U.S. export controls impact what pharmaceuticals and medical devices can be exported and with whom companies may conduct business, and affect sales of finished products to distributors, agents and customers as well as sending technology or information outside the U.S. for manufacturing, testing or engineering purposes. This article will discuss key U.S. export control issues affecting U.S. pharmaceutical and medical device companies, and provide practical tips on reducing export control risk.
Most pharmaceuticals and medical devices will be regulated by the Bureau of Industry and Security (BIS) as “dual-use” items pursuant to the Commerce Control List (CCL) that is part of the Export Administration Regulations (EAR). U.S. pharmaceutical and medical device companies are also subject to the jurisdiction of the Office of Foreign Assets Control (OFAC) at the U.S. Department of the Treasury that maintains U.S. economic sanctions programs including the List of Specially Designated Nationals (SDN). The EAR cover what and how you can export, and OFAC’s regulations cover who you may sell to or otherwise transact business with. Just because a product may be freely exported under the EAR does not mean that the transaction is consistent with OFAC’s regulations (and vice-versa).
Every pharmaceutical and medical device company should ask five (5) questions in connection with every export transaction: (i) What is being exported and how is it classified under the EAR?; (ii) What is the country of ultimate destination?; (iii) Who is the ultimate end user?; (iv) What is the ultimate end-use of the product; and (v) Are there any red flags related to the export transaction that suggest a probability of an export control violation? The answers to these questions will generate much of the information you need to determine whether a specific export transaction is consistent with U.S. export control regulations.
The EAR controls the export of U.S.-origin biological material, pathogens, toxins, genetically-modified organisms, certain chemicals, materials and biomedical and chemical handling equipment. Pursuant to the EAR, BIS has export jurisdiction over every U.S.-origin item not controlled as a defense article, although BIS does not require a license for every export. U.S. origin items include products developed, manufactured or otherwise present in the United States, meaning that U.S. export controls cover sales or transfers to distributors, agents, customers, and other end-users as well as the export
of controlled items or related technology for testing or manufacturing purposes. The term “U.S.-origin” also includes any foreign-produced items with more than a de minimis amount of controlled U.S.-origin content, potentially including, for example, a product finished overseas that includes a controlled item as a part or component. Lastly, U.S. export controls also address re-exports, defined as the transfer of a controlled item from one foreign jurisdiction to another, and treated as an export to the ‘final’ jurisdiction. Your company retains export control liability after the product has left the United States, even after it has been incorporated into another product or re-exported.
“Deemed export” rules can be a trap for many pharmaceutical and medical device companies. A “deemed export” occurs when a foreign national (any person who is not a U.S. citizen or permanent resident) present in the U.S. is exposed to, or has access in any manner to, an export-controlled item, software, technology or information. Such exposure/access is an export to the foreign person’s home jurisdiction. Deemed exports can occur if you employ foreign nationals, if you have foreign national interns or if you receive site visits from foreign customers or partners.
U.S. export control regulations overseen by OFAC restrict with whom you may conduct business. BIS maintains similar controls. Even if your product does not need a license for export, you will still need to determine whether any restrictions or license requirements attach to your purchaser. OFAC maintains the U.S. economic embargo against Cuba, Iran, North Korea, Sudan, and Syria—meaning that you must apply for a specific license from OFAC in order to export to any person, association, government or company in those five jurisdictions. In addition, OFAC maintains targeted embargoes against persons and entities included on the SDN list because of targeted U.S. sanctions. You should screen each potential customer against the SDN and other related lists to ensure your export is consistent with OFAC-administered sanctions and other economic restrictions.
You should keep records of specific exports, including export licenses and documentation related to a license exception, for a period of five (5) years from the date of export. By virtue of exporting an item, you grant BIS the right to review your export files, and failure to keep proper records can be a significant violation.
Violations of the EAR can trigger fines of up to $1,000,000 per violation in criminal cases, and $250,000 per violation in most administrative cases. In addition, criminal violators may be sentenced to prison time of up to 20 years, and administrative penalties may include the denial of export privileges. Exports in violation of OFAC sanctions can also trigger fines of up to $250,000 per violation. In addition to these penalties, you need to consider the reputational damage to your company that comes from the public disclosure of illegal exports, as well as the legal and other costs to investigate and remedy export control violations.
If you don’t have an export compliance program and policy, you need one right away. If you have a program and policy that have not been reviewed in that last six (6) months, you need to review and upgrade them now. An effective export compliance program has a written policy at its core, and the policy should discuss your company’s export control responsibilities in reasonable detail. The policy should also set a “tone from the top” that your company intends to comply strictly with all relevant parts of U.S. export controls. Further, the policy should set out review procedures for potential exports, and appoint a specific export control compliance officer to whom questions or concerns may be directed. An effective compliance program also provides for periodic audits and updates to the policy, as well as training of key personnel. Most importantly, a compliance program will detect and deter possible export control violations, saving your company the time and expense of remediation.