If your business exports products, technology, and/or software that are subject to the International Traffic in Arms Regulations (“ITAR”) or the Export Administration Regulations (“EAR”), then you should consider the implementation of an Export Control Plan (“ECP”).  This post discusses the proper foundation of an ECP.  Although such a plan is not mandated by ITAR or EAR, it is a valuable proactive measure that can save your business millions of dollars it might otherwise spend in penalties to the United States government.

Once you make the decision to create an ECP, your employees should understand and observe the commitment from management.  Management should ensure that employees do not regard this plan as a set of written procedures that simply collect dust.  Employees will take these measures seriously only when they see that management is devoting time and resources to the implementation of the ECP and that the rules and procedures will be strictly enforced. 

The next step in implementing an ECP is to appoint a compliance officer from within the company with sufficient authority to demand compliance.  Due to potential bias, this person should not be involved in export sales. 

Before any written polices and procedures are put into place, management should conduct a risk assessment, which is usually performed along side an outside expert.  During a risk assessment, the individuals involved will discuss, in detail, the present environment surrounding the companies’ export transitions, including the likelihood of certain violations, the severity of consequences, and the controls already in place.

These elements are essential to building a solid foundation for an ECP.  Once accomplished, your business can begin creating the ECP’s written policies and procedures.  If you would like more information on export control regulations or an Export Control Plan, please feel free to contact me at recoley@kaufcan.com.  –R. Ellen Coley

The Foreign Corrupt Practices Act (“FCPA”) includes two primary components: (1) the anti-bribery provisions, and (2) the recordkeeping and internal controls provisions.  This post will discuss the recordkeeping and internal controls provisions, which prohibits the false characterization of payments.  The purpose of the FCPA is to prevent a company from hiding bribes and other improper transactions.  However, the recordkeeping and internal controls provisions apply no matter if the record is linked to bribery of a foreign official or not.  In addition, there is no minimum dollar amount that triggers the FCPA: from $1.00 to $1 million, your recordkeeping must accurately reflect the transaction.

The recordkeeping and internal controls provisions of the FCPA require all issuers–all companies with securities traded on a U.S. exchange or which are otherwise required to file periodic reports with the Securities and Exchange Commission– to maintain records and accounts that accurately reflect the company’s transactions.  To facilitate this requirement, companies must maintain internal accounting controls sufficient to provide “reasonable assurance” that financial statements are accurate.  Reasonable assurance requires the level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.  Although such a standard may be somewhat vague, one thing is for certain: internal controls in your accounting department are a must.  Your company should consider implementing written guidelines and a checks and balances system that encourages accountability among employees.  

In addition, internal controls will help companies avoid violating the FCPA and incurring the penalties that come along with such a violation.  On the civil side, a business can be fined up to $500,000 and a criminal fine can be up to $25 million.  An individual can also be fined civilly $100,000 and $5 million for a criminal fine, neither of which can be paid by a company on whose behalf the individual acted.  Written policies and procedures that are adhered to and regularly enforced can help protect a company from these expensive violations. 

If you would like more information on the recordkeeping and internal controls provisions of the Foreign Corrupt Practices Act, please feel free to contact me at recoley@kaufcan.com. 
–R. Ellen Coley

The Foreign Corrupt Practices Act (“FCPA”) includes two primary components: (1) the anti-bribery provisions, and (2) the recordkeeping and internal controls provisions.  This post will discuss the primary exception and affirmative defenses to the FCPA. 

The primary exception to the FCPA is called the “facilitating payment exception.”  The anti-bribery provisions do not apply to “any facilitating payment or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action.”  This exception is extremely limited and there is little guidance available in applying it to specific transactions.  Nevertheless, it is important to note that if the payment does not qualify as a “facilitating payment,” recording the payment as such is a separate record keeping violation.

When dealing with a FCPA violation, you should consider whether certain affirmative defenses are applicable.  First of all, payments/gifts are permitted if they are lawful under the written laws and regulations of the foreign official’s country.  This defense only applies to laws that render the bribe itself legal (not simply legal amnesty to a defendant).  Also, there is an affirmative defense for reasonable and bona fide expenditures incurred by or on behalf of a foreign official directly related to the promotion, demonstration, or explanation of products or services or to the execution or performance of a contract with a foreign government or agency.  Once you and your attorney have determined that a certain expense qualifies as a reasonable and bona fide expenditure, the following are recommended best practices: 

• Only pay for the expenditures of the government official (not family members)
• Do not request a specific visiting government official
• Pay costs directly to service providers
• Do not provide officials with cash or spending money
• Souvenirs should have nominal value
• Do not fund non-business related activities

If you would like more information on the Foreign Corrupt Practices Act, please feel free to contact me at recoley@kaufcan.com.  -R. Ellen Coley

The Foreign Corrupt Practices Act (“FCPA”) includes two primary components: (1) the anti-bribery provisions, and (2) the recordkeeping and internal controls provisions.  This post will discuss the anti-bribery component, which prohibits the offer or payment of money or anything of value to a foreign official to obtain or retain business.  It is important for companies to realize that the phrase “anything of value” is construed broadly and is not limited to money.  In addition, there is no minimum value that would exempt a payment or gift from the anti-bribery provisions of the FCPA. 

Although the anti-bribery provisions only prohibit bribes to a “foreign government official,” this term is also construed broadly and includes the officials or employees of a foreign government, including its departments, agencies and instrumentalities, public international organizations, and persons acting in an official capacity for or on behalf of such entities.  Furthermore, a foreign government official also includes low level employees of state-owned entities.  You should consider the following when determining whether an entity will be interpreted as a “state-owned” entity:

   -  The foreign state’s characterization of the entity/employees

   -  The foreign state’s degree of control over the entity

   -  The entity’s purpose

   -  The entity’s obligations and privileges under the laws of the foreign state

   -  The creation of the entity

   -  The ownership of the entity (financial support) 

If you would like more information on the anti-bribery provisions of the Foreign Corrupt Practices Act, please feel free to contact me at recoley@kaufcan.com. 
-R. Ellen Coley

A broker is defined under the International Traffic in Arms Regulations (“ITAR”) as “any person who acts as an agent for others in negotiating or arranging contracts, purchases, sales, or transfers of defense articles or defense services in return for a fee, commission, or other consideration.”  22 CFR § 129.2(a)  Brokering activities include acting as a broker, as previously defined, and “includes the financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import of a defense article or defense service, irrespective of its origin.”  22 CFR § 129.2(b).  If your company performs these activities, then ITAR applies and it must comply with the ITAR obligations for brokers.

If your company acts as an agent for others in negotiating or arranging contracts, purchases, sales, or transfers of products, then the first step is to determine whether the products in which your company deals are defense articles.  To do this, you must review the United States Munitions List (“USML”), which is located at 22 CFR § 121.1.  If the product is located on the USML, then the product is considered a defense article.  Assuming your company acts as a broker in exchange for a fee, commission, or other consideration, it must register with the Directorate of Defense Trade Controls (“DDTC”) pursuant to ITAR.  Exemptions from registration are narrow and include only the following persons:

1. Employees of the United States Government acting in official capacity,
2. Employees of foreign governments or international organizations acting in official capacity, and
3. Persons exclusively in the business of financing, transporting, or freight forwarding, whose business activities do not also include brokering defense articles or defense services.  (For example, air carriers and freight forwarders who merely transport or arrange transportation for licensed USML items).

 22 CFR § 129.3   

To register as a broker, your company must submit (1) a statement of registration, (2) a transmittal letter, (3) documentation that demonstrates it is incorporated or otherwise authorized to do business in the Unites States, and (4) a registration fee of $2,250.00.  22 CFR § 129.4.  In addition to registration with the DDTC, a broker may be required to obtain a license before engaging in certain enumerated brokering activities, depending on the particular product and country involved in the transaction.  See 22 CFR § 129.6-.7.  Even if a license is not required, the registered broker must provide an annual report to DDTC specifying its brokering activities by quantity, type, U.S. dollar value, and purchasers’ and recipients’ license numbers, as well as any applicable ITAR exemptions.  If you would like more information on the obligations of brokers pursuant to ITAR, please feel free to contact me at recoley@kaufcan.com. –R. Ellen Coley

Shipments of defense articles by and to United States government facilities or personnel in foreign countries are generally not exempt from adhering to the International Traffic in Arms Regulations (“ITAR”) because such shipments constitute “exports,” for ITAR purposes.  However, ITAR provides some exemptions for shipments involving the Government.  22 CFR § 126.4 states that “[a] license is not required for the temporary import, or temporary export, of any defense article, including technical data or the performance of a defense service, by or for any agency of the U.S. Government (1) for official use by such an agency, or (2) for carrying out any foreign assistance, cooperative project or sales program authorized by law and subject to control by the President by other means.”

This exemption applies only when all aspects of the export transaction are affected by a United States Government agency or when the export is covered by a United States Government Bill of Lading.  This exemption, however, does not apply when a United States Government agency acts as a transmittal agent on behalf of a private individual or firm, either as a convenience or in satisfaction of security requirements.  Furthermore, in the majority of cases, the Office of Defense Trade Controls must issue approval before defense articles previously exported pursuant to this exemption are permanently transferred.

Another ITAR exemption provides that “[a] license is not required for the temporary import, or temporary or permanent export, of any classified or unclassified defense articles, including technical data or the performance of a defense service, for end-use by a U.S. Government Agency in a foreign country under the following circumstances:

1. The export or temporary import is pursuant to a contract with, or written direction by, an agency of the U.S. Government; and
2. The end-user in the foreign country is a U.S. Government agency or facility, and the defense articles or technical data will not be transferred to any foreign person; and’
3. The urgency of the U.S. Government requirement is such that the appropriate export license or U.S. Government Bill of Lading could not have been obtained in a timely manner.

It is important to note that if you export pursuant to one of the above exemptions, you must present a Shipper’s Export Declaration (SED) and a written statement certifying that these requirements have been met at the time of export to the appropriate District Director of Customs or Department of Defense transmittal authority.  In addition, you must provide a copy of the SED and the written certification statement to the Directorate of Defense Trade Controls (“DDTC”) immediately following the export. 

The DDTC tends to narrowly construe these exemptions, so your company should conduct a thorough analysis to ensure the applicability of a particular exemption.  If you would like more information on these ITAR exemptions, please feel free to contact me at recoley@kaufcan.com.
–R. Ellen Coley

Many companies mistakenly assume their products are not subject to the International Traffic in Arms Regulations (“ITAR”).  At first glance, the phase “defense-related products” can be deceiving.  The reality is that items subject to ITAR may be difficult to identify.  Despite this fact, a violation of ITAR can be an extremely costly mistake.  Penalties for violations of the ITAR can reach into millions of dollars and can even include prison time. Therefore, ITAR compliance is becoming increasingly important to companies that manufacture, export, or broker in defense articles. 

The place to start is the United States Munitions List (“USML”), which includes all products that are subject to ITAR and is broken down into the following categories: 

• Category I-Firearms
• Category II-Artillery Projectors
• Category III-Ammunition
• Category IV-Launch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs and Mines
• Category V-Explosives, Propellants, Incendiary Agents, and Their Constituents
• Category VI-Vessels of War and Special Naval Equipment
• Category VII-Tanks and Military Vehicles
• Category VIII-Aircraft, [Spacecraft] and Associated Equipment
• Category IX-Military Training Equipment
• Category X-Protective Personnel Equipment
• Category XI-Military [and Space] Electronics
• Category XII-Fire Control, Range Finder, Optical and Guidance and Control Equipment
• Category XIII-Auxiliary Military Equipment
• Category XIV-Toxicological Agents and Equipment and Radiological Equipment
• Category XV-Spacecraft Systems and Associated Equipment
• Category XVI-Nuclear Weapons Design and Test Equipment
• Category XVII-Classified Articles, Technical Data and Defense Services Not Otherwise Enumerated
• Category XVIII-[Reserved]
• Category XIX-[Reserved]
• Category XX-Submersible Vessels, Oceanographic and Associated Equipment
• Category XXI-Miscellaneous Articles

It is your responsibility to confirm that the product your company manufactures, exports, or brokers is not included in any of the above categories.  The USML has further details regarding specific products listed under each category.  After a careful review of the USML, if your company is still unsure about whether a particular product is included in the USML, then you may want to consider submitting a commodity jurisdiction (CJ) determination to the Office of Defense Trade Controls.  CJ determinations can take 4 to 6 months to process; however, once the determination is made, your company will have a written confirmation as to whether or not the product is subject to ITAR. 

If your product is subject to ITAR, then you must submit a registration package to the Directorate of Defense Trade Controls (“DDTC”). This package includes a transmittal letter, a statement of registration, supporting documentation, and a $2,250.00 fee for first time registrants.  It is extremely important that companies realize that this registration does NOT confer any exporting privileges.  In order to export the ITAR controlled product, you must request and receive an export license subsequent to submitting the registration package.  If you would like more information on how to registar with DDTC or apply for an export license, please feel free to contact me at recoley@kaufcan.com.  -R. Ellen Coley

On August 18, 2011, President Obama signed an executive order imposing additional sanctions on Syria.  These sanctions block all assets of the Syrian Government subject to the jurisdiction of the U.S.  In addition, all U.S. persons are prohibited from exporting or reexporting services to Syria and operating or investing in Syria.  All imports of Syrian-origin petroleum or petroleum products are banned, and U.S. persons are prohibited from having any dealings in or related to Syrian-origin petroleum or petroleum products.  These sanctions will immediately supplement the strict sanctions already imposed on Syrian exports/imports.  Along with these additional sanctions, the Treasury Department’s Office of Foreign Assets Control (OFAC) also added several Syrian energy companies to the List of Specially Designated Nationals.  U.S. persons must refrain from engaging in any transactions with such parties or risk the imposition of a hefty penalty.

Companies are still welcome to apply for a license if they wish to engage in a prohibited transaction.  In fact, OFAC has just promulgated a series of general licenses to authorize certain transactions with Syria that are now otherwise prohibited due to the new sanctions.  These general licenses are for diplomatic services, legal services, bank service charges, services incidental to authorized exportation, internet based services, and personal remittances.  If you would like more information on how to apply for one of these licenses, please feel free to contact me at recoley@kaufcan.com. –R. Ellen Coley

This post is the third iteration in a series regarding the Antiboycott Provisions of the Export Administration Regulations (EAR).  An overview of the prohibitions included within the antiboycott provisions can be found here, and a detailed discussion of the reporting requirements of the antiboycott provisions can be found here.  This post addresses the specific exceptions to the antiboycott provisions of the EAR.  Once you have determined that the antiboycott provisions of the EAR apply to your company, then you should become familiar with the exceptions listed in 15 C.F.R. § 760.3 of the EAR, which can be found here.

One exception provides that U.S. persons may comply with certain shipping requirements of the boycotting country.  Pursuant to this exception, when shipping goods to a boycotting country, a U.S. person may comply with the requirements of the boycotting country regarding the specific route of the shipment or the specific carrier.  The agreement may be stated in positive or negative terms.  However, this exception does not permit an agreement to ship the goods only on vessels eligible to enter Arab waters or to refrain from using blacklisted vessels. 

In addition, U.S. persons may comply with certain shipping document requirements.  This exception allows a U.S. person to furnish the following information on shipping documents: a positive certificate stating the origin of the goods, a positive statement of the name of the supplier of the goods or the provider of the services, and a positive statement as to the route of the shipment or the name of the carrier of the goods. 

Another exception permits a U.S. person to furnish positive certificates of origin of goods and certification regarding his/her own blacklist status.  For example, you may state that you or your company is not on the “blacklist”.  You may also certify that the goods are of a particular country’s origin.  If you would like more information on the Antiboycott Provisions of the EAR, please feel free to contact me.  –R. Ellen Coley

This post is a follow up to my last post regarding the Antiboycott Provisions of the Export Administration Regulations (EAR).  Pursuant to the antiboycott provisions of the EAR, companies are required to report certain conduct to the U.S. government.  For instance, if your company receives a request to take an action that has the effect of furthering or supporting a boycott, then such a request must be reported, regardless of whether your company intends to comply with this request.  However, 15 C.F.R. § 760.5, which can be found here,  includes a list of requests that are “not reportable.”

The report should be submitted using the single transaction report form, BIS 621-P, which can be found here, and it must be postmarked by the end of the month following the calendar quarter in which the company received the boycott request.  However, if the request was received outside of the U.S., then it must be postmarked by the end of the second month following the calendar quarter in which the company received the boycott request.  The submitted report will be made publicly available unless the company specifically requests the report to remain confidential and follows the instructions to request nondisclosure that are provided on form BIS 621-P.  All company records pertaining to the boycott request and the submitted report must be maintained for at least a five year period.  If you would like more information on the Antiboycott Provisions of the EAR, please feel free to contact me.
–R. Ellen Coley