Companies need to maintain a vigilant awareness of export control laws applicable to China. The U.S. Department of Commerce has indicated that investigating China-related exports of goods and technology for unauthorized use is a top priority, second only to Iran-related investigations. When considering business involving Chinese companies, a number of U.S. trade control laws and regulations may come into play. These include:
- Embargoes and sanctions administered by the Treasury Department’s Office of Foreign Assets Control (OFAC)
- The Bureau of Industry and Security’s (BIS) Export Administration Regulations (EAR, 15 C.F.R. Parts 730-774)
- The State Department’s Directorate of Defense Trade Controls’ (DDTC) International Traffic in Arms Regulations (ITAR)
Violations of these U.S. export control laws and regulations carry a heavy penalty. Violations may result in civil penalties up to $500,000 per violation under the ITAR and $250,000 under the EAR and OFAC sanctions. Criminal penalties carry steeper penalties of up to $1 million and up to 20 years in prison. Furthermore, these provisions may be applied extraterritorially, which has resulted in the prosecution of foreign persons located outside the United States. These are violations that companies need to be very cognizant of and do everything in their power to avoid.
It is important to remember that U.S. and non U.S. entities that deal in any of the following are subject to these regulations:
- U.S. origin goods;
- foreign made products or technology that include more than de minimis amounts of controlled U.S. origin content; or
- foreign made direct products of sensitive U.S. origin technology.
The U.S. Regulatory Agencies may hold accountable U.S parents of non-U.S. subsidiaries, owned or controlled affiliates, and joint ventures (JV). The rise of business in China combined with the focus of U.S. regulatory agencies on China-related criminal matters requires companies to be particularly vigilant in seeking appropriate licenses.
These export controls cover both goods and technology. In the case of a Chinese JV partner or subsidiary, precautions must be taken to ensure that appropriate licenses are in place for the transfer of any controlled technology. This applies even to a U.S. affiliate that owns a facility or a product that is being manufactured in China that will ultimately be shipped exclusively to the United States.
The following transfers of technology are governed by U.S. export control regulations:
- the physical shipments or transfer of technology;
- cross-border electronic transmissions, including controlled data subject to U.S. jurisdiction from one non-U.S. business unit to another non-U.S. business unit and;
- transfers of technical data subject to U.S. jurisdiction to a third party, including subcontractors. Such transfers may even occur when both parties are located in China.
It is particularly important to keep these regulations in mind for dual-use products and technologies. Generally, dual-use goods and technologies on the Commerce Control List (CCL) of the EAR exported, re-exported or transferred to and within China require a license. However, some items for export to China do not require a license. In the event an EAR controlled item is intended for a military end use, a license is required and may not be approved.
Even if a license has been obtained, provisos and end-user limitations must be observed. End-user limitations include use limited to specific end-users and prohibitions on diversion or transshipment to other end-users. It is U.S. policy to deny licenses for export to China of items that are designed, tailored or adapted for military use and meet the ITAR definition of defense articles. The policy includes prohibition of the export of U.S. defense articles, defense services and technical data. U.S. policy likewise prohibits the import of Chinese defense articles into the United States, if the United Munitions Import List (USML) includes the item. This U.S. policy of presumptive denial of export control licenses to items intended for military use in China (often called the “China Military Rule”) also applies to EAR 600-series (formerly ITAR-controlled) items that may directly and significantly contribute to Chinese military capabilities.
Companies should keep in mind the various ways in which China-related exports of goods and technology may be exported. Technology exports may happen via email, online databases, shared drives and the cloud. While publicly available or public-domain information does not require a license, an export license is usually needed to transfer controlled proprietary technology to China. Furthermore, companies must meticulously monitor the disclosure of technology or software source code to Chinese nationals, including those who may be working within a U.S. company.
Additionally, companies need to keep in mind that the U.S. government maintains lists of entities that are identified as parties to illegal exports, threats to U.S. national security, or who the U.S. government otherwise wants to restrict from trading with U.S. persons or from importing/exporting U.S. origin items. These include the Denied Parties List, List of Debarred Parties and the Specially Designated Nationals list. In the event a listed individual owns (whether directly or indirectly) 50% or more of an entity, then that entity is also treated as a listed entity. To protect themselves from inadvertently trading with a restricted party, companies should conduct due diligence to carefully screen all potential parties to a transaction.
The Bureau of Industry & Security also maintains the Entity List and the Unverified List – both of which contain Chinese entities. Licenses are required for any commodity or technology subject to the EAR that is to be sold or transferred (including in-country) to a party indicated on the Entity List. Exports and re-exports of commodities and technology subject to the EAR to a company on the Unverified List will require a UVL statement in advance from the company to receive the commodity or technology. US exporters must also check both these lists in advance to ensure that none of the parties to an export or re-export are listed. If they are, the exporter is responsible for obtaining any required licenses or statements before the export or re-export may take place.
Companies engaging in mergers and acquisitions, particularly in the aerospace industry, need to thoroughly examine any possible export control problems involving the company to be acquired. For instance, in 2003, The Boeing Company and Hughes Space and Communications were fined a $32 million fine for violations Hughes committed prior to being acquired by Boeing. In the case of a Chinese company acquiring or investing in a U.S. Company, licenses will be required, regardless of whether the Chinese company fully or partially owns the goods, software, or technology.
Companies can take a number of steps to protect themselves from possible violations. For those companies unsure of how to proceed, expert legal counsel can help develop and implement protective actions. Recommended protective actions include:
- Conduct a risk assessment that evaluates and identities any compliance deficiencies and areas where the company may be subject to export control
- Provide comprehensive export control compliance training for all individuals that may be involved in export or import transactions
- Perform due diligence on all parties to a transaction, including customers
- Develop and implement policies to address licensing rules
- Develop and implement a technology control plan that includes physical and electronic procedures to limit access
- Develop and implement policies on travel to/from China
- Hire and/or develop China dedicated export compliance staff
In those instances when a company suspects that a violation has occurred, there are number of steps to take to remedy the situation. The company should first speak to expert counsel about the potential violation. The company is then likely to be advised to file a Voluntary Self Disclosure and to implement many of the protective actions listed above as corrective measures. It is also likely that the company will need to perform a five year comprehensive evaluation of all possible export control violations. Companies should not take potential violations lightly and should act swiftly to remedy any company practices and/or internal behavior that leave the company vulnerable to a China-related export control violation. These violations carry significant penalties and U.S. regulatory agencies have increasingly demonstrated over the past few years the serious commitment they are bringing to prosecuting China-related export control violations.