There are a variety of reasons companies may be tempted to run their record keeping operations offshore. For example, with a myriad of national and international governing bodies overseeing global trade, some US companies may consider consolidating all compliance functions into a central location with responsibility over ensuring compliance with the international trade laws from each jurisdiction. This can provide certain logistical advantages, by allowing compliance personnel from the importing jurisdiction and exporting jurisdiction to cooperate on a given transaction. Another example is where a non-resident importer of record chooses to maintain records related to their imported products in their home country. Despite the possible benefits keeping records offshore may provide, doing so may create unnecessary risks. For instance, many export related records may qualify as controlled Technical Data or Technology, thus triggering licensing requirements. Another risk is that a US agency may require that your records be turned over to them, which could be challenging depending on the method of storage in the foreign jurisdiction. For these reasons, it is probably ill advised to maintain record keeping operations offshore.
Export Control Record keeping and Technical Data Issues
Under the International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR), a license is often required to export controlled Technical Data/Technology, which includes blueprints, drawing, photographs, plans, instruction or other documentation. This is significant because both sets of regulations define an export to include not only the physical export of the data, but also the release of such technology or data to a foreign national abroad or in the United States (whether it be through email or otherwise). Therefore, maintaining documentation abroad may require export licenses if the documentation is controlled under the EAR or ITAR. Such export license would be required for the physical export of the data intended for storage, and/or to authorize foreign nationals to access such data. This may lead to a myriad of issues in cases where a specific storage facility lacks access controls and the records could be potentially accessed by foreign nationals with a variety of citizenships. Therefore if companies seek to have export related documents stored in a foreign location, it will be important to assess whether those documents qualify as controlled Technical Data or Technology, what those controls are, and obtain the necessary licenses, if any, to have those documents transmitted to the foreign location.
It is equally important to evaluate the security access controls of the facilities where the company records will be stored in. This applies to both physical storage of records as well as electronic storage. Adequate access controls are crucial to avoid inadvertent releases of Technical Data or Technology to foreign nationals without a U.S. Government authorization, or to avoid going beyond the scope of an existing authorization. At a minimum, physical access controls must ensure the storage facilities possess adequate physical barriers such as locked doors, guards, or fences to restrict the data from unauthorized access. Similarly, if the records are stored electronically then the records containing controlled Technical Data and Technology should be placed under password-restricted folders and the server should be located in the United States, unless U.S. Government authorization is obtained. When considering storing records abroad, you should ascertain whether the storage facility you are considering possesses a technology control plan outlining their security measures.
In short, if an exporter seeks to maintain controlled documents overseas, they will need to ensure that either (a) the Technical Data/Technology is subject to an exemption/exception from licensing (which triggers new record keeping requirements related to that exemption) (b) the Technical Data/Technology is not accessible by any foreign nationals, or (c) the foreign nationals are authorized by the relevant government agency to view the Technical Data/Technology. Creating such a system when the documents are being transmitted to a foreign company would create additional challenges.
Turning over Export Control Records
Both the ITAR and EAR require exporters to maintain records and turn over those records if requested to do so by the relevant agency. Depending on how one chooses to store their records and on one’s interpretation of the regulations, it may be difficult to turn over records within the time frame acceptable by DDTC and BIS.
For example, 15 CFR 762.5(b)(9) of the EAR states that a “regulated person must furnish, at the examination site, the records…and, if necessary, knowledgeable personnel for locating, reading, and reproducing any record in the system.” Thus, if your factory based in the US is exporting EAR controlled products and receives a visit from BIS, you will need to either have the records on site or have someone that can locate, read, and reproduce those records. This would necessitate either exact copies of the records or a digital storage system where they can be immediately retrieved. If the records are stored in a digital system, accessible to personnel at the potential examination sites in the US, it is important that those records meet the requirements of the EAR and ITAR for digitally stored copies of original records. Among the requirements for storing records is that they be readable, legible, and that all changes be recorded. For more detail, refer to 15 CFR 762.5 and 22 CFR 122.5.
Offshore Record Keeping and Customs Compliance
On the import side, offshore record keeping often arises where an importer’s corporate headquarters or base of operations is located in a foreign country or where the importer has no presence in the U.S. As a result, that importer may choose to run their record keeping operations out of the foreign country rather than out of the US. While there is no express requirement that an importer of record maintain records in the US, there are several risks associated with this strategy.
First, CBP can require during the course of an investigation, audit or other inquiry, that the importer turn over import records with the requirement that CBP provide “reasonable” notice. What qualifies as “reasonable” notice is not clear, but in any case, an importer must provide records to CBP within 30 days. If the records requested are more current, CBP may shorten this time frame. Depending on the manner in which the records are stored, turning over the requested records within the applicable time frame could be impossible.
Other Important Considerations
A very important consideration is that the record keeping system is properly managed. This means that all required records are stored in a manner that makes them accessible in case of a government request, audit, or other action, and that the records are protected. If a U.S. company is basing its compliance operations offshore, this raises red flags as to whether they can exert the proper level of management and control over the record keeping operation to ensure compliance. If a mistake does occur, the U.S. government is likely to view the offshore record keeping operation as evidence of a company’s lack of committal to international trade law compliance.
Most importantly, the non-production of records or information can also result in the imposition of very substantial penalties. For example, intentional failure to maintain, store, or retrieve import records may lead to penalties up to $100,000 per violation, per cargo release. If the failure to comply is a result of negligence of the person maintaining, or storing records, the penalty may go as high as $10,000. Similarly, penalties for failure to maintain export records are severe. For willful failure to maintain ITAR records, companies may be fined up to $ 1 million and 20 years imprisonment, and up to $500,000 for unintentional recordkeeping violations. For EAR violations the penalties could range anywhere from $250,000, or up to $1 million, or 20 years imprisonment for willful violations.
Maintaining records offshore raises a variety of challenges and risks, which leads us to recommend that records be maintained in the U.S. If records are maintained overseas, a digital system where appropriate personnel in the U.S. can access the system as needed would probably be a smart strategy. However, export documents should not be maintained overseas unless the records do not contain controlled Technical Data/Technology, or licenses for export to the country where the record keeping operation is based are not required. Please be mindful that such a record keeping operation would be extremely risky, since a failure to properly assess licensing requirements could lead to export control violations, which in turn could lead to severe penalties. Finally, there are real questions as to whether a U.S. based company could properly manage record keeping functions in a foreign location. Where the management is deficient, the penalties for failing to keep or produce the records upon demand are significant. For these reasons, we would advise against such an operation.