Got Export Controlled Technology? Do not overlook Compliance with the Deemed Export Rule

The “deemed export” rule under the Export Administration Regulations (EAR) presents unique compliance challenges for universities, R&D centers, and any number of companies and organizations involved in high-tech fields.

In short, under the EAR, the release of export controlled technology to a foreign national is deemed to be an export to the country of which the foreign national is a citizen. A “release” includes giving a foreign national access to the controlled technology. The deemed export rule applies to foreign national employees who may be authorized to work in the U.S. under an H1-B, O, L-1 or other visa, as well as foreign national visitors, those employed by business partners, graduate assistants and other researchers and student interns. The deemed export rule does not apply, however, to foreign nationals who have become naturalized U.S. citizens; those who are legal permanent residents of the U.S. (have “green cards”). The rule applies equally to organizations with overseas operations, such as subsidiaries, JVs, affiliates, and other partners.

The sharing of or giving access to controlled technology, blue prints, formulations and the like with a foreign national during a meeting in a conference room, in an email or text message, in a Skype or phone call, are all considered to be a release under the deemed export rule. Therefore, just as an exporter of a commodity must determine whether its export controlled item is subject to licensing requirements or if it chooses to rely on an applicable export license exception, organizations that have controlled technology must similarly analyze whether a release of that technology, in whatever format and via whatever media, must also carefully analyze whether a deemed export license may be required before the release to the foreign national colleague can occur.

This week, a civil penalty settlement announcement made by the U.S. Department of Commerce, Bureau of Industry and Security (BIS), Office of Export Enforcement (OEE) gave organizations with controlled technology another reminder (perhaps a jolt for some) that violations of the deemed export rule are detectable and costly. In a press release, BIS announced that it reached a $115,000 civil settlement with a Santa Clara, California company resulting from five violations of the EAR’s deemed export rule.

The company’s violations included the unauthorized release of export controlled manufacturing technology to a Russian national engineer working at its U.S. headquarters. This occurred in 2007. The unauthorized release involved drawings and blueprints for parts, identification numbers for parts, and development and production technology. The information is used for a product in hard disk drive manufacturing. The controlled technology was stored on a server at the company’s headquarters. (Best Practice Tip: store controlled technology on U.S. servers only, not abroad and not in the cloud). The company “released” the controlled technology to its Russian national engineer by providing the employee with a login ID and password “that enabled him to view, print, and create attachments.” After that occurred, the company applied for a deemed export license from BIS, but continued to store controlled technology on its server and failed to take steps to deny access of the technology to its Russian national while the license application was pending.  This resulted in charges of knowingly violating the EAR on three occasions. Apparently, those applying for the license failed to inform the IT department to disable the engineer’s login or otherwise deny access to the controlled technology. In 2010, a similar release violation occurred when a Chinese national working in the company’s Shenzhen, China subsidiary accessed similar controlled technology on the company’s server in California using a login ID and password to open an attachment containing the technology.

The company voluntarily disclosed its violations to BIS. But it should be recalled that for many visa categories used to employee foreign nationals in the U.S. Part 6 of the I-129 requires the applicant to certify compliance with the EAR (and ITAR), including obtaining an export license when necessary and not releasing or giving access to the controlled technology to the foreign national employee. In other words, BIS and U.S. Citizenship and Immigration Services (USCIS) have information available to help detect and penalize deemed export violations in addition to information provided to BIS through a voluntary self-disclosure (VSD).

In announcing the penalty, BIS stated that the company’s failure to prevent access while the deemed export license was pending was considered to be an aggravating factor in determining the penalty. There can be no doubt that BIS is serious about protecting U.S. technology that is subject to export controls, enforcing the deemed export rule, and penalizing violators. “Deemed export compliance is a top priority for the Bureau of Industry and Security,” said David W. Mills, Assistant Secretary of Commerce for Export Enforcement. “Today’s settlement highlights the need for companies to be vigilant to prevent the unauthorized release of U.S. technology and data.”

The BIS case documents can be accessed here,http://1.usa.gov/1jCWCEk.

For assistance with understanding and complying with the deemed export rule, sections of the Export Administration Regulations (EAR) or other export controls and economic sanctions, as well as representation before BIS in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Esq., jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

International Trade Presentations in Buffalo to Ring in the New Year!

International trade and business attorney, Jon Yormick, will discuss Export Control Reform (ECR) and economic sanctions in 2 separate presentations in Buffalo next month.

On January 15, the Law Offices of Jon P. Yormick Co. LPA is co-sponsoring a 2-hour workshop, Export Control Reform, Revisited, with Mohawk Global Trade Advisors and Daemen College. The event will be held at Daemen College, with check-in beginning at 8:30 am.  The program will run from 9:00-11:00 am. In addition to Jon, the workshop will feature Jim Trubits of Mohawk Global Trade Advisors, and Rae Perrott of Moog, Inc. They will discuss and share experiences with the recently implemented ECR from the perspectives of a global exporting company, a freight forwarder, and legal counsel. The focus will be on the transition of defense articles from the ITAR to the EAR, new AES documentation requirements, and tips for export compliance based on lessons learned from recent consent decrees. The cost is $35 and includes breakfast. For registration, contact Abby Frank at 315.552.3001 or at afrank@mohawkglobal.com.

Also on January 15, Jon will give a presentation at the Buffalo World Trade Association’s monthly dinner meeting. The BWTA was founded in 1921 and has the mission of expanding international business knowledge and activity of U.S. and Canadian companies in the Buffalo Niagara region.  In his presentation, Navigating Economic Sanctions Successfully, Jon will discuss economic sanctions regimes, OFAC General Licenses and TSRA licenses that give companies certain business opportunities within the U.S. sanctions regimes, and emphasize economic sanctions compliance, including lessons learned from recent OFAC and BIS civil penalty cases.  The meeting will be held at the Millennium Hotel, 2040 Walden Ave., with cocktails beginning at 5:30 and dinner at 6:30 pm. For registration and membership information, visit www.bwta.us.

Upcoming Presentations in Buffalo and Cleveland Focus on U.S. Export Controls

In September, Jon Yormick will speak on U.S. export controls and offer guidance on compliance measures organizations must take in this era of investigations, enforcement, and increased penalties.

On September 19 in Buffalo, Jon will address the American Immigration Lawyers Association Upstate New York Chapter at its dinner meeting, “What Upstate NY Immigration Lawyers Should Know About Export Controls.”  His presentation will focus on the I-129 Part 6 Certification requirements and the role of immigration counsel in export controls compliance.  Jon will discuss specific issues regarding compliance with the deemed export rule, including dual/third-country nationals, TN and B-1 visa, and staffing company concerns.  He will be joined by Jim Trubits of Mohawk Global Advisory Services.  The meeting will be held at the Protocol Restaurant and be videotaped for Lawline CLE.

Two days later, on September 21, Jon will speak at the Ohio Aerospace Institute’s Industry Roundtable meeting on “Busting Myths of DDTC Registration.”  He will debunk misconceptions and misunderstanding about registration and provide guidance on what aerospace, defense, technology companies and universities need to know about registering with the Department of State, Directorate of Defense Trade Controls (DDTC) for items and technical data on the U.S. Munitions List and provide an update on Export Control Reform (ECR).

New York Company Settles AECA and ITAR Violations for $8M after Making Voluntary Self-Disclosures: The Cost of Failing to Properly Determine Export Control Jurisdiction

A Long Island, New York company, Aeroflex, Inc., has entered into an $8 million settlement with the U.S. Department of State for an estimated 158 alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).

According to the nearly 18-page long Proposed Charging Letter, the Department considered the series of voluntary disclosures submitted by the company and its remedial compliance measures as “significant mitigating factors” in deciding the charges to pursue.  The Department, however, found that there were significant national security interests involved and systemic and longstanding violations, including improper product classifications, and decided to charge the company with an estimated 158 violations for unauthorized exports based on information contained in the voluntary disclosures.

The Department found that the “violations were caused by inadequate corporate oversight and demonstrate systemic and corporate-wide failure to properly determine export control jurisdiction over commodities,” leading to “the unauthorized exports and re-exports of ITAR-controlled electronics, microelectronics, and associated technical data; and caused unauthorized exports of ITAR-controlled microelectronics by domestic purchasers.”

The 158 alleged violations included: 32 unauthorized exports of ITAR-controlled microelectronics and electronics, including to NATO and other allied countries; 96 unauthorized exports of ITAR-controlled microelectronics to China; causing 18 unauthorized exports of defense articles when the company and its subsidiaries “sold ITAR-controlled radiation tolerant multipurpose transceivers to domestic buyers who exported the transceivers without Department authorization,” due to Aeroflex’s incorrect jurisdiction determination; causing 7 unauthorized exports of defense articles to China by exporting “ITAR-controlled microelectronics to foreign entities who then re-exported these defense articles to the People’s Republic of China without Department authorization,” again due to making incorrect jurisdiction determinations; causing an unauthorized export of defense articles when it sold ITAR-controlled integrated circuits to the UAE for end-use on satellite projects in India, knowing the items would be re-exported without Department authorization; and misused the ITAR Canadian exemption 4 times when it exported radiation hardened microelectronics to Canada without Department authorization.

Despite the company-wide failures noted in the Proposed Charging Letter, Aeroflex and its subsidiaries apparently did make some efforts at export controls compliance – they were just badly misguided.  The company apparently relied primarily on “commodity classification guidance from the Department of Commerce in reviewing the export control status of its microelectronics and electronics,” but failed to understand that Commerce can only properly classify items and technology that are subject to the Export Administration Regulations (EAR).

In other words, Aeroflex often skipped over the critical first-step in the export control analysis which is to determine jurisdiction over the commodities, technology, and software involved – whether jurisdiction lies with the Department of State or the Department of Commerce.  Only after this determination is made, can classification be determined.  The Proposed Charging Letter noted that while “companies may self-classify an article or service, it is to their advantage to seek a [Commodity Jurisdiction] CJ determination where a company has doubts” about whether an article or service is covered by the U.S. Munitions List and, therefore, falls under the jurisdiction of the Department of State.

Making the proper jurisdiction determination is highlighted not only by this settlement, but by Export Control Reform (ECR), which, in a little more than 60 days, will cause a shift in jurisdiction from the Department of State to the Department of Commerce for certain aircraft parts and components and gas turbine engines.  Companies should be well into their reviews of how ECR will impact their exports.  And as the Aeroflex settlement shows, incomplete or incorrect analyses of jurisdiction can lead to costly violations.  Companies should not assume that jurisdiction will shift for their items and technologies under ECR.  Whether affected by ECR or not, companies should use this settlement as a reminder to review jurisdiction regularly or to perform that in-depth analysis for the first time before “systemic and longstanding violations” occur.  There really are no short-cuts to be taken with export controls.

Copyright/Disclaimer
New York State Statement of Client's Rights
Attorney Advertising