how to bankrupt a chemical company – an export control ......2013/07/29 · penalties, most...

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Chemical industry Chemical industry

How to bankrupt a chemical company –an export control commentary

The nature of a chemical company’s business makes it susceptible topossible export control violations at almost every stage of its operations. Corey Norton examines the violations waiting to happen at every bend inthe pipeline and the penalties for not being properly prepared.

This is a true story, of sorts. Thetitle is admittedly somewhatmelodramatic, but it is meant to

highlight the very real penalties that anactual sequence of illegal exports couldbring to a single chemical company.The story below shows the substantialpenalties that chemical companieshave paid in various enforcement casesand how one company alone couldhave committed the respectiveviolations. While bankruptcy might nothave resulted for the companiesdescribed here, a single companycharged with the violations detailedwould certainly face substantialeconomic harm.

There are numerous accounts ofchemical companies falling foul of U.S.export control laws and, as a result,being forced to pay hefty penalties,even though, frequently, the companymost likely did not intend to break thelaw. While these enforcement cases

tend to arise from a particular segmentof a company’s business, such asprocurement, engineering or sales, areview of all chemicals export controlenforcement cases suggests violationsoccur in nearly every aspect of acompany’s operations. I’ll summarizethose aspects as (1) running a facility,(2) employing people needed todevelop and manufacture the productsand (3) getting products to thecustomer.

In my experience, most chemicalcompanies are international in somerespect. In addition, many use or sellchemicals, technology and equipmentthat cannot be exported or shared withforeign national employees without aU.S. government licence – even thoughthe items probably appear to beentirely benign (used, for example, forpaints, mining or semiconductors).Given the global scope of mostchemical companies, and the fact thatmany aspects of such global businessesare controlled under U.S. law (andcounterpart foreign laws), companiesin the chemical industry facesubstantial export compliance risks.

The violations described belowactually occurred and most couldactually occur within a single company.Consequently, the cumulative penaltiesthat could fall on a single chemicalcompany are staggering. (As an aside,I should mention that the mistakesnoted here are highlighted onlybecause the relevant information ispublicly available; this story is notintended as a commentary on anyparticular company’s complianceefforts.)

You can’t use that equipment in your facilityWithin every facility that works withchemical products there is, of course, awide variety of equipment needed tostore, process, and transfer thechemicals or related products. The U.S.government prohibits the export ofmany such types of equipment, even toaffiliated companies, because ofpossible problematic uses of thatequipment. Pipes and fittings, forexample, often need to be made of, orcoated with, specialised materials towithstand harsh operating conditionsand the corrosive nature of chemicalproducts. A U.S. government concern

with respect to such equipment, andmany related types of equipment

A review of all chemical

export control

enforcement cases

suggests violations

occur in nearly every

aspect of a company’s

operations.

Brief background: the

legal issues

Under the U.S. Export

Administration Regulations (‘EAR’)

and International Traffic in Arms

Regulations (‘ITAR’), numerous

chemicals and related technologies

and equipment cannot be exported

from the United States or re-

exported unless the exporter first

obtains a U.S. government licence.

Many of those technologies and

related technical assistance also

cannot be provided to foreign

nationals, including employees,

without a licence. Products made

outside the United States that

incorporate controlled U.S.-origin

materials or components or are

made using U.S. technology can

also be subject to the same U.S.

prohibitions. The basis for export

controls relevant to the chemical

industry typically is that the

chemicals, technology or equipment

can be used for a purpose that

raises national security issues,

such as the development of

chemical, biological or nuclear

weapons.

Failure to obtain a required U.S.

government licence can result in a

penalty per violation of $250,000

or twice the value of the

transaction. These penalties can

add up fast. Other penalties can

also include a loss of export

privileges, the requirement to hire

an outside monitor and to make

ongoing reports to the U.S.

government regarding export

compliance.



(including reactors, agitators, storagecontainers, condensers and pumps) isthat it could also withstand theconditions in a facility that processeschemical weapons. As a result, U.S. lawrestricts the export of such items.

Export control compliance issuesarise often with respect to the export ofvalves used in chemical processingfacilities. It is easy to imagine the manyvalves needed throughout a facility. Itis also easy to imagine the number ofcustomers overseas who would like topurchase valves from a U.S. companyas well as the number of valves that aU.S. company might send to its ownoverseas operations. A problem arisesbecause many valves cannot beexported without a U.S. governmentlicence, as was the case in the followingexample.

BJ Services Co. of Houston, Texas,was in the business of providing oil andgas equipment services before it

became part of Baker Hughes. Thecompany’s business activities includedexporting valves around the world forpetroleum industry operations. In2009, the U.S. Commerce Departmentcharged BJ Services with 67 violationsfor exporting valves to variouscountries, primarily in the Middle East,and was prepared to seek $16,750,000in penalties (Case E2108, 22 April2009).

The public case documents do notidentify exactly which types of valveswere at issue in the case, but valves aregenerally controlled because they havecertain dimensions and are made of, orlined with, sensitive materials, such ashigh nickel or chromium alloys,fluoropolymers with high fluorinecontent, glass, alloys of tantalum,titanium or zirconium or variousceramic materials.

This particular case came to theCommerce Department’s attention viathe EAR’s voluntary self-disclosureprocess. The EAR essentially providesthat should a company bring an exportcontrol violation to the government’sattention before the government learnsabout it, the disclosing company willreceive substantial mitigating credit insettlement talks. Here, BJ Servicessettled for $800,000, far less than thepotential maximum penalty. Filing avoluntary self-disclosure might notalways be appropriate, however. Thework that is required to file anadequate disclosure might, forexample, be disproportionate to thenature of the violation and benefit thedisclosure might offer.

The main point that the BJ Servicescase raises, however, is that anychemical company that exportsequipment, regardless of how benignthe equipment appears, needs to knowwhether that equipment can beexported without a U.S. governmentlicence. It is generally less expensiveand disruptive for companies withsignificant volume of equipmentexports to address that issue inadvance. The way to do so is to have aprocedure in the company’scompliance programme that chargesrelevant personnel with determiningwhether any equipment that might beexported is subject to a licensingrequirement, recording that conclusionin the order-processing system, andcharging compliance personnel withensuring no equipment export occurswithout first reviewing and complyingwith any associated licencerequirement.

You can’t involve that scientistor engineerLike most industries, the chemicalindustry draws upon the talents offoreign national personnel working inthe United States and abroad. Thispractice, however, poses a significantlegal risk. The United States generallydeems the act of making controlledtechnology available to a non-permanent resident foreign national tobe an export to that individual’s homecountry, even if the technology neveractually leaves the United States.Chemical companies cannot, therefore,draw upon the skills of certainemployees without first obtaining aU.S. government licence.

Lam Research Corporation of

Fremont, California, describes itselfonline as being in the business ofsupplying wafer fabrication equipmentand services to the worldwidesemiconductor industry. As manycompanies do, Lam Researchemployed Chinese and Russiannationals. Some of these had access totechnology covering the developmentor production of anisotropic plasmadry etching equipment, most likelyrelated to semiconductor processing.Such technology typically cannot beexported to, or shared with, nationalsof numerous countries, includingChina and Russia, due to itsimportance in the production ofmaterials used in sophisticatedelectronics.

The Commerce Departmentcharged Lam Research with twoviolations of the EAR and threatened toseek $500,000 in penalties for thoseviolations (Case E2018, 21 November1987). Due certainly in large part toLam Research’s decision to voluntarilydisclose the matter, Commerce settledthe case for a penalty of just $27,500,which also covered three violations forexporting manometers to Asia withoutthe required licence.

Companies who employ foreignnationals for their technical expertise,as is particularly common in thechemical industry with respect toscientists and engineers, need toincorporate into their hiring process aprocedure to identify the technologiesthe employees will need to performtheir responsibilities. Companiesfurther need to know whether thosetechnologies are controlled and, if theyare, should ensure they obtain a licencebefore permitting access to thosetechnologies.

Further security measures arerequired to prevent access to othertechnologies that might be controlled.These requirements are also now setout in the U.S. I-129 foreign workervisa application.

You can’t export that productWhile technology transfers andequipment exports can generate largepenalties, most companies probablyexport chemical products or chemicalsto customers or for their own useabroad with a greater frequency thanthey export technologies or equipment.Chemical exports themselves,therefore, probably pose the mostsubstantial risk for causing the greatest

In 2009, the U.S.

Commerce Department

charged BJ Services

with 67 violations for

exporting valves to

various countries,

primarily in the Middle

East, and was prepared

to seek $16,750,000 in

penalties.



number of violations and, therefore,the largest penalties.

It is not uncommon for companiesto be unaware of U.S. export controlrules and never incorporate relevantmeasures into their corporatecompliance programmes. As a result,hundreds of international shipmentscould go out the door each yearunknowingly without the requiredlicence. When the U.S. governmentbrings enforcement cases in this area,it can seek penalties for violations overthe preceding five years. Multiplyingthe number of possible unlicensedshipments over a typical year by fiveyears and then by $250,000 perviolation will create a huge potentialpenalty. Numerous chemicalcompanies have been in this situation.

Novamet Specialty ProductsCorporation of Wyckoff, New Jersey,advertises that it sells a number ofspeciality metal products. In October2009, the Commerce Departmentalleged that one of those products,nickel powder, was a controlledsubstance and had been exportedillegally (Case No. E2139, 1 October2009). Nickel powder can be subject tocontrols based on its purity and particlesize. Commerce said Novamet hadmade 32 exports of nickel powder tocountries around the world, includingMexico, India and Taiwan, over a five-year period and that it was prepared toseek a possible penalty of $8,000,000.Commerce ultimately settled the casefor $700,000 and a requirement thatNovamet undergo an exportcompliance audit and report the resultsto the Commerce Department.

Similarly, Essex Group, Inc. of FortWayne, Indiana, was charged withhaving exported aromatic polyamide-imide solution to China without arequired licence on 14 occasions (CaseNo. E2225, 23 September 2011). The

solution appears to have been formagnet wire applications. Exports ofthese particular imides were controlledbecause they had a particularly high‘glass transition temperature’. Exportsof a variety of other imides arecontrolled as well. Essex Group and theCommerce Department ultimatelysettled that matter for $200,000.

Elecmat, Inc. of San Francisco,experienced an even more severe fate;it lost its ability to export from theUnited States for 20 years (Case No.E2093, 26 January 2009). Commercecharged it with having exported variouschemicals, metals and electroniccomponents on 19 occasions to Taiwanwhile knowing, via supplier guidanceand past licence applications, that itwas illegal to do so without a licence.

There are several other U.S. exportcontrol enforcement cases arising outof the unlicensed exports of chemicals.Of these, perhaps as a result of itsbroad uses, cases involvingtriethanolamine appear to be the mostcommon, and cases involving thoseviolations have also settled forhundreds of thousands of dollars.

The key compliance take-away withrespect to exports of chemicalsthemselves is that companies need toidentify in advance whether any of theirpossible chemical exports would besubject to a licensing requirement. Aswith the equipment and technologyexports noted above, controlledchemicals also need to be identified ina relevant corporate database, andprocedures need to be implemented toensure shipments are not processedwithout possible licensing require -ments being reviewed and pursued.

Overall pointThe U.S. government, along withforeign governments, has determinedthat, despite numerous perfectlyacceptable commercial uses, manychemicals and chemical-relatedproducts have applications thatthreaten national security. As a result,such items and related technology andequipment often cannot be exportedwithout a licence, and the licensingrequirements are enforced viapenalties regularly in the range ofhundreds of thousands of dollars, totalloss of export privileges, or other

burdensome requirements such asoutside audits.

What is perhaps unique, or at leastparticularly applicable, to the chemicalindustry is that the types of products,technologies and equipment that arecontrolled are relevant and requiredfor every aspect of a chemicalcompany’s business. While mostexport control enforcement cases tendto pertain to one aspect of chemicalcompany’s business, the variety ofchemical enforcement cases shows thateach aspect of the business is subject topossible licensing requirements andpotentially steep penalties. It is nothard to imagine that a chemicalcompany that is not familiar orsufficiently diligent with respect toexport control compliance could besubject to penalties that are sufficientto undermine its bottom line andpossibly even cripple its exportbusiness altogether.

Having a robust written complianceprogramme that identifies controlledchemical products, technologies andequipment and procedures forensuring required licences areobtained is, of course, the criticalstarting point. Companies oftenstruggle, however, in finding a way forpersonnel to sufficiently internalise therelevant policies and procedures sothat they develop an intuition forcompliance. In this regard, rather thanjust teaching the dense details ofexport control compliance, it may bemore helpful for chemical companypersonnel to pay attention to thepublicised shortcomings of their peercompanies and the penalties thatfollowed their export controls failings.

I would like to thank my colleagueLaura Venker for her helpfulthoughts on this piece.

Elecmat, Inc. of San

Francisco, experienced

an even more severe

fate; it lost its ability to

export from the United

States for 20 years.

Corey Norton is an exportcontrol and import complianceattorney in the Washington, D.C.office of Keller and HeckmanLLP, which specializes inchemical industry complianceissues, among others.

[email protected]


france france

Illegal or unjustified seizure of dual-useitems in France: is it worth fighting?

French law provides recourse to exporters whosegoods have been unjustifiably seized by theauthorities. But is it ever worth taking Customson? Raphaël Barazza tackles the issue.

When exporting dual-use itemsor merchandise that canarguably qualify as such,

exporters in France face variouschallenges from the authorities. FrenchCustoms (Les Douanes) areempowered with extensive powers ofinvestigation: for instance, they areentitled to request disclosure of anydocument considered relevant to theexport regardless of its nature andcontent. Customs officials are alsoentitled to visit exporters’ premises,including those of exporting companiesthemselves, of freight-forwarders, andof warehousing agents, while anyattempt to challenge those powers runsthe risk of the challenger committing afurther infringement.

Sometimes, of course, it is apparentthat an exporter has clearly notcomplied with export control rules, andits liability, and possible penalties(including the seizure of the concernedproduct) will be beyond dispute. Often,however, exporters who are faced withprosecution will consider themselves tohave complied with all the applicablerules: perhaps the merchandise is noton the control list or may qualify for anexception; perhaps the item is alreadycovered by a global licence; or perhapsthe administration has acted after theexpiry of the statute of limitations. Yetnonetheless, the product is still liableto be detained for an excessive periodof time by Customs.

Faced with the unjustified seizure orretention of its products, an exportercan ask the court that the seizure bewaived. If the seizure is found to be

unjustified or illegal, the judge willaccept the exporter’s claim for waiver.However, by the time the exporter hasreceived a positive decision from thejudge, it will most likely already havesuffered several losses, including, butnot limited to, court and lawyer fees,

damages from the counterparty to thepurchase agreement, expenses forstorage, and so on. And, of course, bythe time the good is freed, it may nolonger be saleable, it may have becomeobsolete or, if it had been designed fora single customer, it may no longer bewanted. On top of this, the exportermay even face additional damage to itscommercial reputation.

In such a case, can the exporter fightback against the administration inorder to be indemnified? Let us reviewhow things work in France.

The principles of the Customsadministration’s liability Article 401 of the French Customs Codesets out the principle of theadministration’s civil liability: theCustoms administration is liable for its

agents’ actions which shall beaccomplished in the framework andduring the course of their functions,and is entitled to recourse againstthem.

In accordance with commonliability principles, the claimant canbring evidence of negligencecommitted by the administration,demonstrate that it has suffered froma correlative damage, and that thisdamage has been caused by theadministration’s alleged negligence.

Besides this general principle, theFrench Customs Code also provides forthe administration’s liability in twodifferent cases: an illegal seizure, or avisit which did not give rise to aseizure. We will focus on unjustifiedseizures.

Unjustified seizure and illegalproceedingsIn accordance with article 414 of theCustoms Code, dual-use items whichare exported without a licence can beseized by Customs. If the defendantchallenges the seizure, for instance onthe grounds that the item is notcovered by the annex of regulation2009/428, and if the judge thus findsthat the seizure is not justified, thedefendant can receive anindemnification of 1% of the value ofthe item per month from the time theitem was subject to the retention up tothe date on which the item is released,or on which the release is proposed(article 402).

This principle has given rise tosignificant debate because the value ofthe prejudice is often higher than theindemnification. Also the concept of‘not justified’ seizure is unclear.

Firstly, it should be clarified that forthe purpose of implementing article402 of the French Customs Code, thedefendant need not demonstratenegligence or illegal action on the partof the administration, rather that theseizure was not justified. Also, theFrench Supreme Court (Cour deCassation) has made a distinctionbetween a seizure which is found to be‘invalid’ because of proceduralrequirements and a seizure which is

Customs officials are

also entitled to visit

exporters’ premises,

including those of

exporting companies

themselves, of freight-

forwarders, and of

warehousing agents.

Links and notes1 Cour de Cassation, Chambre commerciale, 11 October 2005, 03-20.307. 2 Cour de Cassation, Chambre Commerciale, 9 April 1991, n° 89-16.259 89-17.555.3 Cour de Cassation, 30 November 1999, n°97-20.281).


france france

‘not justified’. When, for example, thenotice of proceedings fails to mentionsome procedural requirements, theseizure can be cancelled as invalid, butit will not nonetheless be heldunjustified as per article 402 of theFrench Customs Code1.

It should also be noted that it hasbeen determined that the exporter’sgood faith does not have any impact onthe seizure when it is found legal andjustified2.

Also, the French Supreme Court hasheld that the indemnification onlycovers the unjustified retention of thegoods. Therefore, if the seizure is alsoillegal, the exporter can be granted fullindemnification on the basis of theabove-mentioned general principle ofthe administration’s liability underarticle 401 of the Customs code3.

In the end, it is clear that theprinciples set forth by the FrenchCustoms Code regarding the Customsadministration’s liability will apply to avery limited number of cases – this isevidenced by the fact that over decadesthere have not been many decisions inthis respect. Also, in practice, the goodsin question are not necessarily alwaysretained by Customs.

Seizure of dual-use items inpracticeAside from the restrictive conditionsexplained above, there are severalreasons which may explain why thereare few opportunities for exporters toseek damages from the administrationfor exercising retention on the goods.

In practice, during the clearance ofthe goods, Customs will not necessarilyseize the product but will inform theexporter that the clearance process isdelayed – this can happen whenCustoms is unsure about the nature ofa product, particularly if it falls under

an export control rule and licencerequirement. Customs will leave themerchandise under the exporter’scustody and responsibility, withouthaving to proceed to the seizure of theitem, and consequently without givingrise to any right to indemnification forthe exporter. Customs willsubsequently conduct an admin -istrative request to the Dual Use Item

Bureau to verify if the product issubject to a licence requirement. If it isfound that there is no need for a licenceafter all, the exporter must put up withthe additional delays without havingany right to indemnification.

Also, if by the time the item hasalready left the customs territory of theEuropean Union, the Dual Use ItemBureau confirms that the good inquestion is covered by the control listand therefore that the exporter failed tocomply with a licence requirement,Customs is then able to seize orconfiscate the concerned merchandisein value, in other words, withouthaving to physically detain the good inquestion. Customs can claim before the

court for an amount equal to the valueof the product (regardless of anyadditional penalties).

It will come as little surprise thatthe vast majority of Customs litigationcases end in a settlement, and owing tothe risk of penalties incurred before acourt of law, few exporters have thecourage to attempt to recover damagesfrom Customs, even where they havebeen harmed by an illegitimate,lengthy and unjustified seizure andinquest.

And finally…Another principle which is worthrecalling, at least for its historicalinterest, is the indemnification grantedto the person who receives a Customsvisit which does not result in a seizure.The concerned person is entitled bymeans of a law dating from 1791, thedays of the French Revolution, to theequivalent of a Euro 0.76 lump sum byway of indemnity! This is anotherreason why few exporters choose tofight back – at the end of the day, it israrely worth it.

With all this in mind, greater focusand attention should be given tocontracts between parties to exportoperations. Defining liabilities inadvance and limiting such liabilities fordelays resulting from the admin -istration’s actions makes wiser counselthan attempting to seek damages fromthe administration itself.

Owing to the risk of

penalties incurred

before a court of law,

few exporters have the

courage to attempt to

recover damages from

Customs, even where

they have been harmed

by an illegitimate,

lengthy and unjustified

seizure and inquest.

Raphaël Barazza is a Paris-based avocat à la cour. Headvises on all aspects ofinternational commerce.

[email protected]

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Turkey Turkey

Bridging the gap: developing exportcontrols in Turkey

Turkey’s export legislation essentially conforms to that of the EU, yetwithin exporting companies, knowledge of export controls is patchyand regulations often circumvented. Orçun Çetinkaya and AsenaAytuğ Keser describe the general situation and offer a particularinsight into the operations of Turkish subsidiaries of U.S. companies.

From its establishment in 1923,and more particularly since theGreat Depression of 1929,

Turkey has tended toward stronglyprotectionist and interventionisteconomic and foreign trade policies bysupporting import-substitutingindustrialisation.

Since 1980, however, and in thecontext of global and domesticeconomic change, the Turkishgovernment has overseen a radicalreappraisal of previous economicpolicy, and has promulgated acomprehensive economic packageknown as the ‘January 24 Decisions’.

Through the adoption of thiseconomic programme, the key purposeof which was to enable the nationaleconomy to function in parallel withthe rules of the free market and toachieve integration with the worldeconomy, Turkey abandoned itsimport-substitution strategy which hadpreviously created a self-enclosedeconomic structure, and adopted

instead an export-oriented growth andindustrialisation model.

Following the adoption of theJanuary 24 Decisions and the supportof exports, investments made in thefield of transportation, communicationand other infrastructure servicesaccelerated and consequently foreigntrade, and particularly export volumes,began to show substantial increases. In1995, Turkey became a member of theWorld Trade Organisation (‘WTO’), andon 1 January 1996, after negotiationswith the European Union (‘EU’),Turkey joined the Customs Union.

These national and internationaldevelopments spurred legislativechanges and, in line with the rules ofthe EU harmonization process, Turkishlegislation essentially conformed to thecustoms, foreign trade and exportregulations and regimes of the EU.

This article first briefly lays out thelegal basis of Turkish export practices,the export regime, and exportrestrictions. We will also look at the

impact of U.S. export controls onTurkish subsidiaries of U.S. companiesand the results of violating thoserestrictions.

Turkish export regulation

Legal basisExport transactions are carried outwithin the framework of the Council ofMinisters’ Decision on Export Regime(the ‘Decision’), the Export Regulation(the ‘Regulation’) based on theDecision, various communiqués,directives, and bilateral or multilateraltreaties.

Before considering the main exportlegislation, it should be noted that thebilateral and multilateral treatiesprescribing regulations in relation toexports constitute a substantial part ofthe export legislation as promulgatedinternational treaties are deemed tohave equal standing to domestic law.

Therefore, the international


Turkey Turkey

agreements to which Turkey is a party– like the customs union agreementbetween the EU and Turkey, the freetrade agreement in relation to goodswithin the scope of the treatyestablishing the European Coal andSteel Community, the free tradeagreement between Turkey and theEFTA countries, and other free tradeagreements executed between variouscountries (e.g. Serbia, Montenegro,Israel, Macedonia, Croatia, Bosnia-Herzegovina, Morocco, Palestine,Tunisia, Syria, Egypt, Georgia, Albania,Chile), the agreement establishing theWTO, and the Chemical WeaponsConvention – establish the basis of theexport legislation.1

That said, whereas the CustomsCode No. 4458, dated 27 October 1999,makes a general definition of ‘exportregime’, with article 150 stating that itis the regime subject to the provisionsin relation to the exit of the goods onfree movement outside the Turkeycustoms zone for export purposes, theDecision regulates the main principlesin relation to export practices. Further -more, the Regulation prescribes theprocedures and principles related toexport transactions to be carried out inaccordance with the Decision.

The Regulation also distinguishesbetween ten different categories ofexport:

(i) export without returns (ii) export subject to prior

authorisation of the relatedauthority

(iii) export subject to the registry ofthe General Secretariat ofExporters’ Association

(iv) export on consignment (v) participation in foreign fairs and

exhibitions (vi) export of imported goods (vii) export to the free zones (viii) transit trade (ix) export by commercial lease, and (x) offset.

As each of those could be dealt withseparate articles, it would be beyondthe scope of our article to discuss thosecategories in detail here.

Export restrictionsThe radical change in foreign tradepolicies of the 1980s also impacted onexport restrictions and Turkey hasespoused an export liberalisationmodel since then. Indeed, export

liberalisation is also accepted by article4 of the Decision which stipulates that‘within the scope of this Decision,exporting any goods except from thosethe export of which have been bannedby laws, decrees and internationalagreement is free [from controls]’. Theonly exception to this is article 3 (b) ofthe same Decision, and according towhich the Ministry of Economy isauthorised to impose exportrestrictions or bans due toextraordinary developments in themarkets, public security, publicdecency, human health, precautions forprotection of animals, plants andenvironment, and protection of artistic,historical and archaeological works.

Having regard to the above, whenconducting export-related trans -

actions, the nature of the goods to beexported will also be decisive, alongwith the country to which the goodswill be exported.

The rules specific to countries bringcertain documentary obligations. Inrelation to the export to the EUcountries, EFTA countries and thecountries with which Turkey hasexecuted free trade agreements, therules specific to goods includeobligations and restrictions governing(i) goods, the export of which isbanned; (ii) goods, the export of whichis subject to prior authorisation; and(iii) goods, the export of which istracked within the scope of registeredexport.

Goods within the scope of thesecategories are regulated undercommuniqués issued by the Under-Secretariat of Foreign Trade. Apartfrom these, the only export bans thatTurkey applies to countries arise fromthe international treaties to whichTurkey is a party. For example, as perthe Communiqué on Export of theChemical Substances Included in theAppendix of the Chemical WeaponsConvention, chemical substances listedwithin the convention cannot be

exported to countries not being a partyto the convention. Likewise, theCommuniqué on Export of Ozone-Depleting Substances, based on theMontreal Protocol, bans the export ofgoods determined within the protocolto the countries not being a party to theCopenhagen amendment or Beijingamendment to the protocol.

Except from such obligationsarising from international treaties,Turkey abides by the free tradeprinciple foreseen both by domesticlegislation and the rules of the WTO.Thus, even though the Decisionstipulates within article 3-b that theMinistry of Economics is entitled toimpose export restrictions or bans forcertain reasons, there is not a countrywhich is subject to an export banimposed by Turkey, though somecountries, i.e., Armenia and SouthernCyprus have been subject to embargofor many years.

Impact of U.S. export controlson the Turkish subsidiaries ofU.S. companiesU.S. export restrictions are seriouslytaken into consideration bysubsidiaries of U.S. companies inTurkey. Country managers as well asexport managers and staff are typicallytrained by their headquarters on aregular basis. However, the extent towhich the export managers and staffcan grasp the nature, reasoning, andconsequences of restrictions isdebatable, and while the employees ofU.S. subsidiaries are trained as to thescope and effect of U.S. restrictions,nonetheless, there is a tendency toexplore alternative ways to exportgoods to restricted countries with aview to maximising the subsidiary’sprofits, personal benefits and bonuseswhilst sacrificing their complianceobligations. The practices of U.S.subsidiaries in Turkey vary, therefore,to the degree that while the majoritytry fully to comply with controls, somesubsidiaries may still try to exportgoods to restricted regions throughthird-party intermediaries so as tocircumvent the rules in place.

Current practice of Turkishsubsidiaries to avoid sanctionsarising from restrictionsDespite best endeavours to train staffemployed by subsidiaries, typically theconcept of controlling exports is onethat Turkish employees can find

Some subsidiaries may

still try to export goods

to restricted regions

through third-party

intermediaries so as to

circumvent the rules in

place.


Turkey Turkey

difficult to grasp. Partly, this reflectsthe lack of export restrictions (with theembargo exceptions noted above) inplace in Turkey, and, partly, the factthat Turkish professionals may nothave encountered the situationwhereby a non-compliant export mayhave serious consequences for both thecompany and individuals concerned.

This is why training has always beencrucial to raising awareness amongemployees involved in exports in thoseU.S. subsidiaries. In this respect,however, the way in which training iscarried out carries significant weight.Some companies prefer online trainingfor their Turkish employees while someprefer group training with trainersattending. Our experience suggeststhat the latter is more effective atovercoming both language barriers andthe lack of familiarity with the conceptof export controls.

Methods that might be chosen byTurkish subsidiaries tocircumvent restrictionsAs indicated above, regular trainingcan diminish the risk of export controland sanctions breaches. But in caseswhere training is not efficient, exportofficers in the subsidiaries may not besufficiently empowered or encouragedto prevent export to restrictedcountries. Because export staff mighthave benefits or bonuses linked to thevalue or volume of annual exports, andbecause they lack awareness of thepotential consequences of breaches,there can be a tendency to seek outmethods for circumventing the laws towhich they are subject: for example,creating collusive third-party buyersthrough which the export is made tothe end-user in the restricted countrieswithout being traced.

In order to avoid such abuses andbreaches, an effective audit andreporting system should be put inplace, with timely/regular checks sothat each transaction can be monitoredappropriately.

In this regard, Turkish practice inrelation to database protection shouldbe mentioned as it might be necessaryto review company databases duringaudits so as to understand whetherthere is any breach. There is no law or

regulation about data protection inTurkey. However, according toprecedents of the Turkish Court ofAppeals, any data of employees kept atthe workplace and on soft or hardcopyworkplace documents, including emailcorrespondence, can be reviewed bythe employer without prior approval ofthe employee – a green light to the useof random workplace reviews.

ConclusionTurkey has been striving for a state-of-the-art customs system in general andan export regime in particular for manyyears. To this effect, Turkeyharmonised its customs regulations toa large extent according to the WTOprinciples and rules as well as the EUregulations. However, when it comes toexport restrictions, the Turkish systemis focused more on the goods beingexported rather than on countries ofdestination. Experience has shown thatcompanies serious about reducing thelikelihood of compliance breachesbeing committed by the employees oftheir Turkish subsidiaries have agreater chance of success if theyintroduce in-person training andregular auditing.

The Turkish system is

focused more on the

goods being exported

rather than on

countries of

destination.

Orçun Çetinkaya is a partnerand Asena Aytuğ Keser anassociate in the Istanbul office ofMehmet Gün & Partners.

[email protected]

[email protected]

Links and notes1 http://www.gumrukticaret.gov.tr/altsayfa/icerik/358/312/ihracat-mevzuati.htm

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Peru Peru

Customs control in export operations:the Peruvian experience

Exports from Peru are overseen by Customs,which adopts a risk-management approach inadministering controls. Julio Guadalupe explainsthe approach and process and identifies theexports that are prohibited or restricted.

On 27 June 2008, the Peruviangovernment publishedLegislative Decree 1053,

approving the new General CustomsLaw (‘GCL’). This introduced drasticchanges to the way the variouselements of the customs equation1

interrelate. In addition, the GCLconstitutes the tool by which the FreeTrade Agreement with the UnitedStates is legally implemented (the‘FTA’2). This is highly significant as, inpractice, the FTA has been the modelon which other internationalagreements have been negotiated byPeru (such as the recent free tradeagreement with the European Union).

In this context, a full understandingof the GCL and its application is vital inassuring: (i) foreign trade dynamicsand operations (with respect tocustoms controls exercised onmerchandise entering and leaving thecountry and to facilitating andsimplifying the processes involved);and (ii) an adequate level ofcompliance with the provisions of theFTA (and all free trade agreementssigned by Peru in general) regardingcustoms procedures and the facilitationof foreign trade.

Risk managementThese changes have significantlyaffected the way customs actions areimplemented, moving from ‘random’controls to those supported by the useof ‘risk-management’ techniques.

According to the GCL, ‘riskmanagement’ is understood to meanthe use of techniques that make itpossible to focus customs controlactions on high-risk operations (whilerespecting the confidential nature ofthe information obtained for thatpurpose). On the other hand, of course,customs control should be flexible (to areasonable extent) with respect to low-risk operations. In other words, when

applying these techniques, Customs‘quantifies’ the level of insecurity orexposure to the danger that may beposed by a shipment (container,package or loose load). This shouldresult in the appropriate balance ofcustoms control and facilitation offoreign trade so that customs controlactions are performed responsibly.

With this in mind, it is important tostate that the role of Customs has beenredefined worldwide3. ModernCustoms is considered to be an entityintended to exercise (customs) controlwhile remaining oriented toward thegoal of facilitating foreign trade. Inother words, the customs authority’slimited resources (personnel, time,money and technology) must beutilised efficiently, performing customscontrol actions (physical inspection ofcontainers and/or review ofoperations-related documentation)only in those cases in which it is trulynecessary. This is achieved by usingreliable and regularly updated riskindicators and through the intelligencework performed by Customs based oninternational cooperation with customsauthorities in other countries. Thus,customs control actions should befocused on the frontal assault againstinternational terrorism, drug traffick -ing, contraband, piracy and other illicitactivities (preventing the use ofinternational commerce as a channelfor these purposes), while legitimatetrade should benefit from flexible

customs controls so as not to impedetrade flows.

AEO statusIt is important to mention that theconcept of the authorised economicoperator4 (‘AEO’) is enshrined in GCL,enabling foreign trade operators ingeneral (and no longer only majorcontributors), once they have obtaineda ‘trusted associate’ classification, tobenefit from flexible customs controlsand simplified customs procedures andpaperwork.

As in the European model, thisstatus should be based on mutualcertification5, i.e., on validation byCustoms in the destination country(importing country) of the ‘trustedoperator’ certification issued byCustoms in the shipping country(exporting country). In this way, agreater level of security (and, therefore,lower risk) is given to the importoperation conducted by the importeras it is assessed by his country’sCustoms, allowing the importer tobenefit from ‘flexible customs control’and to collect his merchandiseimmediately or almost immediately,with the resulting reduction inoperating costs.

Therefore, there are advantages toimporters in doing business withexporters certified as being an AEO.Certification should produce aneconomic benefit for the AEO and asituation that may generatecompetitive advantages over othercountries with similar or substitutableexport offers in which there is nosimilar status, or in which, if it doesexist, there is no mutual certificationmechanism like that described above.

Customs control in exportingThe Peruvian authorities have begun toimplement the AEO status within theexport sector. Provisions have alreadybeen issued establishing legal,economic, technological, and securityrequirements governing this type ofcertification.

However, the concrete advantagesexporters will obtain from AEOcertification still need to be clearlydefined. While it is clear that mutual

The Peruvian

authorities have begun

to implement the

authorised economic

operator status within

the export sector.


Peru Peru

international certification is a measurethat should have concrete economicbenefits, nonetheless, at present, thesehave yet to be seen in Peru assomething realistically achieved in theshort or medium term (this level ofinternational integration normallytakes time to mature). At present,exporters are still viewing theimplementation of AEO accessrequirements as a cost rather than aninvestment, a situation that will have tobe reversed before it can truly begin tofunction.

Since they do not currently have amechanism that orients customscontrol actions toward riskyoperations, export operations areincluded within the general customscontrol actions based on the use of therisk-management techniques mention -ed previously.

In this respect, it should be notedthat the customs control exercised byCustoms is also based on so-called‘Customs Intelligence’, i.e., foreigntrade operation analysis and trackingactions which, by their very nature, arenot disclosed (in the interests ofnational security).

This is closely linked to thediscretion with which Customs isempowered to conduct customs controlactions and operations, therebyestablishing risk indicators related notonly to the exporters’ actionsthemselves, but also, for example, tothe records of the customs agents, thecustoms storage facility, and/ortransporters who participate in theexport operations.

These criteria will be taken intoconsideration when the export controlchannel is assigned. According toPeruvian law, two control channelsapply to the definitive export customssystem: the orange channel (review ofdocumentation only) and the redchannel (review of documentation plusphysical inspection)6. The assignment ofone or the other depends upon the risklevel which, based on the techniquesused for that purpose and on theassociated Customs intelligence work, isdetermined by Customs for eachindividual export operation. There mayalso be extraordinary customs controloperations, independent of the assignedcontrol channel, which areimplemented by Customs at the time ofthe export shipment, as well as customscontrol operations after the shipment,based on scheduling inspection visits tothe exporter’s facilities.

At the export shipment level,customs control actions are supportedby the information provided by thecustoms agent and the customs storagefacility. The customs agent performs anauxiliary function of monitoringcompliance with customs regulations,which consists of transmitting relevantand vital information so that the exportprocedure can be initiated andcompleted in a valid manner (customscontrols can be evaded fairly easily ifthis information is not true or correct).For its part, the customs storage facilityis responsible for confirming thecharacteristics of the merchandise thatwill be exported, as well as taking thenecessary steps so that Customs canphysically recognise the merchandiseinvolved (red channel).

The customs control applied to theexport operation procedure consistsbasically of the following:

(i) The customs agent transmits theinformation related to themerchandise to be exportedelectronically in the customsmerchandise declaration (‘CMD’)form approved for that purpose.

(i1) Customs generates a CMD casenumber, which is transmitted tothe customs agent.

(iii) The customs agent enters themerchandise into the customsstorage facility after presentingwritten proof of the properlynumbered CMD7.

(iv) The customs storage facility thenweighs the merchandise and

Customs control for merchandise whose export is

prohibited or restricted

According to Peruvian customs regulations, certain types of merchandise are

prohibited from being exported (‘prohibited-export merchandise’), while others

can only be exported if they have the appropriate authorisations (‘restricted-

export merchandise’) issued by the relevant authorities in the pertinent sector

(ministries of the interior, of production, of education, of energy and mines, etc.).

In this respect, if Customs detects the presence of prohibited- or restricted-

export merchandise (which does not have the respective authorisation) during an

export shipment, it will suspend that shipment, separating it from the rest of the

lot, if possible. If, after the appropriate investigation, indications of fraud or

violations are detected, the Customs official will impound the merchandise and

report that fact immediately to the proper authorities. Prohibited-export

merchandise includes, for example:

l Endangered species of wild flora and fauna

l Llamas, alpacas, vicuñas and guanacos

l Mahogany and cedar

l Camu camu

l Botanical seeds

Restricted-export merchandise includes, for example:

l Arms, munitions and explosives

l Pyrotechnic articles

l Chemical ingredients that may directly or indirectly be used in preparing the

basic paste for cocaine, cocaine hydrochloride, among other things

l Hydrobiologic resources for research, recreation or cultural diffusion purposes

l Residues or wastes

l Liquefied gas, liquid fuels and other hydrocarbon derivatives

l National heritage items (from the Pre-Hispanic and Viceroyalty periods and

some from the Republican period)

It should be mentioned that in 2008 Peru began the process of implementing

the so-called ‘single window for foreign trade’ (‘VUCE’ for its initials in Spanish),

which constitutes an integrated system that allows exporters to manage

electronically the arrangements required by the applicable sector entities to

obtain the appropriate authorisations for sending restricted-export merchandise

out of the country.


Peru Peru

confirms the external physicalconditions (checking safety tags,looking for packagingdeterioration, etc.), and afterwardtransmits that information toCustoms.

(v) If the information transmitted bythe customs agency is consistentwith what was transmitted by thecustoms storage facility, Customsassigns a control channel to themerchandise. Assignment of theorange channel impliesimmediate authorisation forshipment. Assignment of the redchannel implies having to performa physical inspection of themerchandise at the customsstorage facility.

(vi) The Customs official determines,as applicable, which packages willbe randomly inspected; the samecriteria may be applied todetermine which items ofmerchandise within the selectedpackage will be subject toinspection. If no problems aredetected in the physicalinspection, the Customs officialconfirms that on the printed CMDform, which authorises theshipment. If problems are found,the Customs official stops theexport shipment and performs theadditional verification actions hedeems appropriate.

(vii) At any time, Customs may require

that a merchandise item assignedto the orange channel bephysically inspected.

(viii) The customs storage facilitytransmits the detailed list ofcontainers, pallets or loosepackages to be shipped, indicatingthe CMD number, assignedcontrol channel, and number ofthe safety tag, if applicable.

(ix) Customs validates thisinformation and, if applicable,numbers the shipmentauthorisation. Before shipment,Customs can randomly check themerchandise to be exported,based on the informationtransmitted from the customsstorage facility.

(x) The transporter verifies theshipment of the merchandise andrecords the situation on the CMD,as well as the number of packagesactually shipped, weight andcompletion date of the shipment.

(xi) After the shipment is completed,the exporter must formalise theexport operation with Customs bypresenting the relevantdocumentation (basically, thecommercial invoice andtransportation document).

ConclusionsThe GCL states that the customs controlactions to be performed in exportoperations must be based on risk-

management techniques. This,according to: (i) the free tradeagreements signed by Peru with itsprincipal commercial partners; and (ii)the current international trend towardfocusing control actions on high-risk

operations while being flexible withregard to low-risk operations.

Although the GCL has establishedthe authorised economic operator figure(as a tool that should make it possible toeffectively direct customs controlactions toward high-risk operations),and the Peruvian customs authority hasprioritised its application in exportoperations, the implementation of thatmeasure is still in the process of beingevaluated by the private sector as theconcrete benefits that it wouldintroduce (in accordance with Peruvianlegislation) are not immediately clear.

To date, customs control actions inexport operations translate to the use ofrisk indicators applied by the customsauthority to all customs systems ingeneral (and not just to that of finalexport). These risk indicators determinethe assignment of ‘control channels’ toexports (‘orange channel’ if only adocumentation review is required or‘red channel’ if physical inspection ofthe merchandise is required in additionto the documentation review).

Customs control cannot be exercisedefficiently without the activecooperation of customs agents, customsstorage facilities and transporters inpromptly transmitting relevantinformation before the merchandise isshipped.

The GCL states that the

customs control actions

to be performed in

export operations must

be based on risk-

management

techniques.

Julio Guadalupe is a partner inthe Customs and Foreign TradeArea of Rodrigo, Elías &Medrano, Attorneys-at-Law,Lima.

[email protected]

Links and notes1 In simple terms, we could say that there are three interacting elements involved in customs

activities: (a) the subjects (customs authority and foreign trade operators); (b) the object (the

merchandise entering or leaving the country); and (c) the communication channel (mechanism

allowing the ‘subjects’ to interact with the ‘object’ and with each other). 2 In Peru, the FTA was the legal instrument that initiated and made it possible to change the Peruvian

customs system as established in the GCL.3 Documents such as the ‘Framework of Standards to Secure and Facilitate Global Trade’ issued by

the World Customs Organization (WCO) and the ‘International Convention on the Simplification and

Harmonization of Customs Procedures (known as the ‘Revised Kyoto Convention’) clearly indicate

that modern Customs needs to implement mechanisms oriented toward securing the International

Logistics Chain, but without generating impediments to foreign trade. 4 This tool is based most directly on the ‘authorised economic operator’ figure used in the European

Union countries. However, similar tools have also been developed at the international level (intended

to add security to the international logistics chain), such as the American programme ‘Customs-

Trade Partnership Against Terrorism (C-TPAT); the Canadian programme ‘Partners in Protection (PIP);

the Swedish program ‘StairSec’; and the Australian programmes ‘Frontline’ and ‘Accredited Client’;

among others.5 This could involve the execution of international customs cooperation agreements, which in turn

would imply standardising customs procedures, computer processes, information reporting formats,

etc. to permit mutual approvals in these areas.6 This is an important difference compared to the final import system, in which there is also a third

control channel: the ‘green channel’, in which the merchandise is not subject to physical inspection

or documentation review, without affecting the performance of control actions after the customs

shipment. 7 In some cases, merchandise is exempted from entering customs storage facilities before the export

shipment takes place. This occurs, for example, when dealing with explosive, flammable, toxic or

radioactive merchandise. In these cases, direct shipment from the location assigned by the exporter

is authorised. If a physical inspection is indicated, it is performed at the exporter’s location.

Contributors in this issueDr. Ian Anthony and Lina Grip, SIPRI

www.sipri.org

Farhad Alavi, Akrivis Law Group, PLLC

www.akrivislaw.com

J Christian Kessler, NorthRaven Consulting LLC

[email protected]

Corey Norton, Keller and Heckman LLP

www.khlaw.com

Raphaël Barazza, avocat à la cour

www.customs-lawyer.fr

Orçun Çetinkaya and Asena Aytuğ Keser,

Mehmet Gün & Partners

www.gun.av.tr

Julio Guadalupe, Elías & Medrano, Attorneys-at-Law

www.estudiorodrigo.com

WorldECR Editorial BoardMichael Burton, Joiner Burton, Washington, DC

[email protected]

Larry E. Christensen, Miller & Chevalier, Washington, DC

[email protected]

Iain Macvay, King & Spalding, London

[email protected]

Dr. Bärbel Sachs, Noerr, Berlin

bä[email protected]

Edmund Sim, Appleton Luff, Singapore

[email protected]

George Tan, Bryan Cave Consulting, Singapore

[email protected]

Stacey Winters, Deloitte, London

[email protected]

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WorldECRThe journal of export controls and compliance

ISSUE 23. JUNE 2013

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