Tightening Export Controls Require Industry Awareness

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ethics corner

December 2006

By Fred Shaheen and Natalia Geren

U.S. export-control enforcement activities by the Departments of Commerce and State remain on the rise.

By September 2006, Commerce enforcement cases already had surpassed the total number of cases in 2005. While the State Department does not publish similar statistics, the defense industry has noted more vigorous enforcement by that agency, as well.

One reason for this trend is the increased interagency cooperation and information sharing during export enforcement. For example, interagency intelligence reports recently led to the seizure of U.S. electronic components by the Commerce Department and Immigration and Customs Enforcement. The components were supposed to be headed for the United Arab Emirates, but commerce officials determined they were destined, instead, for Iraq, where they were to be used by insurgents in making improvised explosive devices.

Export control agencies also focus on compliance relating to foreign nationals in the U.S. work force. Recently, the Commerce Department proposed that the status of foreigners should be based upon country of birth, rather than nationality, triggering an outcry from U.S. business and academic communities.

Business attacked the burden and cost of the proposal. Academia contended the change would impede research. Commerce has withdrawn this proposal and formed a private-sector advisory committee to review the deemed export policy. At the first meeting of the committee, Co-Chair Robert M. Gates, president of Texas A&M University, charged that the deemed export issue “strikes at the heart of scientific inquiry and economic competitiveness.” The problem, Gates told reporters, “has the potential to be a very serious one.”

The Defense Department also weighed in on the deemed exports issue. An export of technology or controlled information is deemed to take place when it is released to a foreign national within the United States. The department previously proposed new requirements to prevent unauthorized disclosure of export-controlled information and technology under defense contracts.

Many public comments to this proposal took issue with the department’s attempt to craft new export-control requirements, many conflicting with existing regulations. In August, the Pentagon amended the proposal to recognize contractor responsibilities to comply with existing commerce and state regulations. However, the amended proposal also includes new Defense Federal Acquisition Regulations. It also changes existing DFAR requirements for contracts involving export-controlled information or technology and for foreign nationals’ access to export-controlled information or technology related to fundamental defense research.

Then comes China. While the long-standing arms embargo against China remains unchanged, in July, Commerce proposed a rule making “dual-use” exports to China — items with both commercial and military or proliferation applications — more difficult. This proposed rule would add 47 commodities, materials, software and technology not currently controlled for exports, if destined for military end-use in China. If adopted, this rule will significantly increase the number of export licenses required for China transactions.

Finally, in March, each export-control violation increased from $11,000 to $50,000. Congress is considering legislation further increasing penalties to $120,000 per violation.

These developments underscore some of the complexities of the existing regulatory landscape and help explain why defense, aerospace and other high-tech exporters are prioritizing their compliance programs.

In January, Doug Bain, Boeing’s then-senior vice president and general counsel, in a speech to the company’s leadership, identified export controls as the biggest issue facing the organization, noting: “The cultural question we need to ask is, do we view export as somebody else’s problem, because ‘my job is to sell product?’ Or is it all of our responsibilities?”

These remarks cut to the heart of the issue — making sure all levels of the exporting company understand the export control landscape.

Warren E. Buffett recently observed, in his published letter to Berkshire Hathaway Managers, that the argument that “everybody else is doing it” when the “it” is not ethical could not be more wrong. This attitude obviously raises a huge red flag in the export community. Vigilance will be the hallmark in export compliance for the indefinite future. As Buffett puts it, “culture, more than rule books, determines how an organization behaves.”

With this in mind, take into account a company’s export-compliance posture and consider the following steps:

• Implement a comprehensive export-control compliance and ethics program.

• Assign senior corporate officials with responsibility for the implementation and oversight of the program.

• Ensure effective communication with all employees through regular compliance training and certifications.

• Establish an effective reporting system enabling all employees to flag suspicious export conduct without fear of retribution.

• Implement effective disciplinary measures to cover violations.

• Implement detailed export-control due-diligence requirements in mergers and acquisitions to avoid successor liability.

• Include relevant export-control-compliance language in all agreements, contracts and other relevant documentation.

• Periodically provide for independent audits by outside counsel and compliance experts.

• Educate staff on when and how export-control-compliance personnel and counsel can and must stay current on relevant issues.

• Stay abreast of export-control developments and advocate on the company’s behalf in the export community.

The authors are attorneys at the law firm of Greenberg Traurig LLP. The opinions expressed here are solely those of the authors and are not intended to provide legal advice or represent the view of NDIA or the NDIA Ethics Committee.

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