Compliance in the International Marketplace: Export and Import Considerations

1. Compliance in theInternational Marketplace:Export and Import Considerations Association of Corporate Counsel Dallas-Fort Worth Chapter Annual In-House Symposium May 22, 2008

2. Agenda • Export Control and Related Laws • Customs Laws

3. U.S. Export Control and Related Laws

4. Who Regulates Exports? • Department of Commerce, Bureau of Industry and Security—export of commercial/“dual use” items. • Department of State, Directorate of Defense Trade Controls—export of items that are specifically designed or modified for military or commercial space applications. • Department of the Treasury, Office of Foreign Assets Control—U.S. sanctions laws. • Other U.S. agencies, such as the Department of Energy, the Nuclear Regulatory Commission and Customs and Border Protection.

5. What is an Export? • An export is NOT just the shipment out of the country of a finished product. • An export can occur when software, technology or data are released to a foreign person. • Technology includes “technical data” and “technical assistance.” • Technical data: specifications, designs, formulae, manuals, instructions • Technical assistance: instructions, working knowledge, training • Technology/technical data does not include publicly available (Commerce) or public domain (State) information, such as published information or patents or fundamental research. • Different definitions of publicly available and public domain.

6. ReleasingTechnology and Software • Software may be released through shipment of DVDs, by “pushing out” software (e.g., via email), via downloads from the Internet or FTP sites, or sharing source code with a foreign national. • Special rules apply to commercial encryption software. • Technical information may be released through visual inspection, oral exchanges or application of personal knowledge and/or technical experience. • Exports and re-exports of technical data can occur in ways that are not obvious: - phone calls - visits to facilities - faxes - meetings - e-mail - drawings, specifications • Inadvertent exports are more likely with technical data than with hardware.

7. ‘Deemed’ Exports • Disclosing technical data or providing technical assistance to a foreign person or a foreign company is an export, regardless of whether the disclosure takes place in the U.S. or abroad. • Sharing technical data with a foreign person, including employees, in the U.S. is ‘deemed’ to be an export of the information to the national’s home country. • A foreign person is anyone who is not a U.S. citizen, a U.S. permanent resident (green card holder), or an individual who is protected under the Immigration and Naturalization Act. • Commerce’s rules: Home country is the last place in which the person obtained permanent residency or citizenship. • May 19, 2008 Proposed Rule would require exports to consider also the foreign person’s place of birth and previous citizenship. • State’s rules: Home country depends on all factors, including place of birth.

8. Extraterritorial Export Laws:The “Reexport” • Export laws apply to the retransfer to a third country of: • U.S.-origin items • Items manufactured outside the United States containing U.S.-origin content • Commerce: De minimis rules look to amount of U.S. content • State: “See through” rules, so there is no de minimis content • Certain items manufactured outside the United States that are derived from U.S.-origin technology • Deemed reexports: Govern the release of technology/technical data outside the United States to third country nationals.

9. Export Controls:Licensing Requirements • ALL exports/reexports are subject to export control regulations, but the regulations may or may not require a license or other U.S. Government authorization. • Licensing requirements depend, in part, on which agency has jurisdiction over the proposed export/reexport. • Commodity jurisdiction determinations – made by State.

10. Department of CommerceBureau of Industry & Security Export Administration Regulations (EAR)

11. Department of Commerce • Administers the Export Administration Regulations (EAR) • The EAR control exports/reexports of so-called “dual-use” items—military and commercial applications—and commercial only items including hardware, software and technology. • For example, antennae for cell phones and blackberries are subject to the EAR.

12. EAR – Licensing • Licensing decision requires consideration of the following factors: • Classification of item on Commercial Control List (CCL) • Destination country • Ultimate end-user • Ultimate end-use

13. Licensing Analysis: Classification/Destination • Commerce Control List (CCL): The EAR set forth a list of items that require licenses for exports to various destinations. • The CCL contains ten categories, each with technical descriptions of hardware, software and technology. • Each description is assigned an Export Control Classification Number (ECCN). • Depending on the ECCN, a license may be required for one destination, but not another. • Items that are subject to the rules, but do not fit any technical descriptions on the CCL are assigned a basket number: “EAR99.” • No license is required to export EAR99 items, except to prohibited destinations (Cuba, Iran, North Korea, Sudan, and Syria), to prohibited end-users, or for prohibited end-uses.

14. Classification/Destination Licensing: Compliance Tips • Classification is a highly technical process. • Review by Legal with assistance of Engineering. • Create a product/technology matrix. • Include Schedule B numbers. • Implement mechanisms for review of new products or product changes. • When in doubt, submit a classification request to Commerce. • Classification reviews required for certain items, such as encryption items. • Commerce’s determination is referred to as a “CCATS.” • Be prepared to provide ECCN and/or CCATS to distributors and/or customers.

15. Licensing Analysis:Prohibited End-Users • Apart from the classification/destination analysis, items may not be exported to prohibited end-users (even if a licensing exception is available) • There are seven lists of prohibited end-users: • Department of Commerce’s Denied Persons List • Department of Commerce’s Entity List • Department of Commerce’s Unverified List • Department of Commerce’s General Order 3 to Part 736 • Department of the Treasury’s List of Specially Designated Nationals and Blocked Persons • Department of State’s Debarred Parties List • Department of State’s Nonproliferation List • The lists are available at:http://www.bis.doc.gov/ComplianceAndEnforcement/ListsToCheck.htm

16. Prohibited End-Uses • No exports/reexports to individuals or entities if there is “knowledge” that the exported item will be put to the following end-uses or transferred to end-user involved in such activities: • Nuclear, chemical and biological weapons and missile delivery systems • China – Military (end-use rules applicable to items with certain ECCNs) • “Knowledge” means “know” or “have reason to know or to believe” and can be inferred from conscious disregard or willful avoidance of facts.

17. Anti-Diversion Controls:“Red Flags” Examples • Client or purchasing agent reluctant to offer information about the end-use of a product • Product’s capabilities do not fit the buyer – e.g., foreign financial institution seeks assistance in improving production processes for certain nuclear power plants • Product ordered is incompatible with technical level of country to which product is being shipped – e.g., nuclear-related technology required export for country without commercial nuclear power plants • Shipping route is abnormal for the product and destination • Packaging is inconsistent with the stated method of shipment or destination • Payment method is unusual • When questioned, buyer is evasive or unclear re whether product is for domestic use, export or re-export

18. “Know Your Customer” Guidelines: Compliance Tips • To guard against inadvertent unauthorized exports, most exporters screen transactions. • Exporters look for “red flags” – end-use, end-user, or destinations and often request written end-user/ end-use information. • In the case of certain exports to China, additional due diligence may be required to confirm to verify the end-use. • It is important not to self-blind – i.e., cut off flow of information into company. • If appear to be red flags, a company should inquire and investigate. • If no sufficient explanation for red flags, an exporter should refrain from transaction.

19. Export Administration Regulations: Penalties • Criminal “willful violation” • Corporations: up to $1 million per violation • Individuals: up to $250,000 per violation and up to 20 years in prison • Civil: up to $250,000 per violation or twice the value of the transaction. • Suspension or denial of export privileges. • Debarment from U.S. Government contracts. • Mechanism for voluntary disclosure – mitigates penalties.

20. Case Study:MTS Systems Corporation • In 2003, MTS submitted two applications for exports to India of seismic testing equipment. • Failed to disclose on the applications that the equipment may be used as part of nuclear power plant testing. • Internal compliance officer “warned” employees about Red Flags and told representative in India that current licensing policy was a presumption of denial for nuclear end-uses in India. • Fined $400,000 criminal penalty and $400,000 civil penalty.

21. Department of StateDirectorate of Defense Trade Controls International Traffic in Arms Regulations (ITAR)

22. Department of State • Administers the Arms Export Control Act and implementing International Traffic in Arms Regulations (ITAR). • Governs all exports (temporary and permanent) of “defense articles” identified on the U.S. Munitions List. • Governs all exports of “defense services.” • License is required to virtually all destinations. • Information developed under a Department of Defense contract may be controlled by the EAR or the ITAR. • Proposed DFARS rule would require compliance with export controls.

23. Defense Articles • “Defense articles” – items that are specifically designed, modified or configured for military or commercial satellite use. • Identified on the U.S. Munitions List. • USML has 20 categories of defense articles. • Even so-called “COTS” items can be considered “defense articles.” • Commercial items modified even in minor ways for a defense application can become “defense articles.” • Include hardware, software and “technical data.” • If an item is on the USML, it is subject to the ITAR even if its intended use is commercial or research/development.

24. Technical Data andDefense Services • “Technical Data” – Information required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles. • May be in the form of data, presentations and documents • Also includes software • “Defense Services” – Furnishing of assistance or training to foreign persons in the design, development, engineering, production, processing, manufacture, assembly, testing, use, operation, overhaul, repair, maintenance, modification, or reconstruction of defense articles. • Furnishing foreign persons controlled “technical data,” whether in the U.S. or abroad.

25. What Authorization Is Required? • Prior approval by the Department of State is required for virtually all exports to almost all destinations. • Canada – An existing exemption limited to (a) the Canadian Government and certain companies registered under the Canadian Controlled Goods Directorate and (b) only certain defense articles and defense services. Reporting requirements may apply. • United Kingdom – Pending exemption. • Australia – Pending exemption. • Approval may be in the form of an export license or an agreement. • Commercial contracts should take into account lead times necessary to obtain licenses before an export occurs.

26. ITAR: Penalties • Criminal penalties include up to $500,000 per violation (and imprisonment for individuals). • ITT $100,000 million in fines. • Civil penalties include up to $250,000 per violation. • Historically, fines imposed in “headline” amounts. • Recent amendment clarifies mitigation for voluntary disclosures. • Recent trend to require independent compliance reviews for companies that submit voluntary or directed disclosures.

27. Common ITAR Pitfalls:Technology Transfers • “Access to” technical data • Presumption of release of data to foreign national employees/contractors who have the ability to access technical data. Tips: (a) Identify foreign person employees. (b) Segregate technical data. (c) Implement Technology Control Plan. (d) Implement IT system to track access.

28. Common ITAR Pitfalls: Procurement • Foreign procurement: transfers of technical data in connection with the procurement of parts/components for an ITAR-controlled item may require prior authorization from State. • Domestic supplier/vendor: • Not registered with State. • Manufactures items abroad. • Subcontracts with a foreign manufacturer. • Employs foreign persons. Tips: Mark technical data. Specify applicable export rules in contract.

29. Common ITAR Pitfalls:Sales Representatives • The ITAR requires brokers to register with State and in certain circumstances, file notifications or reports regarding their activities. • Dealings with an unregistered broker can result in a denial of licenses, or in the worse case, penalties. • Commissions and payments to brokers may be subject to reporting requirements. Tip: As part of due diligence, require ITAR compliance.

30. Doing Business with Distributors:Do you know where they are reselling your products? Department of the TreasuryOffice of Foreign Assets Control U.S. Economic Sanctions

31. What are Sanctions? • U.S. imposes economic sanctions to further its foreign policy and national security objectives. • U.S. sanctions programs may prohibit a U.S. company from dealing with certain targeted countries, foreign governments, individuals, entities and practices.

32. Department of the Treasury:Office of Foreign Assets Control • U.S. imposes economic sanctions to further its foreign policy and national security objectives • U.S. sanctions programs implemented and enforced by the Treasury Department’s Office of Foreign Assets Control • OFAC administers and enforces economic & trade sanctions against targeted: • Foreign governments (e.g., Iran, Sudan, Cuba) • Individuals (e.g., terrorists, narcotics traffickers) • Entities (e.g., drug front companies, charities linked to terrorist groups) • Practices (e.g., trade in non-certified rough diamonds, proliferation of WMD)

33. OFAC: Jurisdiction Individuals • American citizens and permanent resident aliens located anywhere in the world. • Any individual, regardless of citizenship, who is physically located in the United States. Commercial Entities • Corporations organized under U.S. law, including foreign branches of U.S. companies. • Any corporation or company physically located in the U.S., including U.S. branches of foreign companies. • Under the Cuba and North Korea programs, non-U.S. entities that are owned or controlled by U.S. companies or citizens/permanent residents.

34. Department of the Treasury:Office of Foreign Assets Control OFAC currently administers sanctions programs against: • Balkans • Belarus • Burma (Myanmar) • Cote D’Ivoire • Cuba • Diamond trading • Iran • Iraq • Liberia • Narcotics trafficking • Non-proliferation • North Korea • Sudan • Syria • Terrorist Organizations • Terrorists • Zimbabwe

35. OFAC: Comprehensive Sanctions • Applicable to Cuba, Iran and Sudan • In general, the following are prohibited under comprehensive sanctions programs: • Exports (direct or indirect) • Imports (direct or indirect) • Trade brokering, financing or facilitation • Any attempt to evade or avoid the sanctions • Applies to most goods, technology & services • Limited exceptions may be licensable by OFAC, such as agricultural goods or humanitarian items

36. OFAC: Limited Sanctions • North Korea • Importation of items of North Korean origin are restricted. • Assets of certain persons blocked. • Burma (Myanmar) • Importation of items of Burmese origin is prohibited. • Ban on export of financial services. • Specific entities are blocked. • Exports to Burma are not prohibited, but transactions must comply with export control rules and the prohibitions regarding financial services. • Syria • Ban export of US-origin goods. • Requirement to block assets of entities and individuals related to terrorism, WMD, undermining reconstruction in Iraq & assassination of Prime Minister Harari. • Diamond Trading • Import and export of rough diamonds restricted.

37. List-Based Sanctions • Balkans – block property of Milosevic supporters • Belarus – block property of persons undermining democratic process • Cote d’Ivoire – block property of individuals threatening peace • Iraq – sanctions lifted, but assets previously blocked remain blocked • Liberia – block property of Charles Taylor and his supporters; no imports of Liberian timber • Zimbabwe – block property of persons undermining democratic process • Nonproliferation – no dealings with persons involved in proliferation of weapons of mass destruction • Terrorism – no dealings with persons or organizations involved with terrorism • NarcoticsTraffickers – no dealings with designated traffickers

38. SDN List • OFAC maintains a list of sanctioned individuals and entities – List of “Specially Designated Nationals” (SDN List) • SDN List includes all blocked persons – agents of current and former sanctioned country governments as well as terrorists, terrorist organizations, persons sanctioned under the WMD program and narcotics traffickers • Review this list prior to engaging in an export or other international transaction • This list is one of the seven lists of prohibited persons that will be shown in the EAR discussion

39. Sanctions vs. Export Controls Export Controls • Aimed at controlling the dissemination of dual use or military products & technology to destinations & end users throughout the world • BIS/DDTC expertise includes engineering and product knowledge used for product classification • Jurisdiction is U.S. persons as well as technology and goods Sanctions • Comprehensive use of U.S. economic force based on foreign policy goals • Blocked assets and restrictions on trade & financial transactions • Used against specific targets & their agents • OFAC expertise is financial • Jurisdiction includes U.S. companies & citizens/permanent residents

40. Sanctions Regulations: Penalties • Criminal “willful violation” • Corporations: up to $1.2 million per violation • Individuals: up to $250,000 per violation and up to 20 years in prison • Civil: up to $250,000 per violation or twice the value of the transaction. • Mechanism for voluntary disclosure – mitigates penalties.

41. Sanctions Issue:Resale of Products • Our distributor has proposed to resell our commercial products into Cuba. We advised that it could not do so. The distributor has suddenly changed its delivery requirements, requesting that all products be delivered to its facility. Is this a problem? • Recently, we discovered that our distributor is reselling our commercial products into Syria. Do we have any liability for these retransfers? • In reviewing our commercial distributor agreements, we discovered that one agreement includes Iran in the sales territory. We do not have a license and are uncertain whether any products have been sold to Iran. Do we have any obligation to investigate?

42. Sanctions Issue: Secondment of U.S. Employees Abroad • Placement of U.S. employees within or U.S. officers/directors on boards of foreign subsidiaries. • As U.S. citizens/permanent residents, they must comply with U.S. sanctions. • If they remain employees of the U.S. company, the U.S. company could “facilitate” transactions. • Recusal policies and OFAC training are important.

43. Sanctions Issues:Blocking Statutes • Canada, the European Union, and Mexico have implemented statutes prohibiting compliance with U.S. sanctions laws’ extraterritorial requirements. • Sheraton Hotel in Mexico penalized under blocking provisions. • European Commission is pressuring member countries to enforce provisions. • Blocking provisions do not provide an excuse for noncompliance with OFAC’s laws. • Trend to utilize discrimination laws as a “blocking” mechanism.

44. Doing Business in the Middle East Antiboycott Regulations

45. Antiboycott Regulations • Prohibit participation in international boycotts not supported by the U.S. Government. • Prime example: Arab League’s boycott of Israel • Prohibit actions to comply with, further, or support the Arab League boycott. • Deny tax benefits for certain types of boycott-related agreements. • Boycott related requests may originate from: Algeria, Bahrain, Egypt, India, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Malaysia, Nigeria, Oman, Pakistan, Qatar, Saudi Arabia, Syria, Tunisia, the United Arab Emirates, or the Republic of Yemen. • Boycott related requests continue as tensions in the Middle East persist.

46. Antiboycott Regulations • U.S. Antiboycott regulations are complex and not intuitive. • Prohibit agreements to refuse to do business with Israel. • Prohibit furnishing information about dealings with Israel. • Boycott related requests may appear in RFPs, contracts or letters of credit. • Reporting requirements for boycott-related requests, even if the company does not respond to the request. • EAR Penalties apply for non-violations. • Section 999 requirements to report operations in or with a boycotting country, regardless of whether the company receives a boycott-related request. • Be wary of agreements to “comply with” the laws of a boycotting country, for tax penalties may apply to the U.S. taxpayer’s foreign operations.

47. INTERNATIONAL TRADE DOGS HAVE COMPLIANCE TAILS

48. INTERNATIONAL TRADE DOGS HAVE COMPLIANCE TAILS • International trade continues to grow as more and more goods cross borders • The world is both a global factory and a global market

49. National governments have a stake in international trade • Regulate trade ( national security, health and safety, environment, unfair competition) • Monitor imports and exports • Promote international trade, investment • Collect revenue

50. Private Companies Concerns • Private Companies must be mindful of intersecting domestic and international laws and regulations • Enforcing compliance with those laws is a key government policy