with co-author Thomas Scott III
Two topics dominated the trade compliance arena in 2014 and will continue to present significant trade compliance challenges in 2015:
- Changes to both the Export Administration Regulations and the International Traffic in Arms Regulations resulting from continued implementation of the Export Control Reform Initiative
- Russia’s actions with respect to Ukraine and the resulting set of layered sanctions on Russia
Implementation of Export Control Reform
The Departments of Commerce and State continued to publish rules in 2014 that make changes to their respective regulations in order to implement the President’s Export Control Reform Initiative. The most talked-about aspect of Export Control Reform involves the movement of low-level defense articles from State Department jurisdiction to Commerce Department jurisdiction. The typical response to those changes is an assumption that liberalized export treatment for those transferred items will decrease the compliance burden for exporters. However, exporters must ensure their use of increased export flexibility remains in full compliance with the law.
- Proper classification of exported items under the Export Administration Regulations or the International Traffic in Arms Regulations is the most important step to ensure compliant exports. The determination of any required export authorization is dependent on an accurate classification, coupled with the country of destination. Consequently, improper classifications may result in exports without the proper authorization. Likewise, submission of a license application to the wrong agency based on a faulty jurisdiction determination will result in the return of the application without action and may add several weeks or even months to the time required to obtain the required license.
- The movement of low-level defense articles from State Department jurisdiction to Commerce Department jurisdiction is still an ongoing process, with 15 of the 21 U.S. Munitions List categories having been addressed. Review and revision of the remaining six categories should continue into 2015. Affected exporters likely will need to cope with the transition from State Department to Commerce Department jurisdiction throughout 2015.
- While the liberalized treatment of items transferred to Commerce jurisdiction has dominated the discussion surrounding Export Control Reform, the initiative also involves tightening controls on some items subject to U.S. and/or UN arms embargoes. Specifically, military items that have been identified on the Commerce Control List for the past 20 years will now be subject to the same embargoes that apply to items on the U.S. Munitions List.
Given the ongoing and significant changes to U.S. export controls, the best insurance policy against potentially costly violations of export control laws is an adequate and properly trained export compliance staff. Export compliance personnel should be afforded appropriate resources and provided with regular training to provide them with the skills and knowledge to ensure export compliance. Top company executives should demonstrate their support for those compliance efforts in a formal statement of commitment to compliance and by providing compliance personnel with the authority to take necessary steps to ensure compliance.
Because of the crucial importance of export classification, classifications should be made by personnel who have been trained on the classification process and are knowledgeable about the items being classified. The resulting classifications should be well documented and maintained as part of the company’s export records.
OFAC Embargo and Sanctions Programs
The Office of Foreign Assets Control (OFAC) at the Treasury Department administers a variety of economic and trade sanctions programs intended to impose restrictions on trade by U.S. citizens with countries, organizations or individuals that the U.S. government has determined pose foreign policy or national security concerns. The longstanding embargoes against Cuba and Iran are perhaps the most recognizable sanctions maintained by the OFAC, with the U.S. embargo against Iran being the most dynamic and arguably the one presenting the greatest risk for U.S. exporters. While ongoing multilateral negotiations over Iran’s nuclear program offer some hope for future relaxation of the sanctions on Iran, at least for the foreseeable future, U.S. persons will need to comply with a collection of complex and often confusing sanctions against Iran.
In addition to the general prohibitions on doing business with or in Iran, specific prohibitions are still in place on persons and foreign financial institutions engaging in transactions that involve the Iranian automotive sector, the Iranian rial and the sale, transport or marketing of Iranian petroleum, petroleum products or petrochemicals.
Another major development in 2014 in the sanctions arena, and the one that will likely present significant challenges in 2015, is the imposition of sanctions on Russia. These sanctions were a result of the annexation by Russia of Crimea in the spring and continuing activities in the eastern part of Ukraine. The U.S. initially imposed a travel ban and assets freeze on certain officials deemed to have been involved in the violation of Ukrainian sovereignty. While the effect of those sanctions on most U.S. persons was minimal or nonexistent, the failure of Russia to respond in a manner satisfactory to the U.S. resulted in the successive imposition of additional layered sanctions:
- A prohibition on U.S. persons dealing in debt with a maturity of longer than 90 days or in new equity of numerous specifically named Russian banks and two Russian energy companies
- A prohibition on U.S. persons dealing in debt with a maturity of longer than 30 days or in new equity of six Russian banks
- A prohibition on U.S. persons doing business with certain Russian defense companies and one ship-building firm whose property was frozen
- A prohibition on the export to five Russian energy companies of goods, services or technology in support of oil exploration or production in deepwater, Arctic offshore or shale projects.
The layered sanctions on Russia present a complex set of restrictions and prohibitions that ostensibly prevent all business involving certain designated entities, while at the same time prohibiting some, but not all, activities involving others. The result is that any potential transaction with Russia requires significant due diligence to ensure there is no violation of the targeted sanctions currently in place. It is also important to note that the Commerce Department has introduced a licensing requirement for exports of items under its export jurisdiction to some Russian companies if the items are intended for use in exploration or production of gas or oil in Russian deepwater, Arctic offshore or shale projects. In some cases, a single transaction might require a license from both OFAC and the Department of Commerce.
Also remaining a concern in 2015 are OFAC’s less comprehensive, targeted sanctions on Belarus, Burma, Democratic Republic of Congo, Iraq, Ivory Coast (Cote d’Ivoire), Lebanon, Libya, North Korea, Somalia, Syria, Yemen and Zimbabwe. Sanctions are also in place targeting persons or entities engaged in activities threatening international stabilization efforts in the Balkans, narcotics trafficking, terrorism, undermining Lebanese sovereignty or democratic processes or institutions in Lebanon, the former Liberian regime of Charles Taylor, proliferation of weapons of mass destruction, trade in rough diamonds and transnational criminal organizations.
Export Enforcement Priorities
Enforcement priorities at the Office of Export Enforcement (OEE) continue to focus on three primary areas of concern:
- Weapons of mass destruction
- Unauthorized military use
With the advent of sanctions on Russia, OEE is focused on exports destined for Russia to ensure they are in compliance with the sanctions targeting certain aspects of Russia’s oil and gas industry. Consequently, exports to Russia by companies engaged in the oil and gas industry, or by those who support the oil and gas industry, will be subject to close scrutiny by the U.S. government and exporters should be prepared for that. Likewise, with the continued implementation of export control reform, OEE will continue to look closely at the export of items transferred from State Department to Commerce Department jurisdiction to ensure those exports are properly authorized.
In reviewing their compliance programs and procedures, exporters should focus on these issues as priorities and ensure compliance procedures are properly structured to identify and address any risk that their exported products might be diverted to unauthorized end users, end uses or destinations. While no compliance program can provide complete protection against diversion of exported products to proscribed destinations or end users/end uses, awareness of the risks and how their products might be used (e.g., WMD, terrorism or military applications) is crucial in crafting and implementing compliance procedures reasonably calculated to protect against those risks. Should an export be diverted despite an exporter’s best efforts, the ability to demonstrate reasonable compliance efforts can provide significant mitigation of any potential penalties resulting from a violation.
Evolving Export Controls Require Exporters to Adapt
The changing landscape of U.S. export controls resulting from both Export Control Reform and inevitable geopolitical developments requires exporters to be vigilant and nimble in adapting export compliance programs to meet the new challenges presented. One of the biggest threats to a company’s compliance is the failure to regularly assess the risks it faces in its particular export business and the failure to adapt its compliance program to address new or shifting compliance risks as its international business grows and develops. By investing in appropriate resources and tailoring the compliance program to attend to legitimate business risks, a company will be better positioned to pursue international business opportunities with the assurance that it has taken reasonable steps to minimize contingent liabilities.