Export compliance regulations don't just apply to the big guys. Even the smallest U.S. businesses that send their products to customers outside the country are subject to a variety of export regulations and could face substantial penalties for violating these rules.
Unfortunately for many small and medium-sized businesses, company personnel may not know these requirements until it's too late.
According to the U.S. Department of Commerce's Bureau of Industry and Security (BIS), fines for export violations can reach up to $1 million per violation in criminal cases, while administrative cases can result in a penalty amounting to the greater of $250,000 or twice the value of the transaction. In addition, criminal violators may be sentenced to prison for up to 20 years, and administrative penalties may include denial of export privileges.
Penalties of this size and nature can be especially devastating to small and medium-sized businesses, which represent 97% of the approximately 300,000 U.S. companies that export, according to U.S. Census Bureau statistics. Small and medium-sized businesses may think they lack the time or money to train personnel in export regulations and the necessity of compliance screening. Even if they do have the necessary experience and training, export personnel may not have the support of senior management, who are often totally unaware of U.S. export regulations.
BIS has published a book, Don't Let This Happen to You, which outlines exporters' compliance responsibilities and includes real-life examples of penalties they have recently issued against individuals and businesses.
Protecting Your Business Against Export Violations
Businesses that are already exporting or are planning to start exporting need to follow some basic steps to ensure they are compliant with U.S. export regulations. While the following six steps are by no means all inclusive, they should provide companies with a starting point for implementing an export compliance plan.
1. Properly Classify Your Products
Most exporters are familiar with the Harmonized System (HS) or Schedule B codes used to classify products for duty, quota and statistical purposes. However, exporters are often less familiar with the requirement that they determine whether or not their products are controlled for export by the Department of Commerce or the Department of State.
The Department of Commerce's Bureau of Industry and Security (BIS) controls the export of most commercial products. While only a small percentage of exports under BIS's jurisdiction require an export license, it's a product's technical characteristics, the destination country, the end user, and a product's end use that factor into this determination. (Products under State Department control are typically products or services specifically related to defense and are outside the scope of this article.)
The first step for deciding whether or not a product requires an export license is determining if it has a specific Export Control Classification Number (ECCN) by checking the U.S. Export Administration Regulations (EAR). If a product does have a five-character ECCN code, the EAR will also list one or more reasons why it is controlled. Companies use these reasons for control to help them determine if they need to apply for an export license based on the countries to which they are exporting (see step #2 below).
You can search for an ECCN code in a printed copy of the EAR or online at the BIS website.
Products that do not have an ECCN code and are not subject to control by any other U.S. agency are designated as EAR99. Products classified as EAR99 are low technology consumer goods and usually do not require an export license. However, even EAR99 items require licenses for exporting to embargoed countries, to a restricted party, or in support of a prohibited end use.
2. Determine if the Destination Country Requires an Export License
There are several reasons the U.S. government prevents exports to certain countries without an export license. In the most extreme cases, the U.S. has placed embargoes on countries like Iran and Syria for supporting terrorist activities. In other cases, the U.S. restricts companies and individuals from exporting certain products to specific countries for reasons of national security, nuclear nonproliferation, chemical and biological weapons, or several other reasons outlined in the EAR.
Companies must use the ECCN codes and reasons for control described in step #1 above to determine whether or not there are any restrictions for exporting their products to specific countries. Once they know why their products are controlled, exporters should refer to the Commerce Country Chart in the EAR to determine if a license is required.
Although a relatively small percentage of all U.S. exports and reexports require a BIS license, virtually all exports and many reexports to embargoed destinations and countries designated as supporting terrorist activities require a license. These countries are Cuba, Iran, North Korea, Sudan and Syria. Part 746 of the EAR describes embargoed destinations and refers to certain additional controls imposed by the Office of Foreign Assets Control (OFAC) of the Treasury Department.
3. Screen All Parties In Your Export Transaction
The U.S. government, as well as several other governments and organizations like the United Nations and the European Union, publish lists of restricted parties to whom you can't export without a license. That includes items that are EAR99 or otherwise don't require an export license based on the country of export.
These restricted parties are individuals, businesses and other organizations that have been identified as engaging in activities related to the proliferation of weapons of mass destruction, known to be involved in terrorism or drug trafficking, or who have had their export privileges suspended. These individuals, businesses or organizations could be located within the U.S.
While there is no requirement that companies check every export against these various restricted party lists, it is a violation of export regulations to export to anyone on the U.S. lists. Even the smallest exporters should check all the parties in every export transaction against the various restricted party lists to prevent penalties.
4. Watch for Red Flags: Know How Your Product Will Be Used
Even products that seem harmless can sometimes be used in ways not intended. Companies are responsible for knowing how their products will be used once they leave the country. Some of these end uses are prohibited while others may require an export license. For example, companies may not export to certain entities involved in the proliferation of weapons of mass destruction (e.g., nuclear, biological, chemical) and the missiles to deliver them without specific authorization, no matter what the items are.
BIS publishes a list of Red Flags that may be indications that the use of a product may be prohibited. For example, companies should be reasonably suspicious that orders for items that are inconsistent with the needs of the purchaser, a customer's declining installation and testing when included in the sales price or when normally requested, or requests for equipment configurations that are incompatible with the stated destination could be violating U.S. export regulations.
BIS cites the example of a South African businessman who tried ordering several dozen replacement switches for a medical imaging machine. In this case, it's normal to order one replacement switch; it's not normal to order several dozen at one time. It turns out these switches were going to be used as detonators for nuclear bombs. If suspicion has been raised, a company should refrain from the transaction until an export license application has been submitted to and issued by BIS.
5. Be Aware of Deemed Exports
The export restrictions outlined in the EAR don't just apply to products being shipped outside the U.S. Companies are exporting technology by sharing technical data such as plans and blueprints of products or by allowing a visual inspection of a product to foreign nationals within the U.S. This is called a deemed export and requires that companies follow the same procedures outlined in steps #1 through #4 above just as if they were physically shipping goods internationally.
6. Document Compliance
When small and medium-sized businesses become aware of their legal obligations as exporters, often their first reaction is to try to avoid these responsibilities by hiring a freight forwarder or another party to handle their exports. While there is absolutely nothing wrong with outsourcing the export functions, companies must realize that they cannot outsource their liabilities.
Companies that hire third parties to manage their exports should require documentation that all export regulations are being followed, and they should retain copies of this documentation—as well as the actual export forms that must be generated for each shipment—onsite for at least five years. This documentation can be used to demonstrate compliance with the EAR or, in case some violations are found by the U.S. government, be used as evidence of a good-faith effort to comply, which could result in reduced penalties.
Implementing Export Compliance Procedures
Companies of all sizes need to be aware of their responsibilities as exporters. This article focuses on some basic steps that all export companies and their personnel should know, follow and document. It should serve as a starting point for creating a more comprehensive and written export management and compliance plan.
For any plan to be effective, it must be endorsed by companies' top management and shared with all employees involved in any part of the export process—from managers, to sales and administrative personnel, to the warehouse team. Such an effort can save companies thousands if not hundreds of thousands or even millions of dollars in fines, prevent restrictions on exporting that can cost companies millions of dollars in lost revenue, and even jail time for the most serious violations.
An effective export compliance program includes ongoing training of all company personnel involved in the export process including all management, sales and support staff.