Compliance in theInternational Marketplace:Export and Import Considerations

Association of Corporate Counsel

Dallas-Fort Worth Chapter

Annual In-House Symposium

May 22, 2008

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Agenda

Export Control and Related Laws

Customs Laws

U.S. Export Control and Related Laws

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Who Regulates Exports?

Department of Commerce, Bureau of Industry and Security—export of commercial/“dual use” items.

Department of State, Directorate of Defense Trade Controls—export of items that are specifically designed or modified for military or commercial space applications.

Department of the Treasury, Office of Foreign Assets Control—U.S. sanctions laws.

Other U.S. agencies, such as the Department of Energy, the Nuclear Regulatory Commission and Customs and Border Protection.

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What is an Export?

An export is NOT just the shipment out of the country of a finished product.

An export can occur when software, technology or data are released to a foreign person.

Technology includes “technical data” and “technical assistance.”

Technical data: specifications, designs, formulae, manuals, instructions

Technical assistance: instructions, working knowledge, training

Technology/technical data does not include publicly available (Commerce) or public domain (State) information, such as published information or patents or fundamental research. Different definitions of publicly available and public domain.

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ReleasingTechnology and Software

Software may be released through shipment of DVDs, by “pushing out” software (e.g., via email), via downloads from the Internet or FTP sites, or sharing source code with a foreign national.

Special rules apply to commercial encryption software.

Technical information may be released through visual inspection, oral exchanges or application of personal knowledge and/or technical experience.

Exports and re-exports of technical data can occur in ways that are not obvious:

- phone calls - visits to facilities

- faxes - meetings

- e-mail - drawings, specifications

Inadvertent exports are more likely with technical data than with hardware.

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‘Deemed’ Exports

Disclosing technical data or providing technical assistance to a foreign person or a foreign company is an export, regardless of whether the disclosure takes place in the U.S. or abroad.

Sharing technical data with a foreign person, including employees, in the U.S. is ‘deemed’ to be an export of the information to the national’s home country.

A foreign person is anyone who is not a U.S. citizen, a U.S. permanent resident (green card holder), or an individual who is protected under the Immigration and Naturalization Act.

Commerce’s rules: Home country is the last place in which the person obtained permanent residency or citizenship.

May 19, 2008 Proposed Rule would require exports to consider also the foreign person’s place of birth and previous citizenship.

State’s rules: Home country depends on all factors, including place of birth.

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Extraterritorial Export Laws:The “Reexport”

Export laws apply to the retransfer to a third country of:U.S.-origin items

Items manufactured outside the United States containing U.S.-origin content Commerce: De minimis rules look to amount of U.S. content State: “See through” rules, so there is no de minimis content

Certain items manufactured outside the United States that are derived from U.S.-origin technology

Deemed reexports: Govern the release of technology/technical data outside the United States to third country nationals.

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Export Controls:Licensing Requirements

ALL exports/reexports are subject to export control regulations, but the regulations may or may not require a license or other U.S. Government authorization.

Licensing requirements depend, in part, on which agency has jurisdiction over the proposed export/reexport.

Commodity jurisdiction determinations – made by State.

Department of CommerceBureau of Industry & Security

Export Administration Regulations (EAR)

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Department of Commerce

Administers the Export Administration Regulations (EAR)

The EAR control exports/reexports of so-called “dual-use” items—military and commercial applications—and commercial only items including hardware, software and technology.

For example, antennae for cell phones and blackberries are subject to the EAR.

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EAR – Licensing

Licensing decision requires consideration of the following factors:Classification of item on Commercial Control List (CCL)

Destination country

Ultimate end-user

Ultimate end-use

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Commerce Control List (CCL): The EAR set forth a list of items that require licenses for exports to various destinations.

The CCL contains ten categories, each with technical descriptions of hardware, software and technology.

Each description is assigned an Export Control Classification Number (ECCN).

Depending on the ECCN, a license may be required for one destination, but not another.

Items that are subject to the rules, but do not fit any technical descriptions on the CCL are assigned a basket number: “EAR99.”

No license is required to export EAR99 items, except to prohibited destinations (Cuba, Iran, North Korea, Sudan, and Syria), to prohibited end-users, or for prohibited end-uses.

Licensing Analysis: Licensing Analysis: Classification/DestinationClassification/DestinationLicensing Analysis: Licensing Analysis: Classification/DestinationClassification/Destination

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Classification/Destination Licensing: Compliance Tips

Classification is a highly technical process. Review by Legal with assistance of Engineering.

Create a product/technology matrix. Include Schedule B numbers.

Implement mechanisms for review of new products or product changes.

When in doubt, submit a classification request to Commerce. Classification reviews required for certain items, such as

encryption items. Commerce’s determination is referred to as a “CCATS.” Be prepared to provide ECCN and/or CCATS to distributors and/or

customers.

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Licensing Analysis:Prohibited End-Users

Apart from the classification/destination analysis, items may not be exported to prohibited end-users (even if a licensing exception is available)

There are seven lists of prohibited end-users:

Department of Commerce’s Denied Persons List Department of Commerce’s Entity List Department of Commerce’s Unverified List Department of Commerce’s General Order 3 to Part 736 Department of the Treasury’s List of Specially Designated Nationals and

Blocked Persons Department of State’s Debarred Parties List Department of State’s Nonproliferation List

The lists are available at: http://www.bis.doc.gov/ComplianceAndEnforcement/ListsToCheck.htm

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Prohibited End-Uses

No exports/reexports to individuals or entities if there is “knowledge” that the exported item will be put to the following end-uses or transferred to end-user involved in such activities:

Nuclear, chemical and biological weapons and missile delivery systems

China – Military (end-use rules applicable to items with certain ECCNs)

“Knowledge” means “know” or “have reason to know or to believe” and can be inferred from conscious disregard or willful avoidance of facts.

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Anti-Diversion Controls:“Red Flags” Examples

Client or purchasing agent reluctant to offer information about the end-use of a product

Product’s capabilities do not fit the buyer – e.g., foreign financial institution seeks assistance in improving production processes for certain nuclear power plants

Product ordered is incompatible with technical level of country to which product is being shipped – e.g., nuclear-related technology required export for country without commercial nuclear power plants

Shipping route is abnormal for the product and destination Packaging is inconsistent with the stated method of shipment or

destination Payment method is unusual When questioned, buyer is evasive or unclear re whether product is

for domestic use, export or re-export

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“Know Your Customer” Guidelines: Compliance Tips

To guard against inadvertent unauthorized exports, most exporters screen transactions.

Exporters look for “red flags” – end-use, end-user, or destinations and often request written end-user/ end-use information. In the case of certain exports to China, additional due

diligence may be required to confirm to verify the end-use.

It is important not to self-blind – i.e., cut off flow of information into company.

If appear to be red flags, a company should inquire and investigate.

If no sufficient explanation for red flags, an exporter should refrain from transaction.

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Export Administration Regulations: Penalties

Criminal “willful violation” Corporations: up to $1 million per violation Individuals: up to $250,000 per violation and up

to 20 years in prison Civil: up to $250,000 per violation or twice the value

of the transaction. Suspension or denial of export privileges. Debarment from U.S. Government contracts. Mechanism for voluntary disclosure – mitigates

penalties.

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Case Study:MTS Systems Corporation

In 2003, MTS submitted two applications for exports to India of seismic testing equipment.

Failed to disclose on the applications that the equipment may be used as part of nuclear power plant testing.

Internal compliance officer “warned” employees about Red Flags and told representative in India that current licensing policy was a presumption of denial for nuclear end-uses in India.

Fined $400,000 criminal penalty and $400,000 civil penalty.

Department of StateDirectorate of Defense Trade Controls

International Traffic in Arms Regulations

(ITAR)

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Department of State

Administers the Arms Export Control Act and implementing International Traffic in Arms Regulations (ITAR).

Governs all exports (temporary and permanent) of “defense articles” identified on the U.S. Munitions List.

Governs all exports of “defense services.”

License is required to virtually all destinations.

Information developed under a Department of Defense contract may be controlled by the EAR or the ITAR. Proposed DFARS rule would require compliance with

export controls.

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Defense Articles

“Defense articles” – items that are specifically designed, modified or configured for military or commercial satellite use.

Identified on the U.S. Munitions List. USML has 20 categories of defense articles.

Even so-called “COTS” items can be considered “defense articles.”

Commercial items modified even in minor ways for a defense application can become “defense articles.”

Include hardware, software and “technical data.”

If an item is on the USML, it is subject to the ITAR even if its intended use is commercial or research/development.

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Technical Data andDefense Services

“Technical Data” – Information required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles. May be in the form of data, presentations and documents

Also includes software

“Defense Services” – Furnishing of assistance or training to foreign persons in the design, development, engineering, production, processing, manufacture, assembly, testing, use, operation, overhaul, repair, maintenance, modification, or reconstruction of defense articles.

Furnishing foreign persons controlled “technical data,” whether in the U.S. or abroad.

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What Authorization Is Required?

Prior approval by the Department of State is required for virtually all exports to almost all destinations.

Canada – An existing exemption limited to (a) the Canadian Government and certain companies registered under the Canadian Controlled Goods Directorate and (b) only certain defense articles and defense services. Reporting requirements may apply.

United Kingdom – Pending exemption.

Australia – Pending exemption.

Approval may be in the form of an export license or an agreement.

Commercial contracts should take into account lead times necessary to obtain licenses before an export occurs.

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ITAR: Penalties

Criminal penalties include up to $500,000 per violation (and imprisonment for individuals). ITT $100,000 million in fines.

Civil penalties include up to $250,000 per violation.Historically, fines imposed in “headline” amounts.Recent amendment clarifies mitigation for voluntary

disclosures.Recent trend to require independent compliance

reviews for companies that submit voluntary or directed disclosures.

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Common ITAR Pitfalls:Technology Transfers

“Access to” technical dataPresumption of release of data to foreign national

employees/contractors who have the ability to access technical data.

Tips: (a) Identify foreign person employees.

(b) Segregate technical data.

(c) Implement Technology Control Plan.

(d) Implement IT system to track access.

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Common ITAR Pitfalls: Procurement

Foreign procurement: transfers of technical data in connection with the procurement of parts/components for an ITAR-controlled item may require prior authorization from State.

Domestic supplier/vendor: Not registered with State.

Manufactures items abroad.

Subcontracts with a foreign manufacturer.

Employs foreign persons.

Tips: Mark technical data.

Specify applicable export rules in contract.

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Common ITAR Pitfalls:Sales Representatives

The ITAR requires brokers to register with State and in certain circumstances, file notifications or reports regarding their activities.

Dealings with an unregistered broker can result in a denial of licenses, or in the worse case, penalties.

Commissions and payments to brokers may be subject to reporting requirements.

Tip: As part of due diligence, require ITAR compliance.

Doing Business with Distributors:Do you know where they are reselling your products?

Department of the TreasuryOffice of Foreign Assets Control

U.S. Economic Sanctions

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What are Sanctions?

U.S. imposes economic sanctions to further its foreign policy and national security objectives.

U.S. sanctions programs may prohibit a U.S. company from dealing with certain targeted countries, foreign governments, individuals, entities and practices.

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Department of the Treasury:Office of Foreign Assets Control

U.S. imposes economic sanctions to further its foreign policy and national security objectives

U.S. sanctions programs implemented and enforced by the Treasury Department’s Office of Foreign Assets Control

OFAC administers and enforces economic & trade sanctions against targeted:

Foreign governments (e.g., Iran, Sudan, Cuba)

Individuals (e.g., terrorists, narcotics traffickers)

Entities (e.g., drug front companies, charities linked to terrorist groups)

Practices (e.g., trade in non-certified rough diamonds, proliferation of WMD)

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OFAC: Jurisdiction

Individuals

American citizens and permanent resident aliens located anywhere in the world.

Any individual, regardless of citizenship, who is physically located in the United States.

Commercial Entities

Corporations organized under U.S. law, including foreign branches of U.S. companies.

Any corporation or company physically located in the U.S., including U.S. branches of foreign companies.

Under the Cuba and North Korea programs, non-U.S. entities that are owned or controlled by U.S. companies or citizens/permanent residents.

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Department of the Treasury:Office of Foreign Assets Control

Balkans

Belarus

Burma (Myanmar)

Cote D’Ivoire

Cuba

Diamond trading

Iran

Iraq

Liberia

OFAC currently administers sanctions programs against:

Narcotics trafficking

Non-proliferation

North Korea

Sudan

Syria

Terrorist Organizations

Terrorists

Zimbabwe

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OFAC: Comprehensive Sanctions

Applicable to Cuba, Iran and Sudan

In general, the following are prohibited under comprehensive sanctions programs:

Exports (direct or indirect)

Imports (direct or indirect)

Trade brokering, financing or facilitation

Any attempt to evade or avoid the sanctions Applies to most goods, technology & services

Limited exceptions may be licensable by OFAC, such as agricultural goods or humanitarian items

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OFAC: Limited Sanctions

North Korea Importation of items of North Korean origin are restricted. Assets of certain persons blocked.

Burma (Myanmar) Importation of items of Burmese origin is prohibited. Ban on export of financial services. Specific entities are blocked. Exports to Burma are not prohibited, but transactions must comply with export

control rules and the prohibitions regarding financial services. Syria

Ban export of US-origin goods. Requirement to block assets of entities and individuals related to terrorism,

WMD, undermining reconstruction in Iraq & assassination of Prime Minister Harari.

Diamond Trading Import and export of rough diamonds restricted.

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List-Based Sanctions

Balkans – block property of Milosevic supporters

Belarus – block property of persons undermining democratic process

Cote d’Ivoire – block property of individuals threatening peace

Iraq – sanctions lifted, but assets previously blocked remain blocked

Liberia – block property of Charles Taylor and his supporters; no imports of Liberian timber

Zimbabwe – block property of persons undermining democratic process

Nonproliferation – no dealings with persons involved in proliferation of weapons of mass destruction

Terrorism – no dealings with persons or organizations involved with terrorism

Narcotics Traffickers – no dealings with designated traffickers

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SDN List

OFAC maintains a list of sanctioned individuals and entities – List of “Specially Designated Nationals” (SDN List)

SDN List includes all blocked persons – agents of current and former sanctioned country governments as well as terrorists, terrorist organizations, persons sanctioned under the WMD program and narcotics traffickers

Review this list prior to engaging in an export or other international transaction

This list is one of the seven lists of prohibited persons that will be shown in the EAR discussion

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Sanctions vs. Export Controls

Sanctions

Comprehensive use of U.S. economic force based on foreign policy goals

Blocked assets and restrictions on trade & financial transactions

Used against specific targets & their agents

OFAC expertise is financial Jurisdiction includes U.S.

companies & citizens/permanent residents

Export Controls

Aimed at controlling the dissemination of dual use or military products & technology to destinations & end users throughout the world

BIS/DDTC expertise includes engineering and product knowledge used for product classification

Jurisdiction is U.S. persons as well as technology and goods

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Sanctions Regulations: Penalties

Criminal “willful violation” Corporations: up to $1.2 million per

violation Individuals: up to $250,000 per violation

and up to 20 years in prison Civil: up to $250,000 per violation or twice the

value of the transaction. Mechanism for voluntary disclosure –

mitigates penalties.

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Sanctions Issue:Resale of Products

Our distributor has proposed to resell our commercial products into Cuba. We advised that it could not do so. The distributor has suddenly changed its delivery requirements, requesting that all products be delivered to its facility. Is this a problem?

Recently, we discovered that our distributor is reselling our commercial products into Syria. Do we have any liability for these retransfers?

In reviewing our commercial distributor agreements, we discovered that one agreement includes Iran in the sales territory. We do not have a license and are uncertain whether any products have been sold to Iran. Do we have any obligation to investigate?

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Sanctions Issue: Secondment of U.S. Employees Abroad

Placement of U.S. employees within or U.S. officers/directors on boards of foreign subsidiaries.

As U.S. citizens/permanent residents, they must comply with U.S. sanctions.

If they remain employees of the U.S. company, the U.S. company could “facilitate” transactions.

Recusal policies and OFAC training are important.

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Sanctions Issues:Blocking Statutes

Canada, the European Union, and Mexico have implemented statutes prohibiting compliance with U.S. sanctions laws’ extraterritorial requirements.Sheraton Hotel in Mexico penalized under blocking

provisions.European Commission is pressuring member countries

to enforce provisions.Blocking provisions do not provide an excuse for

noncompliance with OFAC’s laws.

Trend to utilize discrimination laws as a “blocking” mechanism.

Doing Business in the Middle East

Antiboycott Regulations

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Antiboycott Regulations

Prohibit participation in international boycotts not supported by the U.S. Government.

Prime example: Arab League’s boycott of Israel

Prohibit actions to comply with, further, or support the Arab League boycott.

Deny tax benefits for certain types of boycott-related agreements.

Boycott related requests may originate from: Algeria, Bahrain, Egypt, India, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Malaysia, Nigeria, Oman, Pakistan, Qatar, Saudi Arabia, Syria, Tunisia, the United Arab Emirates, or the Republic of Yemen.

Boycott related requests continue as tensions in the Middle East persist.

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Antiboycott Regulations

U.S. Antiboycott regulations are complex and not intuitive.

Prohibit agreements to refuse to do business with Israel.

Prohibit furnishing information about dealings with Israel.

Boycott related requests may appear in RFPs, contracts or letters of credit.

Reporting requirements for boycott-related requests, even if the company does not respond to the request.

EAR Penalties apply for non-violations. Section 999 requirements to report operations in or with a boycotting

country, regardless of whether the company receives a boycott-related request. Be wary of agreements to “comply with” the laws of a boycotting

country, for tax penalties may apply to the U.S. taxpayer’s foreign operations.

INTERNATIONAL TRADE DOGS HAVE COMPLIANCE

TAILS

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INTERNATIONAL TRADE DOGS HAVE COMPLIANCE TAILS

International trade continues to grow as more and more goods cross borders

The world is both a global factory and a global market

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National governments have a stake in international trade

Regulate trade ( national security, health and safety, environment, unfair competition)

Monitor imports and exports

Promote international trade, investment

Collect revenue

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Private Companies Concerns

Private Companies must be mindful of intersecting domestic and international laws and regulations

Enforcing compliance with those laws is a key government policy

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INTERNATIONAL TRADE LAWS

Domestic legislation implements international standards – customs and inbound trade laws at Title 19 US Code

World Trade Organizations (WTO) – Geneva 1994 General Agreement on Tariffs and Trade (GATT) (1947)

WTO GOALS Eliminate Non-tariff Barriers Lower duties Promulgate international trade laws – harmonize the system

World Customs Organization (WCO) – Brussels

Formerly Customs Co-Operation Council

implement / reconcile laws

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Customs Laws ___ Trade Laws

Customs Laws

Raise revenue – duties are an indirect tax

Imports attract duties and other indirect taxes such as Value Added Tax (VAT) or Goods and Services Tax (GST)

In the United States, pre-1913 income tax, duties and excise taxes accounted for large shore federal government revenues

In U.S. today, $21 billion in annual revenue

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While duty rates in the U.S. and developed world have been lowered since the post-WWII rounds of GATT MTNs, (average U.S. duty is 3%) they may be spiked very high – apparel, footwear, luggage, chemicals-rates approach or exceed effective tax rates (women’s sweaters over 33%).

In developing countries, indirect taxes (duty, VAT) are the primary source of revenue

Duties and VAT are inseparable

Costs of goods $100

International freight Insurance $10

Duty @ 10% $11

VAT @ 15% $18.15 TAX- Base is $121

Duty, VAT $29.15 Customs value, international

freight, plus duty

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Most duties are imposed on ad valorem basis – as a stated percentage levied against the dutiable value of the imported article.

Requires ascertaining the

Tariff classification of imported article – what is it?

Dutiable value – how much is it worth?

Origin - where is it from?

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Tariff Classification

Process whereby the paper product category is assigned to imported article

10,000 separate categories

Similar to tax many used in biological sciences to assign phylum, genus, species, etc.

Harmonized System – common rules since 1989 – 97 chapters in international system

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Example – Harmonized to 6-digit lead

Other AC motors, multi-phase of an outpost not exceeding 750 W

In U.S. Duty Rate

8501.51.40 20

Exceeding 74.6 but under 735 W gear motors

2.5% free 35%

8501.51.50 20

Exceeding 735 W. but under 746 W gear motors

3.3% free 35%

In EU

8501.51.00 Other AC Motors, multi-phase of an output not exceeding 750W

2.7%

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Valuation

International Agreement on Customs Valuation - 1979 Hierarchy of methods Transaction Value is preferred method – defined as the price actually

paid or payable when sold for exportation to the United States Equates to invoice value of an FOB sale in the U.S. (other

jurisdictions use CIF basis) Off-invoice elements of cost must be added tack to make dutiable

value (e.g., packing costs, selling commissions) Focus on transfer pricing (TP) mirrors income tax authorities’ focus

on TP – e.g., section 482 of IRC Current trend Tax-Efficient Supply Chain Strategies – setting up

offshore entity to play sourcing / trading role – in Hong Kong but with tax, transfer pricing, customs issues in U,S, and all sourcing countries. Contract Manufacturing regs, Branch rules, PE concerns

Current trend First sale for Export rule under attack in U.S.

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Origin

The origin of the imported goods will dictate

Labeling

Duty rate (normal trade preference or Free Trade Agreement, col. 2 rates)2.5% free 35% for gear motors

Susceptibility of article to antidumping / CVD

Eligibility for Buy American Act preference in government procurement

Current trend great audit emphasis on documentation supporting FTA or preference treatment

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International Trade Laws

Free Trade Agreements Provide for duty-free entry from FTA partner countries E.g., NAFTA, US/Israel, US/Australia Pending Colombia, Korea, Panama

Tariff Preferences Bolster development in friendly Beneficiary Developing Countries (BDCs) Generalized System of Preferences (GSP) and regional programs

Trade Remedy Laws Antidumping Duty Countervailing Duty Safeguards (no fault)

Social Issues No child labor, prison labor Anti–Burma prohibition on rubies and jadeite

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Customs Compliance

U.S. – far greater emphasis on customs compliance than most trade partners

United States changed the program in 1994 with the Customs Modernization Act (Mod Act)

Importers are responsible for the customs clearance function – must show “reasonable care” and “informed compliance”

Audit activity in late 1990s – Compliance Assessment Team (CAT) audits

Focused Assessments program – focus on internal controls

U.S. relies heavily on post-entry audit program – other countries have much less emphasis, with a focus on the entry process itself

Importer Self Assessment (ISA) – voluntary program

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Customs Focused Assessment Tariff Classification

Valuation

Origin

Recordkeeping

Trade Programs (NAFTA)

Quantities

Internal Controls Assigned responsibility

Processes

Manual

Tariff classification database

Manage the broker function

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9/11/01

Post 9/11 – Customs and Border Protection missionis national security Some blending of national security, trade compliance, health and safety

U.S. and key trading partners (China, EU) collaborating closely on cargo security

In U.S., C-TPAT (Customs-Trade Partnership Against Terrorism)

In EU, Authorized Economic Operator (AEO)

In U.S. corporate world, unprecedented focus on trade compliance

Current Trends

Resource constraints are driving voluntary programs

U.S. companies who have worked hard to get their U.S. programs in order are now looking at trade compliance throughout their company – all of its overseas locations

Major corporations are establishing Director or VP-level Global Trade Compliance positions

Companies assign compliance responsibility to Tax or Legal function

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Challenges

Remember that Tail.