Export controls and their effect on business operations.

Burke, Debra D. ; Nixon, Mary Anne ; Wilson, LeVon E. 等

INTRODUCTION

Despite his testimony that he did not intend to break the law, plasma physicist J. Reece Roth, a retired 70-year-old University of Tennessee professor, recently was convicted of exporting scientific know-how in violation of federal law. Roth had worked on U.S. Air Force contracts with a Knoxville technology company, Atmospheric Glow Technologies, to develop plasma-based guidance systems for unmanned surveillance vehicles (drones). Roth improperly shared sensitive information with his students from China and Iran and traveled overseas with electronic versions of that material on his computer. The Knoxville company and another scientist also pled guilty to related charges. Enforcement authorities have warned that there is heightened interest from China and the Middle East in obtaining this type of information from seemingly benign settings such as a university. Roth will be sentenced in early 2009 and may face more than a decade in prison (Johnson, 2008).

Clearly the professor was not a spy engaged in espionage activities, so what law did the professor violate? Federal laws regulate the distribution of strategically important products, services and information to foreign nationals and countries in the interest of our national security. The primary agencies responsible for implementing and managing these export control laws, which apply to the transfer of physical items, information, and services, are the Department of State through its International Traffic in Arms Regulations (ITAR) administered by its Directorate of Defense Trade Controls (DDTC) and the Department of Commerce through its Export Administration Regulations (EAR), administered by its Bureau of Industry and Security (BIS). Additionally, the Department of Treasury enforces economic sanctions and trade embargoes, which prohibit transactions with countries, entities and individuals subject to boycotts and trade sanctions, through its Office of Foreign Assets Control (OFAC).

Such a regulatory scheme must balance the desire for free trade and globalization needed for economic growth with the need for maintaining national security (Juster, 2001).While the federal government historically has treated the enforcement of international trade and security restrictions seriously, the war on terrorism, coupled with the strengthening and commensurate enforcement of corporate ethics and liability laws, are responsible for an increased intensity of monitoring efforts (Clark & Jayaram, 2005).

This regulation of exports, including technical data, is of particular interest to small business owners. According to the Intuit Future of Small Business Report, (Intuit, 2008), small businesses are continuing to drive U.S. economic growth and by 2018, almost half of them will be involved in global trade. Nearly 97 percent of all businesses that export goods are small to medium sized organizations, representing 30 percent of the total value of U.S. goods exported globally. Considering that more than 70 percent of the world's purchasing power, and 95 percent of its population, are outside of the United States (Hernandez, 2007), it is readily apparent that opportunities to market products globally are great. Yet, while military and government officials are expected to be vigilant in safeguarding weapons and sensitive data, and to be punished for their failures (Tyson & White, 2008), it is less intuitive that such expectations and ramifications may also exist for business owners. This paper will discuss the significance of this export control regulatory scheme to business operations and the responsibility of businesses in pursuing global markets while preserving national security interests.

INTERNATIONAL TRAFFIC IN ARMS REGULATIONS (ITAR)

The Department of State has the responsibility for the control of the permanent and temporary export and temporary import of defense articles (such as weapons and technical data) to foreign countries to prevent the development of arms and weapons capabilities. The Arms Export Control Act (AECA) charged the President to "control the import and the export of defense articles and defense services and to provide foreign policy guidance to persons of the United States involved in the export and import of such articles and services" (22 U.S.C. [section] 2778 (a)(1), 2006).

The Act provided for the promulgation of implementing regulations, or the ITAR (International Traffic in Arms Regulations), which are also administered by the State Department. These regulations primarily address the importation and exportation of defense related trade and technology transfers. The Arms Export Control Act, which the professor in the introduction violated, provides that the "Secretary of State, in consultation with the Secretary of Defense and the heads of other appropriate departments and agencies, shall establish and maintain, as part of the United States Munitions List (USML) a list of controlled items, which under the regulations require a license prior to exportation" (22 U.S.C. [section] 2297 (a), 2006).

The twenty-one categories of USML items are inherently military in character, and include equipment, software, and military electronics, as well as chemical and biological agents (22 C.F.R [section] 120.10, 2006). The classification is based upon the capability of the product to be used for military purposes, and not whether or not the intended use of the article after export is for military or civilian purposes (Liebman & Lombardo, 2006). There is also a catch-all category entitled "Miscellaneous Articles" for items that are not specifically enumerated in other categories of the USML, but which have substantial military application and have been designed or modified for military purposes, including technical data and defense services that are directly related to the defense articles specifically enumerated (Liebman & Lombardo, 2006).

As originally enacted, the AECA imposed licensing and registration requirements only on individuals engaged in the business of manufacturing, exporting, or importing USML articles and services; however, Congress expanded the category in 1996 to include persons engaged in the business of brokering activities with respect to the manufacture, export, import, or transfer of USML articles and services, defining "brokering activities" as "the financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import of a defense article or defense service" (22 U.S.C. [section] 2778(b)(1)(A)(ii)(II), 2006). Persons now potentially subject to licensing and registration requirements include "any U.S. person, wherever located, and any foreign person located in the United States or otherwise subject to the jurisdiction of the United States" (22 C.F.R. [section] 129.3(a), 2006). The regulations now detail the requirements for the registration and licensing of brokers as well (22 C.F.R [section][section] 129, 2006).

All exports of USML items and technical data, such as blueprints, drawings, plans, instructions, diagrams and photographs, must be licensed by the Directorate of Defense Trade Controls (DDTC) unless expressly exempted. (22 C.F.R [section][section] 123 & 125, 2006). DDTC regulates items in order to "advance national strategic objectives and U.S. foreign policy goals through timely enforcement of defense trade controls and the formulation of defense trade policy" (DDTC Mission Statement, 2006). To this end, the DDTC adjudicates license applications for exports of defense articles and services, handles matters related to defense trade compliance and enforcement, and provides reports to Congress and the public on defense trade.

The Arms Export Control Act directs that

[D]ecisions on issuing export licenses under this section shall take into account whether the export of an article would contribute to an arms race, aid in the development of weapons of mass destruction, support international terrorism, increase the possibility of outbreak or escalation of conflict, or prejudice the development of bilateral or multilateral arms control or nonproliferation agreements or other arrangements (22 U.S.C. [section] 2278 (a)(2), 2006).

As part of the regulatory scheme designed to provide the government with necessary information on who is involved in defense manufacturing and exporting activities, companies that produce, furnish or export items requiring a license must register with the Office of Defense Trade Controls and pay an annual fee. Even manufacturers that do not export are required to register and pay the fee, as "registration provides important information on the identity and location of defense companies and enforces on their management a large degree of responsibility for compliance with export controls laws" (22 C.F.R [section] 122, 2006). Registration is a precondition for the issuance of any license or other approval for export. All exports of USML items and technical data, such as blueprints, drawings, plans, instructions, diagrams and photographs, must be licensed by DDTC unless expressly exempted.

DDTC maintains a fully electronic defense trade licensing system, "D-Trade," in order to facilitate the process (D-Trade Information Center, 2006). As part of the Public Service Plan within DDTC's mission, the agency strives to take initial action on license applications within ten working days of receipt, and responds substantively to inquiries within forty-eight hours of receipt (DDTC Public Service Plan, 2006). Licensing forms are available for the permanent export, temporary export and temporary import of covered items and services. In addition to the resources available on the State Department's website for licensing compliance, the Society for International Affairs, Inc. (SIA), a volunteer, non-profit, educational organization, hosts a forum for the exchange of information related to export and import licensing, which covers licensing issues pertaining not only to the Department of State, but also to the Departments of Commerce, Defense and Treasury.

Exemptions from the license requirement, and hence governmental control of dissemination, include items already in the public domain, fundamental research and teaching (for example, information and technology taught in university catalogue courses). In other words, it is not a crime to transmit information abroad that is expressly exempted from the statutory prohibition. "Public domain" means information which is published and which is generally accessible or available to the public" by one of several listed means, such as through:

* sales at newsstands and bookstores

* subscriptions available without restriction

* second class mailing privileges

* libraries open to the public or from which the public can obtain documents

* patents available at any patent office

* unlimited distribution at a conference, meeting, seminar, tradeshow or exhibition, generally accessible to the public, in the United States

* public release, and

* fundamental research in science and engineering at accredited institutions of higher learning in the U.S. where the resulting information is ordinarily published and shared broadly in the scientific community

(22 C.F.R [section] 120.11, 2006)

The public domain limitation applies to technical data, not to items such as firearms or weapons on the USML, as the government may still preclude their export, even though such items might be available to the public in the United States (Lee, 2003). In other words, actual shipments of USML items will always require a license.

As noted, the ITAR exempt fundamental research which is generally classified as being in the public domain. It is defined in the regulations as basic and applied research in science and engineering where the resulting information is ordinarily published and shared broadly within the scientific community, as distinguished from research the results of which are restricted for proprietary reasons or specific U.S. Government access and dissemination controls. The regulations provide that university research will not be considered fundamental research if it, or its researchers, accept restrictions on publication of scientific and technical information resulting from the project or activity, or if the research is funded by the government and specific access and dissemination controls protecting information are applicable (22 C.F.R [section] 120.11(8), 2006).

While industry-sponsored research at an institution of higher education may qualify for this exemption, care should be taken in defining proprietary rights. For example, if a laser manufacturer reviews research prior to publication in order to ensure that patent and other proprietary rights will not be compromised, or reserves the right to withhold publication if the results are undesirable, then the research no longer qualifies for the fundamental research exception under the ITAR (Rege, 2006).

Export means the actual sending or taking a defense article or technical data out of the United States in any manner, (except by a person merely traveling abroad whose personal knowledge includes technical data), or transferring its registration, control or ownership. An End Use Certificate must accompany each bid submitted by a prospective purchaser. The End Use Certificate indicates the purchaser's intended disposition of the property and the property's intended end use. The DDTC's Blue Lantern Program monitors the end-use of commercially exported defense articles, services, and related technical data subject to licensing in an effort to deter diversions to unauthorized end-users, to aid in the disruption of illicit supply networks, to make informed licensing decisions, and to ensure compliance with the AECA and the ITAR. End-Use Reports on checks performed under the Blue Lantern program are available annually on the State Department's website (End-Use Reports, 2008).

Additionally, export also means what is commonly referred to as a "deemed export," that is disclosing (including oral or visual disclosures) any defense article or technical data to a foreign person, or performing a defense service on behalf of, or for the benefit of, a foreign person, whether in the United States or abroad (22 C.F.R. [section] 120.17, 2006). A foreign person, or foreign national, means any natural person who is not a citizen, a lawful permanent resident (green card holder), a refugee or alien granted asylum, as well any foreign corporation, business association, partnership, trust, society or any other entity not incorporated or organized to do business in the United States (22 C.F.R [section] 120.16, 2006). The conclusion drawn under the deemed export rule is that ultimately the foreign national will return to the home country, and the information will then be deemed exported.

The regulation of deemed exports can catch the unwary business by surprise. For example, as applied, a deemed export of information that would require a license could include a foreign national witnessing any demonstration or briefing, or using controlled equipment in a corporate research laboratory, U.S. employees of foreign subsidiaries sending non-public information (i.e., information not in the public domain) to themselves via email while overseas, and industrial scientist-employees of corporations submitting articles for peer-review abroad, if the corporation retains proprietary rights to keep the information private (Rege, 2006). Thus, a disclosure of controlled technical information to a foreign national in the U.S. or abroad without a license could occur by seemingly benign transmissions, such as through:

* communication by fax

* telephone discussions

* e-mail communications

* computer data disclosures

* face-to-face conversations

* training sessions

* tours involving visual inspections

* conferences and meetings

* transfers of equipment abroad

* sharing/shipping encryption source code

As Professor Roth can attest, the failure to obtain the appropriate license can result in substantial criminal penalties. Any person or entity who willfully violates the regulations, or willfully, in a registration or license application makes any untrue statement of a material fact or omits a material fact, may be fined up to $1,000,000 for each violation and/or imprisoned up to ten years (22 USC [section] 2778(c), 2006). Civil penalties may be assessed up to $500,000 for each violation as well (22 USC [section] 2780, 2006). Additionally, violators may be debarred from exporting defense articles and technical data, or from furnishing defense services for which a license or approval is required, for an appropriate period of time as determined in State Department proceedings (22 C.F.R [section] 127.7, 2006). The State Department encourages the voluntary disclosure of violations by firms, and may take such disclosures into account as a mitigating factor in determining the imposition of administrative penalties (22 C.F.R [section] 127.12, 2006).

EXPORT ADMINISTRATION REGULATIONS (EAR)

To counter the proliferation of weapons of mass destruction, the EAR restrict the involvement of "United States persons" anywhere in the world in exports of foreign-origin items, or in providing services or support that may contribute to such proliferation. Unlike the ITAR, which only regulate articles, technology and services related to defense, the EAR are concerned with "dual use" items, that is, goods and technology that are primarily commercial, not military in nature, but which may have a dual militaristic use, such as lasers, global positioning systems and computers. For example, the EAR require licensing for encryption items, because they "can be used to maintain the secrecy of information, and thereby may be used by persons abroad to harm U.S. national security, foreign policy and law enforcement interests" (5 U.S.C. [section] 742.15, 2007).

The EAR are issued by the United States Department of Commerce, Bureau of Industry and Security (BIS) under laws relating to the control of certain exports, re-exports, and activities (15 C.F.R. [section] 730.1, 2007). The mission of BIS is to "advance U.S. national security, foreign policy, and economic objectives by ensuring an effective export control and treaty compliance system and promoting continued U.S. strategic technology leadership" (BIS Mission Statement, 2006). In addition, the EAR implement anti-boycott provisions that prohibit specified conduct by United States persons that has the effect of furthering or supporting boycotts fostered or imposed by one country against another country that is friendly to the United States (15 C.F.R. [section] 730.1, 2007).

The majority of exports that require a license under the EAR are controlled pursuant to the Commerce Control List (CCL), which is administered by the Department of Commerce (15 C.F.R. [section] 774.1, Supplement No. 1, 2007). Many items are not on the CCL, or, if they are on the list, require a license to only a limited number of countries. License requirements under the EAR are dependent upon an item's technical characteristics, the destination, the end-user, and the end-use. The exporter must determine whether or not an export requires a license. When making that determination, consideration must be given to:

* what is being exported

* where it is being exported

* who will receive the export, and

* purpose for which the export will be used

(Introduction to Commerce Department Export Controls, 2007)

BIS maintains the CCL, which includes items (commodities, software, and technology) subject to its authority. The CCL categorizes the products and related technology that it covers into 10 topical categories, numbered as follows:

0--Nuclear Materials, Facilities and Equipment and Miscellaneous

1--Materials, Chemicals, "Microorganisms," and Toxins

2--Materials Processing

3--Electronics

4--Computers

5--Telecommunications and Information Security

6--Lasers and Sensors

7--Navigation and Avionics

8--Marine

9--Propulsion Systems, Space Vehicles and Related Equipment

(15 C.F.R. [section] 738.2(a), 2006)

Within each category, items are arranged by group. Each category contains the same five groups. Each group is identified by the letters A through E as follows:

A--Equipment, Assemblies and Components

B--Test, Inspection and Production Equipment

C--Materials

D--Software

E--Technology

(15 C.F.R. [section] 738.2(b), 2006)

Any product or technology that is subject to the EAR that does not fall under one of the ten specific CCL categories will fall into EAR 99. For example, bullet-proof windshield glass exported separately from a vehicle is on the control list if it is for vehicles designed or modified for non-combat military use, but it is classified as EAR99 No License Required (NLR) if it is for civil automobiles designed for the transportation of passengers and marketed through civilian channels (BIS Advisory Opinions, 2006). Licenses are not required for products or technologies in this category except in a few circumstances, such as for exports to certain countries where such exports have been embargoed (Liebman & Lombardo, 2006).

In order to classify an item against the CCL, an exporter should begin with a review of the general characteristics of the item to be exported. This will usually guide the exporter to the appropriate category on the CCL. Once the appropriate category is identified, the exporter should match the particular characteristics and the functions of the item to a specified Export Control Classification Number (ECCN). Within each group, individual items are identified by an ECCN. A brief description is provided for each ECCN. There is also information relating to "License Requirements," "License Exceptions," and "List of Items Controlled." The CCL identifies all possible reasons for control, in order of restrictiveness, and the extent to which each applies. The accompanying country chart identifies almost every country in the world and contains licensing requirements based on destination and reasons for control (15 C.F.R. [section] 738, 2006).

By identifying the ECCN for a proposed export, and cross-referencing that number to the country chart to which the item is to be exported, the exporter will be able to discern whether or not a license is needed (15 C.F.R. [section][section] 738.1-738.4 & Supp. 1, 2007). In addition to this licensing matrix, other restrictions based on embargoes may also apply to exported dual use goods. For example, the Department of Commerce will deny applications to export items subject to the EAR to entities sanctioned by the Department of State pursuant to statutory authority , such as Cuba, Iran, Iraq, Rwanda, and North Korea (15 C.F.R. [section] 744.19, 2007). If exporters are unsure about whether or not a commodity is subject to the jurisdiction of the Commerce Department's export licensing authority, or if they are unsure of the item's classification, then they may make a Commodity Jurisdiction request or a Commodity Classification request to the BIS, as appropriate, to determine the ECCN or if a license is needed.

Some transactions may be covered by one or more of the license exceptions to the EAR such that no license is required (15 C.F.R. [section] 730.7, 2007). Exceptions from the license requirement may include such things as the use of certain temporary exports up to one year, which may include beta test software or commodities necessary for news-gathering purposes. More importantly, no license is required for the export of public information, that is information which is "generally accessible to the interested public in any form," such as information in periodicals, books, print, electronic, or any other media available for general distribution (5 C.F.R. [section] 734.7(a), 2007). There is also an exception for "basic and applied research in science and engineering, where the resulting information is ordinarily published and shared broadly within the scientific community," as distinguished from "proprietary research and from industrial development, design, production, and product utilization, the results of which ordinarily are restricted for proprietary reasons or specific national security reasons" (5 C.F.R. [section] [section]734.8(a), 2007). Since much research in business will be of a proprietary nature, it will be subject to the EAR's licensing requirements.

Like the ITAR, the deemed export principle applies under the EAR as well. For example, technology or software is "released" and deemed to be an export if it is the focus of or if it falls within one of these three broad definitions: visual inspection by foreign nationals of U.S.-origin equipment and facilities, oral exchanges of information in the United States or abroad, or the application to situations abroad of personal knowledge or technical experience acquired in the United States (15 C.F.R. [section] 734.2(b)(3), 2006). The EAR also restrict technical assistance by U.S. persons with respect to encryption commodities or software (15 C.F.R. [section] 730.5(d), 2007). Other examples of more traditional exports under the EAR include the return of foreign equipment to its country of origin after repair in the United States, shipments from a U.S. foreign trade zone, and the electronic transmission of non-public data that will be received abroad (15 C.F.R. [section] 730.5(c), 2007).

Further, both the EAR and the ITAR also apply to re-exports. Re-exports are commodities, software, and technology that have been exported from the United States to be exported again from the country to which the U.S. export was consigned (15 C.F.R. [section] 772.1, 2007). Some re-exports may go to destinations which qualify for an exception from licensing requirements depending on the countries involved, whereas others may not (15 C.F.R. [section] 730.5(a), 2007). Deemed-re-exports are also possible. For example, if technical data is exported to a U.S. subsidiary in Germany, and that technology is shared in Germany with a foreign national from India who works for the subsidiary, then a subsequent license for that disclosure might be needed, depending on the classification of the data. Moreover, in some cases, authorization to export technology from the United States is subject to additional assurances that items produced abroad that are the direct product of that technology will not be exported to certain destinations without authorization from the BIS (15 C.F.R. [section] 730.5(b), 2007).

As a result, in additional to traditional export transactions, certain activities should be monitored carefully such as:

* visits of foreign nationals

* purchasing and dealing with foreign/international vendors

* shipment of equipment and its end use

* collaboration with foreign nationals within and outside of the U.S.

* travel outside the U.S. by employees

* access to facilities and equipment by foreign national employees

* transmission and receipt of information subject to licensing

Like the ITAR, sanctions under the EAR can be substantial. Convicted defendants may be fined not more than five times the value of the exports or re-exports involved or $50,000, whichever is greater, or imprisoned not more than five years, or both. Corporate criminal penalties for "willful" violations shall be a fine of not more than five times the value of the export or re-export involved or $1,000,000, whichever is greater; and, in the case of an individual, shall be fined not more than $250,000, or imprisoned not more than 10 years, or both. There are also administrative sanctions for civil violations that include monetary penalties, denial of export privileges, and exclusion from practice. Items transferred in violation of the EAR are subject to being seized, as are the vessels, vehicles, and aircraft carrying such items (15 C.F.R. [section] 764.3(c)(2)(i), 2006).

BIS strongly encourages disclosure to the Office of Export Enforcement (OEE) if a person believes that he or she may have violated the EAR, or any order, license or authorization issued under the EAR. Voluntary self-disclosure is a mitigating factor in determining what administrative sanctions, if any, will be sought by the OEE (15 C.F.R. [section] 764.5, 2006). The weight given to voluntary self-disclosure is solely within the discretion of the OEE, and the mitigating effect of voluntary self-disclosure may be outweighed by aggravating factors. Voluntary self-disclosure will not prevent transactions from being referred to the Department of Justice for criminal prosecution (15 C.F.R. [section] 764.5(4), 2006). If a person learns that an export control violation of the EAR has occurred or may occur, that person may notify the OEE, which is a division of the U.S. Department of Commerce, Bureau of Industry and Security. Notification of violations of anti-boycott provisions of the EAR should be sent to the Office of Anti-boycott Compliance, which is a separate division of the U.S. Department of Commerce, Bureau of Industry and Security.

OFFICE OF FOREIGN ASSETS CONTROL (OFAC)

The third category of export controls is administered by the Office of Foreign Assets Control (OFAC), which is located in the U.S. Department of Treasury. This office enforces economic and trade sanctions in furtherance of foreign policy and national security. The Treasury Department administers economic sanctions against a variety of countries, including Burma (Myanmar), Cuba, Iran, Sudan, Libya, North Korea, and Syria, which prohibit economic interaction with the target country, as well as any dealings with designated individuals (e.g., foreign nationals) and entities, such as parties affiliated with a sanctioned country or government, parties connected to terrorist activities, and parties connected to the international narcotics trade (Clark & Jayaram, 2005).

Additionally, the property of certain persons or entities from other countries with questionable domestic or foreign policies, such as The Congo, Belarus, The Cote d'Ivoire, Zimbabwe and the Balkans, may be frozen from time to time, and trading privileges suspended.

Economic sanctions can be violated by U.S. firms in several non-obvious ways, for example, by

* purchasing an approved foreign firm's assets, which happen to include supply contracts with a sanctioned entity

* investing in a joint venture if other participants include sanctioned parties or sanctioned entities

* acquiring even a minority interest in the shares of an approved company that engages in significant sales to a sanctioned customer

(Clark & Jayaram, 2005)

Of course, licenses may be obtained from OFAC to engage in a transaction that otherwise would be prohibited. There are two types of licenses: a general license, which authorize a particular type of transaction for a class of persons without the need to apply for a license, and a specific license, which is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application (31 C.F.R. [section] 501.801, 2006). For example, the Clinton Administration authorized commercial sales of food, medicine, and medical equipment to Iran on a case-by case basis to approved buyers with certain payment restrictions (Donboli & Kashefi, 2005).

Compliance with the regulations enforced by OFAC can be challenging because they are broad, ambiguously drafted, and often interpreted by the Treasury Department in a far-reaching and undocumented manner (Clark & Jayaram, 2005). Since there is no list or set of regulations issued by OFAC comparable to the USML or the CCL, but only various provisions in the Federal Code detailing sanctions against specific target countries or entities, transactions with any of these targeted countries, or other entities identified as proliferation risks, should be handled with extreme caution (Liebman & Lombardo, 2006) as noncompliance with trade sanctions can prove to be costly.

Again, fines for violations often can be substantial. Depending on the program, criminal penalties can include fines ranging from $50,000 to $10,000,000 and imprisonment ranging from 10 to 30 years for willful violations, while civil penalties range from $11,000 to $1,000,000 for each violation. Most recently,

* Vesper Corporation remitted $23,800 to settle allegations of violations of the Cuban Assets Control Regulations and Iranian Transactions Regulations

* Tyco Valves & Controls Middle East, Inc., remitted $450,905.50 to settle allegations of violations of the Iranian Transactions Regulations

* EMD Chemicals, Inc., remitted $8,250 to settle allegations of violations of the Iranian Transactions Regulations

* Encore Medical, L.P., successor by merger to Chattanooga Group, Inc., remitted $3,241.20 to settle an alleged violation for disregarding licensing requirements for the export of physical therapy equipment to Iran

(U.S. Department of Treasury, 2007).

In determining a settlement amount or penalty assessment, OFAC considers whether or not the institution made a deliberate effort to conceal the violation, along with any useful enforcement information provided during an OFAC audit, investigation, or penalty proceeding (Wray & Hur, 2006).

COMPLIANCE PROGRAMS

The maintenance of compliance programs by exporters are essential in order to insure not only that their exports are properly licensed, but also that controlled items, technologies, and software are not diverted to prohibited end users or end uses (Export Management, 2007). To this end, it is imperative that a company know its customers because the Department of Commerce has the authority to make individuals and companies ineligible to export materials from the United States, as well as to receive exports from the United States. BIS maintains several lists that should be consulted, which identify prohibited parties (Lists to Check, 2007), such as the Denied Persons List, consisting of parties denied export privileges (Denied Persons List, 2007) and the Unverified List which includes names and countries of foreign persons previously parties to a transaction for which BIS could not conduct a pre-license check or a post-shipment verification (Unverified List, 2007).

In addition to the lists maintained by BIS, the Treasury Department's Office of Foreign Assets Control maintains the Specially Designated Nationals List (SDN) (Specially Designated Nationals List, 2007), consisting of front companies, parasitical entities, or individuals determined to be owned or controlled by, or acting for or on behalf of, targeted countries or groups, as well as "Blocked Persons," who are specially identified individuals, such as terrorists or narcotics traffickers. United States entities are prohibited from engaging in any transactions with them, and must block any property in their possession or under their control in which they have an interest.

The State Department maintains a list of parties who are barred under the ITAR from "participating directly or indirectly in the export of defense articles, including technical data or in the furnishing of defense services for which a license or approval is required" (22 C.F.R [section] 127.7, 2006). The list is available on DDTC's website. Transactions with parties on these lists should raise a red flag under exporter compliance programs. Software packages, such as Visual Compliance, may be purchased to screen for restricted parties and countries, and to determine if export licenses are required (e-Customs, 2008).

Compliance with this complicated maze of export regulations can be daunting for corporations, particularly small companies. Costs include the expenses involved in inventorying the equipment and technology subject to the ITAR and the EAR, as well as applying for export licenses and deemed export licenses for foreign national employees and affiliates (Findley, 2006). Additionally, export controls can complicate corporate transactions in several ways, for example, by:

* necessitating export licenses and other export approvals as well as the need for amended or new ITAR registrations which require government approval

* requiring notifications regarding certain types of corporate transactions involving ITAR-registered companies, and often State Department reviews of transactions to verify whether a party is a reliable exporter

* triggering more intensive scrutiny of compliance records in assessing whether the proposed transaction would threaten the national security, particularly with companies that generate sensitive export-controlled technology

* recognizing successor liability for export control violations committed by the acquired entity before the acquisition

(Clark & Jayaram, 2005)

DDTC admittedly applies the doctrine of successor liability to deter fraudulent restructuring designed to escape liability; for example, in 2003 Boeing Company paid $32 million to settle charges resulting from the provision to several Chinese nationals by Hughes Space and Communications ("HSC," a subsidiary of Hughes Electronics) of controlled data on the failed launches of two commercial communications satellites mounted on Chinese-origin rockets, even though Hughes Electronics reserved liability for any pre-acquisition export violations in the sale of HSC to Boeing (Fellmeth, 2006).

Badway (2005) argues that the complex federal regulatory scheme puts American businesses, particularly small companies, which cannot afford the added expense of a staffed compliance program, at a competitive disadvantage with European competitors, which face less stringent controls and which can export dual purpose goods more promptly. This result is particularly disconcerting since the technologies the controls are attempting to protect to the detriment of American business, are often readily available elsewhere. More often than not the controls do little more than delay the inevitable exportation, while demanding excruciating attention to detail with respect to the license application (Klaus, 2003). Some authors, thus, advocate the elimination of the current transaction-based approval program in favor of regional or partner based trade agreements (Klaus, 2003; Bowman, 2004).

On the other hand, Sievert (2002) counters that simply because U.S. enemies can acquire articles from non-U.S. suppliers does not mean that U.S. companies should not be vigilant and exercise corporate responsibility in the exportation of goods and services in the interest of national security, although he admits that the current export control system could be relaxed somewhat "on shipments to firms, organizations, and nations that have demonstrated a history of using items for peaceful purposes and not transferring or re-exporting."

Nevertheless, for now, compliance programs and risk assessment plans are essential to U.S. businesses that deal in either dual use or defense related articles, technology or services. If companies fail to comply with export control laws, they subject themselves to severe monetary and criminal penalties, a time-consuming and costly defense, as well as potentially bad publicity, the loss of exporting privileges and debarment from government contracts. To insure compliance in this regulatory framework, companies should conduct self-audits based on the risk of non-compliance and develop internal controls, including an export control compliance manual that identifies red flags to consider for compliance-triggering transactions, such as shipping to new customers, sending data and specifications to suppliers, developing new product lines, hiring new employees, and sharing technology (Doornaert, 2005). Dunn (2005) developed a comprehensive model compliance program for companies that includes appropriate forms and lists specific red-flag alerts to heed at critical processing points.

Businesses must secure facilities and restrict access to technical information and items subject to control, particularly if foreign nationals are employed. Additionally, it is imperative that licensing documentation for all items subject to export controls and embargoes be maintained at a central repository (EAR 15 C.F.R. [section]762.2, 2006). The safekeeping of such records should be an integral part of any compliance program.

Another area of critical importance concerns laptop computers. As noted previously, encryption software may require a license for exportation under the EAR. For example, the encryption technology employed in the Computrace software (Lojack for laptops) that many companies use to protect laptops from theft is controlled. Thus, if employees travel with their laptop computers to an embargoed country, such as China, not only the employees, but also the company, could be subject to substantial penalties for violating export control restrictions. Unless employees plan to sleep, eat, and shower with their personal computer, alternatives to taking a laptop should be seriously considered. The company could provide "travel friendly laptops" that do not have the encryption device, and develop a system for reserving such computers and monitoring their return.

At a minimum, businesses involved in covered transactions should coordinate compliance efforts by implementing an organizational a compliance regime. An Export Control Review Committee (ECRC) should be established to provide a communication plan to ensure compliance with federal laws and regulations related to export control. The committee should be chaired by the Enforcement Officer (EO) so that someone in the organization bears responsibility for compliance and oversight. The Committee should be charged with developing an Export Control Plan (ECP) to ensure not only that policies and procedures are in place at key points, but also to verify compliance with those established procedures and to evaluate the risk factors associated with the operation and functions of the business. Membership should include the following key personnel:

* Legal Counsel

* Internal Auditor

* Chief Operating Officer

* Chief Financial Officer

* Human Resource Director

* Purchasing, Receiving & Shipping Coordinator

* Safety Officer

With recommendations from the ECRC, the office of the EO should:

* Ensure compliance with the Export Controls Plan, its implementation and oversight

* Review and approve departmental compliance plans

* Oversee training on Export Control issues and policies

* Conduct annual refresher training

* Ensure recordkeeping

* Ensure audit findings are addressed in a timely manner

* Monitor access by foreign nationals to covered technology and data

* Examine contracts for restrictions on personnel who may be used on the project or restrictions on those who may have access to the technology or data

In addition to absorbing the oversight function into the structure of the organization, four specific screening points should be monitored

* Legal Counsel must verify that no federal laws or regulations are violated in relationship to financial support for foreign collaboration, foreign entities providing goods and services to the company, or the company providing goods and services to a foreign entity which is on any list of embargoed countries

* The Office of Human Resources must screen and clear foreign nationals who are finalists for employment to ensure potential employees are not included on government lists, and alert other divisions regarding potential restricted access for certain foreign nationals employed.

* The Safety Officer must inventory and record all hazardous chemical and radiological material, since, at a minimum, export control regulations dictate that hazardous materials, which might be used for terrorist activity, must be safeguarded.

* Purchasing, Receiving and Shipping must screen all vendors and equipment suppliers to ensure that they are not on any government lists. It is also imperative that the actual shipment of equipment and samples be coordinated with Legal Counsel and the EO to determine whether or not an export license is required

BIS, which administers the licensing program for the Commerce Department, provides support for companies to implement compliance systems in order to establish a process for the evaluation of the requirements and the documentation of compliance with those requirements based upon the type of product being exported, the country to which the product is being exported, the entity or person to whom the product is being exported, and the applicable requirements in such circumstances (Meagher, 2002).

DDTC in the State Department also provides guidelines for a compliance program (Guidelines for DTC Registered Exporters/Manufacturers Compliance Program, 2006). DDTC suggests that companies develop operational compliance programs, which include manuals that articulate the processes to be followed in implementing the company program. It advises that manuals and programs include

* a detailed organizational structure which describes the company's trade functions and control structures for tracking compliance

* a directive by senior management indicating corporate commitment to ensure compliance

* methods tailored to the corporate structure, organization and functions which are designed to identify, tag, and account for export controlled items, data, and transactions

* procedures for the re-export and re-transfer of items or technical data

* procedures for screening customers, carriers and countries for restricted or prohibited exports and transfers

* the implementation of a recordkeeping system for U.S. origin products

* the establishment of and internal audit system for periodic compliance checks

* a company training program on export control regulations

* procedures for the notification of potential violations and employee discipline

* the establishment of an Ombudsman office to investigate problems and provide independent evaluations on the effectiveness of the compliance program

Drawing from these resources, Rege (2006) provides suggestions for the implementation of an internal control program for universities to insure compliance, which readily translates to business operations as well:

* develop a policy statement clearly indicating their commitment to complying with export control law

* fortify the policy with education programs and training manuals for key personnel

* identify a department with primary responsibility for ensuring compliance and implementing a comprehensive accounting system, which maintains records of completed transactions for at least five years, as generally required by BIS and DDTC

* conduct periodic internal reviews to verify compliance, including unannounced visits to relevant areas of the operations

* implement a well-publicized system of notification procedures to follow for questions that may arise regarding the propriety of specific transactions, which includes corporate counsel in the information loop

* develop procedures to continuously monitor OFAC's list of Specially Designated Nationals, as well as BIS's "Denied Person List," which registers individuals and entities that have been denied export privileges and with whom business may not be transacted

Measures such as these, if implemented, serve not only to manage potential risks, but also to create a corporate culture of compliance. As companies are under an obligation to self-regulate, corporate leadership must create such a culture of compliance and ensure that violations do not occur, particularly since enforcement provisions consider compliance as an aggravating or mitigating factor once culpability is determined (Morris, 2006).

CONCLUSION

Entrepreneurs who export items with military or dual use capabilities or employ foreign nationals must be familiar with the ITAR and the EAR. These export control regulations are designed to ensure that businesses comply with regulations that restrict the export of goods, technology and related technical information to countries that have been identified as a threat to our homeland security or economic status. The control of arms sales to foreign parties is an integral part of the U.S. ability to safeguard national security and further foreign policy objectives in an environment of burgeoning conventional arms and technology transfers (Dhooge, 1999). The response to terrorism and a concern for the export of sensitive technology, particularly to China, likely will continue to shape export control policy in the near future (Chapman, et al, 2006).

This paper has provided an overview of the regulatory maze with suggestions for compliance programs to insure that businesses steer a proper course through this complicated system of controls. To reiterate, licenses may be required by the Departments of Commerce or State if information, technology, items or services are controlled under the respective regulations. Controlled items, information or software designed or modified for a military use, or capable of dual use (civilian and military), may be covered by the regulations. In addition to the actual transfer of items and technology, the regulations also prohibit the disclosure of controlled technical information by any method to a foreign national in the U.S. or abroad without a license from Commerce or State. Therefore, care also must be exercised with respect to foreign national employees, both here and abroad. The following table summarizes the most basic information from the article above:

WHERE TO GO FOR HELP

The small business seeking additional or up-to-date information for complying with the laws and regulations discussed in the article above may find the following web links useful:

* Society for International Affairs, Inc. Educating the International Trade Community on Import and Export Processes (2008): http://www.siaed.org/

* The FedEx Export Logistics Guide: http://exportlogisticsguide.com/ fedex-and-us-commercialservice-agreement-to-boost-us-small-medium- business-exports

* U.S. Department of Commerce:

** A Basic Guide to Exporting, Preparing Your Product for Export. U.S. Department of Commerce (with the assistance of Unz & Co., Inc): http://www.unzco.com/basicguide/c7.html

** The denied persons list from the Bureau of Industry and Security (note additional links in the left margin): http://www.bis.doc.gov/ dpl/thedeniallist.asp

** Introduction to Commerce Department Export Controls (2007): http://www.bis.doc.gov/licensing/exportingbasics.htm

** Department of Commerce, Lists to check: http://www.bis.doc.gov/complianceandenforcement/ liststocheck.htm

* U.S. Department of State

** Compliance program guidelines, Directorate of Defense Trade Controls (2008): http://www.pmddtc.state.gov/compliance.htm

** Getting started with D-Trade, Directorate of Defense Trade Controls, (2008): http://www.pmddtc.state.gov/ getting_started_with_dtrade.htm

** Preparing a complete registration package, Directorate of Defense Trade Controls, (2008): http://www.pmddtc.state.gov/registration.htm

* U. S. Department of Treasury

** Office of Foreign Assets Control (2007) http://www.treas.gov/offices/enforcement/ofac

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Table: Summary of Export Controls

 Regulation
Federal Enabling Sanction,
Department Legislation Embargo Administering Body

Department The Arms International Directorate
of State Export Control Traffic in Arms of Defense
 Act (AECA) Regulations Trade Controls
 (ITAR) (DDTC)

 * Office of
 Defense Trade
 Controls
 (ODTC)

 * United (Companies producing,
 States furnishing, or
 Munitions exporting items
 List requiring a license
 (USML) must register with the
 ODTC. See "D-
 * Visual Trade")
 Compliance
 (software)

Department Export * Denied * Bureau of
of Commerce Administration Persons List Industry and
 Regulations Security (BIS)
 (EAR) * Unverified
 List * Office of Export
 Enforcement
 * Commerce (OEE)
 Control List
 (CCL) (10 * Office of Anti-
 product & boycott
 technology Compliance
 categories) (OAC)

Department * Specially * Office of
of Treasury Designated Foreign Assets
 Nationals Control (OFAC)
 List
 (SDN)

Federal
Department Applies to

Department Manufacture, import,
of State export, transfer, brokering
 of defense related trade &
 technology transfers:
 blueprints, drawings, plans,
 instructions, diagrams,
 photographs

 21 Categories:
 Capability of use for
 military purposes:
 equipment, software,
 military electronics,
 chemical & biological
 agents inherently military
 in character).

Department Dual Use items--good and
of Commerce technology primarily
 commercial (not military in
 nature) which may have
 dual (military) use
 License requirements
 dependent upon an item's
 technical characteristics,
 the destination, the end-
 user, and the end-use.

Department Enforces economic
of Treasury sanctions and trade
 embargoes prohibiting
 transactions with countries,
 entities and individuals
 subject to boycotts and
 trade sanctions