Export Compliance Matters

Insight on Export/Import & Compliance Issues

Big Talk After a Cautious Expansion of Ukraine-Related Sanctions by the U.S. – But Still No Big Changes for U.S. Exporters

Although  Obama Administration officials undoubtedly recognize the need to punish Russia and Russian-backed rebels for their alleged role in the MH17 tragedy, they also will continue to weigh the effects of further sanctions on U.S. entities.  The Administration is truly caught between a rock and a hard place on this one: expand sanctions and you risk hurting your own economy; fail to act and you’re telling Moscow that there are no real consequences for Russian actions. Thus, the Ukraine-related sanctions likely will expand slowly, with each new round of sanctions becoming increasingly nuanced in order to minimize any damage to U.S. businesses. So, in the interest of understanding what the most recent changes to these sanctions means for your business before they are further expanded, keep the following highlights and advice in mind:

  • The latest round of Ukraine-related sanctions were imposed on June 16th, 2014 (one day before the downing of commercial flight MH17), pursuant to (existing) Executive Order 13662 (dated March 20, 2014).
  • 11 parties have been added to OFAC’s SDN List, including Kalashnikov Concern (makers of AK-47s), the Russian state research and production enterprise “Bazalt,” as well as both the rebel Donetsk People’s Republic and Luhansk People’s Republic (rebel-established governments in eastern Ukraine).
  • A new list dubbed the “Sectoral Sanctions Identification List” (SSI List) has been created to target the Russian energy and banking industries. Among the notable additions to this list are Gazprombank (financial arm of Russian state-controlled gas producer Gazprom) and Vnesheconombank (state economic development bank). However, these entities are not ‘blocked parties’ like those on the SDN List so trading with them is generally allowed. Instead, two specific types of transactional prohibitions apply to SSI List entities:
  • Transactions involving the establishment of certain debt (with a maturity of longer than 90 days) or new equity are prohibited if they involve SSI entities that fall under Directive 1.
  • Transactions involving the establishment of certain debt (with a maturity of longer than 90 days) are prohibited if they involve SSI entities that fall under Directive 2.

BOTTOM LINE

These new “sectoral sanctions” have created a new list that you must run your potential trade partners against. If a potential trade partner is on the SSI List (or is 50% or more owned by entities on the SSI List, since the 50% rule applies to the SSI List as well) it does not automatically mean that a transaction involving them is prohibited. Rather, it means further due diligence is necessary to determine whether the transaction is of the particular type that SSI List Directives 1 or 2 (based on which one applies to the particular entity) prohibits. As you can see, this latest development does not amount to sectoral sanctions in the sense that trade with a given sector of the Russian economy has not been totally prohibited. Rather, these sanctions target a certain narrow set of transactions with certain named entities: that’s pretty good news for U.S. exporters doing business with Russia in that most transactions can still go forward for now! On the other hand, if you’re curious about how these sanctions are affecting the Russian economy check out this recent article by BBC News’ Katie Hope. And make sure to continue checking in for updates, because based on the big talk in Washington and around the globe, it’s likely this wasn’t the last round of sanctions.

Have a great weekend!

Doreen

Prohibited Country Sanctions and Embargoes: Make Sure You Know the Difference When Drafting Contract Language and Evaluating Export Markets

Casually, the words ‘embargo’ and ‘sanction’ are often used interchangeably. But when it comes to drafting a contract or assessing the viability of an export  opportunity, failing to use the correct  word  can have serious  consequences.  Generally, both terms describe government measures that prohibit individuals and entities under the jurisdiction of one country (not necessarily just its citizens and companies) from engaging in trade or transacting with those of another. Historically, an embargo connotes a complete ban on all commercial activity between two nations, while sanctions are more limited in scope and prohibit trade in certain types of goods or transactions with particular individuals and entities. In fact, sanctions are described by some as a ‘partial embargo.’ The current measures governing commercial relations between the United States and Cuba are a classic example of what is considered an embargo. But even this characterization can be misleading. Strictly speaking, the measures imposed against Cuba are not a total embargo as certain transactions involving journalistic pursuits, certain foodstuffs, humanitarian assistance, and religious travel  are allowed despite the ‘embargo.’  Thus an embargo to one person may not be an embargo to all.  Another example is Iran.  There is an embargo on US goods going to Iran unless you export medical and dental “devices” or foodstuff.  However, consider N. Korea where most people would say we also have an embargo.  US entities are permitted  to make financial  investments in North Korea. Who knew that?  Of course it isn’t true for Iran or Cuba.  Each country has its own specific unique set of sanctions.

When drafting  sanction and embargo clauses in contracts or considering where to do business, keep these points in mind:

· If you (or your company) are a U.S. person, the  U.S. sanction or embargo restrictions apply everywhere in the world: whether you are in the United States, in the country being sanctioned, or anywhere else. So avoid language that ties a party’s sanctions obligations to a physical location.

· Just because a country is sanctioned (or even embargoed) it does not mean that all commercial opportunities in that country or with that country’s nationals are off limits. Each sanctions regime is different (compare the fairly limited sanctions currently imposed on certain Russian and Ukrainian individuals and entities with the broader sanctions that are imposed on most transactions with the Iranian government, Iranians, and Iranian entities), so in certain cases a particular deal can go forward because it falls outside the scope of applicable restrictions. Of course, a detailed review of current regulations is necessary to determine whether this is true in a particular case, but make sure to leave room for lawful activity in sanctioned countries by avoiding blanket statements that prohibit parties from involving themselves in any transaction that involves a sanctioned country. ( I have seen really high priced lawyer make this mistake.

· Due to the political nature of sanctions and the fact that they are used by the US government as diplomatic tools to influence the behaviors of other nations they are constantly changing in response to the ever-evolving geopolitical landscape. So avoid including lists of specifics countries in your contracts because if sanctions against a particular country are lifted while the contract is still in force such outdated language could potentially complicate a party’s plans to enter an attractive new market.

· In most cases, due to the all-encompassing nature of the concept of an embargo discussed above, it is preferable to describe measures as sanctions in a contract in order to allow for the intricacies of each individual sanctions regime and avoid a reading that would prohibit all (including legal) activity in or with a sanctioned country.

An appreciation for the business activities that remain permissible in or with sanctioned countries along with sufficiently permissive contract language and a comprehensive export compliance program that requires your employees to perform the necessary due diligence on each individual transaction will ensure your company remains compliant but doesn’t miss out on perfectly legal and potentially lucrative opportunities in the process!

Have a great day,

Doreen

It’s Not Rocket Science: Taking the Steps Necessary to Avoid Costly Sanctions Violations

The $963 million settlement OFAC recently reached with French banking giant BNP Paribas SA (BNP) was both the largest OFAC settlement to date and represents only a small fraction of the nearly $9 billion in total fines imposed on the bank by state and federal agencies. With figures this high and the additional imposition of a one-year ban that will prevent certain BNP units from clearing transaction in U.S. dollars, it’s obvious why this is big news in the world of international trade and finance. But for SME exporters (and internationally-oriented businesses of all sizes for that matter), the story should simply serve as a front page reminder that taking the necessary steps to ensure your company’s actions do not violate OFAC’s sanctions should be a no-brainer. Implementing a sanctions compliance program is relatively straightforward while the peace of mind you’ll enjoy knowing your company is protected against potentially crippling government fines is priceless.

The heavy-handed punishment imposed on BNP was the result of the government’s determination that the bank engaged in the “systematic practice of concealing, removing, omitting, or obscuring references to information about U.S.-sanctioned parties” in nearly 4,000 international transactions over the course of seven years and violated U.S. sanctions against Sudan, Iran, and Cuba in the process. The bank’s blatant disregard for U.S. sanctions and active efforts to conceal their illegal behavior no doubt played a large role in raising the amount of fines imposed, which leads us to the first point about sanctions: it’s fairly obvious that wilful sanctions violations (when you are aware what you are doing is illegal, but you do it anyway) are big no-nos, but also keep in mind that ignorance is no excuse. The language “known or should have known” is often used in such regulations to allow for the imposition of substantial punishments on violators that were not aware what they were doing was wrong because they never bothered to check. Here is a list of the key elements every sanctions compliance program should include.  Remember, the list is not in any type of hierarchical order of importance – to be effective your program must include each of these steps:

  • Develop a company sanctions compliance policy and certification and distribute it to all company employees and ask each business partner (including foreign representatives and customers) to review and sign it before going forward with a transaction;
  • Distribute a questionnaire to each business partner and in relation to each transaction designed to determine whether the individual or entity, destination country, and ultimate end-use and end-user falls within the scope of U.S. sanctions;
  • Consult applicable sanctions at the time each specific transaction is being cleared in order to determine if sanctions could potentially apply (because they function as a diplomatic tool, sanctions are constantly in flux as the U.S.’s relationships with other countries develop and change, so it is important to consult current potentially applicable sanctions at the time of the transaction, a general periodical check will not suffice);
  • Run each individual and entity involved in a given transaction against OFAC’s Specially Designated Nationals (SDN) List to make sure they are not prohibited parties;
  • Keep an eye out for red flags including receipt of payments from unrelated third parties, customers that appear curiously uninterested in learning about the product, or requests for shipments of products that are incompatible with the country of destination;
  • Maintain records of the due diligence that you’ve performed as proof of your compliance efforts in the event that an inadvertent violation occurs.

Have a great week,

Doreen

Exporters Pushing Back On Threats of Further Sanctions on Russia

Until recently, American trade associations including the U.S. Chamber of Commerce and the National Association of Manufacturers have made their opposition to the imposition of further sanctions on Russia known to the Administration in a relatively quiet manner. Now however, in light of U.S. and European leaders’ warnings that a new round of sanctions on particular sectors of the Russian economy are likely to be imposed if Russia does not take steps to facilitate the de-escalation of the crisis in east Ukraine, these groups are stepping up lobbying efforts against an expansion of the U.S.’s Ukraine-related sanctions program.

The associations’ campaign includes plans for newspaper ads saying that an expansion of U.S. sanctions to include key sectors of the Russian economy such as energy, defense, and finance, would harm U.S. manufacturers and threaten American jobs. Their aggressive stance reflects the concern that additional sanctions could irreversibly hurt U.S. industry by disturbing long-standing trade relationships between Russian and American firms and opening the door for foreign competitors to swoop in and take the business. A unilateral expansion of sanctions against Russia continues to be the greatest concern, as this would disadvantage U.S. exporters in relation to their overseas competitors. As an alternative, the trade groups recommend sticking to a pro-trade policy coupled with multilateral diplomatic efforts aimed at coxing the Russia into cooperating with stabilization efforts in Ukraine. 

Government officials and members of Congress are well aware that additional sanctions could backfire and hurt the American economy as a whole and U.S. exporters in particular. Therefore, they too would prefer an amicable resolution to the crisis in Ukraine that does not disturb existing ties between Russian and American trade partners. Feel free to weigh in with your opinion.  Contact your representatives in Congress or any trade association related to your business.  To find your congressional representative Google your zip code and “congressional district”. 

Have a great day,

Doreen

 

The World Is Your Oyster!

Dear Exporters,

Trade issues have not been front and center for the last several years.  However, today I saw a bright light.  I have been watching trade matters in Washington since the late 1980s.  In some ways not that much has changed.  Republicans have tended to be free traders with some pro-trade democrats lending support.  We have had big fights on large trade Agreements like NAFTA and been able to pass small trade agreements for Israel, Jordan and Oman with little fanfare.*  Today I heard something new and different.  Senate Finance Committee Chair Ron Wyden has announced he wants to build a bipartisan coalition to create an effective trade policy.  Sounds proactive rather than reactive.  Wow.  Eventually what happens with trade policy in Washington will affect all U.S. exporters.  The business community knows that but politicians have been late to the party.

The world is shrinking because of increased trade.  As the United States becomes party to more free trade agreements SMEs will benefit from:

  • Lower trade barriers
  • Better global IP protections
  • Lower import duties
  • Increased cooperation and enforcement (fewer seizures)
  • Improved supply chain security and safety

Here are a few reasons for hope:

  1. Trade Promotion Authority (TPA) will happen in order to pass the Trans-Pacific  Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). The TPA provides a fast track process to get the agreements approved with a yes/no vote in Congress so they don’t get bogged down or gutted by amendments.
  2. The Obama Administration really is pushing exports and our States are competing around the world for more foreign direct investment. This won’t change no matter who wins  the next Presidential election.
  3. Technology and cloud computing are all slowly being considered and factored into trade agreements.
  4. The World Trade Organization has a green goods initiative aimed at eliminating world-wide tariffs  for environmentally friendly products.  For example, consider ceiling fans.  They face a 4.7% duty right here in the USA.  This ultimately raises the cost to consumers for an environmentally friendly product that should be promoted through duty free treatment, not handicapped by a high tariff.  If ceiling fans are included in the agreement fans will be duty free in WTO countries.
  5. The Trade in Services Agreement (TISA) brings together 50 countries representing 65% of the world’s service providers. The agreement intends to level the playing field  to increase exports of services.
  6. The Customs-Trade Partnership Against Terrorism program is being expanded to include exporting companies. (See last blog.)

I know these agreements take years to come to fruition.  But  Senator Wyden’s comments may breath some new air into the dialogue.  Trade benefits everyone.  And the slow process gives each company plenty of time to plan and form a strategy to take advantage of the opportunities!

*In addition to the three countries named above, the United States has free trade agreements in force with Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Korea, Mexico, Morocco, Nicaragua, Panama, Peru, and Singapore.

Have a great day,

Doreen

Exporters will soon be able to take advantage of C-TPAT benefits! BIG news

Until now, eligibility for a Customs-Trade Partnership Against Terrorism (C-TPAT) certification has been an importers only program. Now a plan is in the works to expand the program to exporters.  One proposed benefit would be for export agencies to apply a “lower level of scrutiny” to the export documentation of participants whose goods are destined for a country that has signed a Mutual Recognition Agreement (MRA) with the US. C-TPAT certification could also reduce the number of export exams that US Customs and Border Protection (CBP) conducts on a participating exporter and provide it with priority processing when an export exam is initiated. There is yet no timetable for the exporter pilot program. However, the certification requirements could be released by CBP by the end of the summer.

C-TPAT is currently a voluntary program offered to importers by CBP that is geared towards improving US border security and facilitating the fluidity of international supply chains. CBP works with  each participant to verify that it has a documented process in place to identify and properly mitigate the risks associated with each step of its international supply chains before it is granted C-TPAT certification. Once certified, participants undergo fewer CBP inspections at the border and receive priority processing if and when a CBP inspection is initiated.

Have a great day,

Doreen

You’re Only As Good as Your Source: Make Sure to Consult the Right Versions of the ITAR and EAR

These days when we’re in need of information on an unfamiliar topic our first thought is often to “Google it.” Usually, these initial searches generate plenty of useful results. But actually differentiating between the websites that contain accurate and reliable information and those that may be misleading can be quite the challenge. Making this distinction becomes all the more important when the information you are seeking will be used for export compliance purposes and inaccurate conclusions can  potentially lead to costly and time consuming violations that could have disastrous effects on your business. 

The websites of the Government Printing Office (GPO), the State Department, the Commerce Department as well as private law firm publications, blogs, and news outlets are but a few sources that pop up when you type in your ITAR or EAR related search term. The trouble is that since new final rules and legislation constantly revise the text of these regulations, often in very significant ways, there is no guarantee that the link or pdf provided on a given website will lead to the most current version of the regulations. Even the US government’s GPO website does not update its copies of the ITAR and EAR every time a new final rule amends them (currently, a version from January, 1 2014 is provided).

Trying to reconcile conflicting versions of the EAR or ITAR can be an overwhelming task.  Luckily, the Bureau of Industry and Security (BIS) and Directorate of Defense Trade Controls (DDTC) websites appear to update their versions of these two regulatory instruments as soon as a rule amending them goes into force.  For example, the amendments to the EAR made by the final rule that was released by BIS yesterday (June 5th) have already been made to the version available on the website.  It makes sense that BIS and DDTC, as the two offices within the Commerce and State Departments that are most intimately involved in promulgating these regulatory regimes, would be the most authoritative source when it comes to the text of the EAR and ITAR.

So, when you want to confirm that you are looking at the current version of the EAR always refer to the BIS website.  And when you want to make sure the ITAR text you are working with is up to date go to the DDTC website.  Following this rule of thumb will ensure you are working with the most accurate version of the regulations and put you in the best position to make the right determination and remain compliant.

Have a great week,

Doreen

 

What Exporters Need to Know About Ukraine-Related Sanctions

As of today, all you exporters out there following news reports of the ever-evolving U.S. sanctions program related to the situation in Ukraine need to know the following:

The Ukraine-Related Sanctions Regulations currently grant the U.S. Treasury’s Office of Foreign Assets Control the power to single out individuals and entities with whom U.S. persons can’t do business. 

Thus, if you have either a longstanding business relationship or are looking to establish new business connections with people or companies that may have ties to Ukraine or Russia you need to use OFAC’s search tool, located here,, to make sure that your potential business partners are not listed as Specially Designated Nationals or Blocked Persons that you consequently can’t do business with.  It’s important to note that although there are roughly 60 individuals and entities listed at this particular time, the U.S. government has confirmed that it is willing to expand the scope of the sanctions program in response to any future actions taken by Russia to destabilize Ukraine.  This means the list could change daily, so check early and check often. 

Beyond this check, it is also important to note that both the Commerce Department’s Bureau of Industry and Security and the State Departments Directorate of Defense Controls have begun to deny pending license applications for exports or re-exports to Russia or Crimea.  But if your export does not need a license from either State or Commerce, and your business partner is not on the Specially Designated Nationals or Blocked Persons List, you can still go forward with the transaction.

Again, keep in mind that these sanctions can change at any time in response to changing circumstances in Ukraine, so these considerations reflect the state of the sanctions regime on June 2, 2014 and may change.

Please call with any questions. Have a great day.

Doreen

How to Comply with your Export and Anti-Corruption Obligations Without Offending Your Customers and Foreign Partners – Blame the Lawyers

Good day.

More and more companies are understanding the federal anticorruption, Patriot Act, and export due diligence requirements to “know your customer”.   However, I am asked over and over how much information is really needed.  Do you really need to know if your foreign partner makes political party contributions?  Must  each foreign person list every relative that works in the foreign government on the compliance questionnaire? If it is an export transaction and you are a supplier to prime contractor, can you ask your customer who it is selling to, where is the ultimate destination and who is the end user?

The answer is the more information you have the better you protect your company and yourself. You really do need the information to understand the risks.   So it is a business decision to balance your diligence obligations with your customers and partners tolerance. Here are some options to consider:

Start with your generic due diligence questionnaire.  Explain that you must have this information to comply with US law, specifically your due diligence documentation requirements.

Explain the questions are standard and do not imply that the company or person has done anything improper.

Revise the questionnaire to be more generic to avoid the time consuming questions initially.  For example, “have you or any close family member held a government position” rather than “list all family members with government positions”.  You can follow up with a supplemental questionnaire as needed.

Explain that you will not share this information and it will be maintained in confidence by your compliance officer.

And finally, explain that your lawyers require the information for you to proceed.

Have a great day,

Doreen

Real OFAC Policy Changes Toward Iran—OFAC will consider non Ag/Med exports

As a new round of nuclear talks involving American, European, and Iranian leaders commence this week in Vienna it appears that the first-step deal agreed upon in January has already led to significant changes in OFAC’ s Iranian sanctions regime. In the months since the initial deal,  OFAC has taken incremental yet steady action geared towards ultimately allowing certain U.S. industries to begin trading with Iranian entities. While initial actions by the President and OFAC did not significantly change anything for U.S. industries in particular (they were primarily geared towards allowing transactions with Iran involving non-U.S. entities to go forward), the following actions may signal the start of a reopening of trade relations between the U.S. and Iran, especially if the current round of talks prove to be as successful as the last:

  1. OFAC has granted Boeing a license to export spare commercial parts to Iran for use in repairing IranAir’s commercial fleet. The transaction will be the company’s first dealing with Tehran since 1979 and represents the first substantial application of OFAC’s new “favorable licensing policy” towards Iran, which was first announced on January 20th.  A Boeing statement maintained that the license had been granted to promote flight safety. Additionally, General Electric said it received permission to repair 18 commercial plane engines it had sold to Iran decades ago. The repairs will be carried out in GE facilities or at a German partner firm. Maybe it is time to consider “out of the box” opportunities?  You have to play to win.  This is big market opportunity for companies that want to get special licenses.
  2. OFAC has published a final rule that implements the following changes to its sanctions program:
    • Amends the existing general license that authorizes the exportation or re-exportation of food to individuals and entities in Iran to include the category of agricultural commodities (this is a much broader category, but keep in mind that the rule does exclude some notable commodities such as castor beans, eggs, and live animals, and furthermore, still prohibits the sale of these goods to military or law enforcement purchasers or importers)
    • Adds a general license that authorizes the exportation or reexportation of replacement parts for certain medical devices to individuals and entities in Iran provided that the parts are classified as EAR99 and limited to a one-for-one export or reexport basis (one replacement part per one medical device)

As has been the case for decades, any potential transaction with an Iranian entity must be carefully and thoroughly vetted to ensure that it does not amount to a violation of OFAC’s ever-changing sanctions regime. Yet now more than ever, it may prove lucrative to entertain these possibilities and perform the necessary due diligence to determine whether they are indeed viable opportunities. If relations between Iran and the U.S. continue to improve, companies in a position to swiftly reenter the Iranian market stand to reap the benefits of high consumer demand coupled with minimal competition.

I think it is not too soon to give your business development team a heads up. And, depending on your industry, time to explore options.

Doreen