Global distributions: the effect of export controls.

AuthorKluber, Berne C.
PositionTrade regulation and electronic commerce
  1. INTRODUCTION

    1. Issue Spotting

      Export controls are not just for "exporters" anymore. The Census Bureau reports that in 1998, 205,188 companies exported $554 billion in merchandise.(1) This is up significantly from the Bureau's 1992 data, which showed that 112,854 companies exported $349 billion in merchandise in that year.(2) Other Census Bureau data show that the export of "advanced technology products" is on the rise, growing from $186 billion in 1998 to $200 billion in 1999 and to nearly $146 billion from January to August 2000.(3) These data are derived from traditional export documentation.(4)

      Notably, however, traditional export documents are not filed when someone downloads a program from a web site maintained in the United States. The export data above do not reflect, for example, a customer service representative in Cleveland sending a PDF version of a technical services manual to a customer in Singapore via e-mail, a sales department giving software demonstrations to a delegation from China, or a lead programmer spending ten days in India teaching the latest trajectory analysis programming techniques to a software development subcontractor. Nonetheless, many federal agencies consider all of these acts to be "exports," despite the fact that in such cases no tangible property ever leaves the United States.(5)

      This paper is concerned with spotting export and trade regulation issues in the global e-marketplace. In particular, it addresses the following questions:

      * What are the penalties for violation of trade laws?(6)

      * What is an "export?"(7)

      * Who licenses exports?(8)

      * How does one comply with U.S. export and trade regulations?(9)

    2. Penalties

      1. Administrative

        U.S. government agencies have a number of administrative penalties available to punish the unwary. For example, under the Export Administration Regulations ("EAR"), civil fines of $10,000 per violation can be levied for most types of infractions.(10) If the violation involves National Security Controls, the penalty can go as high as $100,000.(11)

        Another penalty is the denial of export privileges.(12) This penalty makes it illegal for a denied party to engage in any export transactions and for a third party to enter into an export transaction with a denied party.(13) The EAR further provides a special sanction for attorneys, accountants, consultants, freight forwarders, and others acting in any representative capacity for an exporter.(14) Such individuals can be "excluded by order" from participating in any license application or other activity before the Bureau of Export Administration(15) ("BXA").

        The Export Administration Act of 1979 ("EAA 1979") granted the Secretary of Commerce broad powers to implement regulations for enforcement of the Act and to levy sanctions for violations of the Act.(16) One Court of Appeals has interpreted this to mean that the Secretary is authorized to impose civil sanctions on a strict liability basis (no knowledge or intent is required) once a person has committed the proscribed act.(17)

        Penalties under the International Traffic in Arms Regulations ("ITAR") are significantly greater than those of the EAR.(18) A civil penalty of up to $500,000 is authorized.(19) Under the ITAR, the civil penalties for violations of U.S. sanctions programs vary depending on the program. For example, civil penalties under the Cuban sanction program can be up to $55,000 per violation.(20) The maximum under the Sudanese, Iranian, and Libyan sanctions is $11,000,(21) while the maximum civil penalty for violating the Iraqi sanctions is $275,000 per violation.(22)

      2. Criminal(23)

        Criminal penalties under the EAR for general violations can result in fines of up to $50,000 or five times the value of the export, whichever is greater, and imprisonment for up to five years.(24) Willful violations by an organization can result in fines up to $1,000,000 per violation or five times the value of the export, whichever is greater, and for individuals can result in fines of up to $250,000 and up to ten years imprisonment.(25) ITAR violations can result in fines of up to $1,000,000 and up to ten years imprisonment.(26)

        Examples of criminal penalties for "willful violations" under the sanction programs are as follows:

        Company Individual Program Fines Fines Cuban Assets $1,000,000 $100,000 Iranian Assets 50,000 Iranian Transactions 50,000 Libyan 50,000 Iraqi $1,000,000 $1,000,000 Prison Program Time 31 C.F.R. Cuban Assets 10 years [sections] 515.701(a)(1) Iranian Assets 10 years [sections] 535.701(a)(1) Iranian Transactions 10 years [sections] 560.701(a)(1) Libyan 10 years [sections] 550.701(a)(1) Iraqi 12 years [sections] 575.701(a)(1) 3. Statutory Scheme and Proposed Legislation

        The legislation that authorized the Department of Commerce to enforce export controls expired on August 20, 1994,(27) "and replacement legislation has been languishing for six years."(28) EAA 1979, as reflected in the EAR, provided for fines of five times the value of the exports, or $50,000, and up to five years in prison for "knowing" violations.(29) "Willful" criminal violations could result in a fine equal to the greater of five times the value of the exports or $1,000,000 for companies, and up to a $250,000 fine and ten years imprisonment for individuals.(30)

        After the EAA 1979 expired, Congress continued to authorize penalties for export violations under provisions of the International Economic Emergency Powers Act(31) ("IEEPA"). The penalties under the statute were considerably less severe, with civil violations capped at $10,000, willful violations capped at $50,000, and a possible ten year imprisonment for individuals.(32) However, under the IEEPA(33) and Executive Order 12,924,(34) the EAR remained in full effect.(35)

        A thorough revision of the EAA 1979, the Export Administration Act of 1999 ("EAA 1999"), is currently before the Senate, and would increase civil penalties for violations of commercial export regulations from $10,000 to $1,000,000 per violation.(36) Criminal penalties for individuals would increase to a fine of ten times the value of the exports or $1,000,000, whichever is greater, and a possible prison term of up to ten years.(37) Companies could face a fine of ten times the value of the exports or $10,000,000, whichever is greater.(38)

        The "conventional wisdom" is that EAA 1999 will not pass.(39) An alternative bill, the Security Assistance Act of 1999 ("SAA 1999"), made its way through Congress and became law on October 6, 2000.(40) SAA 1999 modifies the International Emergency Economic Powers Act to increase the penalties for export violations. Civil penalties increase to $50,000 per violation.(41) Criminal penalties also increase for both companies and individuals.(42)

        As an interim measure, on October 30, 2000, Congress passed the Export Administration Modification and Clarification Act of 2000 (House Bill 5239), which extends the terms of the EAA 1979 through August 20, 2001, and reinstates the more severe EAA 1979 penalties.(43) Although the earlier version of the House Bill had called for increased penalties, leaders in the Senate pushed for simply extending the EAA 1979 and leaving full-scale reform of the Act for a later day.(44) The President signed the bill on November 13, 2000.(45)

  2. WHAT IS AN EXPORT?

    The U.S. government defines exports broadly in most instances. For example, under the EAR exports include:

    * An actual shipment or transmission of items out of the United States;(46)

    * Release of software or technology in a foreign country;(47)

    * Release of technology or source code to a foreign national wherever located.(48) This includes visual inspection by a foreign national of U.S.-origin equipment or facilities.(49) It also includes oral exchanges of information;(50)

    * Items produced abroad using U.S.-origin technology;(51) and

    * Re-export of previously exported items.(52)

    By using the word "transmission" the government clearly intends that the use of electronic mail ("e-mail") or the Internet to send items be subject to the EAR. As such, controlled software or data could be included.(53) As specified in the EAR's discussion of the export of encryption source and object code, transmission includes:

    downloading, or causing the downloading of, such software to locations (including electronic bulletin boards, Internet file transfer protocol, and World Wide Web sites) outside the U.S., or making such software available for transfer outside the United States, over wire, cable, radio, electromagnetic, photo optical, photoelectric or other comparable communications facilities accessible to persons outside the United States, including transfers from electronic bulletin boards, Internet file transfer protocol and World Wide Web sites, unless the person making the software available takes precautions adequate to prevent unauthorized transfer of such code.(54) The EAR even specify that U.S. exporters should take certain precautions with regard to Internet transfers of encryption products.(55) The precautions include verifying that the address of each party outside the U.S. who is initiating such transfers does not have a domain name or URL of a foreign government end-user, such as ".gov," ".gouv," ".mil," etc.(56) Presumably, these same requirements would apply to the electronic transfer of other types of software and technical data that are subject to the EAR.

  3. WHAT ARE "ITEMS SUBJECT TO THE EAR"?

    Subject to the EAR include items of U.S. and foreign origin items exceeding de minimis U.S. content.(57) Some examples of product categories that may be subject to the EAR are (1) tangible things such as commodities, products, etc.; (2) software; (3) technology; (4) technical data; and (5) technical know-how.(58) With some exceptions, "[a]ll U.S. origin items wherever located" are subject to the EAR.(59) However, not all items subject to the EAR require a license for export.(60) The EAR are supposedly designed to require licenses...

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