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Posted: December 01, 2008

Legal Insights 2008: Hidden exports, hidden risks

Beware violating U.S. export laws

Ivan P. Koves
You’ve just hired a brilliant engineer! She has two degrees from Cal Tech and can run circles around your current staff. She’s applied for her green card and can remain in the U.S. on her H-1B visa until the green card comes through. She has made it through all of your background checks and signed your standard employment agreements. Your company has not been able to gain any overseas customers. However, a potential large customer in China is sending a representative to your plant in Colorado to evaluate your operations and products. You are ready to roll out the red carpet and show him your modern technology. You take the specifications for your latest product to Canada to meet with potential customers at an international trade show in Toronto. The common factor in each of these scenarios is that they put your company at risk of violating U.S. export laws. Does your company export? Before you say "no," consider the following truisms: 1. Merely talking to a customer in your office or at a trade show may be an export. 2. Simply providing a drawing or print to an employee in the U.S. may be an export. 3. Giving a tour to a visitor at your U.S. location can result in an export. Then consider that exporting controlled technology (or any technology to certain destinations) without a license can get you fined and/or land you in jail. Every company should make it their business to recognize when they are exporting and are therefore subject to the applicable rules and penalties. There are two primary U.S. agencies that regulate exports. 1. The Department of Commerce administers the Export Administration Regulations (EAR) and addresses exports of most everyday items, and also "dual use" goods that can be used for both civilian and military purposes. Exports of dual use goods often require a license, and exports to some countries of any goods also require a license under the EAR. Violations of the EAR are punishable by civil penalties: the greater of $250,000 per violation or twice the value of the transaction that is the basis of the violation and criminal penalties: up to $1 million per violation and/or up to 20 years in prison. 2. The Department of State administers the International Traffic in Arms Regulations (ITAR) and addresses the exports of goods that have primarily a military use/purpose ("defense articles"). Note that exports of any defense article or associated technical data require a license issued by the State Department. Violations of the ITAR are also subject to both civil and criminal penalties, similar in magnitude to the EAR violations mentioned above. These violations are frequently prosecuted. Clearly, there can be a big price to pay for exporting missteps. So let’s get to the principle of export law that is at issue for all companies, regardless of whether they ship merchandise overseas. Then we will return to the scenarios posited at the beginning of this article to understand the specific risks involved and determine how your company can prepare. *The "Deemed Export Rule"* Simply put, the Deemed Export Rule says that if you release technology or source code to a foreign national, then even if that release takes place in the U.S., there is deemed to be an export to the home country of the foreign national. I will borrow liberally from the Department of Commerce, Bureau of Industry and Security (BIS) website to address what the key terms mean. For most businesses, BIS will be the primary regulatory entity governing their export activities. For brevity, the questions and answers below refer only to technology but also apply to source code. *Q: What is a "release" of technology?* A: Technology is "released" for export when it is available to foreign nationals for visual inspection (e.g., reading technical specifications, plans, blueprints, etc.); when it is exchanged orally; or when it is made available by practice or application under the guidance of persons with knowledge of the technology. What is "technology"? Technology is specific information necessary for the development, production or use of a product. Who is a foreign national? Everyone except "U.S. Persons." A U.S. Person is someone who (1) is granted permanent residence by the issuance of a permanent resident visa (i.e., "Green Card"); or (2) is granted U.S. citizenship; or (3) is granted status as a "protected person" (political refugees and political asylum seekers). *How the Deemed Export Rule can impact you* Now that you know the law, let’s return to our opening scenarios to analyze the potential for violations. The engineer who has two degrees from Cal Tech — She’s applied for her green card, and you’ve determined she can remain in the U.S. on the H-1B visa until the green card comes through. She has made it through all of your background checks and has signed all of your employment agreements. Is the engineer a foreign national per U.S. export regulations? Yes. She is not a U.S. citizen and not yet a green card holder. Does the fact that she’s signed a nondisclosure agreement as part of your normal hiring process get you off the hook? No. Any technology you provide to her is still deemed to be exported to her home country. What steps should you take to protect yourself and your company? There are several: 1. You can protect yourself from unlawful exports of technology by providing only publicly available information until she obtains her green card. This is usually impractical because publicly available information is pretty much limited to that which could be obtained by anyone at a library, bookstore or on publicly available Internet websites. You probably want this hotshot working on your most pressing technical issues ASAP. 2. If you want her productive right away, you must first classify the products and technology on which she is to work. That means understanding where they fall on the governing agencies’ list of regulated items. Once you find the items on one of these lists, it will tell you whether the item and the technology to build it can be exported to the home country of the foreign national, and under what conditions. 3. If the outcome of the classification process is that the technology requires a license to be exported to the home country of the foreign national, you can apply to the controlling agency to license these deemed exports. Be aware that the licensing process is often fairly lengthy. It can be accomplished in as little as a couple weeks, but can also last several months. A potential customer in China is sending a representative to your plant in Colorado to evaluate your operations and products. You are ready to roll out the red carpet and show him your modern technology. Is the representative from China a foreign national? If you don’t know, you must find out, especially if you intend to show him technology that may require a license. Export-savvy companies implement a process that requires all visitors to sign in and provide their nationality before they are allowed any sort of access to the company’s facilities or technology. If he is a Chinese national, is there any way I can show him the technology required to make a sale? Sure, but you must go through the process described in our first scenario: 1. You must first classify the products and, more importantly, the technology you want to show him. Again, that means understanding where they fall on the governing agencies’ list of regulated items. Completing classification will reveal whether the technology can be exported to the home country of the visitor and under what conditions. Many items and their technology can be exported without a license. 2. If the outcome of the classification exercise is that the technology requires a license you can apply to the controlling agency. Be sure to allow enough time so that the license can be obtained prior to the visit. 3. Also, remember that mere visual inspection of a manufacturing process is sometimes enough to be considered a release of technology. If you don’t have a license, it’s best to avoid tours that risk these kinds of releases. You are taking the specifications for your latest product to Canada to find potential customers at an international trade show in Toronto. Can you even travel to Canada with this technology without getting a license? Good question! The answer most probably is yes. However, you must go through the classification process described above — even when only "friendly" foreign countries are involved — to be sure the export is authorized. Let’s assume that you’ve done so and no license is required for you to take the technology to Canada. If I can take the technology with me to the trade show, what’s the risk? There is a variation on the deemed export rule known as the deemed re-export rule. Even if the technology is legally in a country (Canada in this case), you must protect against a release of the technology to a foreign national from another country. So, if there will be attendees at the show who are not U.S. or Canadian persons, the same questions/issues arise as we’ve discussed above. The messages from the Departments of Commerce and State are clear: These agencies are targeting deemed export violators. It is the job of U.S. companies to implement processes that prevent violations. _The information in this publication is intended for general guidance and is not meant to be a substitute for professional legal advice. ColoradoBiz and the attorney authors accept no responsibility for loss occasioned to any person acting or refraining from action as a result of using any material in this publication_.

Ivan Koves practices in import and export regulatory matters and has 19 years of experience developing and implementing trade compliance policies, procedures and training. He has broad experience in many international trade areas, including national export and import regimes and supply chain security programs. Prior to joining Holland & Hart, he was the director of global trade compliance for Flextronics, a $30B multinational corporation with over 100 locations in 30 countries around the world.

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