For U.S. MNCs, export compliance programs should not stop at the water’s edge.
Compliance departments must ensure that the comprehensive organizational structures, policies, and procedures they have put in place do not vanish into thin air once products leave the country.
Since U.S. export control laws “follow the item,” subsequent exports (“reexports”) remain subject to U.S. jurisdiction. The main risk to U.S. MNCs involves the activities of overseas subsidiaries, branches, and affiliates that handle its products. Foreign affiliates, believing that U.S. export laws do not apply to them, might reexport items to individuals and entities in countries that are subject to U.S. export license requirements.
U.S. companies can be liable for their foreign affiliates’ violations if they have “knowledge” of those violations, and “knowledge” is very broadly construed under EAR.
Generally, you are accountable for the knowledge that you have, stated or implied, in your normal course of business. In essence, if you access information or have been provided information by phone, in writing, or through data access (i.e. through your ERP system) then you have “knowledge.”
According to Paul DiVecchio, head of the export compliance consultancy DiVecchio & Associates:
“It is evident that Commerce, Homeland Security Investigations, and Treasury are cracking down on those overseas affiliates and distributors that are finding creative ways to avoid compliance with U.S. laws and regulations.”
Indeed, the John S. McCain National Defense Authorization Act (which includes the Export Control Reform Act) has brought renewed focus to export violations occurring outside the United States, and the Trump Administration has been targeting foreign affiliates as part of a crackdown on perceived threats to national security.
Given this backdrop, U.S. parent companies that do not extend their export compliance programs to cover foreign affiliates risk fines, penalties, legal fees, opportunity costs, and reputational costs.
Consider the Keithley Instruments case. In 2009, BIS brought a proposed charging letter against Keithley Instruments International Corp. (“KIIC”), an Indian company, for “evasion” of U.S .export laws. KIIC wanted to sell products manufactured by its U.S. parent (“Keithley U.S.”) to VSCC, an Indian Space Research Organization subordinate entity that was designated on the Entity List. This designation meant that companies needed to obtain a DOC license before exporting items to VSSC.
Instead of obtaining that license, KIIC effectively did an end-run around U.S export laws, by channeling the sale through an intermediary (the Indian company Rajaram). BIS and KIIC entered into a settlement, under which KIIC was assessed a civil penalty of 125,000 USD.
Although Keithley U.S. was not charged with an export violation, it still suffered reputational and monetary damage. Since it shared a name with its Indian affiliate, its reputation was harmed, putting at risk relationships with investors, customers, and associates. It also incurred legal fees and had to divert resources to resolving the case.
What can U.S. companies with global activities do to minimize these risks? At the most fundamental level, they should think of export compliance programs as global programs, not just U.S. programs. This means that any systems, policies, and procedures developed at corporate HQ must be woven into the company’s global infrastructure.
DiVecchio lists several best practices:
- “The commitment of the senior official within an overseas affiliate to abide by the corporate governance and ethics will dictate how subordinates will follow the procedures and policies established by the U.S. corporate compliance organization. Most subordinates tend to be subservient to the general manager of the affiliate, which in some cases runs counter to U.S. corporate governance.”
- “The internal challenge comes in the form of educating your staff overseas about U.S. export regulations. The consistency of systems also helps a lot with meeting the U.S. regulations.”
- It is essential to have a “strong statement from the highest level within the U.S. company for all overseas senior personnel that emphasizes they will be held accountable for their actions if those actions run counter to the principals of the company’s corporate governance.”