The potential for government contractors to grow and become successful outside of the U.S. is tremendous and should not be overlooked by small businesses. The world outside our borders is a critical marketplace that should be considered as part of the growth strategy for domestic companies. According to the International Trade Administration of the U.S. Department of Commerce:
- more than 70 percent of the world’s purchasing power is located outside of the United States
- companies that export goods and services grow faster and are more likely to succeed
- small and medium-sized companies account for 98 percent of U.S. exporters
- the total of U.S. exports goods and services is in the low trillions of dollars
- exporting can be profitable for businesses of all sizes
That said, before jumping into international waters, it is critical to understand the export control regulations and commit to compliance as non-compliance can trigger significant ramifications. Some contractors are unaware that these export control regulations apply to them.
Any contractor that exports commodities, goods, or services from the U.S. must have an export control compliance program. If a U.S. business is sending goods and services to places outside of our domestic borders, they must comply with relevant export control rules. To evaluate whether these regulations apply to the conduct of their work, U.S. contractors should be considering certain facts about their businesses, such as:
- Are you working with primes or subcontractors that are not U.S. companies?
- Do you have employees that frequently travel abroad for company purposes?
- Are you trying to expand your business outside the U.S.?
- Is your software being used outside of the U.S.?
An affirmative answer to questions such as these could trigger export control compliance requirements. If a company’s exports trigger the export control regulations, then prior authorization from the applicable government agency is required. Depending on the type of export, authorization could take the form of a license, registration, an agreement, or other form of approval.
There are two major regimes that govern exports from the United States. One is the Export Administration Regulations (“EAR”) administered by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and, second, the International Traffic in Arms Regulations (“ITAR”) enforced by the U.S. Department of State’s Directorate of Defense Trade Controls. This blog will discuss EAR compliance and a separate, upcoming post will address ITAR.
The BIS administers the EAR (15 C.F.R. parts 730.1-774.1), which regulates the export of “dual use” items. Dual use items have both commercial and military functions and also include certain other commercial items that do not have an obvious military application. An “export” under the EAR is broadly defined to include “an actual shipment or transmission of items subject to the EAR out of the United States, or release of technology or software subject to the EAR to a foreign national in the United States.” 15 C.F.R. § 734.2(b)(1) (emphasis added).
The regulations broadly describe when technology or software is “released” for export when there is:
- visual inspection by foreign nationals of U.S.-origin equipment and facilities;
- oral exchanges of information in the U.S. or abroad; or
- the application to situations abroad of personal knowledge or technical experience acquired in the U.S.
15 C.F.R. § 734.2(b)(3). It is easy to imagine that businesses could inadvertently “export” under this broad definition. Contractors must be careful that their employees are also aware of what may constitute an export.
If you are exporting items that are subject to the EAR, the regulations lay out questions to ask regarding your business to determine your obligations and, particularly, whether you will need to get a license. The basic analysis includes these steps:
- First, what is it that you export? How are the products and services classified on the Commerce Control List (“CCL”)? The CCL is divided into ten categories and five product groups. By finding your item you can determine its Export Control Classification Number (“ECCN”) under the CCL. All items subject to the EAR but not specified in a CCL Category are designated by the number EAR99.
- Second, where is it going? Where is the final ultimate destination for the goods and services? Is it going to a country that is listed on the Commerce Country Chart? Reviewing the Country Chart using the ECCN will allow you to determine whether a license is required.
- Third, who will get the products or services? Who is the ultimate end user? The EAR lists certain entities that U.S. companies cannot do business with without a license
- Fourth, what will the end user do with your goods and services? The EAR sets forth restrictions on the end use of certain exported items.
- Fifth, what other business activities does the end user engage in? The EAR lists prohibited activities of the end users that may prevent you from doing business with them.
Even if a license seems to be required based on the foregoing analysis, one of ten general exceptions may be available. If you do not fall within an exception and must get a license, you will file an application with BIS.
If your goods and services fall within the exclusive jurisdiction of another federal agency, you must comply with the regulations of that agency and you may not need to comply with the EAR. For example, articles and defense services on the U.S. Munitions List are regulated by the ITAR administered by the Directorate of Defense Trade Control (“DDTC”) of the Department of State, to be more fully explored in an upcoming blog post.
Another example is the export of commodities related to nuclear reactor vessels which are regulated by U.S. Nuclear Regulatory Commission and the technology related to the production of special nuclear material administered by the Department of Energy. BIS has also delegated some authority to the U.S. Patent and Trademark Office for the export to a foreign country of unclassified technology in the form of a patent application.
Violating export control regulations can lead to fines, imprisonment, and the denial of future export licenses. Compliance is important but achievable and should not deter you from considering expansion of your business abroad. Be bold. Go global.
About the Author: Kimi Murakami is counsel with PilieroMazza and focuses her practice on corporate transactions with an emphasis on mergers and acquisitions of government contractors. She also has experience advising on intellectual property matters including trademarks and trade secrets. She can be reached at email@example.com.