On February 6, 2014, the U.S. Department of Commerce Bureau of Industry and Security (BIS) published in the Federal Register, Vol. 79, No. 25, pages 7105-7110, proposed amendments to its Export Administration Regulations (EAR) concerning so-called "routed transactions."
Generally, a routed transaction involves a situation where the foreign principal party in interest (FPPI)—defined in the EAR—is responsible for the transportation of items that are subject to the EAR out of the United States. In such transactions, the U.S. principal party in interest (defined in the EAR; referred to in this Alert as USPPI) may retain the responsibility and authority to determine licensing requirements and, as required, apply for an export license.
The current state of the regulations also permits, assuming requirements are met, the USPPI to transfer these responsibilities to the FPPI, acting through a U.S. agent, to assume these responsibilities and authority.
Because of reported confusion in the use of the term routed transaction as it appears in the Foreign Trade Regulations regulated by the Census Bureau, and the term routed transaction as it appears in a number of provisions of the EAR, BIS is proposing elimination of the term as it appears in provisions of the EAR and the substitution of the term "Foreign Principal Party Controlled Export Transaction" in its place in those transactions where the FPPI is responsible for the export from the United States and, also, assumes the authority and responsibility for licensing requirements.
Often, contracts between the USPPI (most frequently the U.S. seller) and the FPPI (foreign purchaser) contain terms and conditions pertaining to responsibilities associated with the export transaction. The proposed regulations will likely have an impact on the drafting of those terms and conditions.
The proposed new terms and conditions associated with what will be known as "Foreign Principal Party Controlled Export Transactions" is found in an amended section 15 CFR 758.3(b) of the EAR. Under the existing provision, BIS imposes a general obligation on the USPPI, as exporter, to ensure that the transaction is in compliance with all export-licensing requirements. However, in routed transactions, where the FPPI assumes that responsibility in writing, responsibility is transferred (subject to specific requirements) to the FPPI. The FPPI must act through a U.S. agent because the EAR requires the exporter to be in the United States. In such a situation, the U.S. agent becomes the exporter. Without such a delegation, the USPPI remains the exporter. Under the current regulation, the USPPI must provide the FPPI with certain information, e.g., "Any and all information the USPPI knows could affect a licensing determination; upon request, an item’s export control classification number (ECCN); sufficient technical information about an item so that the ECCN can be determined." Under the proposed amended regulations, BIS clarifies that an agent of the FPPI must have written authorization from the FPPI before submitting a license application [proposed section 748.4(a)(2)]. This provision also specifies that unless authorized by section 758.3, the USPPI will be the exporter and the party responsible for applying to BIS for a license. Section 758.3(b)(1)-(b)(3) "maintains and clarifies the obligations of each party."
Section 758.3(b)(1) provides for a written assumption of responsibility. Section 758(b)(2) calls for a power of attorney or other written assumption executed by the FPPI whereby an agent in the United States has been designated and the FPPI has provided that agent with a written power of attorney or other written authorization before the agent could make an application to BIS for a license. The FPPI would also be required to provide the USPPI with a copy of the power of attorney or other written authorization prior to the FPPI's assuming responsibility from the USPPI for determining licensing requirements and obtaining licensing authority.
Section 758.3(b)(3) provides for information sharing between the USPPI and the FPPI and its agent. The USPPI would be required to provide the FPPI and its U.S. agent with the correct ECCN, or with sufficient technical information to determine a classification, upon request of the FPPI and its agent. The USPPI would also be required to provide the FPPI and its agent with any information that the USPPI "knows" may affect the determination of license requirements or export authorization. It is to be noted that the definition of "knows" or "knowledge" as found in the EAR is quite broad and that this requirement may give rise to disputes among the parties as to what should have been disclosed; also, use of the term "may affect" could further work against the intent of BIS to clarify the responsibilities of the parties.
Section 758.3(b)(ii) identifies the information that the USPPI may obtain, upon request, from the FPPI's agent regarding the export transaction. Such information includes: date of export, port of export, country of ultimate destination and port of destination, method of transportation and specific carrier identification and export authorization (e.g., license number, license exemption or no license required (NLR) designation). According to BIS, this information will enable the USPPI to confirm that the export was properly authorized. It can be wondered what responsibilities would be placed upon the USPPI should it conclude that it cannot determine that the "export was properly authorized."
For specific information pertaining to the various proposed amendments, please refer to the Federal Register notice identified herein. Similarly, comments are to be received by BIS by April 7, 2014. Please refer to the notice for information regarding methods of filing.