Hard Times Require Tough Export Compliance

Corporate & Finance Alert
(Robert F. Coyne)
July 7, 2009

Distressed economic times can lead to increased export control violations. There are a variety of factors which may contribute to such increased violations. First, employees are under increased and intense pressure to make sales. Employees may be more willing to take risks or cut corners in order to achieve a sale. During good times, export violations tend to arise from ignorance as the company jumps into new markets; but during bad times, export violations may be intentional and may increase towards the end of the year due to the pressure to fulfill annual sales quotas.

At the same time as the recession is creating more risky behavior, a company may have less budgetary resources to devote to compliance and oversight. A company’s internal compliance team may be given less staff and less tools with which to monitor the company’s exports. If the compliance department experiences lay-offs or down-sizing, then the department will not only have less eyes watching for trouble, but will lose institutional knowledge of the classifications and controls applicable to its products and customers. Compliance programs in troubled companies may reduce audits, keep less records, screen fewer customers and spend less resources on educating the company’s employees.

Thus, companies face a very dangerous environment which combines increased non-compliant or risky behavior without the resources to monitor and control such behavior.

Potential Penalties

Penalties for export violations can be severe, and can include jail time and significant fines. Although U.S. export controls are administered by a number of U.S. governmental agencies, the Bureau of Industry and Security (“BIS”) in the U.S. Department of Commerce controls the most goods and services and has been charged with the administration of the Export Administration Regulations (“EAR”). The BIS’s Office of Export Enforcement (“OEE”) carries out enforcement of the EAR and the application of penalties.

The Export Administration Act (“EAA”) previously provided the statutory authority for the EAR, including the basis for any criminal or administrative penalties. In August 2001, however, the EAA was allowed to lapse. The International Economic Emergency Powers Act (“IEEPA”) grants the President emergency power to respond to a threat to the U.S. national security, foreign policy, or the economy from abroad. Through Executive Order, Presidents have used IEEPA to continue the EAR in force during the lapse of the EAA. In October of 2007, the International Economic Emergency Powers Enhancement Act (“IEEPEA”) was passed which amended the IEEPA and increased potential penalties for export violations. Part 764 of the EAR provides that to the extent any provision of the EAR is continued by the IEEPA, then the penalty for a violation of such provision shall be as set forth in the IEEPA. Thus, there are certain penalties when the EAA is in effect, and certain other penalties when the EAA has lapsed and the IEEPA is continuing the EAR.

1. Penalties Under the IEEPA
   Under the IEEPA, criminal penalties can reach $1,000,000 and 20 years imprisonment per violation and the administrative penalties can reach the greater of $250,000 per violation or twice the amount of the transaction that is the basis of the violation.
2. Penalties Under the EAR
   When the EAA is in effect, criminal penalties for “knowing” violations can result in fines of up to $50,000 or five times the value of the export, whichever is greater, and imprisonment for up to five years. “Willful” criminal failure to comply with these trade controls could result in fines of up to $250,000 and up to ten years imprisonment for individuals, and organizational fines equal to the greater of five times the value of the exports or $1 million. When the EAA is in effect, administrative monetary penalties can reach $11,000 per violation, and $120,000 per violation in cases involving items controlled for national security reasons.
   
   Violators may also be subject to denial of their export privileges which would prohibit a person from participating in any transaction subject to the EAR. The EAR further provides a special sanction for attorneys, accountants, consultants, freight forwarders, and others acting in any representative capacity for an exporter. Such individuals can be “excluded by order” from participating in any license application or other activity before the BIS.

Maintaining a Successful Compliance Program

Faced with a potential increase in violations and harsh penalties, all exporters should insure that their compliance programs are up to the challenge. Companies that regularly ship or transmit items to foreign countries should establish and maintain export licensing departments and comprehensive Internal Control Programs (“ICP”) staffed by skilled personnel who are familiar with mapping their way through the export control maze to get products to their foreign destinations. In some cases, the BIS requires proof of a well-regulated ICP in order to grant particular export privileges.

In essence, establishing and maintaining an ICP is a form of insurance. Depending on the level of business activity, an exporter should be able to determine the scope of the program or necessary “insurance.” Should a violation occur, an ICP could be used to isolate an individual or department rather than subject the entire company to an administrative proceeding. Moreover, Federal Corporate Sentencing Guidelines consider formal internal procedures (like implementing an ICP) to be a mitigating factor in the sentencing process.

A company should take the following actions in creating or refreshing its compliance program.

1. Issue a Corporate Policy Statement containing a brief overview of the compliance policy and identifying the in-house persons responsible for carrying out the export control responsibilities, and the punitive procedures associated with a violation of the regulations of the ICP.
2. Identify duties of the parties responsible for export control compliance such as the following: maintaining and updating the ICP, issuing corporate policy statements, preparing and filing the export documentation, and training in-house personnel.
3. Create a final compilation of all classified items to facilitate the classification of new products or re-classifying when the regulations change.
4. Provide a description and definition of each of the export control lists, such as the Denied Persons List, and specify how the lists should be obtained, disseminated, and updated. Identify procedures for handling transactions when a party is on a restricted list.
5. Address regulations specific to trade with certain countries, encompassing the countries to which the U.S. imposes trade embargoes through any of the various regulating agencies and for each of the various reasons for control: e.g., restricted countries pursuant to International Traffic in Arms Regulations (ITAR), and countries of concern under the Enhanced Proliferation Control Initiative Provisions.
6. Review and highlight each of the license exceptions contained in the relevant export regulations and specify the process for preparing, submitting and obtaining individual validated export licenses; monitoring shipments made against validated licenses or license exceptions to ensure that items are exported in conformance with the authorization.
7. Develop a program for staying abreast of changing regulations and train staff accordingly. Company auditing should include a system of review to ensure that policies are adhered to and to outline procedures for correcting deficiencies that are discovered.
8. Create and maintain order processing, recordkeeping and reporting procedures.

Further help in creating or refreshing a compliance program can be obtained from a variety of resources. The U.S. Department of Commerce publishes Export Management System guidelines. The Office of Defense Trade Controls recommends ten (10) critical items that should be included in any company’s export procedure manual. In addition, there are companies that assist exporters with managing export transactions and controls, e.g., JPMorgan and DHL, to name just a few.

Conclusion

Now more than ever, there is pressure on companies to increase sales and to reduce expenses. Companies are being tempted to sell to new and unfamiliar buyers without devoting resources to first investigate whether an export license is required or whether their buyer is a denied party. Moreover, compliance departments may be facing lay-offs which reduce the department’s ability to catch problems. The penalties, however, for a violation of U.S. export control laws can hurt a company much more than lost sales or increased compliance costs. Penalties have increased several times over in just the past few years. Fines of up to $250,000 per shipment can reach damaging levels very quickly. Perhaps worse, companies can be denied export privileges altogether, thus crippling their sales. Therefore, it is critical for companies to review and reinvigorate their compliance programs. Companies need to make the extra effort to review their product lines and applicable export controls, to review their intended destinations and license requirements, and to maintain a strong training program.

Should you have any questions regarding your own situation, please contact Robert F. Coyne of our Corporate Department.