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Understanding Export Controls and How They Impact Business

By Samuel Greengard

Export controls can be a critical consideration for any company that trades or interacts with other businesses outside the United States. Generally, the term refers to a complex and sometimes confusing network of rules, regulations, and laws that involve interrelated U.S. agencies.1 Export controls are put in place to protect the interests of the U.S., in that they can involve national security issues, economic factors, and foreign policy concerns. Collectively, these international export controls encompass information, commodities, technology, and software.2

Small and midsize enterprises (SMEs) are not exempt from export controls. In fact, any company, no matter what size, that does research, produces products, or interacts with non-U.S. firms in the fields of science, computing, and engineering, is likely to be affected by international export controls. This includes firms doing business in any of the following areas: military or defense projects and services, high performance computing, encryption technology and certain types of security software, defense systems, select chemical or biological agents and toxins, nuclear technology, space and satellite systems, and medical lasers.

 

Further complicating matters, according to observers, is that terms and conditions for export controls change all the time. Agencies continually adjust and modify regulations and apply and enforce new laws. There’s also the impact of presidential executive orders, which can instantly change what an export control is, or how certain activities are regulated. Conversely, there are sometimes specific exclusions from export controls, but these exclusions are also subject to specific terms and conditions—and they can be forfeited if an organization fails to abide by stated standards.

 

Unfortunately, experts say, many SMEs don’t consider the risk of noncompliance seriously enough, and many business leaders believe that they do not have the time, money, or staff resources to address export controls.

 

Abiding by the Terms of Export Controls can be Critical

 

Companies, universities, and others that violate international export controls can face fines as high as $1,094,010, while the individuals responsible for violations can face imprisonment for up to 20 years. Not surprisingly, multiple violations can result in even larger fines, prison time, and penalties. Civil penalties increased in July 2016, when the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (aka, the FCPIA Act) took effect.3 Additional business risks now include denial of export privileges, reputational damage, and legal fees and/or settlement costs.

 

Understanding international export controls is essential, say experts. For instance, conducting business overseas might require a specific license.4 In addition, individuals traveling abroad with high tech and/or scientific equipment or devices—as well as with confidential, unpublished, or proprietary data or information—must take steps to ensure that they have adequate protections in place. This could necessitate the use of encryption and specific security protections, such as a virtual private network (VPN). There are also provisions that control certain types of field work and research conducted outside the U.S.

 

Structure Important to International Export Control

 

Another important consideration is how business dealings and research are structured between entities. This includes how meetings take place, how groups interact and collaborate, how an organization manages and shares data and intellectual property with certain foreign individuals and groups, and who can enter labs and other sensitive spaces—both online and in the physical world. In addition, rules and regulations exist regarding the participation of foreign nationals in certain types of projects. Similarly, an organization could face restrictions about who can share and publish certain research results—along with selling physical or virtual goods abroad or through U.S.-linked individuals or intermediaries.

 

Some businesses must also follow payment regulations included in export controls. This includes the international payment of funds to certain individuals and facilities, including business executives, scientists, and university researchers. It can also apply to international consulting firms and consultants, particularly regarding embargoes or sanctioned countries. In some cases, interactions with individuals and institutions in these countries might be prohibited altogether.

 

Ways to Minimize Risk Associated with International Exports Control

 

It’s important to address all aspects of export controls and develop a clear strategy and framework for potential issues. Here are some ways experts suggest risks can be minimized:

 

  • Research all parties involved. It’s not enough that a foreign entity has an office, a website, and even what appears to be strong client referrals. So due diligence through research and background checks on the firm or the individuals that are participating is often necessary. Additionally, it can be important to understand what U.S. agency rules must be adhered to and determine whether the destination country requires an export license.
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  • Understand how partners do business and who they do business with. Many business agreements involve an ecosystem of companies and individuals, such as freight facilitators and forwarders. Consequently, it may be vital to know who a business partner contracts with or outsources to—and whether they have adequate export control management and compliance programs.
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  • Establish strong safeguards. It can be crucial to establish tracking systems and an export control classification system to monitor and manage all routed transactions. Yet, observers suggest, it’s also critical to ensure that strict controls are in place for products, laptops, and data that sales teams and others carry while traveling. This could include the need for specialized security tools and software—or mean that certain software and tools can’t be used overseas at all.
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  • Watch for possible problems. Red flags would include a desire to pay in cash for high-value shipments, a buyer who is unfamiliar with a product or software, or companies that appear unfamiliar with protocols. Poorly designed procedures and standard practices could also be a tip off—particularly a lack of knowledge about international export control standards, requests to insert middlemen or outside agents into a transaction, and a refusal to state whether goods will be used domestically or tagged for export or re-export.
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  • Keep detailed records. In the event of an audit or investigation, authorities say that an organization must have clear and detailed records. Consequently, it’s wise to retain all shipping documentation for at least five years, have documentation for how your firm classifies products, and be able to show that it has exercised due diligence for partners, contractors, and others in a trading network.

The

Takeaway:

SMEs and other organizations that develop a strategic framework for international export controls position themselves for smoother and lower risk business transactions. Experts make clear that the time and money spent developing a strategic framework—with strong internal and external controls to monitor, manage, and audit both people and IT systems—allow these firms to minimize the risk of problems, disputes, fines, and other penalties.

Samuel Greengard - The Author

The Author

Samuel Greengard

Samuel Greengard is a veteran journalist who has contributed to many business and technology publications. He is also the author of two books: The Internet of Things (MIT Press, 2015) and the AARP Crash Course in Finding the Work You Love: The Essential Guide to Reinventing Your Life (Sterling, 2008).

Sources

1. “Regulations,” Export.gov; https://www.export.gov/article?id=Regulation
2. Innovation for a global future, The Ohio State University; http://orc.osu.edu/regulations-policies/exportcontrol/
3. “U.S. Increases Civil Penalties for Export Controls and Economic Sanctions Violations,” GreenbergTaurig; https://www.gtlaw.com/en/insights/2016/9/us-increases-civil-penalties-for-export-controls-and-economic-sanctions-vio
4. “Export Licenses,” Export.gov; https://www.export.gov/article?id=Export-Licenses

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