export penalties already total $184 million in 2014

Export Penalties Already Total $184 MILLION in 2014 – Learn Who, What, Why and How to Stay

Compliant

Perry F. Sofferman, [email protected] in Florida and New York

Jennifer R. Diaz, [email protected] Chair, Customs & International Trade

NCBFAA – April 24, 2014

DISCLAIMER

This presentation is for informational purposes only and does not purport to provide legal advice as all cases and facts are different.

The information in this presentation is provided “as is” and no representations are made whatsoever.

You should not rely on the information included in this presentation as an alternative to legal advice from your attorney.

For questions related to a specific matter, you should consult your attorney.

To the extent permitted by law, this presentation is Copyright © 2013-2014 by Becker & Poliakoff, P.A.

Agenda

� Real Cases– Esterline Case

– Ubiquiti Networks, Inc.

– Weatherford

– Meggitt – USA

– United Technologies

– Aeroflex

– Sixing Liu

– University of Massachusetts

� Penalty Guidelines

� How to Stay Compliant

� Voluntary Disclosures

DON’T LET THIS HAPPEN TO YOU!

� https://www.bis.doc.gov/index.php/enforcement

Esterline Technologies Corporation -

� Esterline is a corporation organized under the laws of the State of Delaware.

� Esterline was engaged in the manufacture and export of defense articles, technical data, and defense services, and was registered as a manufacturer/exporter with Directorate of Defense Trade Controls (“DDTC”)

� Esterline is a specialized manufacturing company principally serving aerospace and defense markets with approximately eighty percent (80%) of Esterline’s total revenues generated from the aerospace and defense markets. Esterline owns and operates several subsidiary operations in the United States and abroad.

Esterline Technologies Corporation -Alleged Violations

� Alleged violations

– Arms Export Control Act (“AECA”) (22 U.S.C. § 2778(e)) and the International Traffic in Arms Regulations (“ITAR”) (22 C.F.R. Parts 120-130) in connection with

• unauthorized exports of defense articles, including technical data, and defense services;

• unauthorized temporary imports of defense articles;

• violations of terms and conditions of licenses or approvals granted;

• exports of defense articles in excess of quantity and value authorized;

• improper use of exemptions;

• and failure to file or filing of incorrect documentation with the Automated Export System (“AES”).


� Types of alleged violations uncovered over several years by the following 7 Esterline U.S. subsidiary companies:

– CMC Electronics Aurora LLC (“CMC”) in Illinois, designs, manufacturers, sells and supports high-technology electronic products for aviation and global positioning markets. (49 charges allegedly relate to CMC)

• CMC without authorization temporarily imported for repair or replacement 253 shipments of defense articles

• According to Esterline, the violations resulted from inadequacies in the existing policies and procedures and a fundamental misunderstanding about the ITAR, including how to properly handle temporary imports and invoke appropriate exemptions at CMC

– Hytek Finishes Co. (“Hytek”) in Washington, provides specialized metal, anodizing, and organic coating services for the aerospace, defense and commercial markets. (6 charges allegedly relate to Hytek)

• Hytek temporarily imported without authorization 388 shipments of aircraft parts and components controlled by USML Category VIII(h) from Canada through the improper use of the Canadian Exemption


� Kirkhill-TA Co. (“KTA”) in California, manufactures elastomer, seals, clamps, insulation material, molded parts, and extrusions for the aerospace, defense, and commercial markets. (1 charge allegedly relates to KTA)

– KTA filed a voluntary disclosure

• unauthorized transfers of technical data and manufacturing know-how to foreign person employees. • violations resulted from insufficient export controls and misclassification of its products due to a mistaken belief that all of its

products and related technical data were subject to the control of the Export Administration Regulations • KTA then implemented policies and procedures to classify properly its products and prevent unauthorized transfers of

technical data and manufacturing know-how to foreign person employees. • DTCC closed the case on November 10, 2008, cautioning KTA to take immediate and necessary actions to strengthen its

compliance processes and procedures. • Despite DTCC’s warning, KTA continued to have similar compliance issues.

– Homeland Security, Homeland Security Investigations (“HSI”) initiated a criminal investigation of KTA and its activities related to the AECA and ITAR. HSI investigated potential unauthorized exports of ITAR-controlled technical data that were alleged to have occurred during a facility tour between January 10-13, 2011, by a visiting delegation comprised of foreign persons from the People’s Republic of China (“PRC”)

– Esterline, on behalf of KTA, provided credible evidence refuting the allegations set forth in the HSIinvestigation, but disclosed access by foreign person employees from El Salvador, Honduras, India, Mexico, and the U.K. to defense articles and technical data controlled by USML

– According to Esterline, these violations resulted from inadequate export compliance measures and weakness in internal export controls at KTA. The KTA management and empowered official were subsequently replaced.


� Korry Electronics Company (“Korry”) in Washington, specializes in the manufacture of control solutions for operatorinterfaces for the aerospace, defense, and commercial markets. (179 charges allegedly relate to Korry)– HSI initiated a criminal investigation, prosecution was later

declined– Esterline, on behalf of Korry, filed an initial notice of voluntary

disclosure concerning unauthorized exports to foreign suppliers,including those which were the subject of the subpoena.

• Korry exported twenty-three (23) shipments of aircraft parts to the U.K. for repair or replacement despite MA 1047-01A not authorizing exports of defense articles.

• On at least fifty-three (53) occasions, Korry exported without authorization technical data related to variable resistor parts and assemblies for control panels and NVIS respectively controlled by USML Categories VI(g) and VIII(i) to a U.K. entity.


� Types of alleged violations uncovered over several years by the following Esterline U.S. subsidiary companies (cont):

– Leach International Corporation (“Leach”) in California, designs and manufacturers power switching and control components and equipment for aerospace, rail, and industrial applications. Leach’s sister company, Leach International Eurpore S.A. (“LIE”) in France, also designs and manufactures power switching and control components and equipment for aerospace, rail, and industrial applications. (6 charges allegedly relate to Leach)

• Leach exported without authorization parts and components and related technical data controlled by USML Category VI(f), VI(g), VII(g), VII(h), VIII(h), and VIII(i) for use in submarines

– Mason Electric Company (“Mason”) in California, manufactures control devices and subsystems for military airplane cockpits and vehicles. (40 charges allegedly relate to Mason)

• Mason disclosed that it had exceeded the authorized value of exports in furtherance of TA 1655-02A by $1,928,233.27. Mason also disclosed that fees or commissions in the aggregate amount of $100,000 or more were paid, offered, or expected to be paid to Mason’s Brazil agent for sales of defense articles manufactured under TA 1655-02A. Mason failed to report these fees or commissions to DDTC

• One year later, Esterline, on behalf of Mason, disclosed additional violations. In total, Mason exceeded the value of exports authorized under TA 1655-02A by $3,064,869.06

– Memtron Technologies Company (“Memtron”) in Michigan, manufactures various custom-designed input components, including membrane switches. (1 charge allegedly relates to Memtron)

• From 2007 up until January 2010, Esterline failed to include Memtron as a manufacturer of defense articles on Esterline’sregistration with the Department due to an administrative error.


� Nature of Violations included violations of many ITARsections, and can be generally characterized in the following manner:

1) Improper classification of articles;

2) Failure to administer properly licenses and agreements; and

3) Incomplete or poor recordkeeping.

� Violations disclosed by Esterline were the result of:

1) Insufficient understanding and knowledge of the ITAR, and;

2) Corporate oversight and a corporate export compliance program that were insufficient to prevent the alleged violations.

Esterline Technologies Corporation –Mitigating Factors

� External audit (at request of DDTC) of Esterline and 17 subsidiaries

� Multiple disclosures – both voluntary and directed

Esterline Technologies Corporation –Aggravating Factors

� Audit failed to identify persistent compliance issues at Esterline entities and inadequacies in Esterline’scompliance program.

Esterline - Consent Agreement and Order

� Esterline shall pay in fines and in remedial compliance measures a civil penalty of $20,000.000– $4,000,000 within 10 days– $2,000,000 within 1 year– $2,000,000 within 2 years– $2,000,000 within 3 years– $10,000,000 suspended ON

CONDITION that this is spent on remedial measures/compliance costs

� Compliance measures include appointing Special Compliance Official to monitor and oversee compliance program

� Esterline President and CEO Curtis Reusser said in a statement that the company accepts responsibility for the actions leading to the penalties, and it has already spent more than $5 million to improve its procedures.

Esterline Technologies Corporation

� Proposed Charging Letter:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/Esterline_PCL.pdf

� Consent Agreement:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/Esterline_CA.pdf

� Order:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/Esterline_Order.pdf

Ubiquiti Networks, Inc. - Violation

� Ubiquiti appears to have violated §§ 560.206 and 560.208 of the ITSR by engaging in transactions related to the exportation, reexportation, sale or supply, directly or indirectly, of goods for broadband wireless connectivity to Iran, and facilitating the reexportation, sale or supply of such goods to Iran, when it entered into an agreement granting a distributor in the United Arab Emirates (“U.A.E.”) exclusive rights to distribute Ubiquiti’s goods in Iran, then subsequently sold to the U.A.E. distributor and exported or shipped to the U.A.E. goods that were reexported to Iran.

� Additionally, from on or about December 1, 2009, to on or about February 25, 2011, Ubiquiti appears to have violated §560.204 of the ITSR by engaging in 13 exports of goods for broadband wireless connectivity to a distributor located in Greece, with knowledge or reason to know that the goods were intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran.

Ubiquiti Networks, Inc. –Mitigating Factors

� No prior sanctions history, including not being the subject of a penalty notice or Finding of Violation;

� Ubiquiti cooperated with OFAC during its investigation

� Ubiquiti took remedial action in response to the apparent violations

Ubiquiti Networks, Inc. – Aggravating Factors

� Demonstrated reckless disregard for U.S. sanction requirements;

� Ubiquiti was on notice in February 2010 that the conduct at issue constituted a violation of U.S. law; members of Ubiquiti’s senior management knew or had reason to know that Ubiquiti products were reexported to Iran

� Ubiquiti had no OFAC compliance program in place

Ubiquiti Networks, Inc. - Settlement

� Agreed to a $504,225 settlement with OFAC for apparent violations of the Iranian Transactions and Sanctions Regulations.

� OFAC Settlement

– http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20140306_ubiquiti.pdf

Weatherford - Violation

� 2005-2008 - Weatherford conducted 441 transactions totaling $69,268,078, that provided oilfield equipment and services in which the government of Cuba and/or blocked Cuban nationals had an interest, including travel-related transactions by Weatherford employees to and from Cuba,

� 2003-2007 - Weatherford conducted extensive oilfield services business in Iran, including 100 transactions totaling $23,001,770, which involved the direct or indirect exportation of goods, technology, and/or services to Iran

� 2005-2006 - Weatherford conducted oilfield services business in Sudan, including 45 transactions totaling $295,846, which involved the direct or indirect exportation of goods, technology, and/or services from the United States to Sudan

Weatherford - Violation

� Part of a global settlement – Includes the Department of Commerce’s Bureau of Industry and

Security (“BIS”), and the U.S. Attorney’s Office for the Southern District of Texas (“USAO”).

� Entered into a Deferred Prosecution Agreement with the USAO, and two of its subsidiaries have also entered into plea agreements with the USAO.

� A related Foreign Corrupt Practices Act investigation, led by the Department of Justice’s Fraud Section, and a related Securities and Exchange Commission case, will be resolved at the same time as the criminal and civil sanctions and export matters.

Weatherford – Mitigating Factors

� Weatherford has not been the subject of prior OFACpenalties or other administrative action;

� Weatherford undertook significant remedial steps to ensure future compliance; and

� Weatherford substantially cooperated with OFAC’sinvestigation of the apparent violations. – Specifically, Weatherford retained outside counsel to

conduct a comprehensive internal investigation and submitted extensive documentation and reports regarding potential sanctions violations.

– In addition, Weatherford agreed to toll the statute of limitations

Weatherford – Aggravating Factor

� Violations were egregious and not voluntarily self-disclosed;

� Conduct was willful;

� Various executives and senior management in Weatherford companies knew or had reason to know of the conduct that led to the apparent violations;

� Apparent violations constituted a long-term pattern of conduct;

� Apparent violations resulted in significant harm to U.S. sanctions programs objectives;

� Weatherford is a large and sophisticated oilfield services company; and

� Weatherford’s compliance program at the time of the apparent violations was substantially deficient

Weatherford - Settlement

� Agreed to a $91,026,450 settlement with OFAC in 2013.

� Deemed satisfied by $50 million in criminal fines and monetary penalties with the USAO, as well as the $50 million civil penalty paid to BIS.

– Pursuant to the global settlement, Weatherford has also agreed to external audits of its efforts to comply with the relevant U.S. sanctions and export control laws for calendar years 2012, 2013,and 2014.

� OFAC Settlement:

– http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20131126_weatherford.pdf

Meggitt - USA

� A holding company for various subsidiaries in North America;

� Specialize in extreme environment components and sub-systems for the aerospace, defense and energy markets;

� Recently undergone a major expansion primarily through the acquisition of existing companies in compatible or complementary industries.

Meggitt - USA - Alleged Violations

� Unauthorized export of defense articles, to include technical data;

– “…resulting from unfamiliarity with the ITAR and/or improper classification”

� Unauthorized provision of defense services;

� Violation of the terms of provisos or other limitations of license authorizations; and

� The failure to maintain specific records involving ITAR-controlled transactions

– “All records must be maintained for a period of five (5) years from the expiration of the license or other approval, to includeexports using an exemption; or from the date of the transaction.”

Meggitt - USA - Note:

“In April 2009, MTSI exported without authorization four (4) training manuals involving operation and maintenance of stationary infantry targets, stationary armor targets, and a computer range control system for targeting, to foreign persons from India and Egypt. MTSI provided the manuals to a translation services vendor in the United States who subsequently provided the materials to foreign persons in India and Egypt.”

Meggitt - USA - Mitigating Factors

� The majority of the alleged violations occurred prior to acquisition of certain subsidiaries and those violations were identified by the company;

� Company’s proposals to settle the alleged violations voluntarily and comprehensively;

� The settlement of certain related matters with the Department of Justice;

� Extensive and substantial self-initiated remedial compliance implemented during and prior to Department of State’s review; and

� Responsiveness and ongoing cooperation.

Meggitt - USA - Aggravating Factors

� Long-standing violations of acquired subsidiaries;

� Those subsidiaries unfamiliarity with and apparent disregard of ITAR compliance;

� One disclosure was a directed disclosure.

Meggitt - USA - Consent Agreement and Order

� Fines and remedial compliance measures of $25,000,000.00

– $3,000,000.00 per payment schedule; and

– $22,000,000.00 suspended as long as used for remedial compliance measures.

� “Respondent shall establish policies and procedures to address lines of authority, staffing increases, performance evaluations,career paths, promotions and compensation.”

� Appointment of Internal Special Compliance Official;

� Audits;

� Additional oversight and requirements.

Meggitt - USA

� Proposed charging Letter:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/Meggitt_PCL.pdf

� Consent agreement:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/Meggitt_CA.pdf

� Order:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/Meggitt_Order.pdf

United Technologies Corporation

� Parent to various subsidiaries, such as Pratt and Whitney and Sikorsky;

� Manufacturer of civil and military aircraft engines, industrial gas turbines and civil and military helicopters and fixed wing aircraft;

� Manufactures rocket engines;

� Manufactures and services commercial and military fire protection systems.

United Technologies - Alleged Violations

� Unauthorized exports and re-exports, resulting from the failure to properly establish jurisdiction over defense articles and technical data;

� Unauthorized exports, resulting from the failure to exercise internal controls over technical data;

– Unauthorized foreign persons with access to 97 ITAR-controlled technical drawings on intranet system;

– HSC contract engineer travelled to People’s Republic of China with a company issued laptop that contained ITAR-controlled technical data. Left laptop at airport and failed to retrieve it. Company retrieved it after 6 months.

� Failure to properly manage Department of State authorized agreements.

United Technologies - Note:

“Respondent’s subsidiaries repeatedly discovered and disclosed violations to the Department, in some cases finding that reported remedial measures failed to prevent or detect additional similar violations. In other cases, Respondent’s self-initiated internal compliance reviews identified additional violations of the same nature, prompting further disclosures and assurances of remediation.”

United Technologies - Mitigating Factors

� Voluntary disclosures;

� Remedial compliance measures

United Technologies - Aggravating Factors

The harm to national security and the systemic, longstanding and repeated nature of certain violations.

“Had the Department not taken into consideration Respondent’s voluntary disclosures and remedial compliance measures as significant mitigating factors, the Department would have charged Respondent with many additional violations and imposed a more severe penalty.”

Note: In charging letter, Department charged company with 576 violations.

United Technologies - Consent Agreement and Order

� Fines and remedial compliance measures of $55,000,000.00– $35,000,000.00 per payment schedule;– $5,000,000.00 suspended on condition company has applied

such amount to self-initiated, pre consent agreement remedial compliance measures;

– $15,000,000.00 suspended on condition company applies such amount to remedial compliance measures over subsequent four (4) years.

� Appointment of a Special Compliance Official� Verify export control jurisdiction of all hardware that

company’s ITAR-regulated operating divisions, subsidiaries and business units have exported in the last five (5) years.

� Audits� Additional oversight and requirements.

United Technologies

� Proposed Charging Letter:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/UTC_PCL.pdf

� Consent Agreement:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/UTC_CA.pdf

� Order:

– http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/UTC_Order.pdf

Aeroflex

� Global provider of high-tech microelectronics to the aerospace, defense, cellular, and broadband communications markets;

� Subsidiary provides standard and custom integrated circuits for aerospace, high-altitude avionics, telecommunications and other military and commercial uses;

� Subsidiary manufactures radiation hardened and tolerant microelectronics;

� Subsidiary produces avionics and communications test equipment; and

� Subsidiary produces microwave assemblies, including those modified according to customer requests.

Aeroflex - Alleged Violations

� Unauthorized exports and re-exports of ITAR-controlled electronics, microelectronics, and associated technical data;

� Caused unauthorized exports of ITAR-contolledmicroelectronics by domestic purchasers.

Aeroflex - Mitigating Factors

� Voluntary disclosures; and

� Remedial compliance measures

“The ITAR violations included in this proposed charging letter are derived from several voluntary disclosures provided by Respondent.”

Aeroflex - Aggravating Factors

� Significant national security interests involved;

� Systemic and longstanding nature of the violations based on improper product classifications.

“The violations were caused by inadequate corporate oversight and demonstrate systemic and corporate-wide failure to properly determine export control jurisdiction over commodities.”

Aeroflex - Note:

� “Over the years, Respondent attempted to develop generic microelectronics that met “one product fits all requirements” for its customers. Respondent failed to realize that its products had radiation tolerance and space survivability superior to those of its competitors. Improvement of Respondent’s Commercial RadHard process eventually revealed that its microelectronics could exceed the 500k rads(Si) range, thereby exceeding radiation tolerance levels and meeting some of the radiation hardness criteria outlined in USML Category XV(d).”

Aeroflex - Consent Agreement and Order

� Fines and remedial compliance measures of $8,000,000.00;– $4,000,000.00 pursuant to a payment schedule; and

– $4,000,000.00 suspended on the condition that company applies this amount to self-initiated, pre-consent agreement remedial compliance measures.

� Appointment of Internal Special Compliance Officer;

� Export classification review for previous five (5) years;

� Audits; and

� Additional oversight and requirements.

Aeroflex

� Proposed Charging Letter:– http://www.pmddtc.state.gov/compliance/consent_agr

eements/pdf/AM%20-%20Aeroflex%20Admin%20Settlement%20-%20Tab%204%20Proposed%20Charging%20Letter.pdf

� Consent Agreement:– http://www.pmddtc.state.gov/compliance/consent_agr

eements/pdf/Aeroflex%20Executed%20CA.pdf

� Order: – http://www.pmddtc.state.gov/compliance/consent_agr

eements/pdf/Aeroflex%20Executed%20Order.pdf

Sixing Liu

� Legal permanent resident in U.S. for 19 years

� Engineer with L-3 Communications

� Went to conference in Shanghai with U.S. military technology on his laptop

– Liu was found with a computer containing L-3 documents relating to his research but authorities determined he was never issued a company laptop and was not approved to access or possess the company’s work product outside of its New Jersey facility

� No evidence he intended to share military secrets

� Attributed it to poor judgment

� 5 years in prison and $15,000.00 fine

University of Massachusetts at Lowell

� Exported atmospheric testing device and equipment to Pakistan

� Correctly identified equipment as EAR 99 under the EAR

� University held liable – suspended penalty of $100,000.00

� Why? – Failed to check Entity List. Destination entity was on the list

� Generally, BIS grants license for this entity if requested

� 15 C.F.R. 30.71 False or fraudulent reporting on or misuse of the Automated Export System.

– (a) Criminal penalties

• (1) Failure to file; submission of false or misleading information. … shall be subject to a fine not to exceed $10,000 or imprisonmentfor not more than five years, or both, for each violation.

• (2) Furtherance of illegal activities. Any person, including USPPIs, authorized agents or carriers, who knowingly reports, directly or indirectly, to the U.S. Government any information through or otherwise uses the AES to further any illegal activity shall be subject to a fine not to exceed $10,000 or imprisonment for not more than five years, or both, for each violation.

Penalties

� 15 C.F.R. 30.71 False or fraudulent reporting on or misuse of the Automated Export System.

– (b) Civil penalties

• (1) Failure to file or delayed filing violations. A civil penalty not to exceed $1,100 for each day of delinquency, but not more than $10,000 per violation …

• (2) Filing false/misleading information, furtherance of illegal activities and penalties for other violations. A civil penalty not to exceed $10,000 per violation ....

• (3) Forfeiture penalties. In addition to any other civil penalties specified in this section, any property involved in a violation may be subject to forfeiture under applicable law.

Penalties (Continued…)

� 30.72 Civil penalty procedures.

– (d) Remission and mitigation. Any penalties imposed under 15 CFRSec. 30.71(b)(1) and (b)(2) may be remitted or mitigated, if:

• (1) The penalties were incurred without willful negligence or fraud; or

• (2) Other circumstances exist that justify a remission or mitigation.

Penalties (Continued…)

Export PenaltiesInternational Emergency Economic Powers Enhancement Act of 1977 (IEEPA)

� $11,000/Violation – prior to March 9, 2006

� $50,000/Violation

– March 9, 2006 to October 16, 2007

– (USA Patriot Act Legislation)

� $250,000/ Civil Violation

� $1 million/ Criminal Violation +20 years Prison

– October 17, 2007 to Present

� For all export violations enforced by:– CBP, ICE, BIS, DDTC and OFAC

Failure to Furnish Requested Information to OFAC Pursuant to 31 CFR 501.602

1. $20,000 Penalty

2. $50,000 Penalty if value involves more than $500,000

Mitigating Factors Include:

� First time USPPI, authorized agent, FPPIcarrier

� Voluntary self-disclosure of the violation

� Clearly documented evidence of remedial measures to prevent future violations

� Exceptional cooperation with government

� Violation was an isolated occurrence

� Party has assisted in another investigation

� Party has a systematic export compliance effort

Aggravating Factors Include:

� Several violations in the same export transaction

� Circumstances suggest an intentional violation

� High number of violations in past three years

� Evidence of criminal conviction for a related violation

� Party exhibits disregard for its responsibilities under U.S. law and regulations

� Party is a regular exporter but lacks a systematic export compliance effort

Principles of Effective Compliance Programsfor Great Weight Mitigation inBIS’s Administrative Cases

1. Whether the company has performed a meaningful risk analysis

2. The existence of a formal written compliance program

3. Whether appropriate senior organizational officials are responsible for overseeing the export compliance program

4. Whether adequate training is provided to employees

5. Whether the company adequately screens its customers and transactions

Principles of Effective Compliance Programsfor Great Weight Mitigation in

BIS’s Administrative Cases (Continued…)

6. Whether the company meets recordkeeping requirements

7. The existence and operation of an internal system for reporting export violations

8. The existence and result of internal/external review or audits

9. Whether remedial activity has been taken in response to export violations

DON’T BREAK THE RULES

� If you export an item without either a license or a license exception, you are responsible for determining that the transaction is either outside the scope of the EAR or that the export is properly designated as “No License Required” (NLR).

� Review these links to help you stay compliant

– Know Your Customer Guidance

– Red Flags

– Don’t Let This Happen To You

WHAT Law Governs

� Some Possible Governing Bodies– Department of Commerce

� Export Administration Regulations (EAR)

» goods and technology capable of being used for commercial purposes

� The Bureau of Industry and Security (BIS) enforces the EAR

– The State Department

� Directorate of Defense Trade Controls (DDTC)

» goods capable of being used as a weapon

OFAC Enforced Statutes

� Trading with the Enemy Act

– (TWEA)

� International Emergency Economic Powers Act

– (IEEPA)

Department of Commerce:Commerce Control List

� The Commerce Control List (CCL):– Items that are subject to the authority of BIS

– Exports covered “exclusively” by other agencies such as the State Department NOT included

– Products regulated by BIS and another agency will reference the controls of the other agency too

� For items governed by the Department of Commerce use the CCL to discover the Export Control Classification Number (ECCN) of your good and whether licenses are required by BIS

Questions To Ask

� Step 1: What is YOUR product?

� Step 2: What is YOUR product classification

� Step 3: Which agency regulates YOUR product?

� Step 4: Does YOUR product need a license?

Understanding the CCL to Obtain your Product’s ECCN

� Categories 0. Nuclear materials, facilities and

equipment (and miscellaneous items)

1. Materials, Chemicals, Microorganisms and Toxins

2. Materials Processing

3. Electronics

4. Computers

5. Telecommunications and Information Security

6. Sensors and Lasers

7. Navigation and Avionics

8. Marine

9. Propulsion Systems, Space Vehicles, and Related Equipment

� Five Product GroupsA. Systems, Equipment and

ComponentsB. Test, Inspection and

Production EquipmentC. MaterialD. SoftwareE. Technology

What to do with the ECCN

� Determine the controls that apply to your product based on its ECCN:

– In the entry under your ECCN there will be a list of controls and which item in the entry the controls apply to, for example:

• Reason for control: CC

• Control (s): CC applies to every entry

• Country Chart: CC Column one

– Cross reference this with the country of destination and column on the Commerce Country Chart (CCC)

� It will also indicate if there are any license exceptions

WHERE is it going?

� How to cross-reference the ECCN with the Commerce Country Chart

– Once you have classified the item, the next step is to determine whether you need an export license based on the “reasons for control” and the country of ultimate destination. You begin this process by comparing the ECCN with the CCC

Understanding the CCC

� If there is an “X” in the box based on the reason (s) for control of your item and the country of destination, a license is usually required.

� If there is no “X” in the control code column (s) specified under your ECCN and country of destination, you will usually not need an export license unless you are exporting to an end-user or end-use of concern.

Requesting the ECCN from BIS

� Submit a classification request online through the Simplified Network Application Process Redesign (SNAP-R). For instructions on obtaining a Company Identification Number (CIN) to access the online SNAP-R system

– https://snapr.bis.doc.gov/snapr/docs/loginHelp.html

What If Your Product is Missing From the CCL?

� If it is a U.S. Department of Commerce regulated product and is missing, you will use designation EAR99. Usually will be for:

– Low-technology consumer goods

– Usually do not require a license in many circumstances, but you are NOT out of the woods

� Sometimes licenses are still required... when:– Sending to embargoed country

– End-user of concern

– Prohibited end-use

� Some people and organizations are prohibited from receiving any exports

� Some people and organizations must be licensed to receive any goods regardless of what is being exported

� Some relevant lists to check:– Consolidated List

• http://export.gov/ecr/eg_main_023148.asp

• Entity List • Treasury Department Specially

Designated Nationals and Blocked Persons List Unverified List

• Denied Persons

WHO Wants Your Product

End Uses and End Users

� Some end-uses are prohibited

� Some end-uses require a license

� Can the object be used in mass destruction?

RED FLAGS

� Customer or address similar to one of the parties on the relevant lists (Consolidated, SDN, Denied Persons, Entity List);

� Customer reluctant to share information about the end use;

� Customer orders a product outside their line of business (e.g. a bakery ordering night goggles);

� Order placed for materials inconsistent with the needs of the customer;

� Product ordered incompatible with technical level of country to which it is being exported;

Red Flags (continued…)

� Customer willing to pay cash for expensive item;� Customer has little or no business background;� Shipping route is unusual;� Customer unfamiliar with products characteristics, but still wants

the product;� Routine installation, training, or maintenance services are

declined by the customer;� Delivery dates vague and destinations unusual;� Freight forwarding firm listed as final destination;� Packaging inconsistent with the stated method of shipment for

the destination; and� Buyer is evasive and unclear about whether product is for

domestic use, export or re-export.

Licensing Codes

� NLR (NO License Required)– Designated as EAR99

– Item is on CCL without an X in the Country Chart under the reason form control

� Designate if an exception applies

� If a license applies put the License number

Need a License?

� Online Simplified Network Application Process Redesign (SNAP-R)

– Fastest way

� Form BIS-748P – Multipurpose Application

– Slowest way

Summary of Steps

1. Verify jurisdiction

2. Classify according to the CCL

3. Review and fulfill licensing requirements designated if your product has an ECCN

4. Ensure the end user is not prohibited

5. Ensure the end uses are not prohibited

6. Export using the correct ECCN, License Code, and expiration date

State Department

� If your product is capable of being used as a weapon the Directorate of Defense Trade Controls (DDTC) is probably in charge

– They do this in accordance with the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR)

– Safeguarding U.S. National Security

Does DDTC Regulation Apply?

� Check to see if your product is on the U.S. Munitions List (USML)

– If the product is on the USML; DDTC Regulation Applies

� If you are not sure, file a Commodity Jurisdiction (CJ) request in accordance with the CJ instructions.

– Note: Only online submissions are accepted

Registration

� If your product is on the USML you must be registered with the DDTC– DDTC will assign you a code that you keep private

– Need a new code every 12 months

� Registration does not give you the right to export, it is a precondition to licensing

� Who must register?

– Manufacturers (even if they do NOT export)

– Exporters

– Brokers

– Foreign Military Sales Freight Forwarders

Licensing

� After you obtain a current registration you need to apply for a license to export

� The government will use Blue Lantern to do End Use Checks

� Use the D-Trade System to obtain the license

– A license is required before you export

Are You Ready to Export?

� You are registered

� You have a license

� You meet the requirements of the AES and handle classified information

� You make it clear on the shipping documents that item cannot be resold or retransferred without U.S. Government authorization

U.S. Census Bureau

� On June 2, 2008, the U.S. Census Bureau published amendments to 15 CFR Part 30 (FTR) mandating the filing of export information through the AES or AESDirect for all shipments where a Shipper’s Export Declaration (SED) was previously required.

Automated Export System (AES)

� The AES is the system, including AESDirect, for collecting electronic export information (EEI) from persons exporting goods from the U.S., Puerto Rico (PR), or the U.S. Virgin Islands, between the U.S. and PR, and to the U.S. Virgin Islands from the U.S. or PR.

Voluntary Disclosure

� Turning yourself in: Bureau of Industry and Security

� Outline: Violations, The Process, Sanctions, & Disclosure v. Non-Disclosure

Voluntary Self-Disclosure

� Export Administration Act (EAA)

� Export Administration Regulations (EAR)

� Bureau of Industry and Security (BIS)

VSD: The Process

� ALL Voluntary Self-Disclosures should be made to the BIS Office of Export Enforcement

� OEE: Procedures

� VSD: Only a Mitigating Factor

� Other Mitigating and Aggravating Factors

Voluntary Disclosure (§30.74)

� A voluntary disclosure reflects due diligence in detecting, and correcting potential violations when required information was not reported or when incorrect information was provided that violates the regulations (whether deliberate or unintentional).

� A disclosure can lead to mitigating factors with regards to civil and criminal penalties, as long as the violation (s) are discovered and identified before the Census Bureau or another Federal government agency identifies the problem.

� The Census Bureau recommends that full disclosures be made for violations going back at least five (5) years.

Voluntary Self-Disclosure: What is a Violation?

a) Engaging in prohibited conduct

b) Causing, aiding, or abetting a violation

c) Solicitation

d) Conspiracy

e) Acting with knowledge of a violation

f) Possession with intent to export illegally

Voluntary Self-Disclosure: What is a Violation? (Continued…)

g) Misrepresentation and concealment of facts

h) Evasion

i) License alteration

j) Acting contrary to the terms of a denial order

VSD: Procedural Requirements

� Initial Disclosure:– Initial notification

� After the initial notification:– Narrative account

• The kind of violation involved

• Explanation of when and how the violation occurred.

• The complete identities and addresses of all individuals and organizations, whether foreign or domestic, involved in the activities pertaining to the violations.

• Description of Items involved

• Supporting documents, shipping documents & mitigating circumstances

• Narrative must be submitted within 180 days of initial notification

VSD: Sanctions

� Civil Penalty

� Denial of Export Privileges

� Exclusion from Practice

� Criminal Sanctions

Resources

� BIS Training Room (Export 101)

– http://www.bis.doc.gov/index.php/compliance-a-training/export-administration-regulations-training/online-training-room?id=284

� BIS – Don’t Let This Happen to You!

– http://www.bis.doc.gov/index.php/forms-documents/doc_view/535-don-t-let-this-happen-to-you-2010

� Red Flags

– http://www.bis.doc.gov/index.php/enforcement/oee/compliance/23-compliance-a-training/51-red-flag-indicators

� Know Your Customer Guidance

– https://www.bis.doc.gov/index.php/enforcement/oee/compliance?layout=edit&id=47

� Denied Persons List

– http://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/denied-persons-list

� SNAP-R system

– https://snapr.bis.doc.gov/snapr/

� Unverified List– http://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-

concern/unverified-list� Entity List

– http://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/entity-list

� Specially Designated Nationals List– http://www.treasury.gov/resource-center/sanctions/SDN-

List/Pages/default.aspx� U.S. Munitions List

– http://pmddtc.state.gov/regulations_laws/documents/official_itar/ITAR_Part_121.pdf

� Commodity Jurisdiction requests– http://pmddtc.state.gov/commodity_jurisdiction/index.html

� D-Trade Information Center– http://pmddtc.state.gov/DTRADE/index.html

� Customs and International Trade Blog– http://www.customsandinternationaltradelaw.com/

More Resources

� Becker & Poliakoff– http://www.bplegal.com/

� Becker & Poliakoff’s Customs & International Trade Practice Group– http://www.becker-poliakoff.com/customs-international-trade

� Customs & International Trade Blog– http://www.customsandinternationaltradelaw.com/

� Jennifer R. Diaz– http://www.bplegal.com/jdiaz

� Perry F. Sofferman– http://www.bplegal.com/psofferman

About Us

Now That We Have Our Paws DirtyNow That We Have Our Paws Dirty…… Any Any

Questions?Questions?

Export Penalties Already Total $184 MILLION in 2014 – Learn Who, What, Why and How to Stay

Compliant

Perry F. Sofferman, [email protected] in Florida and New York

Jennifer R. Diaz, [email protected] Chair, Customs & International Trade

NCBFAA – April 24, 2014