Export Compliance: Definition, Controls, Penalties
Export compliance regulations are the rules, guidelines, and procedures that control how goods, services, and technology move across international borders.
United States export controls are primarily governed and enforced by the Bureau of Industry and Security (BIS), the Directorate of Defense Trade Controls (DDTC), and the United States Treasury Department’s Office of Foreign Assets Control (OFAC). These governing bodies have the authority to enforce export regulations through fines and penalties, including prison time.
These rules protect U.S. security, stop funding for terrorism and money laundering, cut down on trade barriers, and encourage fair trade.
Since export compliance regulations are mandated by law, businesses and even educational institutions must be aware of them. We will talk about the basic requirements of export compliance, how it affects businesses, and how to ensure compliance.
What is Export Compliance?
Export compliance is the specialized, cross-disciplinary framework that includes all export-related activities that are in some way controlled by export control laws. These transactions occur between two separate states, jurisdictions, or countries.
Activities that are subject to export controls may include but are not limited to
- Transfers of controlled information
- Shipment of controlled physical items
- Disclosure of technical data to a foreign person in the United States
- Transfer of services and payments to restricted parties
Export compliance helps to ensure that the export of a product or service does not violate U.S. law and does not harm the security interests of the United States.
U.S. export control regulations and rules safeguard national security interests, foreign policy, and economic interests without stifling lawful international trade. Dual-use, proliferation, and sanctions are control issues directly affecting U.S. security.
Export control regulations are placed on importing commodities such as weapons, munitions, and dual-use products.
A product or service is called “dual-use” if it can be used for both civilian and military purposes. For example, missiles, nuclear reactors, and technology that could be used to make ballistic missiles all fit this description.
The export of items with more than one use is regulated because they can pose a significant risk to U.S. security interests by hurting the economic growth of other countries and giving them resources to threaten U.S. foreign policy and defense interests.
The United States takes part in many export controls to curb terrorist activities, the expansion of weapons of mass destruction (WMD), and the amassing of instability-inducing stockpiles of weapons systems and their components.
Proliferation controls seek to prevent the transfer of WMD and their delivery systems, as well as other technologies that terrorists or hostile countries could use to develop WMD.
Sanctions are the most severe form of export regulations, and the U.S. government can impose them for several reasons. Sanctions may be used to penalize foreign governments or other entities deemed to have violated international law or U.S. foreign policy interests. They’re also used as a tool in diplomatic negotiations with these entities; for example, sanctions may be lifted if certain conditions are met.
Export Control Regulations and Laws
Three export control laws regulate the export of technology that affects production, trade, and distribution. The goal of these laws is to regulate access to types of technologies and the information they generate. These laws are meant to stop sensitive information from being given or shared with a foreign national.
Each law regulates different things and has different governing agencies.
International Traffic in Arms Regulations (ITAR)
ITAR controls the export compliance of all weapons and technology used for defense. DDTC is responsible for enforcing these regulations. The United States Munitions List (USML) contains items regulated under ITAR.
Export Administration Regulations (EAR)
EAR controls the export compliance of all dual-use items and other information and technology that is not covered by ITAR. BIS enforces these regulations. The Commerce Control List (CCL) is a list of items that fall under the jurisdiction of the EAR.
Foreign Assets Control Regulations (FACR)
The Foreign Assets Control Regulations, or FACR, are responsible for U.S. economic trade sanctions against countries and regimes that pose a threat to national security, enforcing embargoes on terrorists or international narcotics traffickers. OFAC is responsible for enforcing these regulations.
When Do You Need an Export License?
U.S. law imposes trade restrictions, including embargoes and sanctions, on several organizations and individuals. These limitations affect both domestic and international business.
An export license certifies that the bearer has been given permission to export a specific number of products from their nation. It is not the same as an import permit, which lets you bring the same goods into your own country.
Export licenses are critical because they inform governments about the movement of goods across borders. They help in managing international trade by keeping track of who is sending what and where
Businesses that are considering whether an export license is required for the shipment, transfer, or transmission of technical data to a foreign country should consider four things:
- What goods are you sending?
- Where are they being sent?
- Who will receive your goods?
- What will the shipment be used for?
The need for a BIS license varies according to the item’s technological specifications, final destination, final user, and intended purpose. As the exporter, you are responsible for determining if a license is necessary.
1. What Goods Are You Sending?
Licenses from the U.S. Department of Commerce’s Bureau of Industry and Security are only needed for a small fraction of all U.S. exports and reexports. Check the item’s Export Control Classification Number (ECCN) to see if you need a license to export it.
Export Control Classification Number
To learn about licensing requirements from the Department of Commerce, you need to look up its ECCN.
The ECCN includes the item category, the product category, and the main reason for control as an alphanumeric code (for example, 3A001). In the ECCN record, you can find information about the item and any necessary licenses. The CCL contains all ECCNs.
In the CCL, there are ten main classifications:
- Nuclear Materials, Facilities, and Equipment on the Commerce Control List (and Miscellaneous Items)
- Hazardous Substances, including Dangerous Chemicals, Microorganisms, and other Toxins, as well as Special Materials and Related Equipment
- Material Handling
- Computing Devices
- Security and Communications
- Lasers and Detection Devices
- Avionics and Navigation
- Propulsion and Aerospace
To get the ECCN for an item, you can self-classify, talk to the supplier, or send a classification inquiry to BIS.
If your product is subject to U.S. Department of Commerce regulations but is not on the CCL, it will be labeled as EAR99. Items designated as EAR99 are less-sensitive consumer goods that often do not need a license.
However, a license may be necessary if the destination of an EAR99 export is an embargoed country, if the end user is someone of concern, or if the recipient will use the item to facilitate an end user that is not allowed.
2. Where Are The Goods Being Sent?
The next step in determining if your item needs an export license is to see if the EAR has the relevant export regulations for your goods.
The Export Administration Regulations spell out the specific licenses that are needed for the export, reexport, and transfer (inside the nation) of certain products to foreign countries. This list includes
- research institutions
- government and private organizations
- other types of legal persons.
You can check if the United States has signed an international agreement at BIS.
Country restrictions may be more or less stringent than others. Due to international embargoes, Cuba, Iran, North Korea, and Syria are the most prohibited places. The embargoed countries and other Treasury Department regulations are detailed in section 746 of the EAR.
3. Who Will Receive Your Goods?
Even if an item is not listed as needing a license on the ECCN and Commerce Country Chart or in the Export Administration Regulations for EAR99, some people and organizations are nonetheless restricted from acquiring U.S. products.
A list of blocked, unverified, and denied persons is on a list of banned entities kept by the U.S. Departments of State, Treasury, and Commerce.
The Consolidated Screening List (CSL) is available on the U.S. International Trade Administration website and may be used by exporters to check potential partners.
4. What Will The Shipment Be Used For?
Specific applications are not permitted, and others may need a license. For instance, without permission, you cannot sell anything to organizations that promote the spread of nuclear, chemical, or biological weapons or the missiles used to transport them. Additional information on limited applications may be found in Part 744 of the EAR.
What Types of Products are Subject to Export Controls Regulations
The United States has export controls over the following five types of goods:
- All items in the U.S., regardless of origin
- All items of U.S. origin
- Items incorporating more than 25% of U.S.-controlled content
- Foreign-made items utilizing U.S. technology
- Other exceptions
As a general rule, export restrictions apply to controlled products, including goods and services, to foreign nationals with potential military uses or such items that might significantly impact our national interests.
What Are the Penalties for Export Violations?
Individuals, businesses, and organizations can face repercussions if they violate export control sanctions and regulations. Non-compliance can be punished criminally or civilly, depending on the offender’s purpose when sending exports. Prison terms are only applicable for criminal offenses.
An administrative body imposes penalties for laws, rules, or regulations violations. They aren’t considered criminal penalties because they aren’t intended to punish the offender. Instead, they’re meant to deter future violations and promote export compliance with the law.
Administrative cases reviewing export non-compliance can take away export privileges to get a business to comply. Violations can be double the value of the transaction or $300,000 per infraction, whichever is larger. Typically, the maximum amount of an administrative fine is increased each year to account for inflation.
A court imposes monetary fines as punishment in criminal cases. They’re considered fines, not penalties, because they’re assessed in addition to other criminal penalties like prison time or probation.
A criminal offense may result in a fine of up to $1 million per export compliance violation. Criminal violators may additionally receive a jail sentence of up to 20 years.
Brand and Reputation Damage
When small to medium-sized businesses experience export violations, the repercussions can be devastating. A company’s reputation may suffer irreparable harm, and it could lose business. A company’s brand value is closely tied to its reputation, which can be damaged when the company is caught violating export compliance regulations. This damage extends beyond those directly impacted by the violation or anyone who has suffered financial loss.
Adverse Media Coverage
Adverse media coverage can also damage a business’s reputation. When the media reports on an export violation, it can be challenging to repair the damage to the company. The company may need help attracting new customers, and existing ones could choose to take their business elsewhere. In addition, competitors could use this information as leverage against them.
Supply Chain Disruption
When an export violation occurs, the entire supply chain can suffer. If suppliers or companies violate export regulations, it can be difficult for them to continue doing business with their partners. Supply chain disruption could lead to a loss of revenue for both parties involved.
Despite the time and resources it takes to learn about export compliance, small to medium-sized businesses should know their legal obligations regarding exporting controlled items, technology, and services. The United States government has several trade sanctions programs that prevent certain exports to certain countries. If you are still determining whether or not an export license is required, check with your local export compliance agency.