Experts from BIS Identify Key Issues for Exporters and How to Develop an Effective Export Control Program

April 24, 2018

Just as the U.S. Treasury’s Office of Foreign Assets Control (OFAC) has great influence over the implementation of U.S. sanctions policy, its cousin – the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) – plays an equally vital role in the implementation of U.S. export/import policy.

BIS regulates less sensitive military items, as well as, commodities and technology referred to as “dual-use;” these are items that are designed for both commercial and military applications.BIS derives its power mainly from the Export Administration Act (EAA) and is responsible for administrating the Export Administration Regulations (EAR). Similarly to OFAC, BIS keeps a list of regulated items called the Commercial Control List (CCL). BIS has broad jurisdiction over U.S. origin items.

Despite BIS’s important role, many compliance professionals are not even aware of what the EAR stands for, let alone what it prohibits.

In a recent webinar at SanctionsAlert.com,Todd Willis, Director of the Munitions Control Division at BIS and Kenneth Soo, Senior Export Compliance Specialist of the Export Management and Compliance Division at BIS’s Office of Exporter Services, discussed the essential elements of a successful export control program and how a company can make sure they stay fully compliant.

A New Administration; A New Focus

Under his Administration, President Trump will inevitably have a new agenda and different priorities. Unlike the preceding Obama Administration, which created a number of new regulations, the current Administration is much more focused on de-regulation and National Security.

In fact, one of President Trump’s first Executive Orders – E.O. 13771:“Reducing Regulation and Controlling Regulatory Costs, also known as the 2-for-1 Executive Order – directs agencies to repeal two existing regulations for every new regulation created. The current export control regimes are exempt from this particular 2-for-1 rule. Nevertheless, with the new Administration’s focus on de-regulation, certain changes to export/import rules are certainly a possibility.

Countries to Watch When Exporting

A few countries may have more export control red flags than others.

Firstly, there have been a number of recent Russian entities that have been placed on the export control list.Five entities were added in January 2018, in conjunction with OFAC designations, pursuant to E.O. of December 29, 2016: “Taking Additional Steps To Address The National Emergency With Respect To Significant Malicious Cyber-Enabled Activities,” which amended E.O. 13694, ten entities were added in June, in conjunction with OFAC designations, to maintain sanctions pertaining to the conflict in eastern Ukraine (E.O.’s 13660 and 13661), and two entities were added in December 2017 for the production producing a ground-launched cruise missile system, and associated transporter-erector launcher, for the Russian Federation Ministry of Defense.

In addition, the recent Russian sanctions law – Countering America’s Adversaries Through Sanctions Act (CAATSA) – though not within BIS’s jurisdiction, can affect those conducting exports/imports to Russia.

The speakers also talked about Iran and the Joint Comprehensive Plan of Action (JCPOA).. Because the Trump Administration is still uncertain of whether or not they will uphold the deal, everything remains status quo. In other words, if you had to have a license before, you will still need that license now. It is also important to note that, though BIS does issue licenses for items on its CCL, no further license from BIS is needed if OFAC has already authorized the transaction, with few exceptions.

Further, the panel discussed developments relating to Cuba. On November 9, 2017, BIS published a rule to implement portions of the National Security Presidential Memorandum on Cuba, dated June 16, 2017. This rule established a general policy of denial for exports/re-exports involving parties on the State Department’s Cuba Restricted List, expanded the list of Cuban government officials ineligible for certain license exceptions, and simplified and expanded the license exception authorizing certain exports/re-exports to the Cuban private sector. Despite this hard rule, some licensing exceptions do exist with regard to support of the Cuban people, agriculture, and consumer communication devices. There is also a favorable case-by-case policy for items such as: medicines/medical devices, telecommunications, and those necessary for environmental protection.

North Korea is also a country to watch. Currently, authorization is needed for all items subject to the EAR, with very limited exceptions. Generally speaking, BIS holds a policy of denial save for those items that can be used for humanitarian purposes. However, all of this could change very quickly.

Lastly, compliance officers should note that BIS holds a favorable case-by-case policy for Sudan and Syria, though authorization is still needed. Recent developments in Sudan sanctions law have signaled a move towards more open trade.

Exporting Foreign-Made Goods – the de minimis rule

The course also covered key facts that all re-exporters should be familiar with.

The application of EAR Items outside the U.S. can be very broad. If an item is of “U.S.-origin, incorporates a certain amount of U.S.-origin controlled content, or is the direct product of certain U.S.-origin technology software, that item will be subject export control regulations.The EAR considers items to be “incorporated” when they are either: essential to the functioning of the foreign equipment, customarily included in the sale of foreign-made items, or re-exported with the foreign-made item.

The EAR applies a de minimis rule based on the percentage value of the U.S.-origin controlled content in a foreign-made item. Therefore, if a foreign-made item does not exceed the de minimis percentage, the EAR will not apply.

To calculate the de minimis percentage, exporters must take the fair market value of the U.S.-origin controlled content over the fair market value of the foreign-made content.

A Key Element of an Effective Export Compliance Program

BIS has recently published Export Compliance Guidelines, which explain the eight elements of an effective compliance program. The panel focused on the one element that they believe to be key: Export Authorization.

The element of Export Authorization includes building procedures and process flows to help employees make consistent and correct export decisions. There are four parts to this element: (1) jurisdiction, (2) classification, and (3) license determination, and (4) screening.

The jurisdiction part of the process involves determining which agency has jurisdiction over your organizations exports. This can be done by reviewing 734.3(b) of the EAR for details of other agencies jurisdictions as well as checking BIS’s website for more information.

Classification can be done by exploring the requirements of each agency to determine how the items should be classified. This can be done by comparing technical specs of your item to those technical descriptions in the CCL. Self-classification can sometimes be a highly technical process and many times, companies will not choose to self-classify. If you do self-classify, the panel warns that it is very important to document exactly how and why you made a particular classification.

Next, compliance officers should remember that a license determination must be made based on the information gathered. This determination, just like the classification, should be well-recorded.

Lastly, the panel covered the most critical part of the Export Authorization process: screening. This involves checking if any items being exported are subject to the EAR or may end up in a sanctioned country. This can be done manually by checking the CCL or other sanctions lists, by out-sourcing to a third party vendor, or with the use of screening software. For those doing manual checks, BIS and ITA have created the Consolidated Screening List tool that includes several lists such as: DDTC’s Nonproliferation Sanctions List and OFAC’s Specially Designated Nationals (SDN) List. For companies that carry out a large number of transactions daily, screening software programs may be preferable, recommends Mr. Soo.

At the end of a successful Export Authorization, you’ll be able to produce a license determination matrix.  This tool communicates the license requirements for the items your company exports, based on the destination.  Below is a template of the license determination matrix.  It can be found on page 47 of the Export Compliance Guidelines.

The next Sanctions Alert webinar,“Compliance Considerations on Countering America’s Adversaries Through Sanctions Act (CAATSA)”will take place on May 17, 2018.

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