Recently, I was fortunate enough to work with Assistant Secretary Kevin Wolf on a webinar on October 23. We based the webinar on questions our team encountered when trying to apply the new regulatory changes to our client’s businesses. This has been a big issue for us as we have been designing an export chart that includes all of the State, Commerce and OFAC requirements for any business when exporting. As we worked with companies using the chart we would get tangled up in the new requirements. So we came up with a series of questions that Assistant Secretary Wolf answered on our webinar. We thought if we had these questions so would other exporters.
You can view the webinar here.
Have a great day,
As you may know, the United States’ export control regime controls items, services, and information through regulations enforced by the State, Commerce, and Treasury Departments. Since all three departments promulgate their own set of definitions and rules, trying to determine which set of regulations and definitions to apply to your particular export can get confusing – especially when similar words are used by different departments to describe similar (but legally distinct) classes of exports.
Today I want to shed some light on a distinction that confuses many of my clients, at least initially: the difference between “Technical Data” and “Technology.”
Since the government has not quite caught up with the rapid evolution of cloud technology and information security products, properly classifying information for export can get complicated. What you need to know is that the information the government regulates is called controlled information. Controlled information is referred to as “Technical Data” (capital T, capital D) under State Department regulations (International Traffic in Arms Regulations) and “Technology” (Capital T) under Commerce Department regulations (Export Administration Regulations).
- If you have an item controlled by the State Department, look at the Technical Data definition. It is defined as information used in the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of Defense Articles, classified information and software relating to Defense Articles, or information covered by a specific invention secrecy order issued by the government. Information is not considered Technical Data if it is in the public domain, consists of general scientific, mathematical, or engineering principles commonly taught in schools, colleges, and universities, or basic marketing information describing the general function or purpose of Defense Articles.
- If you have an item controlled by the Commerce Department, look at the Technology definition. It is defined as specific information necessary for the development, production, or use of an item. Development is related to all stages prior to serial production while production includes all stages ranging from manufacture to quality assurance. In order to be controlled because it is necessary for the use of an item, information must satisfy a narrower standard. The information must be used to operate, install, maintain, repair, overhaul, and refurbish the item. Information is not considered Technology if it is (or will be) published, a result of fundamental research, educational, included in certain patent applications, or under the exclusive jurisdiction of another U.S. government agency,
As with any system, to get an accurate result you have to make sure to employ the proper standard for the particular analysis you are doing. Remember: in order to determine if the State Department controls information see if it falls under the Technological Data definition, and in order to determine if the Commerce Department controls the information see if it falls under the Technology definition.
Have a great day,
Seems like all my free moments are on a plane. This flight in particular is an 8 hour flight — the inflight entertainment and the light controls are not working! This gives me time to reflect on Export Control Reform. With the first set of changes happening on October 15, my colleagues and I have been trying to actually apply the regulations so we can create a process of review for our clients.
You have to really understand the new threshold questions before you try to apply them. Here is a key example: how do you begin if you want to classify something? Should you still use the old specifically designed language for products not affected by the changes or should you revise all your procedures to account for the new specially designed language and the new series of yes/no questions for classification?
What we have learned:
- Since the old (specifically designed) language and new (specially designed) language are included in the actual text of the applicable enumerated classification categories, you can go ahead and revise your checklists and procedures now to include the new classification steps. The new steps will account for (1) the potential applicability of the new definition to your export and (2) the possibility that it has moved from the State Department’s United States Munitions List (“USML”) to the Commerce Department’s new ‘600 Series’. Once these new yes/no questions are incorporated into your materials, you will be able to properly classify any product, regardless of whether it falls under an unrevised USML category (that still employs the specifically designed definition), a revised USML category (that uses the new specially designed language), or the ‘600 Series’ of the Commerce Control List (that also makes use of the new language).
We revised our checklist accordingly based on the new regulations. We also created an online training program that will be available for purchase. We decided to make a straightforward program that is simple as well as being in clear business-friendly English. We don’t spoon feed you the regulations, we actually translate the process for your business. We will post a link soon so you can try it out. The best part is that we’ve created a one page flow chart that includes the new regulations and all three of the agency requirements. No one to my knowledge has done this yet. Feel free to try it. If you don’t like it, please let me know.
Meanwhile, we will use this blog to update you on the regulatory changes. As of October 15, the following USML categories have items moving over to the Commerce Control List:
- Category VIII – Aircraft and Related Articles
- Category XIX – Gas Turbine Engines and Associated Equipment
This means that some of these items will no longer require a license to export. However, it also means that the questions you must ask in order to classify products are also changing. If you have questions or want to make sure you understand this, please join us for a free webinar with Assistant Secretary Kevin Wolf, the man who designed this program for the Commerce Department. The webinar entitled “All You Want and need to Know About Export Control Reform” is on October 23 at 1PM EDT. You can register here: https://www3.gotomeeting.com/register/405406094.
Have a great day.
Saving on your federal income taxes is yet another reason to start exporting. If your company manufactures or processes goods in the U.S. you can set up a Domestic International Sales Corporation (“DISC”) and save up to 20% in federal income taxes on a portion of your qualified export income. To qualify, the goods must be made in the U.S. with no more than 50% imported materials.
A DISC is a “paper” corporation set up to receive commissions based on your export income. The DISC is not required to provide any services or have an office, employees, or tangible assets. Its sole purpose can be to receive tax-deductible commissions from your corporation and distribute these funds to its shareholders as dividends. The qualifying export income funneled through the DISC is paid out to the shareholders as dividends and taxed at the qualifying dividend tax rate of 20% as opposed to the ordinary individual income tax rate of as high as 40%, resulting in a 20% reduction in tax rate on these funds.
Setting up a DISC for tax purposes will not affect your day-to-day dealings. Creating a DISC involves establishing a U.S. corporation that elects to be identified as such for tax purposes (the owner(s) of your company will be the DISC’s shareholders). Once you obtain a tax identification number for the new corporation, a DISC election can be made on IRS Form 4876A. Your principal corporation then enters into a commission arrangement with the newly created DISC.
Rejoice for the tax incentive for exporters from our Members of Congress.
Think about a DISC as a possible opportunity.
Have a good day.
I try to avoid talking about Foreign Corrupt Practices Act (FCPA) issues seeing as though it’s quite a popular topic. However, I can’t ignore the vital take-aways from the 10 year FCPA investigation into Total S.A. (Total), and the National Iranian Oil Company (NIOC). The recent settlement requires Total to pay more than $398 million to the U.S. government and implement an “enhanced” compliance program with an on-site compliance monitor for three years.
Between 1995 and 2004, Total funneled approximately $60 million in bribe payments to an Iranian official. In exchange, the official used his influence to help Total obtain oil rights contracts. The DOJ charged Total with criminal violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. The Security and Exchange Commission (SEC) also issued a Cease and Desist Order addressing the civil charges associated with the bribes. Meanwhile, French authorities continue to investigate the matter and have brought charges against Total in French Criminal Court for violation of the French foreign bribery statute, suggesting that the U.S. settlement may not quite signal the end of Total’s troubles.
Fortunately, this unfortunate example offers a number of takeaways for any company that wants to minimize the risk associated with doing international business.
- The U.S. settlement and parallel French investigation highlight global cooperation in anti-corruption enforcement, not to mention the potential for carbon copy prosecutions. For this reason, a company should not attempt to implement a compliance program that caters to only one country’s anti-bribery laws. Instead, it should ensure its program satisfies international standards, providing a degree of protection against anti-corruption prosecution globally.
- Non U.S. companies should be aware of the U.S. government’s reach. Total has American Depository Receipts (ADRs) registered with the SEC and is publically traded on a U.S. exchange. Additionally, a $500,000 bank wire from New York to Switzerland used to facilitate Total’s bribery scheme bolstered the government’s claim to jurisdiction.
- Companies can face FCPA prosecution relating to very old actions. In the case of Total, the government began its investigation into conduct dating back to 1995.
- Companies must remember that cooperation is key to encouraging leniency on the part of the government and ultimately mitigating the fine imposed. Total’s high fine suggests that it was not very cooperative during the investigation.
Have a great weekend,
On June 3, 2013, President Obama approved a new Executive Order (E.O.) to isolate the Iranian government by tighening U.S. sanctions. The E.O. aims to target Iran’s automotive sector and petrochemicals industry, as well as Iran’s currency, the Iranian rial. These sanctions came into play on July 1st and were imposed prior to the recent presidential election in Iran. The E.O. aims to halt the automotive production in Iran by prohibiting the sale, supply, or transfer to Iran of substantial goods or services relating to the automotive industry. The Office of Foreign Assets Control (OFAC) is choosing to target the automotive industry, as it remains one of Iran’s most profitable industries. Subsequently, such sanctions on the automotive industry are aimed at further devaluating the Iranian rial in the international marketplace. Ultimately, aiming to make it unusable outside of Iran.
The E.O. has authorized sanctions against any companies (or individuals) doing business with Iran’s automotive industry or handling complex business transactions using the rial currency. While U.S. companies are prohibited to engage in business dealings in Iran, it is critical for U.S. companies to perform due diligence prior to business interactions with foreign automobile companies who may be doing business with Iran’s automotive industry. Additionally, the E.O. includes sanctions against any person that aids any Iranian person on the Specifically Designated Nationals (SDN) or Blocked Persons lists. As a result of this E.O., U.S. companies must remain compliant by clearing their potential or current foreign automobile partner[s] against a comprehensive set of U.S. and international sanctions lists, which includes the OFAC SDN List. The U.S. auto industry is prohibited from doing business with foreign automobile companies if such companies are listed as an SDN for business activity with the Iranian automotive market. Furthermore, foreign companies that help Iran evade the sanctions can also face severe backlash from the international community, including a ban on doing business in the United States.
A major takeaway here is the list of sanctions against Iran is growing to hit many profitable industries and while U.S. businesses cannot directly engage in business with Iran, the rules may differ for their foreign business partners. The less obvious trap that U.S. companies must be vigilant of is the activity and relationship their foreign business partners have with Iran. With sanctions on the rise, U.S. companies have the potential to become indirectly involved with Iran via their relationship with foreign companies, if proper due diligence is not made a top priority.
The Office of Foreign Assets Control (OFAC) recently released General License D regarding the exportation of certain services, software and hardware pertaining to personal communication exchange in Iran. The release of this General License is extremely beneficial for companies specializing in personal communication services, including the big “Apple” and other software companies, looking to export their communication software or hardware devices to Iran. The General License includes authorization for fee-based services for personal use involving internet communication. The fee-based software must be compliant with the Department of Commerce Export Administration Regulations (EAR). If exporting to Iran under General License D, it is imperative that you clear your item designated as an EAR99 item by the Department of Commerce.
It is important to note that this General License does not authorize transactions without having first met the compliance requirements of other federal agencies, such as the Department of Commerce and/or Department of State. Therefore, since all business activity in Iran is heavily watched, it is important to confirm your EAR99 classification through the Department of Commerce Bureau of Industry and Security (BIS). EAR99 items are items that are subject to the jurisdiction of the Export Administration Regulations (EAR) but are not located on the Commerce Control List. Even if your item is EAR99, it does not mean your exempt from obtaining a license prior to exporting. In many instances, items with an EAR99 classification may be shipped under a No License Required designation. However, if you are exporting to a sanctioned country, such as Iran, you may need to obtain a specific license to export. This is where the General License kicks in. With regard to General License D, it removes having to wait and obtain a specific license from OFAC, but you still have to be vigilant about the following caveats:
- Self-classifying your item as EAR99 may not be worth the risk when dealing with Iran (or any other sanctioned country). In which case you will need to go through a formal classification process or engage counsel to assist in classifying your item as EAR99.
- Or have your item classified under export control classification number (“ECCN”) 5D992.C.
- You must know your potential buyers and end-users. This should involve a thorough due diligence and screening clearance process.
- The exportation or reexportation of the services, software, or hardware specified in General License D for personal communication purposes must not be intended for the Government of Iran – directly or indirectly.
- The General License does not authorize exporting “commercial-grade” Internet connectivity services or telecommunications facilties, or web-hosting services used for purposes other than personal communication.
One major takeaway – It is important to remember that although a General License may help to ease the exporting process for your company, you must remain compliant with the exporting requirements outlined by all federal agencies. In this case, OFAC’s General License does not mean you are off the hook. First, you have to ensure that you have met the export licenseing requirements of the Department of Commerce before utilizing the General License to export.
Have a great weekend,
In conjunction with the Government’s ongoing Export Control Reform Initiative, the Bureau of Industry and Security (“BIS”) in the Department of Commerce is introducing some useful web-based tools for exporters. Three new interactive questionnaires will help exporters determine:
- Whether goods, technologies, and software are “specially designed” for military use, and whether items are included in the new “600 series” of the Commerce Control List (“CCL”), which is designated for items moving from State Department control;
- How goods, technologies, and software should be classified according to the new “order of review” for classification, which clarifies the process and takes into account the items moving to the CCL; and
- Whether the export in question is eligible to benefit from the “License Exception STA” (Strategic Trade Authorization), which allows exports, reexports, and in-country transfers without licenses of certain controlled goods, technologies, and software to select low-risk countries.
What to Do with the New Tools
Note that these new tools help you with the revised regulations that don’t go into effect until October 15, 2013. But if you are an exporter of military aircraft, gas turbine engines or parts, components, equipment or software related thereto, get ready because these items will be moved from State Department control to Commerce control in this fall.
The tools can be found at these web addresses:
Commerce Control List (CCL) Order of Review Decision Tool
“Specially Designed” Decision Tool for exports after 15 October
Strategic Trade Authorization (STA) Interactive Compliance Tool
DO NOT use these tools as substitutes for carefully reading regulations and seeking advice when there is something that you do not understand. The tools are useful for organizing your thoughts when checking conclusions or doing first-blush analyses, but like all computer programs, they produce results that are specifically based on the accuracy of your inputs. However, these tools show you the new export control agenda, which is based on a catch and release principle. Get familiar with it…more revised regulations are coming.
Have a great weekend,
U.S. importers that are members of the Customs-Trade Partnership against Terrorism (C-TPAT), when serving as U.S. exporters of goods to the European Union (EU), will receive expedited Custom clearance, decreased inspection frequency, and other benefits when they export to European ports. Similarly, companies that have Authorized Economic Operator (AEO) status in the EU will be treated like C-TPAT members when they import into the United States. This represents full implementation of the May 2012 mutual recognition agreement between Customs and Border Protection (CBP) and the EU Taxation and Customs Union Directorate.
In order to take advantage of the benefits of mutual recognition, U.S. importers must be Tier 1 or Tier 2 C-TPAT members, meaning that the adequacy of their security measures and their requirements for business partners must have been “validated” following inspection by CBP. Similarly, EU AEOs must be AEOSs or AEOFs, meaning that they have been validated following examination and inspection by the national authorities of an EU member state as compliant with the safety and security component (as opposed to just the Customs simplifications component) of the AEO program.
The primary benefits available to importers will be lower automated risk assessment scores given reciprocally to members of C-TPAT and EU AEOs. This has the very real advantage of dramatically decreasing inspection frequency for member company’s shipments on both sides of the Atlantic, and member companies’ shipments that are selected for inspection are given priority over nonmembers’ shipments. For those companies that would have become C-TPAT members and EU AEOs absent mutual recognition, the primary benefit is the elimination of the requirement of repeat examinations/audits by both U.S. and EU member state officials of the same aspects of their operations before the companies can benefit from trusted treatment by U.S. and European authorities. The U.S. and the EU have similar mutual recognition agreements with other countries and are in the process of negotiating new ones. This significantly increases the incentive to make the initial investment of time and money and get certified and validated under C-TPAT and/or another jurisdiction’s similar program.
I have covered the Customs-Trade Partnership against Terrorism (“C-TPAT”), a U.S. Customs and Border Protection program that entitles importers who have proven their compliance with its requirements to less frequent security inspections of their goods, before on this blog.
Have a wonderful afternoon,
As the world becomes more global and interconnected, a small business may have the opportunity to grow by exporting its products to foreign markets (or even may find its products are being exported by others). However, achieving success is not as simple as having a strong desire to sell products or services globally. Proper planning and compliance is a must. Here are three tips for a small business to help export confidently and grow its business in a foreign market.
Understand the Market
Understanding whether a particular country is a suitable market is essential to any successful export strategy. Be able to answer the question: “Why this country?” If you are unable to provide an answer, you should not go. To help you determine whether a particular market is suitable for you, ask yourself if there a market for your particular product or service. Also, understand the regulatory environment – are there limitations or restrictions that will impact your ability to sell your product or service in the country? Identify any other barriers to entry. Understand the sales and distribution network for your product or service in that particular country. Learn about your competitors and their products and prices. Understand how cultural differences may impact how you market your product or service.
Identify the Correct Partner
Many small businesses do not have the resources to effectively market and sell their product or service in a particular foreign market all alone. Identifying the right partner to assist you in the foreign market is critical. Do your due diligence when selecting a partner. Is the potential partner who he says he is and can he do what he says he can? Also, consider a company that sells a complementary product or service, that understands how to do business in the market and that has a good distribution network in the country. Determine whether the U.S. considers the potential partner to be a denied person or entity. Will you form a joint venture or engage the local partner as your agent or distributor? Know the repercussions for terminating the partnership before making your decision.
Take Advantage of Free U.S. Government Resources
Remember the U.S. government has agencies available to help a small business to export its product or service, including the United States Commercial Service, the Small Business Administration and the Export-Import Bank of the United States. For example, the United States Commercial Servics can help you with market research and identifying potential partners. The Small Business Administration provides counseling, training and financing to support small business export opportunities. The Ex-Im Bank can help you secure financial support that will enable you to expand your sales to existing markets and to enter new ones and can protect you against the risk of non-payment, enable you to extend credit, access working capital or provide term-financing to buyers. Many state and local governments also offer assistance to small businesses. In addition, retain appropriate advisors, including legal, accounting and a good freight forwarder. These individuals will help you understand regulatory issues, whether your proposed business is permitted, export compliance, and tax and trade treaties that may impact the structure of your export strategy. And last but not least, ensure you understand your obligations as an exporter. You must comply with U.S. export control requirements and sanction requirements.