Basic export controls compliance principles

Jan. 1, 2020
This article follows up on Part V of this series (Mergers and the FCPA [August, Aftermarket Business World]).  This article moves to a new area of regulation of key concern to companies in the automotive sector: export controls.

This article follows up on Part V of this series (Mergers and the FCPA
[August, Aftermarket Business World]).  This article moves to a new area of regulation of key concern to companies in the automotive sector: export controls.

Export controls requirements have been around for years but are taking on increasing prominence. In light of increased U.S. government enforcement activity, automotive corporations that sell and operate abroad need to pay increased attention to export controls and sanctions compliance.

Establishing and implementing an effective compliance program

The basic compliance task from an export control perspective is that there be no exports of goods, services or technology unless it has been established that:

• there is the general authority to make the export to the intended recipient in the intended country of destination or to engage in the transaction;

• the export or transaction is authorized by U.S. government regulations, whether by general authority, specific license applicability or exemption;

• all required documentation is prepared; and

• all relevant records are kept for the required period.

The most important risk-management tool to accomplish these goals is a good compliance program.

Creating a culture of compliance

According to the U.S. Sentencing Guidelines Manual, an effective compliance program requires an organization to “exercise due diligence to prevent and detect [wrongful] conduct” and “otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” Compliance seldom accomplishes these aims unless there is a top-down initiative to underscore the importance of the program. Export controls compliance goals are effectuated by close attention to the following:

• Giving compliance internal status. Creating a culture of compliance starts with education. Companies should make compliance a funding priority so there are sufficient resources to run the program. The person in charge of compliance should have the authority to stop transactions and shipments, without question, until red flags are satisfied. Compliance also should be administered independent of sales or business generation to prevent pressure to overlook red flags. Most important, companies should have a well established chain of communication to ensure important compliance-related concerns get the ear of top management, whether through the General Counsel’s office or otherwise.

• Tailoring compliance. In times past, it was common to find compliance programs that were similar from company to company. The better practice, however, is to tailor the program. Companies should review all facets of the business, including the goods sold, the technology exported and the technology used in production. Company-specific factors dictate the best compliance for each company.

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• Moving beyond shipping. Traditionally, exporters cordoned off compliance to a corner of the company, bringing compliance into play only when it came time to ship or when a new account was opened. A better mindset, however, is to create a compliance mentality by training everyone on at least the basics of export-control and sanctions requirements, with more detailed training being reserved for people involved in sales or high-risk financial areas.

• Involving third parties. Many companies put procedures in place for the vetting of third-party relationships, including through the performance of systematic due diligence.

Taking advantage of technology

Technological innovations have penetrated the compliance realm. The value of the tools cannot be disputed, since they automate a lot of time-intensive screening. There is, however, a fine line between responsible implementation and over-reliance on automated tools.

• Screening software. In prior incarnations, the heart of compliance was a matrix that listed every product sold and its export status. This was cumbersome and thankfully is automated by widely available export screening software and websites, such as Export Control Resource’s ExportWeb. These software packages also are invaluable for the tedious task of checking lists of Specially Designated Nationals (people who are associated with sanctioned conduct or entities, generally referred to as “SDNs”).

• Automated recordkeeping. Exporting has always required a lot of tracking responsibilities. Today, however, requirements to transmit information about exports electronically via the Automated Export System (“AES”) make keeping good records critical, because AES data is shared among numerous U.S. agencies. BIS, DDTC and OFAC can, and do, request supporting documentation for certain transactions, as does OFAC for financial transactions.

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Linking systems. Many larger freight forwarders and shippers routinely screen shipments. It is becoming increasingly common for companies to integrate their procedures for screening with those of their shipping companies, especially now that there is an increasing number of cases targeting freight forwarders and other shippers.

Moving beyond a “goods” mentality

Export control compliance programs traditionally focused on goods because of the belief that no export of a physical good meant no violation. But this attitude, while never particularly accurate, is becoming less and less relevant. Export control regulations restrict exports not only of goods, but also information, technology and software. Forbidden transfers of technical data can occur whenever there are communications with customers, vendors, joint venture partners, foreign affiliates, visitors or foreign employees. Emails, faxes, database access and conversations are all possible violations of restrictions on the export of information. All of these potential danger points have to be taken into account through careful consideration of the following key points:

Technology. Export compliance for technology requires a different mindset, with the focus as much on the process of creation and the use of the product as the good itself. For example, where software is at issue, the focus is not on the physical medium but rather such issues as the method of export (which could be over the internet and thus not involve any good in traditional form) and the potential uses of the software (which might be incorporated into a controlled product by the purchaser). Goods with encryption raise a host of related issues.

Non-traditional exports. Technology also brings into play non-traditional means of export. Such issues as whether there is a “deemed export” (i.e., communication of controlled information to a non-U.S. national, whether by oral discussion, visual inspection or otherwise), export by access to a company’s information systems, issues relating to the employment of non-U.S. nationals, or even whether the mere exposure of a foreigner to a “data-rich environment” are all potential violations that are amplified where technological goods and services are at issue. A good compliance program requires a review of all business operating processes and procedures for involvement of U.S. persons in transactions involving embargoed destinations and carefully monitors the access of non-U.S. nationals to information and technology. Controls also are needed for computer networks, as well as for transfers of data among affiliates, between R&D partners, and for collaborations with other companies.

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