Balancing Free Trade with National Security What Every Alabama Attorney Should Know about International Trade Controls, 0313 ALBJ, 74 The Alabama Lawyer 96 (2013)

• Author: Alan F. Enslen, Bryan A. Coleman and David T. Newton

Balancing Free Trade with National Security: What Every Alabama Attorney Should Know about International Trade Controls

Vol. 74 No. 2 Pg. 96

Alabama Bar Lawyer

March 2013

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 Alan F. Enslen, Bryan A. Coleman and David T. Newton

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The volume of international business conducted by Alabama companies is growing at an impressive pace. Led by the automotive industry, Alabama exported almost $18, 000, 000, 000 in goods during 2011–and almost $13, 000, 000 during the first eight months of 2012–increases of more than 15 percent over the previous periods.^[1] Businesses in Alabama and throughout the United States are increasingly exporting products and technologies to establish or expand their overseas market share. The United States currently has multilateral or bilateral free trade agreements with 20 countries, including recent trade agreements with Panama, Columbia and South Korea, which help to foster the continued expansion of foreign trade.^[2]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0While most of the products and technologies exported from Alabama have dual civil-military uses, a significant number of exports feature specific military applications. Alabama and the surrounding region is home to a variety of businesses that support the national defense industry–particularly within the aerospace sector. From Redstone Arsenal to Fort Rucker and across the Florida panhandle, government contractors provide goods, services, technology and software to all branches of the U.S. military and to U.S. Government agencies, as well as to allied nations via direct commercial sales, foreign military sales or to other assistance programs. U.S. international trade controls were enhanced during the Cold War primarily to ensure that sensitive technology would not be sent or diverted to nations, entities or individuals hostile to the United States. Export and other international trade laws are enforced through a variety of federal agencies, most of which administer comprehensive regulatory regimes that implement underlying statutes. Violating international trade laws can cause immediate harm to U.S. national security. As a result, violations of such controls carry strict civil and criminal penalties for offending parties.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0This article outlines the international trade controls generally applicable to both commercial and defense industries, describes the compliance framework and enforcement provisions associated with these controls and highlights typical compliance issues that international businesses may encounter. The key takeaway from this overview is that effective international trade compliance efforts must span the full spectrum of international trade controls–not just the particular control area presenting the immediate concern.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0International Trade Controls

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Although most international trade compliance programs tend to be anchored by export control concerns, parallel consideration of U.S. economic sanctions programs, anti-boycott restrictions, customs/import controls, anti-corruption laws, and foreign direct investment considerations are necessary to ensure full compliance. There is no single agency, statute or set of regulations that spell out the precise requirements for a company to follow in order to comply with all U.S. international trade controls. Instead, a multitude of federal agencies–many with their own (sometimes overlapping) regulatory schemes–govern the transfer of technology, the provision of services and the shipment of products to or from overseas destinations. These agencies are scattered throughout the U.S. departments of Commerce, State, Treasury, Defense, Homeland Security, Energy, and others.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Export Controls

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0At their core, U.S. export laws and regulations require a company to (1) determine the export control jurisdiction for its products, (2) classify its products and determine both the type and level of applicable licensing requirements, (3) conduct due diligence screening on intended end-users, destinations and end-uses for its products, (4) obtain required licenses and/or governmental approvals, and (5) monitor export transactions for unusual developments (called “red flags”) that may trigger export compliance concerns.^[3]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Commercial/ Dual-Use Items

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Most exports are regulated by the U.S. Department of Commerce through its Bureau of Industry and Security (“BIS”).^[4] The BIS performs its regulatory function pursuant to the Export Administration Regulations (“EAR”), which are a set of federal regulations promulgated to serve the national security, foreign policy, nonproliferation and short supply interests of the United States.^[5] The statutory authority for the EAR is found in the Export Administration Act of 1979 (“EAA”).^[6] The EAA is not permanent legislation, although the President of the United States generally authorizes the continuation of the EAA pursuant to authority granted by the International Emergency Economic Powers Act (“IEEPA”).^[7]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Although the EAR focuses on the export of U.S.-origin items denominated as commodities, technology or software, its application extends beyond the mere export of items from the U.S. The EAR also covers the “re-export” of certain controlled items that originate in the United States, but are then sent from one foreign destination to another.^[8] In addition, the EAR regulates “deemed exports, ” which refers to the release of controlled technology or source code to a foreign person, even if that person is located in the U.S at the time of the release.^[9] Examples of deemed exports include the visual inspection of controlled technology by a foreign national during a tour of a U.S. manufacturing facility, an oral exchange of controlled information between U.S. and non-U.S. persons within the U.S. or abroad, or controlled software being e-mailed by a U.S. company to a foreign person located in the U.S.^[10] Deemed export compliance is often overlooked (particularly by companies that do not actively export technology) because the concept it is somewhat counter-intuitive. The “export” occurs entirely within the U.S., but is “deemed” to be an export to the country of the non-U.S. person recipient. The subject of deemed exports has arisen for many Alabama companies since February 2011, when U.S. Customs and Immigration Services began requiring petitioners to make an export control attestation in connection with a petition for certain non-immigrant visas (including H-1B, L-1, and O-1 visas).^[11]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The EAR controls the export of commercial “dual use” items. A “dual-use” item under the EAR is an item that, while designed for civilian use, also has potential military application.^[12] If the item is required to be controlled for export, it will be listed/described on the EAR’s Commerce Control List (“CCL”), which also sets forth the export licensing requirements and restrictions applicable to each particular item.^[13] Items located on the CCL are assigned a five-character Export Control Classification Number (“ECCN”) that enables the exporter to identify the applicable export con-trols.^[14] Depending on the reason(s) for control and the intended country of destination, an exporter may be required to obtain an export license (or justify a license exception) from the BIS prior to shipping the item to a foreign end-user/destination.^[15] Items not specified on the CCL, but which remain subject to the U.S. Commerce Department’s jurisdiction under the EAR, are designated as “EAR-99.” EAR-99 items will generally not require an export license unless mandated by one of the EAR’s general prohibitions (such as a prohibited end-use/user or an embargoed destination). The vast majority of items exported from the U.S. is designated as EAR-99 and are exported without a license.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Violations of the EAR are subject to severe civil and criminal penalties. Civil penalties may result in fines equaling the greater of $250, 000 or twice the value of the transaction per violation.^[16]Criminal penalties include fines of up to $1, 000, 000 and/or imprisonment of up to 20 years.^[17] Violating the EAR may also result in the denial of export privileges, the seizure and forfeiture of items intended for export, and the suspension of a person or entity’s right to contract with the U.S. Government.^[18]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Defense Trade

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The U.S. Department of State, through its Directorate of Defense Trade Controls (“DDTC”), regulates the export, manufacture and brokering of defense articles and defense services and the transfer of technical data.^[19] The State Department controls defense trade pursuant to the statutory authority found in the Arms Export Control Act (“AECA”), as well as the AECA’s implementing regulations, the International Traffic in Arms Regulations (“ITAR”).^[20]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The ITAR defines a “defense article” as any item (including technical data and software) specifically designed, developed, configured, adapted, or modified for a military application, and which does not have either predominant civil application or the performance equivalent to an article used for a civil application.^[21] Items designated as defense articles are specified on the United States Munitions List (“USML”), which is a categorized listing of all defense-oriented items such as weapons, munitions, aircraft, tanks, sea vessels, and military equipment.^[22] A “defense service” under the ITAR is the furnishing of assistance (to include training) to foreign persons in the design, development, engineering...