In today's environment, your product markets may span the globe. Do you know where your products end up? Why does it matter?
Well, as GWC Valve International, a California industrial valve manufacturer recently discovered, the U.S. government cares and takes U.S. sanctions and export laws very seriously. GWC arranged for the manufacture of valves for customers in Iran and then provided financial and technical services in support of the sales. Even worse, the company falsely represented in shipping and other documents that the valves were to be used in the United Arab Emirates. The government did not take kindly to the company's activities and brought criminal charges against it and GWC's chief executive officer, David Meador. Meador and the company eventually pled guilty. In addition to almost $1 million in corporate and individual fines and forfeitures, Meador was sentenced to 13 months in prison.
The GWC case in some ways may offer false comfort to most manufacturers. After all, the circumstances there involved intentional misconduct at the highest levels. Yet far more common are instances of inadvertence, neglect or lower-level malfeasance ("to make the sale"), which often trigger a range of civil or administrative penalties. Make no mistake: in addition to the possibility of criminal penalty for willful violations, U.S. sanctions regulations permit the imposition of fines of up to $250,000 per violation. Thus, any company with global sales must take U.S. export and sanctions laws seriously.
What Are The Rules?
The United States maintains a comprehensive and complex system of export controls alongside separate, more targeted sanctions. Export controls apply to all products sent to all destinations, but only a small minority of items or end-uses require licenses or approvals. Sanctioned destinations or end-users are a different matter. Five countries -- Cuba, Iran, North Korea, Sudan and Syria - are so heavily controlled that sending almost any product there without permission is prohibited. Libya and Burma (Myanmar) are also under significant restrictions. In addition, the government maintains lists of persons and entities -- often, collectively referred to as Specially Designated Nationals (or "SDNs") -- with whom any transactions are prohibited.
The particulars of the restrictions on dealings with each country and with the SDNs vary, but, broadly speaking, all exports and related financial or other services are prohibited. Moreover, routing a transaction through a permitted destination or selling to a permitted recipient with knowledge or reason to know that that the recipient will be re-transferring the item to a sanctioned destination or SDN also is precluded.
What To Do?
So how should a global manufacturer address this complex set of requirements to avoid finding itself with violations and the prospect of substantial fines or worse? Simply put, adequate compliance requires systemic controls. A solid compliance program requires several key elements:
- First, understand what it is you ship and how heavily it is controlled under export control rules. This "classification" process can be simple or difficult, depending on the variety and complexity of your product line. Companies can submit information to the government, asking it how to classify their products, but -- with very few exceptions -- that is not required.
- Next, implement a process that includes screening of destinations and parties to export transactions. Ideally, automate that process to recognize problem destinations and parties, so that higher-level review of those transactions can take place before shipment. Several commercial services offer software that allows for screening against the SDN and similar lists. It is possible to do this manually, but for large-volume transactions it can be time-consuming. Moreover, relying on individuals instead of systems increases the risk of individual mistake or misconduct.
- Cultivate a culture of compliance. Make compliance with export and sanctions rules a corporate priority. Communicate your policy to employees and ensure that it has teeth. Appoint a compliance officer with authority to investigate and to recommend discipline for violations.
How Much Do You Have to Know?
One vexing question for compliance officers is what does "know or have reason to know" really mean? How much do you have to inquire into the circumstances or potential parties to an export transaction? The answer is "it depends." The government does not expect U.S. companies to become private investigators. Whatever level of inquiry is reasonable and customary in your industry generally will suffice for an adequate compliance program.
However, you must take note of potential "red flags" -- warning signs that a violation may be in the works and that further investigation is advisable. What these red flags will be will depend on your company and industry, but they generally should include circumstances that are unusual or suspicious -- an end-user that seems an unlikely purchaser of your product, that wants to make payment through circuitous or unusual channels or that declines standard on-site installation, maintenance or warranty protections, for example. In addition, shipments to countries that are known points of diversion to sanctioned countries -- such as the United Arab Emirates and Iran - warrant closer scrutiny before approval. A failure to investigate these types of concerns may be regarded as deliberate ignorance and trigger a harsher response from law enforcement should a violation occur.
What To Do If You Suspect A Violation?
Export and sanctions violations create "strict liability." Even if you have in place an excellent compliance program, investigate red flags and take all appropriate measures, violations do occur, and you are responsible for them. Nonetheless, the government enjoys wide discretion in determining what, if any, penalty to impose and invariably considers the adequacy of a company's compliance efforts.
If you suspect a violation, contact counsel immediately. The government encourages (but does not require) voluntary self-disclosures of violations and holds out the prospect of potential mitigation of penalties as an incentive. Sometimes, a voluntary disclosure makes sense; at others, it does not. Working through the factors such a decision involves requires experienced counsel familiar with the relevant agency.
Bottom line: the GWC's of the world are relatively unusual. By far the greater danger lies in the inadvertent, negligent error or malfeasance by a sales representative or lower-level manager. Those types of problems can lead to significant fines. The best method of prevention is a systemic, robust compliance program.
Behnam Dayanim is a partner and co-chair of the litigation and regulatory department of the law firm Axinn Veltrop & Harkrider LLP.