By Odyssey E. Gray, III, Associate, FD Associates, Inc.
A successful and lawful export should be the product of a series of internal processes conducted by persons responsible for trade compliance that help determine/answer pertinent and relevant questions concerning the export. Exporters should be sure to continually review and evaluate internal processes for compliance to the various export regulations.
A baseline starting point is for exporters to be able to answer certain questions about each transaction:
- Who? – who are you doing business with? Who are the other parties in the transaction?
- What? – what is the commodity and associated export controls?
- Why? – what is the end use?
- Where? – where is it going?
Failure to address any one of these things can lead to an unlawful export with negative ramifications ranging from civil penalties such as fines to debarment and imprisonment. It is crucial that exporters have established processes in place to manage compliance requirements with the International Traffic In Arms Regulations (“ITAR”), Export Administration Regulations (“EAR”), Office of Foreign Assets Control (“OFAC”) and Foreign Trade Regulations (“FTR”).
Cryofab, Inc. (“Cryofab”), of Kenilworth, NJ, was recently fined $35,000 by the Department of Commerce, Bureau of Industry and Security (“BIS”), for export transactions that had a total value of $21,570. That’s right, the fines exceeded the value of the transactions. How did this occur? Cryofab exported EAR99 items (liquid helium storage container and accessory; liquid nitrogen storage container and operating tool) as No License Required (“NLR”) to Bhabha Atomic Research Center (BARC), an Indian Department of Atomic Energy entity located in Mumbai, India. BARC is listed as a party on the Department of Commerce Entity List requiring licenses for all commodities exported to BARC. BIS charged Cryofab with failure to screen the Entity List and failure to seek or obtain the licenses required for export.
Had Cryofab conducted a Denied Party List (“DPL”) screening, using either the free government tool, or a paid service, or even just reading the EAR at Supplement 4 to Part 744, it would have been
alerted to the fact that its end user was listed on the Entity List and Cyrofab would have known of the associated licensing requirements under the EAR for this direct hit on the Denied Parties List.
The Entity List in the EAR specifies the license requirements for each listed person or entity. Those license requirements are independent of, and in addition to, license requirements imposed elsewhere in the EAR. Requirements to export, reexport or transfer (in-country) an EAR99 item to a listed entity are specified in the “License Requirement” column of the Entity List. If that column indicates “all items subject to the EAR,” then a license is required to export, reexport or transfer (in-country) the item, even though EAR99 items may be exported to the country of destination as NLR.
Due to its failure to screen parties to the transaction, Cryofab was fined 62% in excess of any profits it may have received for these transactions, and they must pay the fine in a timely fashion to avoid further penalties and interest and risk debarment.
Under the EAR, exporters should be mindful of the ten general prohibitions (Part 736) in connection with an export transaction by considering five facts: classification, destination, end user, end use and conduct. Note the questions above center on consideration of these facts. Cryofab’s exports constituted a violation of General Prohibition Five:
“Export or reexport to prohibited end-uses or end-users (End-Use End-User). You may not, without a license, knowingly export or reexport any item subject to the EAR to an end-user or end-use that is prohibited by part 744 of the EAR.”
A DPL screening should be embedded in the export processes/procedures when vetting/analyzing the scope of a proposed transaction. The screening should be completed for all parties to the transaction, not just the end user.
In this instance, the failure to conduct the DPL screening directly cost the exporter significantly more money than could have been made on the transaction than the preventive measure of screening as part of the company’s processes, quotation, order processing and shipping. Long term repercussions
can include the ability to make future exports, additional scrutiny by government agencies and the company reputation sullied.
Learn from others mistakes by ensuring that you have the correct exporter processes in place. In this instance, Cryofab missed the DPL screening step and focused on the where but not the who. The end result (and penalty) reinforces the need for exporters to understand that with regard to matters of export compliance, it’s in the company’s best interests to be as thorough as possible to avoid penalties such as those described above.