of a controlled country, may lead to penalties of five times the value of the export involved or $1,000,000, whichever is greater. An individual may be fined $250,000 or imprisoned for ten years, or both. A civil penalty of up to $100,000 may be imposed for each violation involving certain national security controls. Under the ITAR, the civil penalties are $500,000 per violation.
Needless to say, under the threat of such serious penalties, proactive steps to avoid non-compliance can be quite cost-effective in the long term.
When Does the Deemed Export Rule Apply?
How do you know if you or your company is at risk of violating the deemed export rule? First, determine if your company has export controlled items or technical data, or provides export controlled services. Unfortunately, the task of “classifying” items for export can be complex and time consuming. Advice in this area from a qualified trade attorney or consultant can be a very quick and cost-effective way to make classification determinations if no internal export compliance resources are available. If the company has no export controlled items or technical data and provides no export controlled services, compliance with the deemed export rule requires periodic reassessment to confirm these items are not acquired or offered by the company in the future.
If the company has export controlled items, technical data or provides export controlled services, the next step is to determine whether your company employs foreign persons or interacts with foreign persons. Keep in mind that this includes such activities as hosting tours by foreign persons of company facilities in the United States and participating in joint projects with foreign persons in the United States. Key to making this determination is an understanding of the term “foreign person” under U.S. export control law.
How Do We Comply with the Deemed Export Rule?
The key element of a deemed export control program is identification of the types and location of all the company’s export controlled items and technical data. This may require a complete review of all departments and business units and creation of an inventory listing of controlled items. Once the controlled items and data are identified, controls must be implemented to protect against inadvertent transfer to unauthorized (unlicensed) foreign persons. These items must be marked or designated as export controlled. In the absence of an export license, controlled items must be segregated and access controls established for authorized personnel only. All newly obtained or created items or technical data must be evaluated and classified for export control purposes.
A deemed export compliance program must also consider controls on services provided by company employees. These services may include activities ordinarily considered freely available, such as training on use of export controlled equipment or computer systems. Deemed export controls must also extend to individuals other than foreign person employees, such as customers, vendors or partners. For example, demonstrating the maintenance or repair of an export controlled item to foreign persons falls under the purview of the deemed export rule. Likewise, presenting a technical paper that contains export controlled information at a conference attended by foreign persons is an activity subject to deemed export restrictions. An effective compliance program will address how to comply with the law in these scenarios.
U.S. export control laws are complex and far-reaching. Further, these controls are not intuitive and may even appear illogical to people not well-versed in the topic. Commonplace business activities, such as hiring foreign persons or hosting tours by foreign persons of company facilities, even when conducted wholly in the United States, can fall under the wide grasp of these laws and regulations. Understanding the basic concept of the deemed export rule, and implementing a minimal set of controls to protect against inadvertent violation can greatly help mitigate a company’s overall regulatory compliance risk. U.S. export control laws are dynamic and ever changing. Seeking advice from competent legal counsel or other experts in this specialized area of the law proactively will likely result in a compliant operation well equipped to compete in the global marketplace – even if the company conducts all of its operations within United States borders!
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1 15 C.F.R. Part 730-774.
2 The EAA lapsed in the 1990s. The current statutory authority for the EAR is the International Emergency Economic Powers Act (IEEPA). 50 U.S.C. §§ 1701-1707.
3 22 U.S.C. § 2778.
4 22 C.F.R. § 120.9.
5 15 CFR 734.2(b)(2)(ii).
6 15 C.F.R. § 734.2(b)(2)(ii) and 22 C.F.R. § 120.16.
7 See 22 C.F.R. § 126.1.
8 See Charging and Settlement documents posted at: http://efoia.bis.doc.gov/exportcontrolviolations/e816.pdf.
David J. Glynn has significant experience in the area of federal regulation of international business with a focus in export controls, trade sanctions, and Customs compliance matters. Mr. Glynn has represented international and domestic companies in complex civil and criminal investigations involving the Departments of State, Commerce, Treasury, Justice and Customs and Border Protection. Having worked on scores of such matters, Mr. Glynn has recognized expertise in conducting detailed internal investigations and audits related to export controls, trade sanctions and Customs laws. Mr. Glynn’s experience also includes the drafting of license applications, commodity jurisdiction requests, technical assistance agreements, registration statements, encryption item review requests, Customs Ruling Requests, Customs Prior Disclosures, Customs seizure responses, C-TPAT applications, duty preference assessments and other international regulatory documents. Mr. Glynn works with clients in the development, drafting and implementation of compliance programs in various areas of federal regulatory law, with extensive experience in export management systems and import compliance programs. He regularly lectures and publishes on Export and Import Compliance for various civic and private organizations, including the World Trade Center Denver, University of Colorado and the University of Denver. Mr. Glynn can be reached at firstname.lastname@example.org
Lizbeth C. Rodriguez has significant experience in the area of federal regulation of international business with a focus in export controls, trade sanctions, and related compliance matters. Ms. Rodriguez has represented international and domestic companies in complex civil and criminal investigations involving the Departments of State, Commerce, Treasury and Justice. Having worked on scores of such matters, Ms. Rodriguez has recognized expertise in conducting detailed internal investigations and audits related to export controls and trade sanctions. Ms. Rodriguez’s experience also includes the drafting of license applications, commodity jurisdiction requests, technical assistance agreements, registration statements, license applications, and other international regulatory documents. Ms. Rodriguez works with clients in the development, drafting and implementation of compliance programs in various areas of federal regulatory law, with an expertise in export management systems. She also publishes and regularly speaks on these subjects. Ms. Rodriguez can be reached at email@example.com