EXPORT COMPLIANCE &
FOREIGN DISTRIBUTION
ICPA FALL CONFERENCE
DFW AIRPORT, TEXAS
OCTOBER 28, 2013
DANIEL MARK OGDEN Attorney and Counselor at Law
Licensed Customs Broker
International Trade Consultant
Presentation Objectives
• Discuss exporters’ foreign distribution structure and how that
structure affects export compliance risks
• Provide EAR definitions of parties in the foreign distribution
structure
• Identify parties in the foreign distribution structure and the
associated compliance risks
• Provide a grid on how to approach foreign distribution export
compliance
• Provide risk management guidelines for managing foreign
distribution export compliance issues
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Scope of Presentation
Presentation will focus on third parties in the export
distribution process and how to reduce and manage export
compliance risk due to the actions of third parties
What third parties will not be included in discussion?
Parties who assist an exporter in the export process by
providing export services but who do not play a role in
distributing the exported goods
• Freight forwarders/Customs brokers
• Banks
• Carriers
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Scope of Presentation
What third parties will be included in discussion?
Intermediaries who are involved in distributing the exported
goods to the ultimate end user in a foreign country
Intermediaries Involved in Foreign Distribution
• Sales Representative
• Distributor
• Branch
• Subsidiary
Why is this important?
Exported goods may end up being re-exported without actual
knowledge but with constructive knowledge on the part of an
exporter (15 CFR § 772)
Foreign intermediaries may be a front for denied parties
and/or restricted countries
Exporter may not have effective control over the actions of a
foreign intermediary
Export compliance risks resulting from a particular foreign
distribution structure may & should factor into an exporter’s
choice of which foreign distribution structure to employ
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
EAR Definitions of export, exporter, buyer, purchaser &
consignee differ from common definitions
What is an Export Under the EAR (15 CFR § 772.1)?
• “Export means an actual shipment or transmission of
items out of the United States.”
• This in effect means an export occurs when goods exit U.S.
territory from any of the 50 States or D.C.
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is the Exporter Under the EAR (15 CFR § 772.1)?
• Exporter is “The person in the United States who has the
authority of a principal party in interest to determine and
control the sending of items out of the United States.”
• Principal Party in Interest is “Those persons in a
transaction that receive the primary benefit, monetary or
otherwise, of the transaction. Generally, the principals in a
transaction are the seller and the buyer. In most cases, the
forwarding or other agent is not a principal party in
interest.”
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is the Exporter Under the EAR (15 CFR § 772.1)?
• As a general rule, this means the exporter is usually the
last party who has contractual title to the goods prior to
the time the goods exit U.S. territory.
• INCOTERMS do not define who is the exporter of record as
well as who has export compliance obligations
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is the Purchaser Under the EAR (15 CFR § 772.1)?
• Purchaser is “The person abroad who has entered into a
transaction to purchase an item for delivery to the
ultimate consignee. In most cases, the purchaser is not a
bank, forwarding agent, or intermediary. The purchaser and
ultimate consignee may be the same entity.”
• As a general rule, the purchaser is the party who first
obtains contractual title in the country of import
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is the Purchaser Under the EAR (15 CFR § 772.1)?
• Ultimate Consignee is “The principal party in interest
located abroad who receives the exported or reexported
items. The ultimate consignee is not a forwarding agent or
other intermediary, but may be the end-user.”
• End-user is “The person abroad that receives and
ultimately uses the exported or reexported items. The end-
user is not a forwarding agent or intermediary, but may be
the purchaser or ultimate consignee.”
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is the Purchaser Under the EAR (15 CFR § 772.1)?
• Intermediate Consignee is “The person that acts as an
agent for a principal party in interest for the purpose of
effecting delivery of items to the ultimate consignee. The
intermediate consignee may be a bank, forwarding agent,
or other person who acts as an agent for a principal party
in interest.”
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is the Purchaser Under the EAR (15 CFR § 772.1)?
• The purchaser and the ultimate consignee may be but are
not always the same party
• The purchaser and the end-user may be but are not always
the same party
• The ultimate consignee and the end-user may be but are
not always the same party
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is a Subsidiary Under the EAR (15 CFR § 772.1)?
• Subsidiary is not defined by EAR for purposes of exports of
non–encryption items
• Subsidiary is “as applied to encryption items, means
(a) A foreign branch of a U.S. company; or
(b) A foreign subsidiary or entity of a U.S. entity in which:
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is a Subsidiary Under the EAR (15 CFR § 772.1)?
1) The U.S. entity beneficially owns or controls (whether directly or
indirectly) 25 percent or more of the voting securities of the
foreign subsidiary or entity, if no other persons owns or controls
(whether directly or indirectly) an equal or larger percentage; or
2) The foreign entity is operated by the U.S. entity pursuant to the
provisions of an exclusive management contract; or
3) The foreign entity is operated by the U.S. entity pursuant to the
provisions of an exclusive management contract; or
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Preliminary Foreign Distribution Issues
Who is a Subsidiary Under the EAR (15 CFR § 772.1)?
4) A majority of the members of the board of directors of the foreign
subsidiary or entity also are members of the comparable
governing body of the U.S. entity; or
5) The U.S. entity has the authority to appoint the majority of the
members of the board of directors of the foreign subsidiary or
entity; or
6) The U.S. entity has the authority to appoint the chief operating
officer of the foreign subsidiary or entity.
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Nature of Foreign Distribution Intermediaries
Independent Intermediaries
• Sales Representative
Agent of exporter
No transfer of contractual title to goods to sales representative
Sales representative is an intermediate consignee
Purchaser and ultimate consignee are generally the same
party, an end–user
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Nature of Foreign Distribution Intermediaries
Independent Intermediaries
• Distributor
Independent contractor as relates to exporter
Transfer of contractual title to goods to distributor
Distributor is purchaser and perhaps ultimate consignee
depending upon interpretation of EAR definitions of purchaser
and ultimate consignee
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Nature of Foreign Distribution Intermediaries
Controlled Intermediaries
• Branch
Direct foreign presence of exporter
No transfer of contractual title to goods
Branch will transfer contractual title to goods to local
distributors or end–users
Exporter is perhaps also ultimate consignee but not the end–
user
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Nature of Foreign Distribution Intermediaries
Controlled Intermediaries
Subsidiary
Foreign legal entity owned by exporter
Various degrees of ownership
Transfer of contractual title to goods
Subsidiary is purchaser and possibly the ultimate consignee
and end–user
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Foreign Distribution Compliance Methodology
Export Compliance Control
• What is the degree of control does exporter have over the
actions of the foreign distribution intermediary?
• Degree of control can be contractually negotiated but is to
a certain extent limited by nature of foreign intermediary
• Degree of control will also relates to control over who will
be the ultimate consignees and end-users
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Foreign Distribution Compliance Methodology
Export Compliance Difficulty
• What is the degree of difficulty the exporter has in
ensuring that transactions with foreign distribution
intermediary are in compliance?
• Degree of difficulty will largely be determined by nature of
the business of the foreign distribution intermediary
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Sales Representative
• Low Compliance Control
Agent only, may be agent also of other parties
Flow of information as to ultimate consignees and end-users
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Sales Representative
• Low Compliance Difficulty
Usually will know who the identity of potential ultimate
consignee or end-user
Easy to contractually require disclosure of identity of potential
ultimate consignee or end-users
Intermediate consignee
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Distributor
• Low Compliance Control
Is an independent contractor
May not provide identity of potential ultimate consignee or
end-user information
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Distributor
• High Compliance Difficulty
Because of nature of business, often do not know identity of
ultimate consignees or end-users
May have difficulty in contractually requiring disclosure of
potential ultimate consignee or end-users
Often unfamiliar with EAR
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Branch
• High Compliance Control
Has complete control over actions
Has good information flow as to identity of potential ultimate
consignees or end-users
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Branch
• Low Compliance Difficulty
Know identity of potential ultimate consignees or end-users in
most instances
Generally will sell to ultimate consignees or end-users
Key personnel will generally be familiar with EAR
Since not a local entity, may be less affected by local country
export control laws
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Subsidiary
• High Compliance Control
Depends upon degree of ownership
If majority or 100% owned, can control actions
Generally will have good information flow as to identity of
potential ultimate consignees or end-users
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Export Compliance Grid
Subsidiary
• High Compliance Control
If not majority or 100% owned, may not have good information
flow as to identity of potential ultimate consignees or end-
users
If not majority or 100% owned, may have conflicts with other
shareholders as to compliance requirements
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
INTERMEDIARIES
Export Compliance Grid
Subsidiary
• High Compliance Difficulty
Key personnel will not necessarily be familiar with EAR
Even if majority or 100% owned, may run afoul of local
country export control laws (Dresser France)
May reexport goods
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
INTERMEDIARIES
Foreign Distribution Export
Compliance Risk Management Checklist
Properly classify nature of foreign distribution
intermediary
Determine degree of compliance control and difficulty
regarding foreign distribution intermediary
Identify compliance risks associated with foreign
distribution intermediary
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Foreign Distribution Export
Compliance Risk Management Checklist
Identify the potential ultimate consignees or end-
users customers of the foreign distribution
intermediary
Determine if the foreign distribution intermediary
will re-export the goods
Be careful regarding requests from distributors
regarding your business relationship with Israel
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Foreign Distribution Export
Compliance Risk Management Checklist
Require in all distributor agreements that the
distributor has the obligation to identify potential
ultimate consignees and end-users and that the
exporter has the right to veto any sales of
distributors to ultimate consignees and end-users
based upon compliance concerns
May have to negotiate this provision as distributors
generally refrain from disclosing this information
due to competitive concerns: non-compete is one
solution
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Foreign Distribution Export
Compliance Risk Management Checklist
Distributor shall disclose to Exporter the identify and nationality
of any parties to which Distributor is marketing or has entered
into a contract with to purchase from Distributor any products
sold by Exporter to Distributor. Distributor shall also disclose to
Exporter the identify and nationality of any parties that have
made inquiries to purchase from Distributor any products sold by
Exporter to Distributor. Exporter shall have the right to veto any
sales of any products sold by Exporter to Distributor based upon
Exporter’s and Distributor’s legal obligations to comply with
United States export control laws and regulations, including
specifically the Export Administration Regulations.
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Foreign Distribution Export
Compliance Risk Management Checklist
Require that key personnel of foreign distribution
intermediaries receive training on the EAR.
Distributor/Sales Representative shall undergo training in the
application of United States export control laws and regulation,
including specifically the Export Administration Regulations. Such
training shall be required of all key personnel of Distributor/Sales
Representative that are responsible for the marketing and/or
distribution of any products sold by Exporter to Distributor or to
sold by Exporter to foreign purchasers through the efforts of Sales
Representative. Exporter shall have the right to specify the nature,
sponsorship, and frequency of such training.
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Foreign Distribution Export
Compliance Risk Management Checklist
Create export compliance audit programs with foreign
distribution intermediaries and require that exporter has the
right to create such an export compliance program.
Exporter shall have the right to create and administer an export
compliance audit program that will audit compliance efforts of
Distributor/Sales Representative relative to all the United States
export control laws and regulations, including specifically the
Export Administration Regulations Pursuant to such right,
Distributor/Sales Representative shall allow Exporter upon
reasonable notice to examine its accounting, business, telephonic,
email, and data records, and all marketing materials in association
with such export compliance audit.
EXPORT COMPLIANCE & FOREIGN DISTRIBUTION
Contact Information
DANIEL MARK OGDEN, ESQ. Attorney and Counselor at Law
Licensed Customs Broker International Trade Consultant
1000 E. Belt Line Rd., Suite 206
Carrollton, Texas 75006 972.417.1916 (voice) 972.674.8300 (fax)
www.internationaltradeattorney.com [email protected]
Twitter: tradeattorney Facebook: internationaltradeattorney
© 2013 Daniel Mark Ogden. All Rights Reserved.
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