By: Stephen Wagner
Your company is a midsize manufacturer of computer network hardware and software, some of which is really cutting-edge technology. A significant portion of your products is exported overseas, either by you directly or by your U.S. distributors. For these U.S. distributors, you ensure that product labeling and literature is in the language of the final user.
You just received a phone call from one of your distributors in Los Angeles. Their customer in Hong Kong just called and told them that officials from the U.S. Department of Commerce just conducted an “end-use check” there in Hong Kong and found “major problems” involving your products. Your distributor is letting you know, so that you can take what your distributor called “appropriate action.”
You don’t know what to do. If there are any problems in Hong Kong, it’s not your problem, right? Especially because this distributor is here in the United States. Should your company be doing something?
Your company needs to take immediate action as a result of this reported “problem.”
If you do nothing, when – not “if,” but “when” – special agents from the Office of Export Enforcement, Bureau of Industry and Security (BIS/OEE) come calling, you will not be prepared and that could result in higher sanctions if they find any export compliance issues at your company.
What risks and/or liabilities do you face?
End-use checks are physical, on-location verifications with the recipient of exported U.S. goods to determine if the party is a reliable recipient of those goods and that items are, or will be, used in accordance with the Export Administration Regulations (EAR). These checks are conducted by the Departments of Commerce, State and Defense, and take place every day in dozens of countries around the world.
If an end-use check found a “major problem” with respect to your company’s merchandise, it could arise from numerous sources. For example, the end-user may have misrepresented itself to the seller or may be transshipping the merchandise illegally. Provided that your company did everything it was supposed to do under the regulations – including investigating red flags, knowing your customer, etc. – you may face little-to-no scrutiny. However, an end-use check could unearth one or more export violation(s) that your company – the manufacturer – may be committing. Depending upon how you manufacture, describe and sell the product, there may be issues with commodity classifications (through CCATS), licenses, etc. Is your company publishing inaccurate Export Control Classification Number (ECCN) or license information on its website and inviting your distributors and customers to rely on such data? This could lead to problems for you.
Moreover, you state that you are aware that your products are being exported. Remember that under export regulations, “All parties that participate in transactions subject to the EAR must comply with the EAR” (15 C.F.R. § 758.3). Are you taking the steps required to ensure that your distributors and customers are compliant with export regulations? Furthermore, if your company is the exporter of record (aka, the U.S. Principal Party in Interest or “USPPI”), you are ultimately responsible for the electronic export information (EEI) that is being filed through the Automatic Export System (AES) and for all classification and license matters.
What should your company do?
Knowing that there is a downstream problem with your exports, it is highly prudent that your company conduct an immediate self-assessment of its export compliance activities—but remember that time is of the essence; if BIS is aware of issues with your exports, it is only a matter of time before they come to call.
You should start by examining the particular transaction(s) involved with this customer. You should be looking to ensure that any export information (e.g., ECCNs, license information) you provided to the customer and/or the distributor was accurate and complete. Expanding your assessment radially, you should examine any and all transactions with this customer, this distributor, and the product(s) involved to ensure that transaction is being performed in accordance with your export compliance management program (ECMP). Then, as time allows, you can review your overall ECMP and perform audits on other, randomly selected export transactions to ensure compliance. An excellent resource to help organize and conduct your company’s self-assessment is the audit module tool developed by BIS. (Click here to view the tool.)
Once you have conducted a thorough self-assessment, you will know if there are any issues with your export compliance program and the export of this product, through this distributor, to this end-user. At that point, you can assess whether any issues you find are systematic problems with your export compliance plan or anomalies that need to be isolated. Regardless of their nature, any issues you find need to be well documented and fixed at once.
As you are remediating any issues you find, your company can decide whether it wants to make any voluntary self-disclosures (VSDs) to BIS. BIS strongly encourages VSDs from exporters, and such disclosures usually result in significant mitigation of any monetary penalties or other sanctions. That said, there are risks to a company making a voluntary self-disclosure and these risks need to be weighed against the benefits.
Also, because your company’s technology is “cutting edge,” your products may embody proprietary, “trade secret” information (such as product materials, designs, and algorithms). Moreover, the end-user and/or your distributor may have commercially sensitive information belonging to your company, such as pricing, training and use information. Because some of this trade secret or commercially sensitive information could be made public during the course of an investigation, you may need to notify BIS/OEE of the need to protect this information from disclosure. Generally, BIS can take steps to help ensure that any disclosure of protected information is tightly controlled. But certainly, the more your company propounds the need for confidential treatment with BIS, the more likely it is that such information will be protected to your satisfaction.
In short, when it comes to export transactions, whether you are the manufacturer, the distributor, the freight forwarder, any other “middle man” or the end-user, compliance with export regulations is always your responsibility, and any “problems” in these transactions should always be addressed as if they were your problems.
* * *
For more information on preparing for enforcement matters, conducting self-assessments, and working with enforcement officials, be sure to join us in Washington, DC on November 5 – 6, 2014, for the Advanced Issues in Export Controls Interactive Workshop to be held at the Embassy Suites hotel in Old Town Alexandria, Virginia. Click here to register for this workshop.
Also, for more information on voluntary self-disclosure of export compliance issues, please join us for “Voluntary Disclosure: The Messy Issues on ‘Coming Clean’,” a Webinar to be held on December 4, 2014. Click here for more information and to register.