Foreign Based Businesses and U.S. Export Compliance

foreign based businesses
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Foreign based businesses and persons involved in the reexport of items controlled under the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) are subject to the regulations and associated sanctions.  This also holds true for foreign producers of items that incorporate threshold percentages (de minimis) of controlled items in their products and producers that utilize U.S. technology, software, or production equipment.  

Tri-Seal Compliance Note Stresses Foreign Based Persons Obligations

This message was reinforced in a recent Tri-Seal Compliance Note from the United States Department of Commerce, Department of Treasury, and Department of Justice.  Agencies under these departments in this report included the Bureau of Industry and Security (BIS) and the Office of Foreign Assets Control (OFAC).  The intent of this release was to enhance awareness of these obligations and help organizations outside of the United States mitigate risks of non-compliance.

Applicability of Sanctions to Foreign Persons

Certain U.S. sanction programs are applicable to foreign persons.  Violations of these sanctions can result in civil or criminal penalties.  These economic and trade sanctions are targeted towards foreign jurisdictions, regimes, entities, and individuals involved with terrorism, narcotics, weapons of mass destructions, and other acts threatening U.S. national security and foreign policy interests.

Non-U.S. persons may be prosecuted for conspiring to cause U.S. entities or persons to engage in violation or evasion of these sanctions.  The OFAC has been actively involved in this aspect of export enforcement in cases involving hiding references of sanctioned entities in financial transactions, misleading U.S. persons on ultimate destination of controlled goods, or routing prohibited transactions through U.S. financial institutions.  Settlements in these cases have resulted in multi-million dollar penalties against the involved parties.

Bureau of Industry and Security and the EAR

The Bureau of Industry and Security (BIS) administers and enforces the Export Administration Regulations (EAR).  These regulations control the export of commodities by prohibiting or placing licensing requirements on specific items.  The term commodities can include software, technology, and intellectual properties. 

These regulations differ from the export regulations of many nations in that these controls can extend to articles controlled in any nation and to the foreign based businesses involved in transactions with them.  This extended regulatory reach exists to ensure that controlled articles are not surreptitiously transferred to a third party that would normally be barred from the transaction. 

Items subject to the EAR also include products manufactured with U.S. origin components or software that is controlled.  Determination of licensing requirements are determined by De minimis calculations to determine the value of controlled U.S.-origin content in a non-U.S. finished product. 

This is done by identifying any controlled components in a bill of material and calculating the percentage of fair market value of those components in the overall product.  Threshold percentages vary according to the components classifications.

Controls also exist to control the use of advanced manufacturing equipment and software.  This is especially applicable for the manufacture of semiconductor devices.  Controls of this nature have been enacted to restrict the supply of certain items to China, Russia, Belarus, and Iran.  The result of this regulatory extension is that licenses for semiconductors may be required for semiconductor components regardless of where they were manufactured.

BIS Enforcement Actions

Enforcement actions have resulted in major penalties for businesses.  In April of 2023  300-million-dollar penalty was imposed on Seagate Technology, LCC,  and included a five-year suspended Denial Order, which if activated, would terminate the organization’s ability to conduct export business under the EAR.

The BIS has also imposed restrictions on types of aircraft allowed to fly into Russia if they include more than 25% de minimis amounts of U.S. origin controlled content.  This includes Airbus planes and effects a large number of airlines servicing Russia including Nordwind, I-Fly, and Meridian Air.

Department of Justice Involvement in U.S. Sanction and Export Regulations

The Department of Justice (DOJ) brings criminal prosecutions against parties involved in willful violations of U.S. sanctions and export regulations.  Recent actions have included the indictment of Latvian nations and a Latvian company involved in the attempted smuggling of dual-use production machinery.  As a result, fines in excess of $825,000 were levied against the defendants.  

Actions were taken against an Iran based person and a Chinese national for attempting to obtain controlled microelectronics for UAV production.  The defendants are alleged to having provided false information concerning the ultimate end users of the devices to U.S. manufacturers.

In November of 2023 a guilty plea was entered by Binance Holdings Ltd. (a cryptocurrency exchange for knowingly having a large number of users from sanctioned regimes.  Penalties for the infractions included a $4.3 billion dollar penalty with additional payments for civil liabilities of $968,618,825.

CVG Strategy Export Compliance Programs

As Developments in Export Administration Regulations illustrate, export compliance is a growing concern for businesses engaged in sales of items that are intended for international sales or could result in international sales.  Failure to comply with regulations can result in criminal prosecution including imprisonment and fines.  It can also result in civil penalties and disbarment from export activities. 

CVG Strategy can assist foreign based businesses meet U.S. export requirements by creating a tailored export compliance program.   We can also perform export control classifications, perform audits, assist in export licenses requirements and educate your team.  Regardless of whether your exports falls under EAR or ITAR, CVG Strategy has the expertise to help.  

Kevin Gholston

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