Recent FedEx® Export Enforcement Underlines Need for Proper Export Controls for All Companies

Recent FedEx® Export Enforcement Underlines Need for Proper Export Controls for All Companies

Shipping giant FedEx’s recent agreement to pay $370,000 in fines to settle allegations that it violated U.S. export regulations by shipping computer equipment to a company in Dubai that allegedly used such equipment to make explosive devices used in Iraq and Afghanistan, highlights the importance of having proper export controls for U.S. companies that ship overseas, panelists at a recent Webinar said.

“I don’t care how big a company you are, how small a company you are, how many lawyers you have on staff—compliance people on staff—sooner or later the chances are pretty good that every company is going to end up making a mistake or error or somehow commit a violation of law or regulation” related to export regulations, said Peter Quinter of Gray Robinson speaking at a recent LexisNexis® Webinar titled “Understanding U.S. Export Regulations.”

Quinter said that once the government suspects an export violation, its first step is to issue an enforcement subpoena or a summons to the company.

“When the government issues an enforcement subpoena or summons, or conducts any kind of investigation … you don’t know whether it’s going to result in a criminal prosecution, an administrative monetary penalty or no action whatsoever. Be advised the government is not obligated to tell you—they may not know at that point. So, you should always suspect the worst—that it is a criminal investigation and to keep in mind that when someone contacts you, you’re not necessarily required to answer their questions. The subpoena [is something] you are required to respond to, however. How you respond and when you respond is of course up to you and your legal counsel,” said Quinter.

Failure to respond to an Office of Foreign Asset Controls (OFAC) subpoena can result in substantial fines—an automatic fine of $20,000 for failure to respond and up to $50,000 if the value of the exported merchandise exceeds $500,000, Quinter said.

“Just because a subpoena asks for everything under the sun does not mean that you absolutely have to discuss or provide that documentation to OFAC,” he said.

Quinter pointed out that just about everybody who does business overseas is subject to OFAC regulations, but that companies that do business with Syria or Iran are particularly under scrutiny. He said that all U.S. citizens, regardless of whether they are living in the country or elsewhere, may find themselves subject to OFAC regulations if they do business with those countries, due to ongoing sanctions programs.

He offered the following advice to companies under investigation by the OFAC: “The government likes it when you cooperate. There are many situations where the violator does not cooperate. As a matter of fact, the violator often provides false information to the government, believe it or not. So when the subpoena is issued by OFAC or BIS [Bureau of Industry and Security] to a company and they ask for certain documents, or ask for certain information and either the documentation or the information is falsified, the government doesn’t like that and will issue penalties based upon that alone. They’ve actually gone after people criminally for lying to the government.”

Quinter recommended that an effective compliance program come from the top down.

“If you’re a substantial exporter, you should really have a written export management and compliance program, signed by the president and enforced by legal counsel or other compliance personnel. It should be a management commitment in writing, right from the top and provided to every employee, that says how important the export rules are. The government agencies like to see that,” he said.

He also recommended that companies engage in continuous risk assessment.

“Someone in the company should always be checking to see—not just initially when they install the program but routinely every six months or every year—that the risks are minimal,” he said. He recommended that companies call into their sales department posing as an international company seeking to, for example, ship goods to Iran or Syria, to test how their personnel reacts.

He also recommended companies engage in ongoing training and awareness programs and keep accurate records of transactions and dealings.

EAR vs. ITAR

Steven Brotherton, of Fragomen, Del Rey, Bernsen & Lowey, LLP, discussed some of the differences between ITAR and Export Administration Regulations (EAR).

“Looking at the two primary export control regulations, the EAR is typically what most companies deal with. It regulates those items that are dual use, which are items that are primarily commercial,” but are also useful in military or space operations, he said.

The items include: semiconductors, telecommunications, high-speed computers, manufacturing, encryption technology and others.

“The technology and know-how that goes into developing some of your desktops and computer processors is fairly controlled—meaning that it requires a license before sharing that with a number of different countries,” Brotherton said.

ITAR applies strictly to military and space technologies, regardless of their technical sophistication, he said.

“One argument we often get from engineers is ‘How can this be controlled? All of our commercial technology is much more advanced than this.’ The simple fact is that, the technology considerations and how advanced they are, are not part of the criteria,” he said.

The key to determining whether an item is subject to ITAR controls is the design intent. “Was the design intended for a military application? Was it civil or was it just a general purpose where it could be used interchangeably in civil and military applications?” said Brotherton. He also recommended looking at the funding history for the development of the item and whether or not a government agency was involved.

Brotherton reiterated the importance of compliance with the U.S. sanctions against Iran and Syria, which was recently expanded to include U.S. owned or controlled entities wherever they are located, under the Iran Threat Reduction and Syria Human Rights Act of 2012.

“If you have foreign entities that are doing business in Iran, I encourage you to take a look at the impact of this new sanction,” he said.

ITAR Compliance

Mark Stevens, President, SCB Training Center discussed what his experience showed as the essentials of an effective ITAR compliance program.

He recommended that everyone within the organization needs to understand their roles and responsibilities with regard to the ITAR. From the compliance officer who must understand the various statutes that apply to every transaction, to the shipping clerk who must comply with any applicable “package marking” requirements.

He also stressed that management needs to be visibly involved in the process and actively committed to compliance.

An organization should carefully determine who is responsible for compliance and oversight. “Typically it’s not necessarily a good idea to have the empowered official also be responsible for sales,” Stevens said. “There’s been many times when a sales manager is trying to get the job done. Trying to improve sales. And while he’s doing that he’s letting transactions go through that shouldn’t necessarily be happening.”

Disclaimer: The views and opinions expressed in this article are those of the individual sources referenced and do not reflect the views, opinions or policies of the organizations the sources represent.