An Introduction to Export Controls
Over 95% of the world’s consumers are outside of the United States. Opportunities abound for U.S. companies that export. However, exporting is a privilege and not a right. U.S. exporters have an important responsibility to adhere to U.S. export control laws, including the Export Administration Regulations (“EAR”), and the International Traffic in Arms Regulations (“ITAR”). Violations of export control laws carry hefty civil and criminal penalties. Exporters can pay hundreds of thousands of dollars in penalties, lose export privileges, and even be imprisoned for violations of U.S. export control laws.
The EAR is a set of regulations which governs whether U.S. persons may export or transfer goods, software, and technology outside of the United States or to non-U.S. citizens. The ITAR, on the other hand, is a set of regulations which governs whether defense or military-related technologies may be exported or transferred to non-U.S. citizens. The purpose of both the EAR and the ITAR is to safeguard U.S. national security interests by ensuring that critical technology does not fall into the wrong hands. The EAR is administered by the Commerce Department’s Bureau of Industry & Security (“BIS”) while the ITAR is administered by the State Department’s Directorate of Defense Trade Controls (“DDTC”).
Filing a Commodity Jurisdiction Request
The purpose of a Commodity Jurisdiction (“CJ”) request is to determine whether a commodity or service is under the licensing authority of the U.S. State Department (under ITAR) or the U.S. Commerce Department (under EAR). If, after reviewing the EAR and ITAR, you are unsure of the appropriate jurisdiction for your proposed export, you should request a CJ determination. Items subject to export controls are often under the jurisdiction of either the ITAR or the EAR, but not both.
Advantages of Filing a Commodity Jurisdiction Request
Filing a CJ request can be a proactive and straightforward mechanism to ascertain the jurisdiction of your proposed export. A CJ determination provides written confirmation from the federal government about which agency has jurisdiction over your proposed export. If an exporter has doubts about which agency has licensing authority but proceeds with filing an export license at the incorrect agency, the exporter can wait a significant period of time only to receive a notice from the agency that it does not have jurisdiction over the proposed export. Alternatively, an incorrect assumption on the part of the exporter about what jurisdiction applies may lead a party to export product in violation of U.S. export control laws. Such a mistake could result in heavy penalties and even criminal liability. In short, a CJ request can save time and money and mitigate risks. The federal government usually responds to a CJ request within 60 days.
Know Before You File: Cautionary Notes
Although a CJ request can save time and money, filing a CJ request comes with the important obligation and responsibility to be knowledgeable about the proposed export and sufficiently transparent in the request. A CJ request includes important technical specifications and details about the proposed export. The filer should have access to and provide all necessary information. Key information to be provided includes a product description, source of the product, understanding the product’s capabilities, understanding the product’s end-uses, product specifications and drawings, real and anticipated customers for the product, any past jurisdiction or export history, and details on comparable products.
BIS has recently increased enforcement against problematic CJ requests. On April 30, 2021, BIS announced that it has fined Flir Systems, Inc. (“Flir”), an Oregon-based producer of thermal imaging and night vision equipment, $307,922 for allegedly making misrepresentations and concealing material facts in its CJ request. According to BIS, when Flir filed its CJ request regarding proposed exports, it was not transparent about its exports to higher-risk markets such as military and drone applications. The key lesson from the Flir case is that filing parties should be careful to be honest, transparent, and sufficiently comprehensive in describing the proposed export.
A CJ determination also comes with limitations. A CJ determination will only identify the proper licensing authority for a proposed export. A CJ request is not the mechanism for applying for a license or otherwise requesting authorization to export. Furthermore, it should be noted that ITAR results will include classification information, but EAR results may not always provide classification information. In other words, if a CJ determination states that the proposed export falls under ITAR jurisdiction, the specific classification on the U.S. Munitions List (“USML”) will be provided. However, if the CJ determination finds that the proposed export falls under EAR jurisdiction, the specific classification on the Commerce Control List (“CCL”) may be provided, but not necessarily so.
What You Can Do
There is a lot you can do to be proactive about your export compliance. These include:
- Develop an effective export compliance program – A key foundation of proactive and effective export compliance requires the development of an export compliance plan. An export compliance plan establishes a set of procedures for your organization to ensure that everyone is on the same page about how standard processes work, who is responsible for what, how to identify violations, what to do when violations occur, etc. An export compliance plan helps build consciousness in your organization that compliance is critical – both to avoid costly penalties and also to protect national security. Diaz Trade Law helps businesses create export compliance manuals that help prove you have a process in place to vet proposed transactions and ensure you can prove you can take compliance seriously and implement all of the important great weight mitigating factors. Diaz Trade Law has significant experience in developing export compliance plans for organizations without plans. Additionally, Diaz Trade Law can assist your business in auditing and improving your current plan so that it is in its best shape.
- Export compliance training – A foundation of a strong export compliance program is export compliance training. Training is important because it (1) ensures that all employees understand the export control laws and reinforces internal policies and procedures, (2) demonstrates to federal government agencies that your business is proactive about export compliance, and (3) avoids your business from being subject to costly penalties and even criminal liability. Fortunately, export compliance training can be highly tailored to meet your company’s needs. All of your training events include assessments for comprehension, certificates for successful participation, and ample opportunities for Q&A. For your next export compliance training event, trust Diaz Trade Law to provide highly-effective, engaging training.
- Transaction vetting – Unsure whether a proposed transaction violates export control laws? Diaz Trade Law has significant experience vetting your potential transaction against export controls and sanctions. Through research and due diligence, Diaz Trade Law ensures that your transaction won’t get you in trouble later down the road. In particular, it is important to vet end-uses (how is your product going to be used?), end-users (who will be using your product?), and destinations (where will your product be used?).
- Voluntary self-disclosures – If your business believes it may have violated the EAR, ITAR, or other export control laws, it can be in your business’ strategic interest to submit a voluntary self-disclosure (VSD). According to the Bureau of Industry & Security, VSDs are “an excellent indicator of a party’s intent to comply with U.S. export control requirements and may provide BIS important information on other ongoing violations.” Diaz Trade Law has significant experience filing VSDs with and mitigating penalties with a range of federal agencies. Check out our articles published by Bloomberg Law on Submitting a Voluntary Self-Disclosure to OFAC and Submitting a Voluntary Self-Disclosure to the U.S. Census.
- Requesting authorization / export license applications – BIS or DDTC export authorization is required for many export transactions of controlled goods. Diaz Trade Law has significant experience in vetting proposed transactions to determine whether BIS or DDTC authorization is required. Furthermore, Diaz Trade Law assists clients by filing export license applications on their behalf.
- Mitigation and corrective action – If your business has violated U.S. export control or sanctions laws, there is a lot you should do to get back into compliance, ensuring you work to prevent future violations, training your employees, updating your manuals, and this work can assist in mitigating potential penalties. Diaz Trade Law has significant experience representing businesses in dealing with DDTC, BIS, Census, OFAC, and a range of other export-related agencies. Specifically, Diaz Trade Law has successfully assisted clients in (1) submitting voluntary self-disclosures to mitigate penalties, (2) negotiated agreements, (3) built corrective action systems to help ensure that your business does not make the same violation again, and (4) updating and enhancing your current export compliance plan.