Colin May, M.S., CFE, 3CE, INCI
In compliance and risk management, sometimes an area that is overlooked is the issue of export and international trade compliance. Export controls and international trade are a niche, but critical portion of compliance that affects many types of business, organizations, and even academic institutions. For this article, we will focus on the Export Administration Regulations (EAR), which cover a sprawling range of goods and services, including sensitive research information.
The Trade Compliance Landscape
In the United States, trade regulatory compliance is made of up several agencies, include Customs and Border Protection (CBP) at the Department of Homeland Security, the Treasury Department’s Office of Foreign Assets Control (OFAC), the Commerce Department’s Bureau of Industry and Security (BIS), the State Department’s Directorate of Defense Trade Controls (DDTC). There are also smaller agencies that oversee specific aspects or commodities, such as the Department of Energy and Nuclear Regulatory Commission.
Interestingly, the U.S. Census Bureau, also part of the Department of Commerce, is a major player, but often behind-the-scenes, since it is the Census Bureau that controls the information and data collection system and the Foreign Trade Regulations (FTR) that enable the tracking of cargo and assessment of tariffs and customs duties by CBP, as well as support the enforcement and compliance efforts of CBP, Homeland Security Investigations, the Defense Criminal Investigative Service, and the BIS Office of Export Enforcement (OEE).
The Export Administration Regulations
In 2018, the Export Control Reform Act of 2018 replaced the decades old Export Administration Act as the authority for U.S. export control regulations. The EAR also is supported by the International Emergency Economic Powers Act (IEEPA) and several Executive Orders. BIS oversees the EAR, which controls exports, reexports, transshipments and other activities, such as the antiboycott law.
“Dual-use” items, defined as a commodity or item that “has civil applications as well as terrorism and military or weapons of mass destruction (WMD)-related applications,” are the primary focus of the EAR and are enumerated on the “Commerce Control List” (CCL), which consist of ten broad categories. The EAR also imposes other restrictions, such as by country, by end-user, or by use.
CCL items include chemical compounds such as “3-Nitraza-1,5 pentane diisocyanate,” a binding agent used in military-grade applications, or polygraph machines. Items as unique as the Yellow Fever virus, acoustic seabed survey equipment, and centrifugal multiplane balancing machines for flexible rotors, and encryption software are all subject to the EAR.
Export Compliance Program Guidance
In 2017, BIS published a comprehensive guide to establishing and maintaining an export compliance program. Many of its elements will be familiar to seasoned compliance professionals, since they are closely aligned with other governmental guidance, such as from the Department of Justice.
BIS takes an eight step approach to creating and implementing an ECP:
- Management Commitment
- Risk Assessment
- Export Authorization
- Recordkeeping
- Training
- Audits
- Reporting Export violations
- Build and maintain your ECP.
The elements relating to leadership buy-in, risk assessment, training, audits, and resourcing are certainly important for all compliance programs, but because of the unique nature, and changing landscape of international trade, special attention needs to be paid to the export licensing, recordkeeping, and handling of export violations.
Distinctive Elements Deserve Special Attention
Export licensing is a specialized skill set that requires a deep understanding of the nature of the product, the end-user, and the potential misuses of the product, and the overall export requirements levied by the EAR. The U.S. company needs to be diligent about understanding who is using the product and where it may go, and put in mechanisms to ensure that the product is not misused or diverted.
Documentation is another key element of the ECP. In Section 762.6 of the EAR, parties are required to keep export records for five years from the latest date of export or reexport from the U.S. In addition, the EAR broadly requires multiple entities to be subject to the recordkeeping requirement, including those outside of the U.S. Information must be produced upon request by government agencies. Although BIS has administrative subpoena authority, no subpoena is needed for documents listed in the EAR.
Finally, violations are taken seriously and investigated fully for both criminal exposure and civil liability, as well as potential administrative sanctions. The Office of Export Enforcement is a small but powerful group of seasoned investigators who understand the issues of trade and criminal law. OEE encourages voluntary self-disclosure submissions and also have issued joint guidance with the Departments of Justice and the Treasury on disclosures that cover multiple areas, such as OFAC sanctions violations.
Fighting Export Crimes, Protecting National and Economic Security
BIS and OEE have a strong track record of targeting violators who are circumventing export controls and diverting sensitive U.S.-origin goods to people, places, and entities that wish to do the U.S. and its allies harm. Some recent headlines are evidence of the types of cases that OEE and its law enforcement partners pursue:
- Alabama Man Sentenced to Five Years in Prison for Violating U.S. Sanctions on Iran
- Ohio-Based Supplier of Aircraft Parts and Three Employees Charged for Illicit Export Scheme Involving Russia
- United States Seizes Venezuelan Aircraft Involved in Violations of U.S. Export Control and Sanctions Laws
As compliance professionals, it is essential to understand the scope of trade regulations and the export control process and incorporate those parts into your organization’s broader risk management and compliance plan implementation.
Colin May, CFE, is Professor of Forensic Studies and Criminal Justice at Stevenson University in Owings Mills, Md. He has spent the past 20 years in oversight, investigations, and compliance, including as a Special Agent with the Bureau of Industry and Security. He can be reached at cmay3231@stevenson.edu. The views expressed in this article are the author’s own, do not necessarily represent those of the government, and are not intended for legal or accounting advice.