Even well-established companies can struggle to understand and comply with the U.S. laws that govern international trade. The challenges are greater still for new companies with limited experience doing cross-border business.
For an emerging company thinking about launching or expanding international business, there are a number of considerations. This content focuses on two U.S. regulatory regimes. First, the company must understand what export controls will apply to exports of its goods, technology, and/or services. Second, the company has to know its customer – and its other business partners – to ensure that those parties will not subject the company to liability.
Classify Products and Technology for U.S. Export Controls Purposes
The United States maintains two primary export controls regimes. The first is the commercial export controls regime, which the U.S. Commerce Department administers under the Export Administration Regulations (the EAR). The second is the defense export controls regime, which the U.S. State Department administers under the International Traffic in Arms Regulations (the ITAR).
The first step in addressing export compliance obligations is to determine the jurisdiction of the good, software, technology, and/or data (any of which is an “item”) that the company will be exporting. Nearly all ITAR-controlled exports require a license, whereas most items controlled under the EAR can be exported to most destinations without a license.
Items controlled for export under the EAR are classified on the Commerce Control List, which forms part of the EAR. The specific classification is the Export Control Classification Number (ECCN). Using the ECCN, a company can determine whether a license is required to export a particular item to a particular end-use and end-user. For example, certain software can be exported to the UK without a license, can only be exported to India with a license, and would almost certainly be barred from export to Russia.
Notably, exports of technology are controlled just like the physical item to which the technology pertains. And given that technology – such as design drawings, specifications, testing results, and the like – is often in electronic form, exports can occur very easily over e-mail or even by telephone.
Indeed, many export violations involve unauthorized exports of technology. For example, in early 2021, Princeton University agreed to pay the Commerce Department $54,000 in civil penalties as a result of unauthorized exports of technology. More detail about that matter is available in this article that we prepared at the time.
Know Your Business Partners
Often the easiest way to commence international operations is through a third party, be it a distributor, agent, or other representative. Under U.S. law, a third party acting on a company’s behalf can subject the company to liability; many U.S. enforcement actions involve conduct by third parties. For instance, if a U.S. company exports an item to a distributor and is aware the distributor will further ship that item to a country subject to a U.S. export embargo, e.g., Cuba, even if the shipment from the distributor to Cuba is lawful under the distributor’s local law, the U.S. company can be penalized for an indirect export to Cuba.
As a threshold matter, it is necessary to ensure that your international business partners are permissible parties under U.S. law. The Commerce Department maintains several lists of prohibited and restricted parties, including the Denied Persons List, that are significantly limited for U.S. export purposes. Even an inadvertent export from the United States to one of these restricted parties can lead to significant penalties.
In addition, the U.S. Treasury Department, Office of Foreign Assets Control, which administers U.S. economic sanctions, maintains lists of prohibited parties. The most significant of these is the List of Specially Designated Nationals (SDN) and Blocked Persons (the SDN List). U.S. companies are prohibited from conducting virtually any transaction with an SDN.
Notably, many of the prohibited and restricted parties designated by the Commerce Department and the Treasury Department reside in countries not otherwise subject to U.S. economic sanctions or embargoes. Some have very innocuous-sounding names. For instance, the Treasury Department recently imposed a blanket prohibition on U.S. companies (and individuals) conducting business with HighTrade Finance, based in St. Vincent and the Grenadines.
Thus even when pursuing business in a country considered a strong U.S. ally, it is important to screen business partners – customers, freight forwarders, agents, financing banks, etc. – against the relevant restricted and prohibited parties lists.
Implement Appropriate Compliance Program
It is usually not necessary to implement a comprehensive international trade compliance program when just getting started conducting international business. The government recognizes that a compliance program should be practical and risk-based. But some policies and processes should be developed and put in place.
As noted above, proper jurisdiction and classification must be one of the first steps when exporting an item, regardless of the destination. Business partners should be screened to ensure they are not prohibited parties under U.S. law. And records should be maintained of all export transactions and be kept in an orderly fashion – this is not only good business but also required under the law.
All of these steps and others the company takes with respect to trade compliance – e.g., employee training, identifying the point of contact for compliance issues, specifically stating the company’s commitment to compliance – should be memorialized in an international trade compliance policy. That policy need not be long, but it should be clear as to the company’s commitment to comply with applicable trade laws – and the steps, as identified above, the company will take to promote that compliance.
Series: Key Considerations for Emerging Companies
Early-stage companies have particular legal needs. Our Emerging Companies Practice Group is releasing a “Key Considerations” series, in which we will share our experience by outlining the most critical factors a company should consider in the most relevant subject areas.
Keep an eye out for future installments.