BIS Update 2011

Well true to this year's BIS Update 2011 namesake - Implementing Export Control Reform - attendees were shown proof of real progress made in reforming America's outdated system of export controls. Quick to dismiss previous year's skeptics, Under Secretary of the Bureau of Industry and Security, Eric L. Hirschhorn, in his opening remarks, commended the agency for its tremendous efforts over the past 16 months and pledged that there is more to come.

Mr. Hirschhorn's remarks echoed the familiar origins of export control reforms (ECR) with the early meetings with President Obama, then National Security Advisor General James Jones, and former Defense Secretary Gates charge for changes to the existing export control system. He also pointed out the obvious flaws in a system that requires the same level of government scrutiny to the export of every nut, bolt and screw for a F-18 fighter aircraft that is applied to the entire aircraft. But this year's remarks had much more to report than just words. Under Secretary Hirschhorn reported on several recent (and well timed) changes and proposed changed to our current system of export control reforms.

The most touted of reforms, echoed by other speakers throughout the day, was last Friday's Notice of Proposed Rule that moves certain items from the U.S. Munitions List (USML) to the Commerce Control List (CCL) and creates the framework to move additional items from Department of State (defense articles) to Department of Commerce (dual-use) jurisdiction. This proposed rule fulfills several objectives of export control reforms. First, to allow our government to focus its efforts on the most critical items to destinations of concern. Secondly, this move would eliminate the Dept. of State registration requirement for many manufacturers as their lower-level components would no longer be subject to their jurisdiction. Additionally, this would eliminate the "see through rule" which makes items manufactured offshore subject to U.S. reexport control if they contain any U.S.-origin ITAR parts or components, regardless of the value or significance of those U.S.-origin items.

Under Secretary Hirschhorn also spoke about the recently implemented license exception, Strategic Trade Authorization (STA), which allows for the license free export of many dual-use commodities to 36 (mostly European) countries and an additional 8 countries for items controlled for NS-only reasons. According to Hirschhorn, the STA exception would have potentially will eliminated 3000 of the 22,000 licenses BIS issued last year. He also stressed that the STA does not "decontrol" these items but will reduce the level of control so as to facilitate trade with U.S. allies. An important aspect of STA is that it will pave the way for future license exceptions for items moving from the USML into the proposed "600" series ECCN classifications.

Mr. Hirschhorn was quick to point out that the U.S. government will continue its comprehensive sanctions against Cuba, Iran, North Korea, Syria, and Northern Sudan. Additionally, there are no plans to alter the U.S. prohibitions on exporting Munitions List items to China or dual-use items for military end use in China.

These key proposed and implemented controls were not the only highlights of Mr. Hirschhorn's speech. He also addressed continuing efforts of the BIS to increase its education and outreach by addressing the DHS Form I-129 export control certification, consolidated end-user screening list, and items to be added to the agency's export compliance tool kit including industry practices. Finally, he addressed the importance of export enforcement activities and the President's executive order to increase coordination among export control enforcement agencies and the expectation for companies to self-police and file voluntary self-disclosures when required.

This year's BIS Update is certainly not short on substantive regulatory changes. As with all things, the devil is in the details and it remains to be seen how the export community will deal with these significant changes now, or soon to be, in play. The breakout sessions that followed brought up a number of very good questions that will need to be addressed in order for these reforms to work in the real world. Stay tuned for future posts on how exporters can put these export control reforms to work at their companies.

A full transcript of Under Secretary Hirschhorn's remarks can be found on the BIS website or at the following link: http://www.bis.doc.gov/news/2011/hirschhorn_update.htm.

Top 5 Mistakes Exporters Make

We all make mistakes, but let's face it, some mistakes are costlier than others. It seems like almost anything you do wrong as an importer or exporter of record can cost you thousands of dollars or land you in jail. This is, in fact, the case because someone in your company is certifying that the information on your documentation is true and correct. Any deviation could be construed as a material misrepresentation of fact. But again, mistakes happen so what are the five big mistakes that an exporter can make?

1) Ignorance. We've all heard the old saying, "ignorance is no excuse for the law". The old saying is very applicable in export trade compliance. Therefore, exporters must know their business which means knowing their products and customers. Simply knowing that your products are EAR99 is not enough. Do you know who is buying them? Do you know what they are doing with them and to whom they are distributing them? Of course, you are not expected to be the world's policeman but you have a duty to understand your business and any attempt to "self blind" or cut off the flow of information normally associated with your transaction will likely be perceived as a aggravating factor in an enforcement proceeding.

2) No Management Commitment. All the knowledge in the world will not benefit you or your company if top management does not support efforts to maintain a compliant business. With knowledge comes responsibility and everyone in the company (even Sales) must be on board with your commitment to export compliance (no offense Sales guys!).

3) Lack of Training. This goes hand-in-hand with management commitment. It is not uncommon for companies to have bases no. 1 and no. 2 covered but presume that their employees are being beamed podcasts of regulatory compliance training while they sleep. Training will not only empower employees to make the right decisions to run the business but studies have shown that employees who receive high levels of training are more productive, have higher levels of job satisfaction and are less likely to leave their employer.

4) Absence of an Export Management Compliance Program (EMCP). This is not simply the culmination of items 1-4. It is a system of checks and balances, internal and external audits, etc. to ensure that there is a 'system' in place to prevent mistakes. It ensures that processes and documentation changes as the business changes. A good EMCP can adapt as the company's product, people, markets and structure changes. Many reputable firms have paid stiff financial penalties for mergers or acquisitions of companies that operated for years without a compliance program. A good EMCP will ensure that your company does its due diligence as its business grows.

5) Acting with Intent. This is the single biggest mistake a company can make. Acting "with knowledge", "having known" or "should have known" are all references to acting with intent. This is detailed in more detail in General Prohibition 10 - Proceeding with transactions with knowledge that a violation has occurred or is about to occur. These violations are not the norm for most companies but are certainly the worst nightmare for those that commit them. These are the same companies that generally try to cover up their mistakes with additional lies which become the steroid-laden food of the enforcement agencies and prosecutors. Acting with intent generally brings with it criminal penalties and covering up is an aggravating factor.

Don't be disappointed if you were looking for specifics in the "five biggest mistakes" listed above. You might try and look again at how you are addressing items 1-4 above. If you do, you will probably already know what the five biggest mistakes your company is at risk of making.

Trade Compliance - What You Don't Know CAN Hurt You

Dual-use items are any items that can have both military and commercial applications. These items may appear to be innocuous but, in the hands of the wrong people, can be used for destructive purposes. Examples of dual-use items include communications equipment, machine tools, handcuffs, information security, electronics, lasers, and encryption software. In addition, there are thousands of metals, compounds and chemicals that are controlled because they can be used for military applications.

Many firms whose primary business is not considered 'sensitive' are unaware of their obligations under the EAR. Companies are proud to export U.S. products overseas but many have never given much thought to the consequence of these activities or the need for trade compliance consulting.

The penalties for violations of export laws can be severe. Companies considered household names have paid significant fines for violations of U.S. export laws. Many smaller companies have been penalized as well. Recent examples include a Florida company having paid a $1,102,200 civil penalty for illegal exports of fingerprint equipment and other crime control items and a New Jersey-based freight forwarder was sentenced to a $250,000 criminal fine and five years probation as well as a $399,000 administrative penalty for the shipment of items to India without the required export license.

The penalties for violations have recently been increased in an effort to improve trade compliance with the BIS regulations. On October 16, 2007, President Bush signed into law the International Emergency Economic Powers (IEEPA) Enhancement Act. The Act provides for civil penalties amounting to the greater of $250,000, or twice the value of the transaction that is the basis of the violation, that may be imposed for each violation of IEEPA. Willful violators can expect criminal penalties including fines up to $1,000,000 and/or up to 20 years in prison.

Questions Every Exporter Must Ask

· Have we had all of our items, technology and software classified by the BIS or other competent expert?

· Do we know our customer (i.e. do we check our customers against the government lists of denied parties, specially designated nationals, and other required databases)?

· Have our employees involved in export transactions received the necessary training to ensure compliance?

· Do we have adequate recordkeeping practices in the event of a BIS enforcement audit?

· Do we have a formal export trade compliance program in place to ensure compliance to U.S. laws and regulations?

Maintaining control of your exports is not a cost of doing business. Aside from being the 'right thing to do', it can save money, avoid negative publicity and improve export shipment flows. What you don't know can hurt you.