Feds Eye Trade Compliance Violators

Those valves you shipped overseas may seem harmless to you, but to the federal government it may be considered a security threat and an expensive mistake.

RF Micro Devices Inc. felt the sting of the federal government's export control laws in August when the semiconductor components manufacturer agreed to pay $190,000 for allegedly shipping modems to China without a license.

The Greensboro, N.C., company provides technologies for wireless communications devices used in various industries, including aerospace and defense. The Commerce Department's Bureau of Industry and Security (BIS) cited the manufacturer for knowingly exporting the unlicensed products on 14 occasions.

The company is one of several manufacturers over the years that's grappled with a tangled web of federal trade compliance rules and regulations. Even the Commerce Department recognizes that current export control laws, which date back to the Cold War era, are cumbersome and confusing.

On Oct. 1, Commerce Secretary Gary Locke proposed reforms to modernize the nation's export controls system (See "Export Laws Under Review,"). U.S. manufacturers are losing business to foreign competitors because of the outdated system, says Locke. While the Commerce Department works to revise the laws, U.S. manufacturers face heightened enforcement of the rules and tougher penalties for violations.

In 2007, the federal government raised civil fines for unauthorized exports under the Export Administration Regulations to two times the value of a shipment up to $250,000. That's significantly higher than the $50,000-per-violation penalties that were in effect a year earlier. Violators also can face criminal charges that carry even greater fines and possibly imprisonment.

Intricacies of Export Compliance

Large and small manufacturers alike appear to be struggling with trade compliance as they seek to expand their global presence. Some violations are less obvious than others. Most manufacturers are aware that they can't ship to embargoed countries, such as Iran, North Korea and Cuba, under regulations of the Treasury Department's Office of Foreign Assets Control. They also know that shipping weapons overseas requires authorization from the State Department.

But some more innocuous items, such as aircraft engine parts or even paint, can fall under "dual-use" regulations, or rules that prohibit exporting products that could be used for commercial and military applications.

Late last year, Lake Bluff, Ill.-based Buehler Ltd. paid a $200,000 fine for shipping a lubricant typically used for cutting tools to various destinations, including China, Brazil and Israel, and on one occasion re-exported the product through a German subsidiary to Iran without federal authorization, according to BIS. The product, called Coolmet, contained a substance called Triethanolamine that the federal government has identified as a potential chemical weapons ingredient.

Buehler's re-exporting violation is an issue that's becoming more common for manufacturers as nations worldwide crack down on sanctioned countries such as Iran, says David Ivey, a partner in Baker Hostetler LLP's Houston office.

"Iran is a major economy and a major oil producer, so they're desperate for everything, and the issue that a lot of manufacturers deal with is transshipment," he says. "They get an order for something, typically from the UAE, or it can be the Netherlands or even Canada, and the end use is not in the UAE, or the Netherlands or Canada; it's in fact headed straight for Iran."

Know Your Customer

The U.S. government expects a certain amount of due diligence from manufacturers to ensure their customers aren't exporting items for prohibited end uses or to embargoed nations. The regulations don't stop once the item leaves the United States, says Lindsay Meyer, a partner with Venable LLP's Trade and Customs practice. For instance, if a company ships an office chair to the Netherlands and it ends up in Iran, the government will initially check with the manufacturer whose logo appears on the chair, Meyer says.

"What the government would look to see is, how have you put your customer on notice about certain laws and regulations?" she explains. "What steps have you taken to make sure you know your end customer? For instance, if it's going to a trading company in the UAE free-trade zone, you can be pretty sure your office chair is not going to end there."

IT server appliance manufacturer MBX Systems has safeguards in place to prevent its products from entering sanctioned countries and ensuring its propriety technology doesn't end up in the wrong hands. The Wauconda, Ill., company designed an export management software system to flag shipments intended for restricted destinations. In January the company encountered a situation in which an Australian customer wanted to ship an MBX product to Syria, recalls Dan Carrasco, manager of global distribution and export for MBX.

When informed of the customer's intentions, Carrasco says he contacted BIS, which asked MBX to have its customer write a letter stating that it would not ship to Syria or to any of the other five embargoed countries. MBX then canceled the order and has continued to do business with the customer elsewhere, Carrasco says.

In addition to viewing e-mails that the export management system generates for each order, Carrasco says he checks the BIS Web site for information on any restrictions on international orders and investigates the customer to ensure they're legitimate.

The company also has to monitor the type of technology it exports, says Jill Bellak, chief operating officer. "We have a proprietary software that was written here in house by our team of developers, so it can be something as simple as making sure we have the correct power cord, all the way to what certifications are required to ship into that country, which can vary based on the type of software on our customer's product," Bellak says.

Staying Out of Trouble

MBX attributes much of its success catching potential problems to relationships it's forged with customers. The company provides logistics services for customers who in some instances may not be aware of certain U.S. trade laws. "That's why they come to us. We educate them on how to ship internationally," Bellak says. MBX provides extensive training to its sales representatives on export compliance so they can pass their knowledge on to customers. The company also plans to create export compliance webinars for some of its prospective customers, Bellak says.

Larger multinational companies may want to hire full-time compliance personnel dedicated to reviewing export shipments, says Ivey. If those manufacturers also have subsidiaries around the world, they don't necessarily need a full-time compliance officer, but they should at least cross-train an employee -- possibly a quality engineer -- who monitors shipments, Ivey says.

Pay attention to export violations across your entire industry because oftentimes government officials will conduct industrywide sweeps, Meyer says. "If a manufacturer's competitor is involved in a case like that, it's more than likely the government will look at them," she says.

On the import side, U.S. Customs officials may audit companies that are seeking lower duties by claiming goods are coming from a particular country of origin. Customs may ask a manufacturer for onsite inspection records or production documents from its supplier to confirm where the components or raw materials were produced, Meyer says.

Manufacturers could find some relief from these costly compliance measures if the federal government revises its decades-old export controls laws. But enforcement of whatever laws are on the books doesn't appear to be waning as manufacturers fight for global business.

"As the economy tightens up, there tends to be more trade cases brought because people fight over the scraps," Meyer says. "And the enforcement of the regulations that perhaps had been on the books or recently revised seem to be at a heightened level."

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