Five myths about US export controls

Compliance with US export control regulations is one of the most challenging areas for any company that deals with either military or dual-use goods, or the technology associated with these. Importers, exporters, freight forwarders, academic institutions and many other businesses and organisations can be affected by these regulations, regardless of where they are located in the world.

In addition, things have just become more complex, thanks to the Obama administration’s Export Control Reform (ECR), which brought significant changes for companies operating in a wide range of industry sectors, including aerospace, automotive, defence, information technology, telecommunications, and software. It aims to implement a single licensing agency with a single control list and one single IT system for all US licence applications. As part of this process, some goods originally controlled under ITAR (International Traffic in Arms Regulations) now fall under the EAR (Export Administrative Regulations). The first pair of new rules came into effect on 15th October 2013 and 6th January 2014, respectively, with more to follow.

Due to the extraterritorial reach of US export control regulations, it is important that companies are aware of their obligations and seek the relevant authorisations, even if they are not located in the US Violations of US export control regulations may result in severe criminal and/or civil penalties, including fines and even imprisonment for those responsible, such as managing directors or members of the managing board. Companies could also find themselves on restricted party lists, which could bring about bad publicity and reputational damage. Once a company is listed on a sanction list, its entire international business is at risk too, as other businesses will refrain from trading with it.

To avoid possible violations and civil and criminal penalties it is worth dispelling five myths about US Export Controls:

1. Companies don’t need to be located within the US to be subject to US export controls. If they handle US controlled articles, they must manage these within the terms of the applicable licence or agreement.

2. US regulations don’t just apply to technology and weapons, but also to items, information and software that are considered to be 'dual-use' – i.e. primarily commercial or civil in nature, but with potential military applications. Dual-use goods are categorised in the Commerce Control List (CCL) and have an Export Control Classification Number (ECCN) that can be used to determine whether a US export licence is required.

3. US export controls not only regulate the movement of controlled physical goods, but also the transfer of sensitive 'technology' and software. Companies outside the US who are involved in research and development (R&D) activities may require a re-export licence if using US-originating, export-controlled software or technology, as the outcome of the R&D itself could become subject to US export control laws.

4. Even companies who already have a national licence may require a US licence. From a US government perspective, a company legally shipping U.S. controlled goods from the EU using a valid national/EU licence may be violating US re-export controls laws. It is vital to have both national and US authorisations in place before shipping US controlled materials.

5. Whenever US controlled materials are transferred or re-exported, the applicable US licence/authorisation must be valid. The exporter from the US should inform the recipient if the materials (or the technical data or services) are US controlled. As a non-US entity cannot apply for a US export licence, it’s important to work with an authorised US entity or broker to make the licence application.

While at first sight the changes being introduced under the ECR may look like an administrative nightmare, they also open up new opportunities for businesses to save costs, standardise workflows and accelerate processes while ensuring compliance.

Modern supply chains are very complex and can involve dozens or even hundreds of parties, each responsible for compliance with both national and US export control regulations, and for passing on relevant information within the supply chain to ensure compliance can be achieved by all involved. Comprehensive global trade software solutions provide the foundation for the required visibility and collaboration across complex global networks and offer background checks on all business transactions, from procurement to fulfilment.

The identification of US controlled materials and technical data is of utmost importance and ideally should be carried out at the point of purchasing, right at the beginning of the process. The supplier should advise that the articles are US-controlled, enabling the implementation of the right controls at the first point of receipt. Maintaining visibility of goods from order entry to fulfilment and at every stage in between is crucial for supply chain security. Software facilitates proper management of controlled articles through transparency of whereabouts, origin and destination at any given point in time, and through real time alerts when the terms of a licence are potentially being violated. It checks all export processes for possible violations of embargoes and licensing requirements in the background of every applicable business transaction, ensuring compliance with relevant EU and US law at every step of the way.

A rigorously enforced, IT-supported compliance programme will ensure the control of materials and intangible movements, such as conversations, in line with the terms of the applicable US licence, and provide virtual controls for data rights management and secure file storage. Demonstrating compliance to auditors is also of paramount importance in order to avoid potential penalties. Data capture, such as physical goods movement history, licence usage, event logs and screening logs, are required to prove that effective controls are in place. Manual management of such complexity is not only impossible beyond a certain volume, but also error-prone and time-intensive.

Global business leaders will use the changes being introduced under the ECR to save costs and speed up processes. Companies should therefore review their current export controls procedures and consider comprehensive global trade management solutions to secure their supply chains and avoid violations of EU and applicable US law while increasing visibility, collaboration and performance throughout the supply chain.