Newsletter

X-Port Advisor, Spring 2011
2011’s “Essential” Export Regulations for High Technology Companies

By: David J. Ricci

Before doing business internationally or even locally with foreign persons, every business should have a clear understanding of the United State’s export regulations. In this edition of the Spring, 2011 Xport Advisor, we examine US export regulations as they pertain to high technology companies. First, we examine the rules and regulations covering the export of commercial products by all businesses. We then address the recent changes to rules governing the export of encryption software and hardware. We conclude with a look at the export regulations that apply to products that have been modified for military application.

II. The Bureau of Industry and Security

The Bureau of Industry and Security is the organizational unit that exercises licensing and jurisdiction over commercial exports from the United States through the Export Administration Regulations (“EAR”). Statutory authority for the EAR is the Export Administration Act of 1979, as amended (“EAA”) 50 U.S.C. app. ss 2401, et seq. The Export Administration Regulations (EAR) implement the EAA at 15 C.F.R. Parts 300 to 799.

Commercial exports are defined at 15 C.F.R. 734.2(b), “Export means an actual shipment or transmission of items subject to the EAR out of the United States, or release of technology or software subject to the EAR to a foreign national in the United States” (emphasis added). The sale of an item over the Internet to a buyer outside the United States is considered an export because it is a transmission of an item outside the United States.

Finding Your Product in the EAR and Classifying it Appropriately

What an item is for export control purposes, is determined by matching it to a “classification” on the Commerce Control List (CCL). A product will be classified based upon its general characteristics. This will guide an exporter to the appropriate category on the CCL. The CCL is composed of 10 categories (Electronics, Computers, Navigation and Avionics, Lasers and Sensors, etc.).

Once the appropriate category is identified, exporters should match the particular characteristics and function of their item to a specific ECCN. If the ECCN contains a list under the “Items” heading, you should review the list to determine within which subparagraph(s) the company’s items are identified. The CCL should be used in tandem with BIS’s Country Chart. This Chart will indicate whether a license is required for any ECCN to any country in the world and the reason or reasons for control.

Exporters are responsible for correctly classifying their items on the CCL. To be certain, BIS recommends all exporters obtain an official classification. from them before exporting a product. A company can do this by submitting  SNAP-R request to BIS and indicate that this form is submitted for the purpose of classification.  Upon review, a company will receive the export control classification number for its product (“ECCN”) on the CCL.  Specific, commonly used, “buzz” words should be used when completing the SNAP-R request to ensure that the BIS is properly understanding the function and use of the product to be exported and to ensure that the form does not get delayed or rejected due to incompleteness or a misunderstanding of export terminology. Once an ECCN is set, it then must be interpreted in accordance with the appropriate regulations. If the SNAP-R request was properly completed using appropriate “buzz” words, the ECCN number will inform you which countries the product may be freely exported to, and/or the restrictions for the export of the product.

Are the items and Activities of your Business Subject to the EAR? –The Significance of EAR99

Due to the rapid pace of innovation, many high technology products are not specifically listed on the CCL. Items not listed on the CCL, but under the control of BIS are classified as EAR99. EAR99 items may be exported to any destination except countries that are embargoed. 15 C.F.R. (Part 774) states, “This interim rule retains one basket entry (EAR99), referenced at the end each category in the Commerce Control List, which contains all the items that used to be classified under those export control classification numbers (ECCNs) ending with “96G” and were thus eligible for General License G-DEST to most destinations. Items classified as EAR99 are those items not specified on the CCL, but still subject to the EAR. Therefore, exporters first must determine that their items are not, in fact, on the CCL; only then may they classify their items as EAR99.”

The benefit of an EAR99 classification is that items under this classification may be exported to any country except those that are embargoed or prohibited. The symbol “NLR” is the correct symbol when exporting an item subject to the EAR not listed on the CCL (EAR99).

Encryption

An electronically transmitted message is usually sent in plaintext (sometimes called cleartext).  The process of disguising a message in such a way as to hide its substance is encryption.  An encrypted message is ciphertext.  The process of turning ciphertext back into plaintext is decryption.

June 25, 2010 Changes to Encryption Regulations

The United State’s Governments export controls related to products containing encryption are some of the most complex of all export controls.  The U.S. government controls the export of encrypted products for National Security reasons.  Originally, the U.S. Government controlled encryption exports Through the Department of State.  Today, in an effort to balance the need for National Security and promote U.S. export  sales, encryption exports are managed by the U.S. Bureau of Industry and Security (“BIS”).

On June 25, 2010, a newly streamlined U.S. Encryption export control (“rule”) was announced.

This rule eases specific license requirements for many types of encryption technology, except to countries subject to export or re-export license requirements for national security reasons or anti-terrorism reasons, or to countries that are subject to embargoes or sanctions.

The new regulations decontrol items that only use encryption for a primary function that is not for computing, communications, networking, or information security.

The BIS has also eliminated its prior 30-day classification review and semi-annual export shipment reporting requirement for 75-90% of mass market and ENC – Unrestricted items.

In addition to the changes listed above, the BIS has indicated that further changes to it’s encryption export controls are under review.

Case by Case Review

Encryption items not falling within the newly streamlined controls may still be approved for export on a case by case basis by BIS.

Embargoed and Prohibited Destinations

15 C.F.R. Part 746 addresses embargoes and other special controls.  This part contains or refers to all the BIS licensing requirements, licensing policy, and license exceptions for countries subject to general embargoes, currently Cuba, North Korea, Iran, Sudan, and Syria.

All the items on the CCL  require a license to Cuba, Iran, or North Korea.  In addition, most other items subject to the EAR, but not included on the CCL, designated by the number “EAR99″, require a license to Cuba, North Korea, Iran, Sudan, and Syria. It is also important to notify the Department of the Treasury when exporting to these countries.

There are also limited embargoes on Iraq and Rwanda. For Iraq, a United Nation’s arms embargo applies to the export of arms and military items to Iraq other than to the Government or multinational forces.  Additionally, a license is required for the known transfer of any item subject to the EAR to a military end-use or end-user.

Penalties for Non-compliance with the EAR Export Administration Regulations

Penalties for non-compliance are discussed at 15 C.F.R. Part 764-Enforcement and Protective Measures.  This Part specifies both the conduct that constitutes a violation of the Export Administration Regulations and the sanctions that may be imposed for such violations.

So that the seriousness of export violations is understood, an example of penalties for a company that “willfully” or “knowingly” violates the Export Administration Act is potentially a $1,000,000 fine or five times the value of the export, whichever is greater, per violation. An employee committing the same violation is potentially subject to a $1,000,000 fine and up to twenty years imprisonment, per violation. Civil penalties of up to $250,000 and a denial of export privileges may be imposed in addition to or in place of any criminal penalties. In addition, note that employees can be terminated or disciplined further by your company, if they are involved in export non-compliance

Voluntary Disclosure

BIS strongly encourages disclosure to the Office of Export Enforcement if you believe that you may have violated the EAR, or any order, or license  thereunder. Voluntary self-disclosure is a mitigating factor in determining what administrative sanctions, if any, will be sought by the Office of Export Enforcement.

Export of Items with Military Applications

The International Traffic in Arms Regulations (“ITAR”) includes Parts 120-130 of 22 C.F.R.  One major element contained in the ITAR is the United States Munitions List (“USML”) (22 C.F.R. Section 121.1), the official list of the types of items controlled by the Department of State. Groups of items with similar uses form the “USML Categories.”  To determine if your article falls under the jurisdiction of the ITAR, refer to the USML.  Identify the generic type of item that you manufacturer or export, or for which you provide technical data or services and if an exporter’s product is referred to, they must register with the Office of Defense Trade Controls.  Any person who engages in the business of either manufacturing or exporting defense articles, defense services, or related technical data in the United States is required to register with the Office of Defense Trade Controls.  Therefore, both manufacturers and exporters of United States defense articles and related technical data and providers of defense services must register with the United States Department of State (ITAR Part 122).  Registration is primarily a means to provide the United States Government with necessary information on who is involved in certain manufacturing and export activities.  Registration does not confer any export rights or privileges.  It is a precondition to the issuance of any license or other approval for export.

United States Export Regulation for commercial items, encryption hardware and software, and items modified for military end-use can appear to be complex and difficult to navigate. Xport advisors can assist you to properly classify your item and seek necessary licensing approval from the appropriate government agency.

This article is not intended to provide legal advice for a specific export problem.