Introduction

Although they may not know it, businesses outside the United States with no physical presence in the United States are subject to encountering U.S. government enforcement action if they are purchasing and subsequently reexporting goods or technology of U.S. origin contrary to U.S. export control laws.  In the last several years, non-U.S. persons and companies have increasingly become subject to U.S. criminal and civil enforcement actions for violating U.S. export laws.  This article briefly highlights certain extraterritorial aspects of the major U.S. export control laws and describes several recent examples of enforcement of these laws against persons and companies outside the U.S.

The Major U.S. Export Control Laws

Although there are a myriad of U.S. governmental agencies that have jurisdiction over all of the goods, technology and services that may be exported out of the United States, the following three U.S. government agencies dominate the field of export control:1

            (i) the Bureau of Industry and Security (“BIS”) of the Department of Commence;

            (ii) the Office of Foreign Assets Control (“OFAC”) of the Treasury Department; and

            (iii) the Directorate of Defense Trade Controls (“DDTC”) of the Department of State.

Under the Export Administration Regulations (“EAR”), BIS is responsible for controlling the export from the U.S. of all items that are not exclusively controlled by another government agency (like defense articles) or otherwise expressly exempt from BIS jurisdiction (such as certain publicly available software and certain publications).2  OFAC is charged with overseeing the economic sanctions and embargoes that the U.S. maintains against certain countries, entities and individuals, which include certain extraterritorial aspects.  Administering the International Trade in Arms Regulations (the “ITAR”), the DDTC has jurisdiction over exports from the U.S. of defense (or military) articles.  These regulatory regimes also control the movement of U.S. origin goods and technology beyond the borders of the United States.  Violations of the U.S. export control laws can have severe civil and criminal consequences.

BIS / EAR

Subject to certain limited exceptions described below, the regulatory jurisdiction of BIS under the EAR3 extends broadly, generally covering all of the following:

            (1)        all U.S. origin items wherever located;

            (2)        foreign-made commodities that incorporate controlled U.S.-origin commodities;

            (3)        foreign-made commodities that are ‘bundled’ with controlled U.S.-origin software;

            (4)        foreign-made software that is commingled with controlled U.S.-origin software; and

            (5)        foreign-made technology that is commingled with U.S.-origin technology.4

All of these items are referred to as “subject to the EAR.”5  An item is “controlled” for purposes of the EAR if it is one of the items included on the Commerce Control List of the EAR.6  The Commerce Control List consists of items that are deemed to have a dual use, meaning they have both civilian and military applications.  Because of this dual use, they are subject to heightened U.S. export controls.

BIS regulates the export and reexport of all items subject to the EAR.7  Under the EAR, a reexport is an “actual shipment or transmission of items subject to the EAR from one foreign country to another foreign country, or the release of technology or software subject to the EAR to a foreign national outside the U.S.”8  Depending on the classification of an item and its intended destination, a license from BIS may be required to reexport an item subject to the EAR (whether the item is a commodity, technology or software).9  There are also certain end uses for which, and end users to which, an item subject to the EAR may not be reexported without a license from BIS.10  When reexporting U.S. goods, technology or software that are subject to the EAR, it is essential to know the classification of such items, the destination, the end user and the end use to be certain that the transaction will not violate the EAR.

Economic Sanctions / OFAC

As may be expected, the sanctions regulations administered by and enforced by OFAC prohibit “U.S. persons”11 or “persons subject to the jurisdiction of the U.S.”12 from engaging in unlicensed export and reexport transactions with countries, entities and individuals that are subject to U.S. economic sanctions.  However, certain economic sanctions administered by OFAC go even further.  The Iranian Transaction Regulations prohibit non-U.S. persons from reexporting to Iran, directly or indirectly, goods, technology or services of U.S. origin if (i) the reexport was undertaken with “knowledge or reason to know” that it was intended for Iran or the government of Iran, and (ii) such transaction was subject to U.S. export licensing requirements independent of the Iranian Transaction Regulations.13  For example, this requirement would apply to a commodity that is controlled under the EAR for antiterrorism purposes under 15 C.F.R. § 742.8.

Under the Sudan Sanctions Regulations, non-U.S. persons are prohibited from reexporting from a foreign country to Sudan any United States goods, technology or services unless (i) the goods have been incorporated into another product outside the U.S. and constitute 10 percent or less by value of that product exported to Sudan from a third country, (ii) the U.S. origin goods have been substantially transformed (into another product, for purposes of harmonized tariff code classification) outside of the U.S. before being reexported to Sudan, or (iii) the goods in question are not subject to U.S. export licensing requirements under U.S. export control laws other than the Sudan Sanctions Regulations.14  Under this ban on reexports to Sudan, a U.S. origin product listed controlled for anti-terrorism purposes under the EAR could not be reexported to Sudan without authorization from OFAC.

DDTC / ITAR

The DDTC administers the International Trade in Arms Regulations (“ITAR”).15  Among other things, the ITAR sets forth the control regime governing the export and reexport of U.S. origin defense articles.16  Subject to certain limited exemptions, a license issued by the DDTC is required under the ITAR for any export from the U.S. of a defense article.17  For purposes of the ITAR, a reexport consists merely of transferring a defense article to an end use or end user not previously authorized by the DDTC.18  The written approval of the DDTC must generally be obtained prior to any retransfer, resale, transshipping or disposing of a defense article to any end user, end use or destination not stated on the DDTC export license (or the Shipper’s Export Declaration for defense article exports under an ITAR license exemption).19

Potential Penalties for Violations

Violations of the export control laws of the United States carry severe civil and criminal penalties.  Under the EAR and most of the economic sanctions administered by OFAC, civil penalties in the amount of the greater of $250,000 or twice the amount of the transaction that was the basis for the penalty may be imposed.20  A violation of the EAR may also result in a denial order, which is an order that prohibits a person subject to the denial order from engaging in export transactions involving U.S. items subject to the EAR.21  Criminal violations (i.e., those which are deemed to be willful) of the EAR and most of the economic sanctions may result in fines of up to $1 million and imprisonment for up to 20 years.22

Violations of ITAR can result in civil penalties of up to $500,000 per violation.23  The consequences of willfully violating the ITAR are criminal penalties of up to $1 million and imprisonment of up to 10 years.24  Moreover, persons who are convicted of violating any of the export control laws may be barred from receiving U.S. federal government contracts and subcontracts.25

Recent Enforcement Activity Against Non-U.S. Persons and Entities

Below is a short list of recent enforcement activity against non-U.S. persons relating to the reexport of U.S. origin commodities.26 

• On February 3, 2010, a Taiwanese citizen was arrested in the United States on charges of illegally exporting and attempting to export U.S. commodities to Iran. The complaint filed by the U.S. Department of Justice alleges that the defendant violated the Iranian Transaction Regulations by receiving orders from customers in Iran for specific dual-use U.S. goods, then arranging for those U.S. goods to be shipped to freight forwarders in Hong Kong and Taiwan, and transshipped to Iran. The defendant faces a maximum sentence of 20 years imprisonment and fines of up to $1 million if convicted.27

 

• On September 24, 2009, a Dutch company and two of its executives, both of whom are citizens of the Netherlands, pleaded guilty to charges of exporting U.S. aircraft components and other items from the United States to Iran.  The defendants were charged with shipping these items from the United States to addresses in the Netherlands, Cyprus and the United Arab Emirates, and then transshipping them to Iran. The Dutch company has agreed to pay a fine of $100,000.  The individual defendants face potential imprisonment of up to five years and a maximum fine of the greater of $250,000 or twice the value of the transaction.28  Both of the individual defendants have also agreed to settle civil charges brought against them by BIS.29

• On August 22, 2008, BIS announced that it settled civil charges against a Taiwanese company for illegal exporting U.S. computer chips to the People’s Republic of China.  BIS alleged that the chips were exported from the U.S. to Taiwan and Hong Kong, and then reexported to the mainland of China.  BIS also alleged that the Taiwanese company falsely represented to the U.S. exporter that Taiwan was the country of final destination of the items in question.  In settling the charges, the Taiwanese company agreed to pay a civil penalty of $90,000, and submit to an audit of its export compliance program. The settlement also included a suspended five-year denial of export privileges, which could be activated if the Company fails to meet the compliance obligations of the settlement agreement.30

 

• In 2008, a Danish company and its subsidiaries in the U.S., the United Kingdom and South Africa settled charges of exporting and reexporting U.S. underwater navigation equipment without the licenses required by the EAR.  The destinations for the unlicensed exports and reexports included South Africa, Singapore, the United Arab Emirates, Mozambique, Taiwan, Russia and India.  In the aggregate, penalties against the Danish company and its subsidiaries exceeded $240,000.31

• A French corporation plea bargained with the U.S. Department of Justice to settle in 2008 criminal charges of violating U.S. export control laws by attempting to arrange for certain controlled submersible pumps to be shipped to Iran, while falsely representing to the U.S. seller of the goods that France was the ultimate destination.  Pursuant to the plea agreement, the French company was subjected to a fine of $500,000 and two years corporate probation.32

 

Conclusion

To mitigate the risk of violating U.S. export control laws, non-U.S. businesses must use special care when dealing with products of U.S. origin.  It is critical, especially when dealing with militarily sensitive and high technology items, to know whether an item is a defense article governed by ITAR (which, subject to certain exemptions, requires written authorization from the DDTC before it can be reexported) or is subject to the EAR.  It is also vitally important to know the classification of items governed by the EAR because dual-use items that are listed on the Commerce Control List require licenses from the BIS for reexport to certain designated end-destinations.  It is also necessary to be aware that U.S. economic sanctions are applicable to many transactions involving U.S.-origin items and components.