Export Control Reform Still Lags, Leaving Compliance Programs in Lurch

Anyone involved in international trade might hope that one day, in the long run, export control reform will alleviate the compliance burden companies face now—and make no mistake, numerous federal agencies involved in export control want to achieve just that.

In the short run, however, expect even more pain as the changes afoot today take final shape.

“It is getting more complicated,” says Judith Lee of the law firm Gibson Dunn, co-chair of the firm’s international trade practice group. “This is one of the most complex and changing environments I’ve seen since I came into this practice in 1987. There are more moving parts than people have ever had to deal with before.”

“Almost every other country has a singular regime for controlling transactions. Either the item itself, or with whom or where you are dealing, is controlled,” says Joseph Gustavus, leader of the law firm Miller Canfield’s export control practice. “We have the disadvantage of having three different laws and three different agencies, within three U.S. departments.”

An attempt to streamline all that U.S. export control law has been underway since 2009 as an initiative spearheaded by the Obama Administration. Much of the work began in 2013, and many of the biggest changes are just now starting to take hold. In May, for example, government agencies released new licensing requirements, prohibitions, and restrictions for software related to cyber-security.

If successful, the reform process will cut through complexity that has built up over decades. There are International Traffic in Arms Regulations overseen by the State Department, and Export Administration Regulations are overseen by the Commerce Department. Originally intended merely to restrict the export of military technology, the lists have expanded to include many everyday products that could be re-engineered. Companies now struggle with the broad scope of the rules, their many licensing requirements, and confusion over whether any given product or part fits within the regimes.

“Almost every other country has a singular regime for controlling transactions; either the item itself or with who or where you are dealing is controlled. We have the disadvantage of having three different laws and three different agencies, within three U.S. departments.”
Joseph Gustavus, Leader of the Export Control Practice, Miller Canfield

Products that can have both military and commercial applications—so-called “dual-use” technologies—are added to a Commerce Control List overseen by the Commerce Department, for example. Products with a determined military purpose fall under the strict controls of the State Department’s Munitions List. The latter’s lack of flexibility means that a bolt on the wheel on a fighter jet is subject to the same controls as the fighter jet itself.

Layered atop all this is the Treasury Department’s purview of sanctions and embargos, including the Specially Designated Nationals List overseen by its Office of Foreign Assets Control.

“There has been a lot of work afoot to try to harmonize [the State Department and Commerce Department lists] and ultimately make them one,” Gustavus says. “In scrubbing these lists, and endeavoring to make their matters of classification the same or similar, things have gotten a little more complicated.”

“You don’t just have to pin down what the situation is today, you have to anticipate what’s going to happen later,” Lee says. “For the short term, it is complicated because a lot of things straddle both the new rules and the old rules.”

Lee is hoping for some clarity in the area of computer and software technology. Rules to prevent off-shoring of encryption technology, Lee says, have always been difficult to monitor because the technology evolves so rapidly. “It is so complicated that nobody really understands it,” she says. “There was a lot of hope that the Administration and the Commerce Department would take a significant look at the encryption rules and try to simplify them. But they have tried several times in the past and every time they just made it more complicated.”

Enter the Politics

Adding to the mid-reform compliance headache is the ever-changing state of U.S. sanctions. The Treasury Department’s lists of forbidden persons and restricted countries change constantly, and additions, subtractions, and modifications have been active in recent months due to evolving U.S. policy on Russia, Ukraine, Iran, and Cuba.

A FUNDAMENTAL COMPLIANCE PROGRAM

Below, CW’s Joe Mont spoke with Suzanne Richer of Customs & Trade Solutions, an advisory firm specializing in global trade compliance, about the future of export control reforms.
Like many, Suzanne Richer, president at Customs & Trade Solutions, has high hopes for ongoing export control reforms, and plenty of concerns.
“Exporters are looking forward to what they believe will be a reduction in the restrictions on what they can export, when, and how,” she says. “The complication is that there is a mistaken belief that there is going to be a shift away from export compliance enforcement. Some things will be simpler to export without so many restrictions, but we shouldn’t mistakenly believe that means a reduction in export compliance. Quite the opposite may be true because the government needs to make sure that you actually vetted your product.
Richer’s advice for benefitting from the reforms, without triggering an enforcement action, “build a fundamental compliance program that will survive the test of time.”
“When we audit a company, they will pride themselves on having written processes, but the policy is not specific as to who is actually accountable or lacks a check and balance to enforce the policy.”
Companies must also understand the pressures that lead to overlooked controls. “One of the challenges exporters face is that on Friday the warehouse is full and by the time they leave it has to be empty,” Richer says. “They are up against the clock and have to start shipping, so there are sometimes opportunities where people are not following the standards, such as denied party checks.”
Any company that exports must have mandatory training, followed by an exam, Richer suggests. There should also be an annual review of all policies and procedures.
“One of the greatest steps a company can take in the coming year with this reform initiative is to really make a corporate commitment to export compliance efficiency,” Richer adds, explaining that specialized software and automation can help avoid the mistakes many companies make with manual data entry. “Ensure the same data that appears on one document feeds into another document,” she says. “That seems pretty basic, but many companies still cut and paste from one document to the next because their systems don’t share information.”
—Joe Mont

“The economic sanctions programs are in flux,” Lee says. “You have new people coming on at least weekly, if not daily. Sometimes there are people who are taken off and if you don’t update your software you can have a very mad customer who has a basis for suing you because you refused to do business with them.”

Lee’s caution for those looking to join the Cuba gold rush: The embargo is not yet fully lifted. “The rumors we are hearing are that a lot of the credit card issuing banks are not taking advantage of the greater travel exemptions and allowing their cards to be used in Cuba because it is just too risky,” she says. Stoking that fear: Step over a sanctions line and expect high-monetary civil penalties and, if the government thinks you did it on purpose, they can launch a criminal investigation.

Comprehensive prohibitions (think Syria, Iran, North Korea) bring a separate set of problems, in that affiliates and subsidiaries abroad must be watched closely to make sure they do not run afoul of U.S. law. Russia, with just a smattering of targeted sanctions, is trickier. “When you have a relationship with a Russian distributor or have built a strong Russian marketplace, care has to be taken to constantly monitor the current state of U.S. economic sanctions,” Gustavus says.

Combining export control and sanctions lists will be a difficult process, Lee says. “Even if they come up with one list, there will be different rules applied to different people on the lists,” she says. “The Commerce Department has a denial of export privileges, different from being an SDN [specially designated national]. The State Department has a debarred parties list, but they also have the Iranian secondary sanctions and prohibitions on lending that are not SDNs. Even if they try to simplify matters by having one list, it still wouldn’t be simple because you have to get the name and then try to figure out what prohibitions apply to this specific person.”

A strategy is needed to keep ahead of all the many changes to export rules, Gustavus says. That effort must include foreign outreach.

“Questions have to be made to your foreign affiliates, subsidiaries, and distributors to ensure that they are not violating export controls without your knowledge,” he says. “A policy and culture of compliance with U.S. export control laws has to be infused in your foreign affiliate. Culturally speaking, they may chafe against that. You are subjected to this obligation to make sure that your affiliates are complying with U.S. export control law, but they may rail against the extraterritoriality and long-arm reach of the U.S. government.”

In-person site visits and training can help reduce this “reluctance or outright hostility to implementing compliance procedures,” he says.

Lee, for one, is hopeful that the reform process will continue beyond the current projects, but there is uncertainty. “People were extremely happy, regardless of what their politics were, when President Obama was reelected and they knew this process would continue and wasn’t going to be cut off after four years,” she says. “But still, if after eight years it is not done, will a new president have the same interest in aggressively pushing this forward?”