Export and Import Compliance ‘Red Flags’

PVF Roundtable May 19, 2009

Presented by:  

Roland Shrull, Esq. Middleton & Shrull

(781) 272-7966 www. middleton-shrull.com

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Agenda- ’10 reasons why compliance is Unneccesary’!! - Why is compliance important to me?- What are my liabilities & responsibilities? - What is an ‘export’?- Are any of my products covered?- Have any similar companies had export

problems? - Do you import into the U.S.?- Do you have any ‘assists’?- What is antidumping & countervailing duties

and can it effect me?- What do I need to build a strong compliance

program?

Copyright (c) Middleton & Shrull

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10 Reasons Trade Compliance Programs are UNNECESSARY!

1)Trade compliance is a cost center with no financial benefit!

2) Classification is easy!3) Shipments to and from Canada &

Mexico are not really imports/exports!4) Any product purchased in the U.S. is

U.S. origin!5) Any U.S. origin product is NAFTA

eligible!

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10 Reasons Trade Compliance Programs are UNNECESSARY!

6) We have been doing business for years without any problems!

7) Our customs brokers and freight forwarders are responsible for compliance!

8) We need to make exceptions for big customers or we’ll lose business!

9) C-TPAT is not mandatory so I’m not spending money and resources on it!

10) Compliance slows deliveries!

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Why is compliance important to me? (1)U.S. companies are increasingly becoming

involved in international trade to survive and prosper.

- From which countries do I buy finished products, parts or material

- Are they related companies? - To which countries do I sell? - Do I have foreign resellers, distributors,

subsidiaries?

- Am I foreign owned?

Copyright (c) Middleton & Shrull

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Why is compliance important to me? (2) U.S. companies are increasingly employing

foreign nationals both abroad and in the U.S.- Do I hire foreign nationals? - What positions do they have in the

company?- Do I outsource, use contract manufacturers,

JVs? - Are they abroad?- Do they use my proprietary data -

manufacturing, R&D?- Do I control their activities? - How? Copyright (c) Middleton & Shrull

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Why is compliance important to me? (3) U.S. companies are finding more

markets as well as suppliers for their goods and services abroad.

- How important are foreign vendors, suppliers, distributors to my supply chain?

- To my bottom line?- If is loss all imports or exports overnight

how would it affect me?- Could I replace them easily? Copyright (c) Middleton & Shrull

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Do You Know?1) Exports are considered a privilege NOT a right.2) There are various statutes that apply to exports;

Arms Export Control Act, U.S. Munitions List, Export Administration Act, and sanctions enforced by OFAC and other agencies.

3) ‘Export’s may occur domestically or abroad.4) ‘Exports’ may involve employees and contractors.5) Law prohibits doing business with certain entities.6) Law prohibits doing business with certain

countries.7) Liability may result from the ‘re-export’ of goods

and technology.8) Exporters are required to watch for ‘red flags’.9) A license may be required to export or re-export

goods or technology.

Copyright (c) Middleton & Shrull

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How would a compliance problem adversely impact me?

Adverse publicity

Significant civil & criminal penalties

Disruption of business

Legal costs ???

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What are My Responsibilities?Legal standard: Export: Due Diligence Exporter Responsible for Compliance

Import: Reasonable Care Burden of Proof on ImporterUnder agency law the principal is

responsible for the acts of his agents (e.g. broker, freight forwarder), duty to supervise

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Why is Export Compliance Important to Me?Penalties under the International Emergency

Economic Powers Act (IEEPA) Enhancement Act.

1) Civil Penalty: up to (1) $250,000; or (2) an amount that is twice the amount of the transaction.

2) Criminal Penalty: (willful and knowing) (1) $50,000 to $1 mil. (incl. aiding and abetting), (2) 20 years per violation is unchanged.

3) Department of Justice increasing focus on criminal prosecution.

4) Penalties apply to both BIS & OFAC violations and are enforced by CBP

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Export Enforcement Act of 2007

Bill before Congress to renew EEA of 1979 for five more years after date of enactmentStronger than International Emergency Economic Powers Act (IEEPA)Would raise violations to $500,000.00 per civil violationCriminal penalties to 10 times value of export or up to $5 million, whichever is greaterExpand list of criminal violations resulting

in denial of export privileges

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Agencies Involved in Export Compliance

Department of Commerce –BIS (Bureau of Industry and Security)Department of State - DDTC (Directorate of Defense Trade Control formerly known as the Office of Defense Trade Controls)Department of Homeland Security (Customs)Department of Defense (Defense Technology Security Administration) – DTSA National Security Administration - NSADepartment of Treasury – OFAC (Office of Foreign Assets Control)Department of Treasury & IRS – Boycott ControlNuclear Regulatory Agency

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What is an export shipment?

What type of items are covered? Commodities of U.S. origin and foreign products in the U.S.TechnologySoftware

Type of transactions are covered?Direct Export Re-export of EAR covered itemsForeign manufactured product with US components/technology (25% & 10%)Deemed export

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What is a Direct Export?

Goods shipped directly from the U.S. to the ultimate destinationMode of transportation does not matterExport also includes:

MailEmailElectronic submission including website postingServices: Installation of equipment, servicing, seminars, lectures, biddingOral communicationEmployment

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What is a Re-Export?Shipment or transshipment of goods subject to EAR from one foreign country to anotherRelease of technology or software subject to the EAR to a foreign national outside the United StatesPrinciple of Extra-Territoriality (U.S. law follows U.S. products, technology, & software wherever they go)Need to advise and possibly control foreign agents, distributors, and partners

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Are Foreign Made Products Covered?

Foreign made products incorporating U.S. controlled components or technology may be subject to U.S. lawMust review whether the foreign manufactured good is covered by CCL and review the destination, end-use, and end-userControl applies to foreign made product having total U.S. content value of;

Over 25% U.S. content except onlyOver 10% U.S. content for goods destined to terrorist supporting countries

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What is a ‘Deemed Export’?

Deemed export is done while in the U.S.Such release is “deemed” to be an export to the home country or countries of the foreign nationalDeemed export rule does not apply to persons lawfully admitted for permanent residence in the United StatesMust be taken into consideration when hiring foreign nationals or providing technology to visiting foreign nationals at your facility

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Are Your Products Covered? 2A226 Valves having all of the following

characteristics:a. A "nominal size" of 5 mm or greater; b. Having a bellows seal; and c. Wholly made of or lined with aluminum, aluminum alloy, nickel, or nickel

alloy containing more than 60% nickel by weight.

2A292 Piping, fittings and valves made of, or lined with, stainless steel, copper-nickel alloy or other alloy steel containing 10% or more nickel and/or chromiuma:

a) Pressure tube, pipe, and fittings of 200 mm (8 in.) or more inside diameter, and suitable for operation at pressures of 3.4 MPa (500 psi) or greater;

b. Pipe valves having all of the following characteristics:b.1. A pipe size connection of 200 mm (8 in.) or more inside diameter; and b.2. Rated at 10.3 MPa (1,500 psi) or more. .

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Are Your Products Covered?2B350g Chemical manufacturing facilities and equipment,

except valves controlled by 2A226 or 2A292, as follows:

Valves with nominal sizes greater than 1.0 cm (d in.), and casings (valve bodies) or preformed casing liners designed for such valves, in which all surfaces that come in direct contact with the chemical(s) being processed or contained are made from any of the following materials:

g.1. Alloys with more than 25% nickel and 20% chromium by weight;

g.2. Nickel or alloys with more than 40% nickel by weight; g.3. Fluoropolymers; g.4. Glass or glass lined (including vitrified or enameled

coatings); g.5. Tantalum or tantalum alloys; g.6. Titanium or titanium alloys; g.7. Zirconium or zirconium alloys; or g.8. Niobium (columbium) or niobium alloys.

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Are Your Products Covered?

2B999 Specific processing equipment, n.e.s., as follows:

f. Monel equipment, including valves, piping, tanks and vessels;

g. 304 and 316 stainless steel valves, piping, tanks and vessels;

k. Vacuum valves, piping, flanges, gaskets and related equipment specially designed for use in high-vacuum service, n.e.s.;

n. Austenitic stainless steel plate, valves, piping, tanks and vessels.

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What is the Impact of ‘Reasons for Control’?

ECCN Reason Control2A226 NP (Col 1), CB (Col 2) & AT

(Col 1)2A292 NP (Col 2), CB (Col 2) & AT

(Col 1)2B350 CB (Col 2) & AT (Col 1)2B999 AT

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What is the Impact of ‘Reasons for Control’?

License RequirementsNP: Nuclear Proliferation NP (Col 1) – most countries NP (Col 2) – a few countries (incl. Israel)

CB: Chemical Biological Weapons CB (Col 2) – many countries [Most Common problem!]

AT: Antiterrorism Embargoed countries: Cuba, Iran, N. Korea,

Sudan & Syria

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Have There Been Any Enforcement Case on These Goods?

BIS Published Case:1) Plastic-O-Mastic Valve, Inc. , NJ

(2007): Violation: a) 13 exports of

thermoplastic valves and controls w/o license

Classification: 3B350 Filed: Voluntary Self-Disclosure Penalty: $55,000

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Have There Been Any Enforcement Case on These Goods?

2) Engineering Valve Group, ITT Corp., NJ (2007):

Violations: a) Exporting lined valves w/o license to Israel, China, Taiwan & Saudi Arabia ($15K)

b) Misrepresentation claiming NLR on SED

Classification: 2B350 Filed: Voluntary Self-Disclosure Penalty: $26,400

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Have There Been Any Enforcement Case on These Goods?

3) Proclad International Pipelines Ltd. UK (2007)

Violation: a) Causing, aiding or abetting export of nickel alloy pipes to Iran through UAE, b) conspiracy, c) providing false and misleading documentation to disguise destination

Classification: EAR99 Penalty: $100K, Denied Persons list (7 years)

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Do You Import any Products into the U.S.?

There are a myriad of Customs regulations that can pose significant problems for importers:

- classification, - valuation, - marking,- special provision (e.g. ‘Returned

American Goods’, - international agreements, e.g. NAFTA

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Do You Provide any ‘Assists’?

The issue of ‘assists’:- identifying, - quantifying,- tracking, - valuating and - declaring them is one of the most

problematic issues for importers.

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What is an ‘Assists’?Materials , components , parts & similar items in the goodsTools , dies & molds used in productionMerchandise consumed in productionEngineering, development ,art and design work , plans or sketches undertaken “ Outside the USA, E.G. ‘NRE’s

Example materials could consist of instruction manuals that you supplied from the USA

Supplied directly or indirectlyFree of charge or at a reduced priceSupplied by the buyerFor production or sale of goods for export to the USA

Example patterns that moved from a US foundry to a foreign foundry or tools that your USA manufacturing facility are supplying

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Would this be Considered an Assist?

1) I provide special packaging and manual to the mfg ?

2) I shift my production abroad and shipped my manufacturing equipment to our CM?

3) I hire a third party to provide material or engineering support to the foreign mfg and they bill me directly?

4) I pay NREs separately?5) We are related companies and I’m just

moving inventory parts and equipment to our foreign mfg division?

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Are My Good Subject to Antidumping Orders? What is Antidumping (A/D)?Dumping is when a manufacturer in one

country exports a product to another country at a price which is either below the price it charges in its home market or is below its cost of production.

What are Countervailing Duties (CVDs)?

CVDs are duties imposed when a foreign country subsidizes its exports, hurting domestic producers in the importing country.

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Do A/D & CVD Issues Effect My Industry?

1) A/D - Malleable iron pipe fittings (China) 111.36%

2) CVD – Welded carbon steel line pipes (China) 35.63% - 40.05%

3) A/D - Circular welded carbon quality steel line pipes (China) 101.10%

4) A/D – Circular welded carbon steel pipes & tubes (Taiwan) 9.7%

5) A/D – Frontseating service valves (China) 12.44% - 55.62%

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What Do I Need to Build a Compliance Program?

1- Management support2- A designated coordinator tasked with

responsibility for compliance3- Multi-departmental compliance committee 4- Open and frequent communication &

coordination5- Employee training6- Written procedures & policies7- Robust review & auditingRemember: Ignorance is NO defense?

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Q&A

Thank you so much for your attendance and attention!

GOOD LUCK!Sincerely