Export controls – federal requirements that certain exports, disclosures of technology, and cross-border transactions be licensed by the United States government – are often problematic for corporate attorneys who represent clients in international transactions and litigators who defend clients against allegations of export law violations. Although export controls are relevant to a wide range of foreign and domestic business activities, the regulations enforced by, among others, the Commerce, Treasury and State Departments are complex, and the learning curve is steep.
ECNE draws on Vince Canzoneri’s 15 years of export control practice at Foley Hoag LLP to assist attorneys in meeting their clients’ needs with respect to, among other things:
- avoiding and mitigating penalties for client violations of export control laws;
- compliance programs individually tailored to clients’ needs;
- Sarbanes-Oxley compliance with respect to export controls;
- due diligence in merger, acquisition, investment and stock offering transactions to identify a target company’s or issuer’s compliance exposure;
- technology licensing transactions that involve disclosures of US-origin technologies to foreign nationals ;
- strategies for international operations that minimize export control restrictions; and
- disclosures of controlled technologies to foreign nationals working in the US pursuant to visas such as H-1B and L-1.
To assist your clients in identifying or rectifying compliance problems, ECNE offers free initial assessments of clients’ compliance needs. Learn more by contacting vince@canzonerilegal.com.
Avoiding & Mitigating Penalties
Exporters have paid as much as $20 million to settle charges levied by the State Department, and the Administration is asking Congress to raise the maximum penalty chargeable by the Commerce Department to the greater of $5 million or 10 times the value of the exports involved – per violation. Criminal convictions carry prison terms of up to five years. The government can also suspend a company’s right to export merely upon suspicion of a violation.
When violations are suspected or alleged, the first task is an internal investigation to determine the nature and scope of the problem. To protect the attorney-client and work-product privileges, it is essential that such investigations be conducted by, or at the direction of, a knowledgeable attorney.
If the government has yet to discover any violations, the next question is whether to make a voluntary disclosure under the relevant agency’s regulations. In all cases, avoidance of a criminal referral is the first goal and negotiation of a consent decree is the usual course.
Where settlement is not reached, administrative and criminal charges are tried before administrative law judges or in the United States District Courts.
ECNE is experienced in all of these arenas.
Compliance Programs – Who Needs Them? What Are They?
To paraphrase a celebrated “redneck” comedian, you know you need an internal program for compliance with United States export control laws if, among other things, your company or research institution:
- exports tangible items from the United States;
- re-exports US-origin products – or exports foreign-produced products of US-origin technology – from abroad;
- engages in “deemed exports” anywhere in the world (by disclosing proprietary US-origin technology to non-US persons, including persons lawfully employed in the United States pursuant to a work visa, such as H-1B or L-1);
- sells product to domestic US companies with knowledge that the domestic purchaser intends
- to export the items purchased; or
- to incorporate those items in products that are specifically designed for military use, whether or not the purchaser intends to export those products; or
- develops or manufactures items that are specifically designed for military use, or provides services to other domestic entities that do, whether or not those items ever leave the country.
Such entities have affirmative duties of due diligence under the export control laws – including but not limited to (i) properly classifying their products and technologies under government regulations, and (ii) keeping records of all export transactions – even if their products and technology do not require licenses for most destinations, and in some circumstances even if they do not export anything themselves.
The Federal Organizational Sentencing Guidelines provide that corporations maintaining reasonable regulatory compliance programs are entitled to mitigation of sentences. Accordingly, the duty of care of such companies’ directors and officers virtually mandates that they maintain export control compliance programs. Since criminal convictions can also result in debarment from doing business with the US government, the duty of care is heightened to the extent that a company depends on government business.
Export control compliance programs come in all shapes and sizes. If a classification-analysis of the nature of a company’s products and technology determines that licenses are required only for export to (or disclosure to nationals of) the so-called “embargoed countries, compliance is largely a matter of keeping required records, documenting the company’s performance of certain due diligence obligations, and training employees to perform those duties. If licenses are required, of course, or if the company operates through affiliates abroad, more elaborate programs – including license applications and internal limitations on access to controlled technologies –may be required.
ECNE tailors export control compliance programs to the needs and practices of each individual company, assists companies in implementing appropriate programs, and audits existing programs to determine their effectiveness, all at hourly rates substantially lower than those ordinarily charged by large law firms.
For a free risk-analysis of your clients’ compliance obligations, contact vince@canzonerilegal.com.
Sarbanes-Oxley Compliance
For more than seventy years, public companies that generate substantial revenues from exports and cross-border activities have been obliged to disclose material export-control problems – such as, for example, threatened denials of their rights to export, exposures to multimillion dollar fines, or the possibility that key employees may be sent to prison. Sarbanes-Oxley Section 302 has upped the ante by requiring officers to affirm, not only that they have reviewed and approved the adequacy of their financial controls, but also that they have designed and maintained controls to ensure that material information is brought to their attention in time to make accurate disclosures for each reporting period.
Depending on the scope of a public company’s reliance on exporting, any threat to the company’s right to export, even for a short time, may well be material enough to require disclosure. Accordingly, many companies have taken the opportunity presented by their re-tooling for compliance with Sarbanes-Oxley to implement or re-evaluate export control compliance programs.
ECNE offers informal analyses of companies’ export-control compliance obligations free of charge, as well as cost-effective advice on structuring and implementing compliance programs that comport with Sarbanes-Oxley.
Strategies For International Operations
Corporate Structuring: Tax considerations often drive the structuring of cross-border affiliations; but such affiliations can also be structured to reduce the burdens of export control compliance and even to avoid certain prohibitions on trade.
For example, an Italian branch office of a US corporation is subject to US export controls as though it were located in Dubuque. But a foreign-incorporated subsidiary of a US corporation is subject primarily to the US “re-export” controls to which all other foreign entities are subject. Such a subsidiary can even do business with Iran and Cuba, so long as no “US person” – including the US parent, itself – is involved in any way.
Outsourcing: The advantages your clients hope to gain by moving operations overseas can be limited – and the process itself may be forbidden – by export control laws. Manufacturing in other countries, for example, usually involves disclosures of US-origin technologies to non-US persons; so clients need to consider whether export licenses may required to do so lawfully, the costs (in time and money) of obtaining such licenses, and the possibility that licenses may not be granted.
Moreover, if a foreign affiliate (including a foreign subsidiary) is itself involved in the exporting from abroad of US-origin products or technology, or of the “foreign-produced direct product of US-origin technology,” it too may have to obtain licenses to “re-export” its products to certain destinations or disclose its technologies to nationals thereof.
Distribution Chains: Export controls can affect many facets of even the simplest distribution arrangements – from dealings with brokers and freight-forwarders to agreements with foreign and domestic distributors and VARs, to issuers of letters of credit.
The time to consider such issues is, of course, before they become problems. ECNE provides risk analysis and advice on the full range of export control issues affecting your clients’ strategic planning for international expansion.
Due Diligence In Mergers, Acquisitions, Investments & Stock Offerings
Acquirers of exporting entities are liable for the export control violations of entities they acquire, even if the acquisition is structured as a purchase of assets. (Half of the 20 million dollar fine alluded to above was paid by the corporation that acquired the assets of the company that violated US export control laws.)
There are lots of other reasons, however, for putting a thorough investigation of the impact of export controls on your clients’ due diligence checklists. For example:
- an issuer representing that it is in regulatory compliance can violate Rule 10b-5 if its non-compliance with the export control laws carries a material risk of sanctions, such as loss of the issuer’s right to export;
- venture capital that’s committed without knowledge of rules that may limit what a company can do in the international arena is subject to unknown risks; and
- foreigners seeking to acquire high-tech US operations need to know to what extent they, as non-US persons, will have unfettered access to, and use of, the US-origin technology in which they are investing.
ECNE provides due diligence on export controls for all manner of cross-border transactions.
Technology Licensing
Non-disclosure agreements are no substitute for an export license if a license is required for disclosure of technology to a foreign licensee (or, for that matter, to the non-US person employees of a domestic licensee). Nor, in many circumstances, is it sufficient to contractually obligate a licensee to observe applicable US law, for a licensor violates US law if it discloses controlled technology with reason to know that an export control violation by its licensee will result.
ECNE assists technology licensors with determinations of which US agency has jurisdiction; classification of technologies to be licensed; and applications for licenses where required.
Domestic Employment Of Skilled Foreign Nationals On Work Visas
It is a violation of the export control laws for any US person to make unlicensed disclosures of “controlled” US-origin technologies to nationals of certain countries who do not hold green cards, even if disclosure is made within the United States to a foreign national who is lawfully employed here under a work visa, such as H-1B or L-1. Accordingly, companies and institutions that share their technology with such foreigners (including foreigners employed by independent contractors pursuant to confidentiality agreements) are obligated by law:
- to determine whether disclosures they wish to make to such persons require export licenses; and
- if licenses are required, either
- to obtain such licenses prior to disclosure, or
- to ensure that such foreigners do not have access to the controlled technology.
ECNE offers free initial needs analyses to persons and entities that share their technologies with such persons. As always, the time to conduct such an analysis is before possibly-controlled technologies are disclosed to such foreigners. For more information, contact vince@canzonerilegal.com.