Back to Basics: Five Essential Export Control Questions

The nature of international trade has undergone significant transformation over the last 500 years. What started as local village exchanges of goods, evolved into a global market by the 16th century with ships traveling to far-flung destinations. Today, the once lengthy process of transporting goods can be completed in just weeks or even days, thanks to air transport. While technological advancements have created a globally interconnected economy, they have also made it easier for fraudulent activities, piracy, terrorism, and other malicious acts to occur. This is where export controls come into play.

Global Export Controls

To prevent the misuse or diversion of products, the World Customs Organization (WCO) and various governing bodies have established mandatory regulations. In 1999, the WCO began aligning global regulations into cohesive guidelines to ensure sensitive information, technology, and products are not misused. These regulations apply to all entities, including public, private, nonprofit, and individuals.

Export controls cover tangible products and intangibles, which include exchange of information and technological knowledge, such as drawings, product schematics, and discussions about the development or use of controlled items. Compliance is crucial for all employees, regardless of their direct involvement in international trade operations.

Basic Compliance with Export Controls

Multinational companies often have compliance departments to monitor cross-border trade activities. These departments draft policies and procedures for acceptable business practices, shared with employees involved in logistics, transportation, and finance. However, all employees, including those in product management, marketing, research and development, procurement, and human resources, must comply with export control regulations.

When dealing with foreign entities, employees should ask the following questions for each inquiry:

1. What do I want to export?
2. Where do I want to export to?
3. Who is the recipient of my product, software, or knowledge?
4. For what purpose will my product, software, or technology be used?
5. When does the recipient need the ordered product?

Answering these questions helps determine if you can proceed with the export process. If there are any doubts or questions, contact your local, regional, or global compliance department, or consult our experts.

Question 1: What Do I Want to Export?

To control sensitive products, the WCO introduced a global control system based on the Harmonized System (HS), Export Control Classification Number (ECCN), and other control regimes. The HS assigns a specific code to tangible commodities, identifying them globally. ECCNs, alphanumeric codes, describe specific tangible and intangible items and indicate the export controls imposed by national and regional governments, such as the United States, European Union, or any other country you are trading with.

Each product must be properly classified according to these systems to determine the necessary license requirements under local Export Control Regulations like European Export Control Legislations, Export Control Administration Regulation (EAR), or any other international or national regulations. This classification process is usually the responsibility of the designer or manufacturer, with trade compliance teams analyzing the item, assigning the classification, and providing supporting documentation.

Exporting out of your country requires compliance with your national laws and regulations, but depending on the origin content of your product, you may also have to comply with other countries' export regulations. For example, an American trader selling a product from the United States to Mexico with EU origin and technology must comply with both U.S. and EU export control regulations. This might require an EU export license.

Question 2: Where Do I Want to Export To?

After classifying the item, the next step is to determine its final export destination and associated requirements. Depending on the destination, some items may require an export license. Restrictions based on specific classifications and destinations also exist. For instance, exporting encrypted telecommunication equipment to China may require a license if the encryption exceeds certain thresholds.

Countries like Cuba, North Korea, Iran, Sudan, and Syria are on embargo lists, meaning no business, including information exchange, can occur without a license. U.S. rules often apply extraterritorially, affecting U.S. firms' foreign operations and subsidiaries. These rules are complex, highly specific, and may conflict with local laws where the operations or subsidiaries are located.

Question 3: Who Is the Recipient of My Product, Software, or Knowledge?

It's crucial to verify the final recipient of your items. Different countries and financial entities compile lists of "Denied Parties" who are prohibited from receiving exports. More than 200 such lists exist globally, including:

• Entity List: Organizations involved in the proliferation of weapons of mass destruction.
• OFAC List: Individuals and organizations linked to terrorism and narcotics trafficking.
• Unverified List: Firms for which end-use checks could not be completed.
• Denied Persons List: Individuals and companies whose export privileges have been revoked.

Exporters must verify recipients against these lists to ensure compliance. If a company or individual is on one of these lists, cease communication and report to your Compliance department. Today we are confronted with frequently changing embargo policies and denied party list updates, making it mandatory to embed the latest updates in your processes.

The final destination is an important aspect, but also verify the logistic route. Check your incoterms to verify if you are in control of logistics to the final destination. If you hand over a transaction even before the goods physically leave the country, you are still liable to ensure your goods end up at the agreed destination and not in the so-called “No Go” destinations.

Question 4: For What Purpose Will My Product, Software, or Technology Be Used?

Understanding the end use of your product, software, or technology is crucial for multiple reasons:

• Preventing Misuse: Knowing how your product will be used helps ensure it won't be employed for harmful purposes. For instance, while exporting a mirror might seem straightforward, it's essential to know if it will be used in constructing telescopes or military equipment, which might require additional scrutiny or licenses.
• Avoiding Diversion: Ensuring that your product isn't redirected to a denied party is critical. For example, an apparel manufacturer ordering computers might seem unusual. While they could need the computers for running their assembly line, there's also a risk that they could reexport them to a prohibited entity, such as a nuclear facility in a sanctioned country.
• License Requirements: Some end users might need a license to receive your export. For example, shipping valves to a defense materials manufacturer may not require a license if they're used for plumbing. However, if they're intended for a weapons system, a license would likely be required. This differentiation is vital to avoid legal complications and ensure compliance with export regulations.
• Special Circumstances: Sometimes, exporting to traditionally suspect end users is permissible with the right licenses. For example, if valves are being shipped to a defense materials manufacturer for a non-military purpose, securing a license might make the transaction legal. This flexibility requires thorough documentation and understanding of the regulations governing such exports.

By understanding the intended use of your exports, you can take necessary precautions to comply with regulations and avoid unintentional violations.

Question 5: When Does the Recipient Need the Ordered Product?

Export controls can impact schedules, especially if there is a contract guaranteeing delivery by a certain date. Obtaining necessary licenses can take weeks or months. Therefore, customer expectations must be managed accordingly. Companies should determine ECCNs in advance to avoid delays and ensure compliance.

The timing of an export is a crucial aspect that often goes overlooked. Understanding when the recipient needs the product can have significant implications for compliance with export controls. Here are the key points to consider:

1. Production and Delivery Schedules:
   1. Feasibility: If a recipient demands a product within a very short timeframe, it might be physically impossible for your production capabilities to meet the request. For example, manufacturing complex items like semiconductor chips or specialized machinery components often involves lengthy processes. This is not just a logistical challenge but also a potential red flag.
   1. Realism: Unrealistic delivery requests can indicate that the buyer might not fully understand the production process or might be attempting to obtain the product for illicit purposes. For instance, a request for a large quantity of high-tech items like microchips or refrigeration units within an unusually short period could suggest urgency that doesn't align with normal business operations.

• Red Flags and Risk Mitigation:
  • Intended Use in Sensitive Industries: Certain products, such as chips or refrigeration units, can have dual uses, including applications in the weapons industry. If a request is made for these items on short notice, it raises the question of why the recipient needs them so urgently. This urgency could imply that the items are intended for rapid integration into projects that might bypass standard regulatory scrutiny.
  • Diversion Risk: Quick turnaround requests could be a tactic to divert attention from proper end-use checks. For example, a rush order for refrigeration units might be intended for use in maintaining controlled environments for sensitive military or nuclear equipment, rather than for the stated commercial purposes.

• Evaluating the Recipient's Intentions:
  • Due Diligence: Conduct thorough due diligence on the recipient. Investigate their background, the nature of their business, and their historical procurement patterns. A sudden, large, and urgent request might not align with their usual operations and can indicate an attempt to procure items for unauthorized uses.
  • Communication: Maintain open communication with the recipient to understand their needs. Asking detailed questions about the urgency and intended use of the products can help identify potential risks. If the answers are vague or inconsistent, it might warrant further investigation or a halt in proceedings until clarity is obtained.

• End-User Undertaking (EUU) Form:
  • Requirement: For every export, but especially for those with short notice requests, an End-User Undertaking (EUU) form should be completed. This form provides detailed information about the end user and the intended use of the product.
  • Investigation: Study the EUU form in full to ensure all applications of the product are understood and align with the stated purposes. This helps in identifying any potential misuse or diversion of the product.
  • Verification: Cross-check the information provided in the EUU form with other available data and lists, such as denied parties lists and country embargo lists. Any discrepancies or red flags should prompt further investigation or consultation with compliance experts.

• Red Flag Indicators

Certain scenarios should be considered as red flags when evaluating export requests. These include:

• Reluctance to provide information: If the customer or its purchasing agent is reluctant to offer information about the end-use of a product, it suggests they might be hiding something.
• Mismatch in business activities: The product’s capabilities do not fit the buyer’s line of business. For example, a small bakery ordering sophisticated lasers is suspicious.
• Technical incompatibility: The product ordered is incompatible with the technical level of the destination country. For example, semiconductor manufacturing equipment would be of little use in a country without an electronics industry.
• Lack of business background: The customer has little or no business background, raising questions about their ability to handle the products.
• Cash payments: The customer is willing to pay cash for expensive items when standard terms call for financing.
• Unfamiliarity with the product: The customer is unfamiliar with the product’s performance characteristics, suggesting they might not be the true end-user.
• Declining services: Routine installation, training, and/or maintenance services are declined, which could indicate a plan to use the product illicitly.
• Vague delivery details: Delivery details are vague, or deliveries are planned for out-of-the-way destinations.
• Abnormal shipping routes: The shipping route is abnormal or not standard for the product and destination.
• Inconsistent packaging: Packaging is inconsistent with the stated transport modality and destination.
• Evasive answers: The buyer is evasive or unclear about whether the purchased product is for domestic use, export, or re-export.

If any of these red flag indicators are present, halt further actions and consult your compliance department or experts. It is better to investigate and ensure compliance than to risk involvement in illegal activities.

The reality

In case you cannot fully answer the five questions:

1. What you want to export?
2. Where you want to export to?
3. Who is the recipient of your product, software, or knowledge?
4. For what purpose will your product, software, or technology be used?
5. Why your customer needs the ordered product within short time frames?

Then do not proceed with the export. Ensure that you obtain all required answers and documentation, which will enable you to verify compliance before proceeding. If you are unable to complete all necessary information and verifications, seek an opinion from a specialist, like our experts. It is better to incur some costs and stay compliant than to risk your reputation, export denials, receive high fines, or even face imprisonment.

Our compliance experts are here to assist you through these challenges. We offer a full suite of services, including detailed regulatory guidance, accurate product classification, and comprehensive denied party screening. We also provide specialized training to ensure your team is up-to-date on all compliance protocols. In Export Control, archiving requirements are also important, and our team and technology can help you with all national archiving requirements, enabling you to retrieve the required information on demand. Whether you need help with documentation and consultation on complex issues, our team is ready to support you. Partner with us to ensure your international trade operations remain compliant and efficient, protecting your business from potential risks and penalties.