An Export Compliance Program: Key To Best Practices

Monday, October 4, 2010 - 01:00

Editor: Please tell us about your most recent position as an attorney with the Office of Chief Counsel for Import Administration of the U.S. Department of Commerce.

Savage: While in that office, my focus was on trade policy issues, specifically unfair trade remedy cases that U.S. manufacturers could bring against products imported into the United States that were causing economic injury, i.e., antidumping and countervailing duty cases. After I came to King & Spalding the nature of my practice has shifted to export controls and economic sanctions, primarily because we were finding it to be an area that the U.S. government was focusing on and one in which companies needed expert assistance.

Editor: I understand that both the State and Commerce Departments have oversight of U.S. exports. How does one distinguish the types of exports each has governance over? Describe ITAR and EAR.

Savage: This is actually an area that confounds many companies because sometimes it is difficult to determine which set of regulations apply. The Commerce Department's Bureau of Industry and Security (BIS) regulates dual-use products under the Export Administration Regulations (EAR), which are products that are designed for both military and commercial applications. The State Department's Directorate of Defense Trade Controls (DDTC) regulates items under the International Traffic in Arms Regulations (ITAR), which are those specifically designed, developed, or modified for military applications, such as military aircraft, and are called defense articles. The ITAR also controls defense services which include the provision of technical data related to defense articles to non-U.S. persons or the provision of training or assistance to foreign militaries. While the distinction between these regulations seems straightforward, in practice it is more difficult. For example, in a case where a company begins designing a navigation system for a military aircraft but determines that there is a robust market for it for commercial aircraft and begins selling in the commercial market, it sometimes is difficult to determine whether it is a dual-use item subject to the EAR or a defense article subject to the ITAR, without getting an official ruling - called a commodity jurisdiction determination - from the State Department.

Editor: Do each of these agencies also have jurisdiction over non-U.S exports as well?

Savage: Yes, they do. In certain instances, the agencies regulate the activities of U.S. persons or companies, even if they are engaging in activities outside the United States. They also regulate the export and reexport of items that are subject to U.S. jurisdiction, either because the item is of U.S. origin, has more than a certain percentage of controlled U.S. content, or is a non-U.S. item manufactured from U.S. technology or software. If you have a product that is subject to U.S. jurisdiction, the reexport of that product from one country outside the U.S. to another will be subject to U.S. regulations, for instance, when a French company moves the product from France to China.

Editor: How does the program of U.S. economic sanctions administered by BIS (Bureau of Industry and Security) overlap with that of OFAC (Office of Foreign Assets Control)?

Savage: As a broad generalization, OFAC often is responsible for administering the restrictions on financial transactions, travel, services, and certain types of exports, while BIS regulates the export or reexport of dual-use items subject to the EAR. More specifically, however, companies should keep in mind that the economic sanctions in place for each country or entity are specific to that country or entity, e.g., there is a separate sanctions program for Iran and a separate sanctions program for Sudan. The underlying legal basis for these sanctions could be one or several different statutes, and under the statutes, each agency may have responsibility for certain aspects of the sanctions program. This means it is important for persons dealing with activities involving the targets of sanctions to consult the regulations of both agencies. For instance, the U.S. government will license certain items, such as agricultural and medical products, to Cuba. If a company wants to sell these products to Cuba, it may have to get licenses from both OFAC - to provide marketing services, transfer or receive funds from Cuba, or travel to Cuba to meet or negotiate with parties - as well as an export license from BIS for the actual export of those products to Cuba.

Editor: Is any effort being made to streamline this process by placing authority with one agency?

Savage: President Obama announced earlier this year that the U.S. is going to embark on a series of export control reforms, one of the cornerstones of which would be to have a single licensing agency that makes decisions regarding both dual use and military products. OFAC's administration of economic sanctions, however, will not be part of those reforms. So, unfortunately, companies will still need to deal separately with OFAC and its regulations.

Editor: How does the U.S. determine what products to control for export?

Savage: There are several reasons why the U.S. controls items - for example, national security or non-proliferation reasons - and then there are some unilateral foreign policy reasons why the United States may choose to control certain items. For multilateral policy controls, such as national security and non-proliferation, there are multilateral organizations that meet to coordinate control policies. For instance, there is a group that includes most European countries, Japan, Australia, Canada and others called the Wassenaar Arrangement. Wassenaar members meet to identify items that should be controlled for security reasons and define them in a technical way so that members can coordinate export controls of those items in each of their countries. Once those decisions are made, the U.S. will implement them by, where necessary, amending U.S. regulations to include the agreement of the Wassenaar members.

Editor: Is Wassenaar the only mutual defense group for prohibiting certain exports that the U.S. is a party to?

Savage: There are others, including the Missile Technology Control Regime, which identifies items that may be useful for missile applications, the Australia Group, which deals with biological and chemical components used in biochem weapons, and the Nuclear Suppliers Group, which coordinates controls on items and technology used in nuclear applications. The U.S., however, also unilaterally controls certain product for U.S. policy reasons or antiterrorism reasons.

Editor: How does the U.S. update these controls since the products change?

Savage: One way is through the international groups mentioned previously that typically meet periodically, e.g., Wassenaar holds meetings every year where representatives propose certain changes, usually based on advancements in technology, capabilities of non-Wassenaar countries, or for clarification. The U.S. also will take into account comments from industry working groups and technical advisory committees about changes that might need to be made. Also, the agencies routinely make changes - generally to clarify the controls or provide additional guidance.

Editor: What countries are subject to sanctions today?

Savage: The most comprehensive sanctions that the U.S. currently has in place are against Cuba, Iran and Sudan, which consist of both prohibitions on investment and financial transactions and on the trade in goods and services. There are certain exceptions to those sanctions, but for the most part they are the most restrictive. Then you have other countries that are subject to varying levels of sanctions, such as Syria, a country where the U.S. has a trade embargo that prohibits the export and reexport of items subject to U.S. jurisdiction, but the prohibition on investment and financial transactions are aimed at specific entities only. The OFAC website lists the sanctions programs by country as well as those aimed at certain groups such as terrorists and narcotics traffickers. Also, certain countries, like China, are subject to arms embargoes, which effectively prohibit engaging in activities subject to the ITAR with those countries.

Editor: What about certain individuals or terrorist groups that are also sanctioned?

Savage: The U.S. has implemented comprehensive trade and financial sanctions against those elements in countries. OFAC designates the specific individuals and entities subject to the sanctions by listing them on its Specially Designated Nationals List which is continuously updated on OFAC's website.

Editor: What kinds of penalties, both civil and criminal, can be levied by each agency?

Savage: There are many different underlying statutes that the U.S. uses to implement export controls and economic sanctions, so the actual penalty amounts will vary based on which underlying statutes are violated. One of the main statutes that the U.S. uses in the sanctions context and also to keep the EAR in effect is the International Emergency Economic Powers Act. Under that Act, the maximum penalties for civil violations, which are those committed regardless of intent, are $250,000 per violation or twice the value of the transaction. There are also criminal penalties that can be imposed based on willful behavior of up to $1 million per violation and 20 years in prison.

Editor: Please give some examples of recent cases where both U.S. and foreign companies have received heavy penalties.

Savage: OFAC and federal and state prosecutors have brought several recent cases against non-U.S. banks for transactions they engaged in outside the United States. In press releases, the government has indicated that the non-U.S. banks had been clearing transactions through the U.S. financial system but deleting information about those transactions that would have caused the U.S. bank that was processing them to block the transaction because parties subject to U.S. sanctions were involved. Several very significant cases have been brought by OFAC and prosecutors, which the banks have settled. The most recent case was with Barclays, which paid $298 million to settle both criminal charges and OFAC's administrative charges. Another case last year involved Lloyds Bank, which paid $350 million to settle similar violations. Prior to that, Credit Suisse paid $536 million to settle similar violations.

Editor: And this is because they were dollar-denominated transactions?

Savage: Essentially, yes. U.S. dollar-denominated transactions are ultimately cleared through correspondent banking relationships in the U.S. As a result, U.S. banking services are being provided to the parties in the underlying transactions.

An example of a non-banking case includes one against DHL involving a civil penalty of $9.4 million for violations of the BIS' EAR and of U.S. sanctions administered by OFAC. The penalty was a global settlement with both agencies for exporting goods subject to U.S. jurisdiction to U.S. sanctioned countries and for failing to keep required records. While DHL was moving shipments on behalf of others, the U.S. government found that DHL had independent responsibility to ensure that it was complying with the laws.

Editor: What types of companies are most subject to run afoul of these regulations?

Savage: First and foremost companies that don't have adequate compliance programs. More companies are transacting business outside of the United States. In addition, under the U.S. regulations we previously discussed, the disclosure of technology to non-U.S. nationals is deemed to be an export to those nationals, even if they are currently in the U.S. Given the complexity and reach of the regulations, a company that does not have an effective compliance program bears more risk that it will inadvertently commit violations. Also, companies that do not have compliance programs at the very least may get less mitigation credit from the government when something does go wrong. In some cases, particularly when companies routinely engage in transactions subject to the regulations, the government may find the lack of an effective compliance program to be an aggravating factor when deciding whether to pursue penalties.

Editor: What are some of the key ingredients that should be included in a company compliance program?

Savage: King & Spalding was involved about ten years ago in the Nunn-Wolfowitz task force commissioned by Hughes to make recommendations for best practices for compliance. Those best practices continue to be valid today because they represent basic tenets of corporate governance and compliance. One key principle is commitment by management that is effectively communicated to employees. Another principle is to have adequate resources given the activities of the company. One of the other things that the task force recommended is to have written compliance processes or manuals, and this is particularly important to maintain continuity because in most companies your compliance personnel may turn over. Another key to continuity is also a systematic program of employee training and education for those who first enter the company and periodic refresher training for existing employees. Other ingredients of a good compliance program include an audit process to make sure that your compliance program is functioning as intended and corrective actions are made when needed. The rest of the key practices represent the nuts and bolts of the program, including putting in transaction-screening processes, making sure you have a process to identify when licenses are needed, abiding by the terms of government-issued licenses, identifying when licenses are needed to disclose technology to non-U.S. nationals - e.g., those engaged in R&D for your company, and also record keeping procedures.

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