The U.S. export control laws which apply to goods, software and technology have a wide ranging extraterritorial reach, and the U.S. government seeks to penalize companies and individuals who breach these laws, regardless of where they are located. The application of the U.S. export control laws will be even broader with the addition of “emerging and foundational technologies” to the list of controlled products (authorized in the Export Control Reform Act of 2018).
There are many reasons as to why the U.S. controls exports – they range from the fight against organized crime and terrorism, nuclear non-proliferation and the control of chemical and biological weapons, to foreign policy and regional stability concerns, and national security considerations. Multiple U.S. departments and agencies are involved in export control. The three primary authorities are:
- the Department of State’s Directorate of Defense Trade Controls (DDTC) which is in charge of the application and the enforcement of the International Traffic in Arms Regulations (ITAR);
- the Department of Commerce’s Bureau of Industry and Security (BIS) which is responsible for implementing and enforcing the Export Administration Regulations (EAR); and
- the Department of the Treasury’s Office of Foreign Assets Control (OFAC) which administers and enforces U.S. embargoes and sanctions against specific countries and individuals.
Export Administration Regulations (EAR)
Whereas the ITAR pertains to defense articles, defense services and related technical data, items subject to the EAR include civilian items, items with both civil and military application and items exclusively used for military applications but which do not warrant control under the ITAR, i.e., less sensitive military items (also note that in 2013 certain articles were moved from the ITAR to the EAR). This article focuses on the EAR.
The types of items subject to the EAR are commodity* (e.g., material, equipment), software and technology. The EAR contain the Commerce Control List (CCL) which lists all items that are subject to the export licensing authority of the BIS. All of these items have an Export Control Classification Number (ECCN) which indicates their level of control. This in turn determines whether the export of an item to a certain country requires a license from the BIS. In case a license is required, the EAR set forth a number of license exceptions which might apply depending on the product, the country of destination and other factors.
The EAR distinguishes among “export,” “re-export,” and “release.” Export means the actual shipment or transmission of items out of the U.S. Re-export means the actual shipment or transmission of items subject to the EAR from one non-U.S. country to another non-U.S. country. Release (or deemed export) means the release of technology or software to a non-U.S. person in the U.S.
Re-export of U.S. goods under the EAR
Companies may not assume that the permitted export of goods from the U.S. means that these goods may then be re-exported to a third country without further consideration of U.S. export control laws. Rather, the EAR require that the export and re-export of goods are assessed separately. The same licensing requirements apply to re-exports as to exports because the U.S. export control laws regulate U.S.-origin products regardless of where they are located.
Example: A Swiss company purchased specific mechanical high speed cameras from a U.S. company. The U.S. seller determined that while the camera in question was subject to the EAR, no license was required for an export of the camera to Switzerland based on the CCL and the Commerce Country Chart which is a look-up table in the EAR listing all countries. The Swiss company now plans to sell these mechanical high speed cameras to a customer in Brazil, which from an EAR perspective would be a re-export. Even though no license was required for the initial export to Switzerland, the Swiss company would need a license from the BIS for the re-export of the cameras to Brazil because the export licensing requirements for this product are different for Switzerland and Brazil.
Export of Swiss Products with U.S. components or technology
The EAR may also apply to Swiss companies that manufacture goods which contain U.S. components or technology. The EAR set forth de minimis thresholds based on the value of the U.S. components or technology incorporated into a non-U.S.-made product to determine if the product is subject to the EAR. The threshold rules apply in case (i) a non-U.S.-made commodity “incorporates” controlled U.S.-origin commodities or is “bundled” with controlled U.S.-origin software, (ii) non-U.S.-made software “incorporates” controlled U.S.-origin software, or (iii) non-U.S.-made technology is commingled with or drawn from controlled U.S.-origin technology. For most destinations and items, a non-U.S.-made product or software is subject to the EAR if the value of the U.S.-origin controlled content exceeds 25% of the total value of the finished item. For some destinations (e.g., Iran, Syria), the de minimis threshold is 10%. The application of the threshold depends on the ECCN of the U.S.-origin controlled content and the ultimate destination to which the non-U.S.-made item is exported; special rules apply to high performance computers and encryption commodities and software. By comparison, there is no de minimis rule for defense articles, defense services and related technical data under the ITAR. As soon as a single ITAR component is installed in a non-U.S.-made product, the ITAR applies.
Example: A Swiss company purchased software designed for the operation of numerically controlled finishing machine tools from a U.S. company. The U.S. seller determined that while the software in question was subject to the EAR, no license was required for an export to Switzerland. The Swiss company would like to use the U.S.-origin software with its own hardware and sell the bundled products to a company based in Ukraine (“bundled” means that the software that is re-exported together with the item is configured for the item but not necessarily physically integrated into the item). If the value of the software exceeds 25% of the value of the bundled product, the Swiss company would need a license from the BIS before being able to lawfully export the product because the export licensing requirements for this software are different for Switzerland and Ukraine.
In 2017, 31 individuals and businesses were convicted and there were 52 administrative cases which resulted in large fines. In recent years, the U.S. government has been placing more and more pressure on businesses outside the U.S. to comply with U.S. export control laws. By way of example, in March 2017, ZTE Corporation, a Chinese telecommunications company, pleaded guilty to conspiring to violate U.S. export control laws by illegally shipping U.S.-origin items to Iran and North Korea and agreed to pay the U.S. government a record-high combined civil and criminal penalty of $1.19 billion. In April 2017, a Chinese national pleaded guilty to violating U.S. laws in connection with a scheme to illegally export to China, without a license, high-grade carbon fiber, which is used primarily in aerospace and military applications. In October 2015, three individuals were convicted of conspiring to illegally export controlled technology to Russia.
Swiss companies which are involved in the re-export of U.S. goods or technology or use U.S.-origin components or technology in their products are well-advised to familiarize themselves with U.S. export control laws and seek legal advice.
*The word "commodity" here is understood not only as “raw materials”, but as “goods in general”.
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