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December 10, 2013

MASSACHUSETTS EXPORT CENTER EXPORT EXPO Essentials of Export Compliance: Regulatory and Enforcement Landscape. December 10, 2013. Sylwia A. Lis, Partner Baker & McKenzie LLP Washington, DC. Regulatory and Enforcement Landscape. Who regulates what?

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December 10, 2013

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  1. MASSACHUSETTS EXPORT CENTEREXPORT EXPOEssentials of Export Compliance: Regulatory and Enforcement Landscape December 10, 2013 Sylwia A. Lis, Partner Baker & McKenzie LLP Washington, DC

  2. Regulatory and Enforcement Landscape • Who regulates what? • Commercial and “Dual Use” Items – Commerce Department, Bureau of Industry and Security • Trade Sanctions – Treasury Department, Office of Foreign Assets Control • Defense-related – State Department, Directorate of Defense Trade Controls • Other agencies involved: Department of Energy, Nuclear Regulatory Commission, Department of Homeland Security, U.S. Census Bureau, Defense Department, intelligence community

  3. Regulatory and Enforcement Landscape (cont’d)‏ • Overlapping, broad, and complex Rules • Overlapping jurisdiction • Complexity of regulations, prohibitions, exceptions, license requirements, recordkeeping, and reporting requirements • Significant administrative discretion • Extraterritorial: “U.S. Person” and item-based controls • Growing complexity of Export Control Reform Initiative and final rules

  4. Regulatory and Enforcement Landscape (cont’d)‏ • Aggressive enforcement climate • Enhanced penalties • Significantly increased levels of overseas investigative cooperation post-9/11 • Significant improvements in obtaining and analyzing evidence in electronic environment (email, documents, Automated Export System trade data)‏ • SEC inquiries • Increased use of regulatory obligation to U.S. government relating to intentions with and activities in sanctioned countries • Export enforcement actions triggered by investigations in other areas • Enforcement actions relating to violations discovered during M&A due diligence and voluntarily disclosures • Enhanced compliance expectations

  5. Regulatory and Enforcement Landscape (cont’d)‏ • Civil penalties move from USD 50K to the greater of USD 250K per violation or twice the value of the transaction • Criminal penalties • Move from USD 50K to USD 1 million • Imprisonment up to 20 years • Negative publicity • Reputational risks

  6. Examples of Enforcement Actions in 2013 • Examples of enforcement actions in 2013: *Penalties to be suspended for two years and thereafter waived, provided that the entity commits no EAR violations during the two-year probationary period.

  7. Regulatory and Enforcement Landscape (cont’d)‏ Jurisdiction: Broad Extraterritorial Reach • Export/reexport controls: apply to any person engaged in exports/reexports of items subject to U.S. jurisdiction • Sanctions generally apply to: • “U.S. Persons”: • U.S. citizens or permanent residents (“green card” holders), wherever located or employed • Companies organized under U.S. law and their foreign branches (but not separately incorporated foreign subsidiaries)‏ • Any person located in the United States • Iran and Cuba • “U.S. Persons” as defined above • Plus entities owned or controlled by U.S. Persons (e.g., separately incorporated foreign subsidiaries)

  8. Regulatory and Enforcement Landscape (cont’d)U.S. Export Controls • Two key sets of regulations • Export Administration Regulations (EAR)‏ • International Traffic in Arms Regulations (ITAR)‏ • Administered by: • Commerce Department, Bureau of Industry and Security (BIS)‏ • State Department, Directorate of Defense Trade Controls (DDTC)‏

  9. Regulatory and Enforcement Landscape (cont’d)Export Control Compliance: Two Critical First Steps • Determining which regulations apply: Is item to be exported subject to ITAR or EAR? • Classifying the item: Which control number (underU.S. Munitions List (USML) or Commerce Control List (CCL)) applies to the item?) • Once these questions are correctly answered, export control requirements are fairly easy to apply – based on destination, end user, and end-use

  10. Regulatory and Enforcement Landscape (cont’d)Exports: Why care whether ITAR or EAR apply? License? NONE ALWAYS EAR99----------Commerce Control List------------USML

  11. Regulatory and Enforcement Landscape (cont’d)U.S. Sanctions • Targets of U.S. sanctions: • Sanctioned countries • Sanctioned country governments • Includes parties owned or controlled, or acting on behalf of governments • Sanctioned parties (located worldwide)‏

  12. Regulatory and Enforcement Landscape (cont’d)Summary of U.S. Sanctions • Comprehensive Sanctions (1)‏ • Cuba and Iran • Apply to U.S. Persons and U.S. owned/controlled entities • Full embargo • Comprehensive Sanctions (2)‏ • Sudan and Syria • Apply primarily to U.S. Persons • Full embargo • Limited Sanctions • North Korea (limited OFAC sanctions)‏ • Nearly total export/reexport embargo under the EAR • Burma (most sanctions lifted in 2012)‏ • List-Based Sanctions (SDNs)‏ • Includes parties designated under various U.S. sanctions programs, including those related to: • W. Balkans, Belarus, Cote d’Ivoire, DR Congo, Iraq, Lebanon, Liberia, Libya, Somalia, Yemen, Zimbabwe • Anti-terrorism, narcotics trafficking

  13. Regulatory and Enforcement Landscape (cont’d) U.S. Trade Sanctions: Basic Prohibitions • Target either countries or restricted persons (without reference to a country)‏ • If country-based program, restrictions apply to any dealings related to the country or to the government of the country (including any state-owned or –controlled enterprises, wherever located)‏ • “Specially Designated Nationals or Other Blocked Persons” are features of both country-based and restricted person programs • Cover a wide range of activities, not limited to export/import • Prohibit nearly all forms of U.S. Person involvement in transactions, direct or indirect • Prohibit U.S. Person “facilitation” of transactions by non-U.S. persons that are prohibited as to U.S. Persons

  14. Regulatory and Enforcement Landscape (cont’d)Ag/Med Sales • In general, favorable licensing policies and procedures • But licensing requirements and procedures vary depending on the sanctioned country and products at issue • Specific vs. general licenses • Overlapping OFAC and BIS jurisdiction

  15. Regulatory and Enforcement Landscape (cont’d)‏ Examples of Activities That May Trigger Export Control and Trade Sanction Compliance Issues • Foreign sales • Donations to parties outside the United States • Outsourcing (e.g., manufacturing agreements)‏ • R&D, collaboration, licensing activities involving parties outside the United States • R&D activities involving foreign nationals in the United States • Submissions to foreign governments for regulatory purposes

  16. Regulatory and Enforcement Landscape (cont’d)The Export Control Reform Initiative • Initiated by Defense Secretary Robert Gates in 2010 • Key objectives of Export Control Reform • Provide greater clarity and reliability through: • A single control list administered by a single agency • Creating a positive list of controlled items, phasing out “catch all” Provisions • Eliminating conflicting or inconsistent standards and definitions between the ITAR and the EAR

  17. Regulatory and Enforcement Landscape (cont’d)The Export Control Reform Initiative • Key objectives of Export Control Reform (cont’d) • Establish a single enforcement coordination agency • Focus cnforcement resources on the most sensitive national security and foreign policy export control objectives • Provide for greater uniformity and consistency in resolution of export enforcement proceedings • First major codification of the Export Control Reform Initiative are the regulatory amendments to the EAR and the ITAR issued on April 16, 2013 • EAR: 78 Federal Register 22660-22740 • ITAR: 78 Federal Register 22740-22759 • Amendments became effective on October 15, 2013

  18. Regulatory and Enforcement Landscape (cont’d)Export Control Reform Initiative: Key Elements • Creation of the 600 Series of controlled items on the Commerce Control List (CCL) • Military Items of lesser sensitivity moved from the USML to the CCL, and thereby transferred from ITAR jurisdiction to EAR jurisdiction • Expansion and clarification of license exceptions (Part 740 of the EAR) to define the terms and conditions of exports of 600 Series items • Creation of specific definition of the concept of “Specially Designed” for export control purposes • Section 772.1 of the EAR • Section 120.41 of the ITAR

  19. Questions? Contact Information: Sylwia Lis Partner Baker & McKenzie LLP Phone: (202) 835-6147 Email: sylwia.lis@bakermckenzie.com :

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