Export Administration Compliance Basics

The sale of products and services from the U.S. overseas or otherwise to foreign nations requires a review of export regulations that may be applicable to the transaction.  For the sale and export of certain commercial and military items, the regulations that require review are known as the Export Administration Regulations ("EAR"). 

The EAR, promulgated under Title 15, Chapter VII, Subchapter C of the Code of Federal Regulations (and its supplements) by the U.S. Department of Commerce (through its Bureau of Industry and Security), regulate the export of goods and services that are found on the Commodity Control List as well as regulate certain U.S. person activities related to anti-boycotting of U.S. friendly foreign nations.  The EAR formally state that they are intended to serve the national security, foreign policy, nonproliferation, and short supply interests of the United States and, in some cases, to carry out its international obligations.  See 15 CFR 730.6

First in determining whether a product or service is subject to the the export control provisions of the EAR, the central question is whether a product or service is actually being exported.  An export under the EAR includes the sale or transfer of such product or service to a foreign country.  It also includes the re-export of that product or service to other foreign countries.  Finally, it includes the release of the products or information to a foreign national on U.S. soil.  This last item is of particular concern to U.S. entities that employ foreign nationals as well as institutions of higher learning that develop of products and services through the work of students who are citizens of other countries.

If an item is being exported under the EAR, the next determination to make is whether such product or service falls with the EAR Commerce Control List.  The Commerce Control List, or the CCL for short, is found at 15 CFR 774 (including Supplement #1) and include predominantly dual use products and services that have a military use as well as a civil or commercial use.  Categories of products and services include nuclear materials, chemicals and micro organisms, materials processing, electronics, computers, telecommunications, information security, lasers and sensors, marine items, navigation and avionics and propulsion systems. 

If the product or service is being exported under the EAR and is found on the CCL, then the next determination is to match the particular ECCN assigned to that product or service with the Commerce Country Chart found in 15 CFR Sec. 738.   A relatively small percentage of exports and reexports subject to the EAR actually match up to a country on the Commerce Country Chart.  The countries most likely affected include embargoed countries such as Iran, Cuba, North Korea, Sudan and Syria.

If the product or service (i) is being "exported", (ii) is on the CCL and (iii) is being exported to a country that matches up to the Commerce Country List as requiring further due diligence, the export administrator, then an application for an export license must be made to the BIS.  The license application will then be issued to permit such export under the terms as applied for. 

In later series of this journal, we will discuss more about the EAR and export controls in particular.

Brief Overview of the FCPA

In November 2012, the criminal division of the Department of Justice and the Enforcement Division of the Securities and Exchange Commission published A Resource Guide to the U.S. Foreign Corrupt Practice Act.  The Foreign Corrupt Practices Act (the “Act” or the “FCPA”) is a U.S.-based law that restricts U.S. Companies and entities under various circumstances from engaging in bribery of foreign officials to gain a business advantage.  The USDOJ and the SEC share enforcement of the Act and any person or business engaging in business overseas needs to be mindful of these provisions, as even innocuous commercial practice could get caught up in the Act’s restrictions.  The Guide is intended to assist companies in their compliance with the salient provisions of the Act.

Originally enacted in 1977, and amended over the last 35 years to create affirmative defenses, expand the definition of foreign officials and to comply with  the Anti-Bribery Convention, the FCPA contains both anti-bribery and accounting provisions intended to reduce or eliminate corrupt payments to foreign officials.  Violations could lead to fines, imprisonment or disgorgement of revenues.  Below are some general requirements of the FCPA.  We will tackle specific issues under the FCPA in later releases.

The anti-bribery provisions of the Act prohibit (i) U.S. persons and businesses, (ii) U.S. and foreign public companies listed on stock exchanges in the United States or which are required to file periodic reports with the Securities and Exchange Commission, and (iii) certain foreign persons and businesses acting on United States soil from making corrupt payments or other bribes to foreign officials to obtain or retain business.The purpose of the FCPA was to eliminate unseemly advantages that some U.S. companies (and others acting on U.S. soil) had, which reduced competition in many marketplaces.

The accounting provisions further seeks to eliminate bribery by requiring the persons and business subject to the Act to make and keep accurate books and records and to devise and maintain an adequate system of internal accounting controls. By creating controls and systems that all companies had to abide by, irregularities that would trigger FCPA audit could be easily identified.  The accounting provisions also prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing or failing to implement a system of internal controls.  The playing field was leveled.

Bribery and corrupt payments can take many forms.  It can include the intent to make a corrupt payment (and not necessarily the execution of the said corrupt payment). It can also include items of nominal value in the U.S. if it has significant value in the country the payment is made.  Further, a corrupt payment can be found even if the identity of the recipient is unknown.

The accounting provisions of the Act consist of two components.   The books and records provision of the Act require issuers to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issu­er’s assets.  This is borne out of the fact that corrupt payments are often mischaracterized as consulting fees, royalties, reimbursement of expenses or rebates.    The internal controls provi­sion of the FCPA, requires issuers to create and maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the issuer’s assets in such a way that accurate reporting of financial information is made.  An issuer is any entity that has its shares traded over a U.S. stock exchange or is otherwise required to report under the Securities Exchange Act, as amended and interestingly enough many of the reporting requirements for financial information of issuers have broader requirements under the Securities Exchange Act and the Sarbanes-Oxley Act.

For more information, the following websites offer a plethora of information that will help your business in complying with and reporting issues related to the FCPA

www.justice.gov/criminal/fraud/fcpa

http://www.commerce.gov/os/ogc/transparency-and-anti-bribery-initiatives