Surviving United States export controls post 9/11: a model compliance program.

• Jurisdiction: United States
• Date: 22 June 2005
• Author: Dunn, Tara L.
• Published date: 22 June 2005
• Author: Dunn, Tara L.

PROGRAM FOREWORD--by J. Triplett Mackintosh PROGRAM INTRODUCTION--by Mark D. Menefee A. PREFACE 1. BEYOND EXPORT COMPLIANCE: THE EXPORT COMPLIANCE PROGRAM'S CRUCIAL ROLE IN CORPORATE GOVERNANCE AND MINIMIZING THE IMPACT OF VIOLATIONS 2. HYPOTHETICAL CLIENT FACTS AND MODEL PROGRAM DESIGN CONSIDERATIONS B. XYZ, LLC EXPORT COMPLIANCE PROGRAM PROGRAM FOREWORD

J. Triplett Mackintosh (1)

September 11, 2001 ("9/11") will stand as a defining moment in U.S. export controls. Viewed from the distance of several years, it is now evident that 9/11 brought to the glare of public awareness the troubling reality that non-state terrorists threaten the core of the United States. The prior prevailing view that terrorism was something that affected foreign venues was one of the many casualties of that day. Another victim of 9/11 was the previously held belief that export controls were merely an irritating part of federal trade controls that were more a nuisance than anything else. It was clear that the 9/11 terrorists and their supporters relied on access to U.S.-origin technologies and financial networks to achieve their scheme. (2) It was also clear that throughout the world there were (and are) many other terrorists waiting for the funds and technology required to harm the United States. (3)

9/11 is not the only noteworthy date in the recent chronology of export controls, but it was qualitatively different from the others. Other salient events in the last half of the 1900s have included the conclusion of World War II, the Cold War, and the first Iraqi conflict. Unlike 9/11, these other events placed the United States in conflict with governments, that is, state-actors. As the United States and its allies considered how to keep these state-actors from acquiring technology that could be used offensively or defensively, the focal point of export controls was relatively clear, well-defined.

For example, during the Cold War, the United States and its allies under the "Coordinating Committee on Multilateral Export Controls" ("COCOM") agreed on an Industrial List of technologies that would be controlled for export to the Eastern Bloc. (4) The analysis was relatively simple for regulators and exporters: "what" is going "where." (5) The "where" answered all the questions regarding use. If it was going to the Eastern Bloc, regulators could conclude reasonably that it would be used to the advantage of the communist state to the detriment of the Free World. (6) That meant that licenses were frequently denied and exports restricted. (7)

The end of the Cold War and the first Iraqi conflict changed the equation. On the one hand, regulators had an incentive to support technological development of former Soviet states. (8) On the other hand, regulators saw after the first Gulf War how Iraq had diverted dual-use or commercial items for military purposes. (9) Regulators also learned how countries, such as Brazil, supported Iraq's military development by diverting otherwise lawful exports from the United States. (10) The equation now centered on "use" and "users." (11) Even an export to an erstwhile ally might be diverted for proliferation purposes if the "user" was unreliable. (12)

9/11 only underscored for the U.S. public what regulators had learned during the first Gulf War: the "use" of an export and the "user" were the critical questions. (13) The country of destination became almost secondary as the focus of regulatory controls went to "end-use" and "end-user." (14) The new goal was to keep important technologies from those who would proliferate weapons of mass destruction and their delivery systems. (15) This focus, however, put a new emphasis--and responsibility--on the exporter. This is where Tara Dunn's model program comes in.

Not surprisingly, post-9/11, enforcement of export controls has taken a new importance. Violations are considered a breach of "homeland security" and export controls are a new darling of federal prosecutors across the country. (16) U.S. companies, therefore, have only one choice: comply. The rules are too important and the penalties too great to treat export controls as if they were some other paperwork obligation. (17) Ms. Dunn's model program provides clear guidance for companies facing this compliance burden.

While her program is designed to meet the business activities of a fictional company, the methodology reflected in her program is directly applicable to other companies. Counsel for exporting companies would do well to review the model program and apply it as a rubric to develop a tailored export compliance program.

Ms. Dunn's work on this project was exemplary. The quality of her program resulted in her receiving the 2004 Holland & Hart Private International Law Award. This was the first time the scholarship award was won by an entry other than a traditional legal paper. All of us at Holland & Hart are proud of her achievement and to have had the opportunity to support this fine young lawyer.

PROGRAM INTRODUCTION

Mark D. Menefee (18)

When a law enforcement officer looks at a company, one of the first questions he or she asks him or herself will be: "Are these people good guys or bad guys?" Much is at stake for the officer. Initial information about the company's activities helps the officer decide not only how to begin the inquiry but, more importantly, how best to protect the safety of the officer and his or her fellow officers when dealing with the company. An investigator approaching an unknown office building is taking a personal safety risk no less than a police officer approaching a car that has been pulled over on the highway. While an officer investigating a so-called "white collar crime" will be typically less likely to encounter a violent response from the person under investigation than, say, an officer investigating a drug smuggling operation, the training for federal criminal investigators emphasizes the possibly fatal consequences to the officer from making incorrect assumptions about the level of threat posed by a person who is the subject of the officer's initial questions.

If you were a federal agent charged with responsibility for investigating white collar crimes such as export control violations or securities fraud, and felt keenly the need to make a quick and accurate first assessment of whether a company consists of good guys who may have made a technical mistake, or terrorist supporters who wouldn't hesitate to defraud other companies in order to accomplish their mission, and who are completely willing to kill you in the process, what would be your test? On an interpersonal level, your initial "gut reaction" about the truthfulness of the people you meet and interview will tell you a great deal--but only about those individuals, not necessarily about the corporation as a whole. Is there some other information, at the corporate level, that could help you quickly assess the character of the whole organization?

At the initial stage of an investigation the single best indicator of whether a company is law abiding is whether the company has an effective compliance program. "According to available information, only 2 of the 865 corporations sentenced for federal crimes during the last eight years had effective compliance programs. Of the 143 organizations sentenced under Chapter 8 in 2002, not one maintained any type of compliance program whatsoever." (19) These sentencing statistics must be understood properly. It does not follow from these statistics that a company can avoid possible criminal liability by merely officially adopting a compliance program. What does follow is that there is a strong correlation between crimes committed by corporations and a complete disregard of their compliance responsibilities by the management of those corporations. (20) In other words, companies whose managers choose not to take their compliance responsibilities seriously are flying blind. They are significantly more likely to commit violations of complex regulatory regimes, such as those governing exports, than companies that maintain reasonably effective compliance programs. (21) They also are much more likely to generate the sort of "smoking gun" memos and email that reveal full well their negligence or their knowing and willing intent to violate laws impeding their short term business plans. An experienced federal investigator knows that when he or she finds a company operating without an effective compliance program, the odds are in favor of discovering evidence of a crime.

The vast majority of business people have absolutely no desire to commit regulatory crimes. But small- and medium-sized companies must make difficult choices about how to come up with the money needed to insure a reasonable degree of compliance. Start-up companies find regulatory compliance to be especially difficult to fund. In the area of export controls, where the regulations are quite complex, the costs of running an effective compliance program can be very high. However, because export controls safeguard the national security of the United States and its allies, the penalties for violations can be devastating. It is not uncommon for violators to be subject to criminal and civil fines as well as denials of export privileges; often penalties will be imposed not only against the corporation but against the midlevel managers or senior executives as well. (22) Small- and medium-sized firms, and their owners, are especially susceptible to multiple penalties.

Tara Duma's model compliance program provides a great service to the international business community. Her program can help a smaller company, or a new start-up firm, reduce its initial export compliance costs while achieving a sophisticated level of compliance. If a company will take to heart the importance of complying with U.S. export controls and use Ms. Duma's model program as its standard, it will be able to manage its risks effectively and economically...