Overview of New Federal Requirements That Increase Scrutiny of Technology Disclosures to Foreign Workers At Home and Abroad

High tech companies across all industries face increased U.S. federal regulatory scrutiny in 2011 if they disclose certain high technology to foreign workers located within the United States or in their foreign subsidiaries abroad. This catches many companies by surprise, and warrants immediate attention.  

Effective Feb. 20, 2011, companies employing foreign nationals in the United States or in their foreign offices must notify the U.S. Citizenship and Immigration Service (USCIS) whether the company will disclose so-called “controlled technology” to these workers. Controlled technology is defined on a case by case basis by the U.S. Department of Commerce, U.S. State Department and Department of Homeland Security (DHS) and it encompasses a wide range of technologies including medical, chemical, environmental control, oil industry, manufacturing, software, encryption technology, gun technology, robotics, semiconductors and aircraft components. A partial list can be found on the Export Administration Regulations website. Companies need to attest that they have the required export certificate from either the U.S. Department of Commerce or U.S. State Department before disclosing technology.

Sanctions

For many organizations, compliance in federal regulations is a “bet the farm” proposition. Sanctions for failing to comply with export or re-export control laws relating to transferring U.S. technology to foreign nationals depends largely on the relative sensitivity of the Commerce Department or State Department technology involved. Depending upon that sensitivity, the company could receive:  

  • A civil monetary penalty equal to five times the value of the export or re-export of the commodity or $50,00, whichever is greater, with an enhancement for willful violations going up to $1,000,000.  
  • Denial of export or re-export privileges – no licenses granted.  
  • Placement on the customs “watch list” to bar any export or re-export.  
  • Placement on the denial list – making it a violation for any company to deal with the denied company.  
  • Denial of licensing.  

Foreign nationals receiving controlled technology, depending upon the sensitivity of the commodity, can be immediately deported or arrested if they are within the jurisdiction of the United States.  

Focus of Enforcement

U.S. Customs and Commerce Department officials have given this a high priority leading to more federal investigations and an increase in penalties, and could catch companies unawares. Many companies who do not see themselves as “exporters,” will realize to their peril that they are subject to laws regarding the export of controlled technology. This is not just hype from the Commerce Department. Many U.S. companies are already seeing stepped up enforcement efforts and increased questioning of their freight forwarders.

Are You a “Deemed Exporter?”

The concept of “deemed exports” catches many foreign companies by surprise. The U.S. Commerce Department refers to the release of controlled technology to a foreign national in the United States or abroad as a “deemed” export to the home country of the foreign national. The “deemed exports” problem most often is encountered where a U.S. company makes controlled technology or software available to a hired foreign national or to a visiting foreign national during a plant tour in the United States.  

Foreign companies are also often surprised that the U.S. Commerce Department reaches into their businesses overseas. If the controlled data is located in a foreign office of the company, the company must evaluate whether foreign persons employed by the foreign office will be exposed to the technology. For example, if a company has controlled technology legally exported to its office in Japan, it will have to determine whether Chinese nationals employed in their Japanese office will have access to the technology. If so, then analysis proceeds as if the Chinese employee was located in the United States.

Legal counsel is required to help the company determine whether a deemed export license is required. When making that determination the company must consider:

  • What technology is being released?  
  • What will the foreign national require of licensee to receive the technology original fee for an exemption?  
  • What will your item be used for?  
  • How will your technology be controlled against further distribution?  
  • How to develop internal compliance programs that meet Commerce Department requirements.  

Once it is determined that the item requires an export license, the next step is to obtain the appropriate Commerce Department application. This general application form calls for specific information about the export, a letter of explanation as to the reason for the export and the resume of the foreign person(s) who will receive the technology.  

Significantly, the application also requires a company to disclose its internal compliance program so that the Commerce Department will know that the technology will in fact continue to be controlled by the company.  

In this situation, where it is apparent that export controls have not been in place for a period of time, the company should consider making a voluntary disclosure to the Commerce Department to avoid the sanctions discussed above.  

More About the Technology

An export of technology or source code (except encryption source code) is “deemed” to take place when it is released to a foreign national within the United States or abroad.

Technology is “released” for export when it is available to foreign nationals for visual inspection (such as reading technical specifications, plans, blueprints, etc.); when technology is exchanged orally; or when technology is made available by practice or application under the guidance of persons with knowledge of the technology.

Under the Commerce Department regulations, “technology” is specific information necessary for the “development,” “production,” or “use” of a product. They further state that “technology required for the development, production, or use of a controlled product remains controlled even when applicable to a product controlled at a lower level.” Please note that the terms “required,” “development,” “production,” “use,” and “technology” are listed on the Commerce Control List.

Assuming that a license is required because the technology does not qualify for treatment under a no license exception, U.S. entities must apply for an export license under the “deemed export” rule when both of the following conditions are met: (1) they intend to transfer controlled technologies to foreign nationals in the United States or abroad; and (2) transfer of the same technology to the foreign national’s home country would require an export license.

Generally, technologies subject to the Export Administration Regulations (EAR) are those which are in the United States or of U.S. origin, in whole or in part. Most are proprietary. Technologies which tend to require licensing for transfer to foreign nationals are also dual-use (i.e., have both civil and military applications) and are subject to one or more export control regimes, such as National Security, Nuclear Proliferation, Missile Technology, or Chemical and Biological Warfare.

Foreign technology with U.S.-origin technology commingled to a degree above a de minimis level is considered to be subject to the EAR.  

Still other technologies do not require any authorization because they are already “publicly available.” These include patent applications; publicly available technology and software (other than software and technology controlled as encryption items) that are already published or will be published; technology which arises during or as a result of fundamental research; or technology which is educational.

Foreign Nationals

Any foreign national is subject to the “deemed export” rule except a foreign national who (1) is granted permanent residence, as demonstrated by the issuance of a permanent resident visa (i.e., “Green Card”); or (2) is granted U.S. citizenship. Thus, deemed exports can involve all persons in the United States as tourists, students, businesspeople, scholars, researchers, technical experts, sailors, airline personnel, salespeople, military personnel, diplomats, etc.

It should be emphasized that although the deemed export rule may be triggered, this does not necessarily mean that a license is required. For example, the technology may be eligible for a license exception. This determination must be carefully made.

The Deemed Re-export Problem

The term “deemed re-export” is often used to indicate the transfer of controlled U.S. technology to a third-country national overseas. As an example, a U.S. exporter transfers its controlled proprietary technology to a firm in Israel. The firm in Israel, in turn, will employ an individual from China who is not a permanent resident of country Israel, or of the United States, and who will need the controlled proprietary technology to perform his or her assigned duties. If the U.S. exporter intends to transfer the controlled technology to the Chinese national who is now an employee of the Israeli firm, the U.S. exporter is responsible for obtaining any required deemed export license, as if it were transferring the technology to China. If the Israeli firm intends to transfer the controlled technology that it received from the United States to the Chinese national, then the Israeli firm is responsible for obtaining any required deemed re-export license from the U.S. Commerce Department and to meet the Commerce Department compliance guidelines.

Conclusion

Given the draconian penalties and sanctions involved, experienced legal counsel should be obtained to guide a company through the new U.S. government’s export enforcement efforts.