Non-U.S. companies involved in the reexporting of U.S. goods or technology should familiarize themselves with the applicable U.S. export laws, regardless of where they are located. This is because the U.S. export and economic sanctions laws have wide ranging extraterritorial reach. While companies with little or no connection to the U.S. may think they are not subject to U.S. jurisdiction, recent enforcement cases are a stark reminder that this is not the case. In fact, companies not located in the U.S. can be penalized for reexports of U.S.-origin products or technology contrary to U.S. laws such as the International Traffic in Arms Regulation (“ITAR”) and the Export Administration Regulations (“EAR”). This is because these laws apply to U.S.-origin products wherever located. This includes foreign products containing U.S.-origin components or incorporating U.S.-origin technology controlled by the U.S. export laws. Additionally, the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”) administers and enforces U.S. embargoes and sanctions programs against countries and certain identified individuals. OFAC sanctions address the conduct of U.S. persons, meaning U.S. citizens and permanent residents wherever located; all persons in the U.S., irrespective of citizenship; and all U.S. incorporated entities and their foreign branches or subsidiaries owned or controlled by U.S. entities.
U.S. Export Laws
The EAR generally imposes the same licensing requirements on exports as it does on reexports. Items subject to the EAR include: all U.S.-origin items wherever located; foreign made commodities that incorporate controlled U.S.-origin commodities; and certain foreign made direct products of U.S.-origin technology or software.1 Non-U.S. products will be subject to the EAR where the foreign made product incorporates more than a de minimis amount of U.S.-origin components or technology.
The key to determining whether a non-U.S. product is subject to the EAR is to determine whether there is more than a de minimis amount of U.S.-origin components or technology. For most destinations, non-U.S. made items incorporating controlled U.S. commodities, software, or technology valued at 25% or less are not subject to EAR jurisdiction. If, however, the non-U.S. product is destined for a country in EAR group E:1 (e.g., Iran, North Korea), then the de minimis threshold is 10% or less of the total value of the finished item. Ultimately, the application of the de minimis rule depends on the Export Control Classification Number (“ECCN”) of the U.S.-origin component or technology and the ultimate destination. Notably, when determining whether the U.S. content is incorporated into the non-U.S. item, the EAR looks at the country of destination and not the end-use.2
The ITAR requires U.S. State Department authorization for the export, reexport, or retransfer of defense articles or technical data subject to the ITAR.3 For purposes of the ITAR, a defense article is any item on the United States Munition List (“USML”). ITAR jurisdiction applies where the defense article is in the U.S., regardless of its origin; the transaction involves a U.S.-origin defense article; or the transaction involves a defense article developed or manufactured with U.S.-origin technical data or assistance subject to the ITAR.
Unlike the EAR, the ITAR does not contain an exception for non-U.S. items that incorporate less than a de minimis amount of U.S.-origin content. Instead, a see-through rule is adopted where the ITAR sees through the non-ITAR controlled end item to control the ITAR controlled part contained within. Additionally, the use of U.S.-origin ITAR controlled technical data or defense services in overseas production of defense articles will subject any article produced with such controlled data or services to the jurisdiction of the ITAR.
Extraterritorial Effect Examples
In recent years, the U.S. government has more widely applied the extraterritorial reach of the U.S. export laws and sanctions. One of the biggest cases occurred in May 2017 when ZTE Corporation (“ZTE”), a Chinese telecommunications firm, agreed to a combined penalty of $1.19 billion in a settlement agreement with the Department of Justice and the Department of Commerce.4 (A more detailed description of this settlement can be found in our previous article, From A to ZTE: A Review of Lessons Learned from the ZTE Case.) Despite operating primarily in China, ZTE was still given one of the largest penalties ever for violating relevant U.S. export and sanctions laws. Although ZTE was fortunate to avoid a denial of export activities for any prolonged period of time, this case shows a renewed resolve to enforce U.S. export laws and sanctions, even against companies operating primarily outside of the U.S.
A notable case for violations of the ITAR and involving a Spanish company ended up in administrative debarment. On June 4, 2014, Carlos Dominguez and the Spanish company of which he was principal, Elint SA, and successor companies were administratively debarred pursuant to ITAR § 127.7(a) for unauthorized reexports and retransfers of night-vision equipment.5 Administrative debarment prohibits any person from participating directly or indirectly with the debarred party in activity subject to the ITAR. Mr. Dominguez’s illegal activity was discovered through “unfavorable responses” to Blue Lantern checks, which are end-use inquiries conducted around the world by U.S. embassy personnel. Mr. Dominguez attempted to avoid a policy of denial issued by DDTC by establishing new business names and other means of circumvention. Mr. Dominguez ignored further communication from DDTC related to the suspected illegal activity, and eventually ignored DDTC’s charging letter, leading to a default order and debarment.
Many non-U.S. companies have learned the hard way that a lack of a U.S. presence will not prevent the extraterritorial enforcement of U.S. laws. On January 12, 2017, Aban Offshore Limited (“Aban”), an Indian drilling services company, settled with OFAC for conduct that violated the Iranian Transactions and Sanctions Regulations.6 On or around June 27, 2008, Aban’s subsidiary in Singapore placed an order for oil rig supplies from a U.S. vendor with the intent of reexporting these supplies from the United Arab Emirates to an off-shore oil rig in the territorial waters of Iran. Although Aban is an Indian company with no U.S. offices, it was subject to the extraterritorial reach of OFAC’s jurisdiction due to the reexported oil rig parts being U.S.-origin.
Steps to Comply with U.S. Export Laws
Because U.S. export laws apply to the products themselves, reexporters of U.S.-origin products should ensure they are in compliance with these laws. If a non-U.S. -origin item is subject to the EAR by virtue of the de minimis rule, the reexporter should determine whether a reexport license is needed, based on the classification of the finished item, not the status of the controlled U.S. content. In many cases, the end-use may be subject to a lower classification than the U.S.-origin content contained within, and may not require a license for reexport.
Additionally, exporters and reexporters should prepare for any end-use checks conducted by the U.S. government. An end-use check allows the U.S. government to verify the end-use declared on the license application is the same as the actual end-use of the covered item. End-use checks are also used in situations where an item is shipped subject to a license exception. While an end-use check may seem overly intrusive to a foreign exporter, once undergone, an end-use check and favorable result can actually make it easier for U.S. exporters to obtain licenses when shipping to the foreign company. Refusing an end-use check will lead to an automatic unfavorable determination by the U.S. agent performing the check. This will likely result in the company being listed on the Entity List and/or the Unverified List. A company listed on the Entity List will effectively lose their export privileges, and the vast majority of U.S. exporters will not ship to companies on the lists.
U.S. export and sanctions laws can be complicated for anyone, but can cause unnecessary headaches for reexporters who are not located in the U.S. If these foreign reexporters are subject to U.S. laws they can face major consequences if they do not comply with them. As such, foreign companies should also consider developing and implementing policies and procedures to navigate the complex area of U.S. export and economic sanctions laws.
1 15 C.F.R. § 734.3(a).
2 15 C.F.R. § 734 Supp. No. 2 at (a)(1) (“Part 744 of the EAR should not be used to identify controlled U.S. content for purposes of determining the applicability of the de minimis rules”).
3 22 C.F.R. § 127.1. (ITAR authorization is also required for the temporary imports of defense items).
4 Department of Justice, Office of Public Affairs, ZTE Corporation Agrees to Plead Guilty and Pay Over $430.4 Million for Violating U.S. Sanctions by Sending U.S.-Origin Items to Iran, https://www.justice.gov/opa/pr/zte-corporation-agrees-plead-guilty-and-pay-over-4304-million-violating-us-sanctions-sending (last visited March 29, 2018).
5 Administrative Debarment of Carlos Dominguez, Elint, S.A., Spain Night Vision, S.A., and SNV, S.A. Under the Arms Export Control Act and the International Traffic in Arms Regulations; Correction, 79 Fed. Reg. 37384, https://www.gpo.gov/fdsys/pkg/FR-2014-07-01/pdf/2014-15398.pdf (last visited March 29, 2018).
6 Department of the Treasury, Office of Foreign Assets Control, Civil Penalties and Enforcement Information, Aban Offshore Settles Potential Civil Liability for an Apparent Violation of the Iranian Transactions and Sanctions Regulations, https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170112_aban.pdf (last visited March 29, 2018).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.