Export Compliance Red Flags
By John Herzo, Senior Associate
Everyone involved in export compliance understands that the cornerstone of corporate compliance is a strong export compliance program. A sign that your export compliance program is functioning properly is the ability of your employees to identify and prevent potential export compliance violations before they occur. One essential tool for an effective export compliance program is employee training on the recognition and remediation of "red flags" in export transactions. The goal of this article is to explain what is meant by "red flags" and the forms in which the "red flags" present themselves in prospective export transactions.
Scenario - Missiles, Inc., of the U.S. (Your Company) received a purchase order from ABC GmbH of Germany for sophisticated missile engine components. Per your company's Export Compliance Manual, Missiles, Inc., performed its due diligence on the new customer ABC GmbH. The due diligence determined the following facts about ABC GmbH:
- ABC GmbH has no company website;
- ABC GmbH's purchase order was sent to you via a Gmail email account;
- ABC GmbH's asked if Missiles, Inc., would accept a cash payment for the missile engine components;
- ABC GmbH's purchase order did not request any ongoing support, which is customary for these products;
- ABC GmbH is listed on several investment websites as a book store;
- A Google Earth search identified ABC GmbH at the street address provided and the store front appears to be a book store;
- Missiles, Inc., ran a denied party screening of ABC GmbH against U.S. Government denied party lists and revealed a hit for ABC GmbH of Germany, but the address is slightly different than the address for ABC GmbH;
- ABC GmbH asked for the missile engine components to be sent to their freight forwarder in the U.S., and did not note delivery to their address in Germany; but identified for the freight forwarder to contact ABC GmbH for delivery instructions
- Lastly, ABC GmbH refused to provide an end use statement regarding its intended use of the missile engine components.
Let's analyze the information Missiles, Inc., is presented with:
Denied Party Screening
Red Flag - ABC GmbH's address is similar to one of the parties found on BIS', the Office of Foreign Assets Control's ("OFAC") or other U.S. Government agency's denied parties/persons lists.
The existence of this "red flag" means that Missiles, Inc., will need to perform additional due diligence, e.g., research, to confirm that ABC GmbH is not the party on the subject denied party list. This is a difficult "red flag" to overcome, particularly when viewed in conjunction with the other "red flags" explained below. Missiles, Inc., must have persuasive evidence, not merely a statement in writing, that ABC GmbH is an entirely different organization from the listed entity at a different address. As companies who are prohibited from receiving U.S. exports will take significant steps to conceal their "prohibited" status, Missiles, Inc., must conduct extensive due diligence to overcome this "red flag".
Red Flag - ABC GmbH refused to provide an end-use statement regarding how it will utilize the missile engine components after Missiles, Inc., requested the end-use statement.
This "red flag" is a very serious one, particularly in light of the sensitive end use and extensive controls applicable worldwide on missile components. Detailed end-use statements are absolutely essential for items like missile components given that the U.S. Government will only approve export to vetted Governmental end users in "friendly" countries. This "red flag" may also present itself in other obvious ways such as the customer providing limited information on end-use when requested. If the potential customer or purchasing agent understands U.S. export regulations and believes it knows the classification of your product, they may try and tell you that there is no licensing requirement for the export of your product to their country. Therefore, end-use information is not required. The correct response, per EAR Part 744, or the ITAR (if applicable) is that the U.S. Government prohibits sales of any item if it will be used in nuclear production or any unsafeguarded nuclear facility; or any missile or unmanned aerial vehicle capable of a range of 300km or greater; or any chemical or biological end-use. Thus, your company requires end-use information to rule out the requirement for a license per EAR Part 744.
or the ITAR
Product Capability Vs. Customer's Line Of Business
Red Flag - Your due diligence revealed that ABC GmbH is a book store, therefore the product's capabilities, sophisticated missile engine components, does not fit ABC GmbH's line of business.
This is a really impossible "red flag" to overcome. The purchase of sensitive items, like missile components by those not in the same line of business is risky, given the high possibility of diversion to unauthorized end users. The fact that ABC GmbH is a book store was corroborated by Missiles, Inc.'s Google Earth search. As a result, Missiles, Inc. needs additional information for any possibility of overcoming this "red flag".
Technical Level Of End-Use Country
Red Flag - The item ordered is incompatible with the technical level of the country to which it is being shipped.
This "red flag" did not present itself in the scenario above because ABC GmbH is from Germany a highly technical country with active missile development end users. This type of "red flag" typically presents itself when the due diligence reveals export controlled equipment is being requested for purchase and shipment to a country that has no known capability to field or use the equipment.
Payment In Cash
Red Flag - ABC GmbH asked if Missiles, Inc., would accept cash for the missile engine components. The missile engine components are very expensive and would normally call for financing.
This "red flag" is indicative of an entity not wanting a "paper trail" and a sign of possible diversion. Your company's business development and sales force should be able to identify this "red flag" during sales meetings and contract negotiations.
Payment By Another Company
Red Flag - A secondary party requests to pay for another party's purchase.
This "red flag" did not present itself in this scenario. This "red flag" will present itself during the negotiation of the sale or after the sale has been negotiated, but prior to payment. Typically, a U.S. entity requests to pay for the purchase of a foreign entity. In some cases, the foreign customer / end user is from a proscribed country, such as Venezuela. The payment through another party may be a way to avert economic sanction regulations or to otherwise avoid being a party to a transaction. This "red flag" may implicate compliance issues with the OFAC regulations and the Foreign Corrupt Practices Act.
Little Or No Business Background
Red Flag - The customer has little or no business background.
This "red flag" also did not directly present itself in the scenario above. This "red flag" will typically present itself during the negotiation of the sale. Your company's business development personnel or sales force should be able to identify this "red flag" readily through bid and proposal discussions.
Unfamiliar With Product's Performance Characteristics
Red Flag - The customer is unfamiliar with the product's performance characteristics but still wants the product.
This "red flag" did not present itself in our scenario above. This "red flag" typically presents itself during the negotiation of the sale. Your company's business development personnel or sales force should also be able to identify this "red flag" as performance characteristics are essential for applications like missiles.
Decline Of Routine Installation, Training, Or Maintenance Services
Red Flag - ABC GmbH's purchase order did not request maintenance information or a warranty.
This "red flag" presented itself in ABC GmbH's email that contained its purchase order for the missile engine components. The failure to request installation, training or maintenance support where it is ordinarily requested can be a "red flag" indicating diversion to a prohibited end use as the ultimate end user would be denied the ability to receive this support, as well as the parts. This "red flag" typically presents itself during the negotiation of the sale. Your company's business development personnel or sales force should also be able to identify this "red flag".
Red Flag - Delivery dates are vague, or deliveries are planned for out of the way destinations.
This "red flag" did not present itself in the scenario above. Typically, this "red flag" will present itself during the negotiation of the sale. Your company's business development personnel or sales force should be able to differentiate between vague delivery dates for valid business reasons as opposed to vague delivery dates that are "red flags". Deliveries to out of the way destinations will present themselves during the due diligence phase when your company is screening the potential customer. For instance, the customer's address is in the United Arab Emirates, but they are asking for delivery to Uganda. This is a "red flag" that is often able to be overcome when the purchaser is able to explain the logical reasoning behind its request. This "red flag" will need to be addressed in the export license application as verification of address is important.
Delivery To Freight Forwarder
Red Flag - ABC GmbH requested that the missile engine components be delivered to its freight forwarder in the U.S. and did not state to deliver to ABC GmbH in Germany.
Is this a "red flag"? It is often customary for the foreign customer to identify the freight forwarder if they pay the freight charge. This can be a red flag if the purchase order doesn't identify to make the shipment from the U.S. direct to ABC GmbH in Germany. In this scenario, the requirement for the freight forwarder to get instructions for delivery information at a later time is another red flag. Is this a routed transaction, where the responsibility for licensing of controlled exports is placed on the U.S. freight forwarder? If yes, receive and review a copy of their export license before you make delivery to the freight forwarder. This allows you to verify the bona fides of the parties to the export transaction. This "red flag" should be identified by your company's business development personnel, sales force or shipping department as it is not typical to ship missile engine components to only the U.S. freight forwarder without knowledge of direct shipment to the foreign customer.
Red Flag - The shipping route is abnormal for the product and destination.
This "red flag" did not present itself in the scenario above. This "red flag" presents itself during the negotiation of the sale and the shipping process. Your company's business development personnel, sales force and shipping department should be able to identify this "red flag". This is a risk of diversion when the product is transported on an unusual route.
Red Flag - Packaging is inconsistent with the stated method of shipment or destination.
This "red flag" did not present itself in our scenario above. The "red flag" presents itself during the shipping process. Your company's shipping department should be able to identify this "red flag". This "red flag" often indicates a product will be diverted and party maybe used to obfuscate the country of export.
Red Flag - When questioned, the buyer is evasive and especially unclear about whether the purchased product is for domestic use, for export, or for reexport.
This "red flag" did not specifically present itself in the scenario above. However, ABC GmbH did refuse to provide an end-use statement, which is a form of evasiveness. This "red flag" may arise during the negotiation of the sale. This is very serious given the strict rules on end use of these types of items. Your company's business development personnel or sales force should also be able to identify this "red flag".
Red Flag - Missiles, Inc.'s due diligence into the bona fides of ABC GmbH revealed that ABC GmbH does not have a company website. While not every company has a website, most companies involved in the use of missile engine components have a website. The failure of your customer to have a website is a "red flag" that your company should perform additional due diligence to determine the bona fides of the customer.
This "red flag" presented itself in the scenario during the performance of Missiles, Inc.'s due diligence. Your company's business development personnel or sales force should also be able to identify this "red flag".
Red Flag - ABC GmbH's email to Missiles, Inc., came from a gmail email account as opposed to an ABC GmbH corporate email account. While not every customer will have a corporate email account, most companies involved in the use of missile engine components have a corporate email account. Your customer's failure to have a corporate email account is a "red flag" that your company should perform additional due diligence to determine the bona fides of the customer.
This "red flag" presents itself at the inquiry stage of the sales process. This "red flag" is easily identifiable by your company's customer service, business development and sales personnel.
With the preponderance of red flags present in this scenario, should Missiles, Inc., proceed with the order? What would your company do?
There can be many different "red flags" to export transactions that should put your company on notice that a given transaction has the potential to lead to an export violation and diversion of goods. It is your company's responsibility to address these "red flags" as they present themselves to different departments within your company from business development to shipping. Having a well-established export compliance program that includes specific departmental export compliance training and specific procedures that include "red flag" alerts and reviews will allow your personnel to identify potentially suspect export transactions and further research them to ensure the transaction is valid before proceeding.
We have utilized the "red flags" published on the Department of Commerce, Bureau of Industry and Security's ("BIS") webpage as a guide for this article.
Traveling With Electronic Devices - Are You Ready?
By Odyssey E. Gray, III, Associate, FD Associates, Inc.
Today’s world is a “smart” world, a world of various electronic devices that provide ever expanding connectivity and access. As a result of this age of “connectivity,” employers may require their employees to travel internationally, conducting business on their behalf while carrying electronic devices with them. What if your business involves ITAR controlled products? Will you receive or hand-carry ITAR regulated technical data on laptops, smart phones or other electronic devices? Are you remotely logging in to your company server while abroad to access ITAR regulated technical data? Are there controls in place to protect this data from being accessed by foreign persons while you are abroad? Is the ITAR technical data being accessed for individual use without further export, or, will you share the ITAR regulated technical data with foreign persons? Most importantly, does your company understand the authorizations required to allow the export of ITAR technical data on devices being carried internationally? Any export of ITAR controlled technical data requires ITAR authorization for the export.
What if the data being carried internationally is not ITAR regulated? Would this would mean no controls and thus, no USG authorization required? This is a common mistake by many who believe that if the data is not ITAR regulated, it is not export controlled. In fact, if the data is not ITAR controlled, then it is, or may be, subject to the Export Administration Regulations (“EAR”) and, if subject, the applicable ECCN for the information (technology) will determine whether Department of Commerce approval or EAR license exception is required for its export.
The good news for international travelers is that both the ITAR and the EAR have clear provisions for the license-free export of technical data and technology for employee use abroad under applicable ITAR license exemption and EAR license exception. The ITAR license exemption is available at ITAR 125.4(b)(9). The EAR has two applicable license exceptions at EAR Part 740.9 (TMP license exception) and EAR Part 740.14 (BAG license exception). These authorizations are commonly referred to as “personal use.”
The “personal use exemption” at ITAR Section 125.4(b)(9) authorizes the export, reexport or retransfer of ITAR controlled technical data, including classified information, without a license, by or to a U.S. person, or a foreign person employee of a U.S. person (who has been authorized to receive ITAR regulated technical data under an ITAR DSP-5 employment license) travelling or on temporary assignment abroad for their personal use.
The EAR “personal use exception” at EAR Part 740.9 – TMP (Temporary Imports, Exports, Reexports, And Transfers (In-Country), authorizes the export, reexport or transfer of EAR controlled technology, without a license, by or to a U.S. person, or a foreign person employee of a U.S. person travelling or on temporary assignment abroad for their personal use.
The EAR “personal use exception” at EAR Part 740.14 – BAG (Baggage), authorizes individuals leaving the United States either temporarily (i.e., traveling) or longer-term (i.e., moving) to take to any destination, as personal baggage, the classes of commodities, software and EAR controlled technology described pursuant to this license exception. License exception BAG authorizes the export of technology as “Tools of Trade” for use in the trade, occupation, employment, vocation, or hobby of the traveler. License exception BAG also authorizes the export of encryption commodities and software subject to EI controls, if for personal use.
Once you know where your data falls jurisdictionally, you can cite the proper export authority, contingent upon meeting all of the stated requirements of using either ITAR 125.4(b)(9) license exemption or the EAR license exceptions TMP or BAG.
Both the ITAR and EAR require that security precautions (e.g., encryption of the data; firewalls; use of secure network connections or other access restrictions on the electronic device on which the data is stored, e.g., passwords, etc.) are in place on the electronic device to prevent unauthorized access to the controlled information by foreign persons.
The most secure method for access abroad by an employee is the use of a secure encrypted tunnel into the company server (e.g., secure VPN), whereupon data may be viewed and accessed by the employee who is using either a company laptop / electronic device or a personal electronic device. All technical data remains on the company server and is not downloaded to the local device, except for viewing in an encrypted window.
If the company provides or allows its employee to use a company laptop or electronic device for hand-carry and use abroad while on travel, the device may already be loaded with ITAR controlled information/files (the hard drive should be encrypted and/or password protected). The company device should contain software that allows the device to be remotely wiped in case of theft or loss. The employee must maintain positive control and access of the company device with stored information so as not to allow unauthorized access. If the employee will not keep the laptop with them, at all times, they should plan to store the laptop in a secure place such as a hotel safe.
The company should have a written travel policy, including written processes and procedures, to provide guidance and instruction to all employees traveling to ensure that all regulatory requirements are met to remain compliant with the export of controlled information to the company employee.
Procedures should exist not only for the use of the applicable ITAR exemption or EAR license exception, but as a means to document the information released, to whom it was released, the manner in which the transfer occurred, as well as information concerning the device used to access/carry the data, whether it be a personal device or company device.
It is recommended that the traveler have a proforma invoice describing the device, the data or software installed, to include, any hard copies of data previously exported, and, the applicable ITAR license, license exemption / EAR license, license exception with them at the time of travel.
In addition to the actual export, the regulations require that records for each export be maintained by the exporter (e.g., description of the technical data that was exported; name of the recipient(s); date and time of export; method of transmission, i.e. facsimile, courier, email, meeting). The same record-keeping requirements that exist for any license approval for exports to foreign parties are the same as those for the use of any ITAR exemption or EAR license exception for exports to employees traveling internationally.
Any exports made beyond the scope of ITAR 125.4(b)(9) or EAR license exceptions TMP or BAG, i.e., not for “personal use,” are subject to the usual export licensing rules under the ITAR or EAR. In other words, if one seeks to provide controlled data to foreign persons, that export/transfer requires separate authorization, e.g., license approval, ITAR license exemption or EAR license exception.
Fines and penalties for any violation of the ITAR or EAR are applicable, thus, use of these “personal use” authorizations must be within the scope as cited in the ITAR or EAR, respectively.
While these steps might seem burdensome to a small company, did you know that the U.S. Customs and Border Protection (“CBP”) issued a new directive in January of this year (2018) which authorizes and provides guidance to CBP in its procedures for “…searching, reviewing, retaining, and sharing information contained in computers, tablets, removable media, disks, drives, tapes, mobile phones, cameras, music and other media players, and any other communication, electronic, or digital devices…” CBP has authority to search the contents of any electronic device leaving or entering the United States at their discretion. In 2017 alone, CBP conducted 30,000 searched of electronic devices.
CBP searches are authorized to facilitate border security. In practice, this means CBP may review and/or copy any information on any electronic device, even those items that are encrypted or password protected. CBP may make copies of any of the information on the device. If the information is not accessible, CBP may detain or seize the device to ship it off-site for further analysis and to facilitate CBP review of all information therein.
Even information marked as “Attorney-Client privileged” is subject to review and/or copy. Individuals, however, should alert and advise CBP if such information exists on the device and its status as “Attorney-Client privileged,” so that CBP is aware that this is protected information. A best practice would be to utilize the same procedures for confidential business information. Note, however, CBP may not use the electronic device to access information stored remotely. This directive is applicable only to the information stored on the actual electronic device.
Consistent with CBP policy, no specific cause is needed for CBP to conduct the search of the device. The directive does instruct that “CBP will protect the rights of individuals against unreasonable search and seizure and ensure privacy protections while accomplishing its enforcement mission.” Should CBP wish to review your device, you want to be able to provide CBP with evidence you have complied with applicable U.S. export laws. A copy of a completed traveler form that identifies the device, the applicable ITAR license exemption / EAR license exception, the reason for travel and the information being carried abroad is a good tool to demonstrate to CBP that you have not violated U.S. export laws.
The primary mission of both the ITAR and the EAR is national security and safeguarding U.S.-origin technology. The regulations recognize that company employees may require the use of export-controlled data to perform work assignments while abroad, thus, the ITAR 125.4(b)(9) license exemption and EAR license exceptions TMP and BAG for “personal use” permit this type of export.
There is one notable exclusion to the use of the ITAR 125.4(b)(9) exemption. It cannot be used for the carrying of ITAR controlled data to proscribed countries per ITAR 126.1 (e.g., China, Venezuela, etc.). Therefore, if a person is travelling to China or Venezuela, for example, on business, or even on personal travel, with their company issued device or a personal device that can access company information, they must know that they cannot lawfully carry or access ITAR technical data or EAR 600-series technical data while they are in ITAR 126.1 countries. Not only is there no applicable exemption under the ITAR or EAR, but there is a policy of denial for exports to these countries.
In today’s “smart” world, businesses should have travel policies and procedures that comply with the exemptions/exceptions available and protect the export of ITAR technical data or EAR controlled technology. If you need help with developing a travel policy, FD Associates stands by to assist you.
Bureau Of Industry And Security, Department Of Commerce Final Rule:
Amendments To The Export Administration Regulations Affecting The Licensing Policy For Cuba
By Odyssey E. Gray, III
The Department of Commerce, Bureau of Industry and Security issued a final rule, published in the Federal Register, effective November 9, 2017, which enumerated amendments to the Export Administration Regulations (“EAR”) in connection with implementation of U.S. policy in accordance with the National Security Presidential Memorandum on Strengthening the Policy of the United States Towards Cuba (“NSPM”), issued under the current administration on June 16, 2017.
The NSPM’s stated goals are “to enhance compliance with United States law; hold the Cuban regime accountable for oppression and human rights abuses; further the national security and foreign policy interests of the United States and the interests of the Cuban people; and lay the groundwork for empowering the Cuban people to develop greater economic and political liberty.” The NSPM makes limited changes to the historic policy changes towards Cuba enacted under the Obama administration that are intended to benefit U.S. commerce and the citizens of Cuba, not its governmental regime.
It is important to note that the statutory embargo of Cuba remains in place whereby items subject to the EAR are subject to a general policy of denial unless the transactions are eligible for review as provided in Part 746 of the EAR, Embargoes and Other Special Controls. Specifically, § 746.2(b) provides policy guidance under the EAR with respect to Cuba.
This final rule makes revisions to § 746.2 of the EAR by amending the Note 2 to paragraph (b)(3)(i) in connection with licensing policy for Cuba, amending License Exceptions found at §§ 740.12, 740.19 and 740.21 (Gift Parcels and Humanitarian Donations (“GFT”), Consumer Communications Devices (“CCD”), and Support for the Cuban People (“SCP”)), respectively, of the EAR to conform with the Office of Foreign Assets Control (“OFAC”) amendment which defines what are “prohibited officials of the Government of Cuba,” and revises § 740.21 (License Exception SCP) to further support free enterprise in Cuba.
In accordance with section 3(a) of the NSPM, Note 2 to EAR 746.2(b)(3)(i) clarifies that BIS will deny license applications for export or reexport to Cuba which include certain entities or subentities the State Department identifies on its List of Restricted Entities and Subentities associated with Cuba, also referred to as the “Cuba Restricted List,” unless the transactions are consistent with the policy and criteria specified in the NSPM. The Cuba Restricted List is now available in the Federal Register and the Department of State website at https://www.state.gov/e/eb/tfs/spi/cuba/cubarestrictedlist/index.htm.
Also in accordance with section 3(a) of the NSPM, sections of the EAR License Exceptions GFT, CCD, and SCP are amended pursuant to the aforementioned OFAC amendment to include certain additional individuals that would be deemed ineligible Cuban government officials which, in turn, would exclude the use of the GFT, CCD, and SCP License Exceptions for exports and reexports to Cuba.
License Exception SCP (§ 740.21) authorizes the export and reexport of certain items to Cuba that
are intended to improve the living conditions of the Cuban people; support independent economic activity and strengthen civil society in Cuba; and improve the free flow of information to, from, and among the Cuban people. Three times since its inception, License Exception SCP has been amended to add additional categories of commodities for export and reexport.
Under this final rule, and to expand opportunities for free enterprise in Cuba pursuant to section 2(d) of the Cuba NSPM, the EAR language identifying specific items, activities and end use activities eligible for License Exception SCP has been simplified and expanded to a single provision that authorizes “the export and reexport to Cuba of items, without specifying types, for use by the Cuban private sector for private sector economic activities.” Limitations of SCP are crafted to ensure any revenue generated is not to the benefit of the state or state-owned facilities. In addition, no exports or reexports may contribute to the operation of the state. Eligible items for export or reexport under the provisions of this license exception continue to be only those items designated as EAR99 or controlled for Anti-Terrorism reasons only.
With these changes, more opportunities exist for U.S. exporters related to commerce in Cuba, however, these opportunities also implement additional layers of scrutiny to ensure that only eligible parties, items and end uses are the basis of proposed transactions. Exporters are advised that they should fully research the many restrictions on exports or reexports to Cuba, particularly when contemplating use of one of the EAR License Exceptions for proposed transactions.
As reported in the media, travel restrictions for U.S. citizens are enhanced based on the limitations that such activities benefit the Cuban government who owns a large number of the hotels in Cuba.
Faulty Processes Can Be Expensive And Put Your Ability To Export At Risk
By Odyssey E. Gray, III, Associate, FD Associates, Inc.
A successful and lawful export should be the product of a series of internal processes conducted by persons responsible for trade compliance that help determine/answer pertinent and relevant questions concerning the export. Exporters should be sure to continually review and evaluate internal processes for compliance to the various export regulations.
A baseline starting point is for exporters to be able to answer certain questions about each transaction:
- Who? – who are you doing business with? Who are the other parties in the transaction?
- What? – what is the commodity and associated export controls?
- Why? – what is the end use?
- Where? – where is it going?
Failure to address any one of these things can lead to an unlawful export with negative ramifications ranging from civil penalties such as fines to debarment and imprisonment. It is crucial that exporters have established processes in place to manage compliance requirements with the International Traffic In Arms Regulations (“ITAR”), Export Administration Regulations (“EAR”), Office of Foreign Assets Control (“OFAC”) and Foreign Trade Regulations (“FTR”).
Cryofab, Inc. (“Cryofab”), of Kenilworth, NJ, was recently fined $35,000 by the Department of Commerce, Bureau of Industry and Security (“BIS”), for export transactions that had a total value of $21,570. That’s right, the fines exceeded the value of the transactions. How did this occur? Cryofab exported EAR99 items (liquid helium storage container and accessory; liquid nitrogen storage container and operating tool) as No License Required (“NLR”) to Bhabha Atomic Research Center (BARC), an Indian Department of Atomic Energy entity located in Mumbai, India. BARC is listed as a party on the Department of Commerce Entity List requiring licenses for all commodities exported to BARC. BIS charged Cryofab with failure to screen the Entity List and failure to seek or obtain the licenses required for export.
Had Cryofab conducted a Denied Party List (“DPL”) screening, using either the free government tool, or a paid service, or even just reading the EAR at Supplement 4 to Part 744, it would have been
alerted to the fact that its end user was listed on the Entity List and Cyrofab would have known of the associated licensing requirements under the EAR for this direct hit on the Denied Parties List.
The Entity List in the EAR specifies the license requirements for each listed person or entity. Those license requirements are independent of, and in addition to, license requirements imposed elsewhere in the EAR. Requirements to export, reexport or transfer (in-country) an EAR99 item to a listed entity are specified in the “License Requirement” column of the Entity List. If that column indicates “all items subject to the EAR,” then a license is required to export, reexport or transfer (in-country) the item, even though EAR99 items may be exported to the country of destination as NLR.
Due to its failure to screen parties to the transaction, Cryofab was fined 62% in excess of any profits it may have received for these transactions, and they must pay the fine in a timely fashion to avoid further penalties and interest and risk debarment.
Under the EAR, exporters should be mindful of the ten general prohibitions (Part 736) in connection with an export transaction by considering five facts: classification, destination, end user, end use and conduct. Note the questions above center on consideration of these facts. Cryofab’s exports constituted a violation of General Prohibition Five:
“Export or reexport to prohibited end-uses or end-users (End-Use End-User). You may not, without a license, knowingly export or reexport any item subject to the EAR to an end-user or end-use that is prohibited by part 744 of the EAR.”
A DPL screening should be embedded in the export processes/procedures when vetting/analyzing the scope of a proposed transaction. The screening should be completed for all parties to the transaction, not just the end user.
In this instance, the failure to conduct the DPL screening directly cost the exporter significantly more money than could have been made on the transaction than the preventive measure of screening as part of the company’s processes, quotation, order processing and shipping. Long term repercussions
can include the ability to make future exports, additional scrutiny by government agencies and the company reputation sullied.
Learn from others mistakes by ensuring that you have the correct exporter processes in place. In this instance, Cryofab missed the DPL screening step and focused on the where but not the who. The end result (and penalty) reinforces the need for exporters to understand that with regard to matters of export compliance, it’s in the company’s best interests to be as thorough as possible to avoid penalties such as those described above.