Export Administration Regulations

Over the last several years, the regulatory framework for export controls and economic sanctions in the U.S. has undergone significant changes. At the same time the risk of enforcement in the event of non-compliance has grown. Most products and technologies contemplated for export from the U.S. fall under the requirements of the Export Administration Regulations EAR.  Determining how a product is classified, the controls associated with a classification and eligibility for license exceptions involves a step-by-step process.  

Export Administration Regulations

Export Administration Regulations (EAR) are found in 15 CFR Parts 730 to 744. These are administered under International Economic Emergency Powers Act by the Commerce Department’s Bureau of Industry and Security. EAR regulates exports including re-exports and deemed exports of commercial or dual-use goods, software and technology.

Definitions

• Export

An export is a shipment or transmission of items out of the U.S.

• Re-export

Re-export is a shipment of items subject to EAR from one foreign country to another.

• Deemed Export

Deemed export is a release of technology or software source code to a foreign national in the U.S.

• Dual use items

Dual use items are the one that have both commercial and military or proliferation applications.

• Commerce Control List

Commerce Control List (CCL) is a list of EAR controlled items. It is found in Part 774 of the EAR and is used to determine export control classification and license requirements. CCL is divided into ten broad categories and these are:

= Nuclear Materials, Facilities and Equipment (and miscellaneous items)
1 = Materials, Chemicals, Microorganisms and Toxins
2 = Materials Processing
3 = Electronics
4 = Computers
5 = Telecommunications and Information Security
6 = Sensors and Lasers
7 = Navigation and Avionics
8 = Marine
9 = Propulsion Systems, Space Vehicles, and Related Equipment

Each category is further subdivided into five product groups:

A: Systems, Equipment & Components

B: Test, Inspection & Production Equipment

C: Materials

D:  Software

E:  Technology

Export Control Classification Number

Each entry in CCL is called an Export Control Classification Number (ECCN). It is an alpha-numeric code used in the CCL to classify items for determination of export licensing requirements.

Reasons for Control

The reason for control may vary according to the sub-category in the specific ECCN. Here are the various reasons for control (one or more may apply to a specific ECCN):

•       AT- Anti-Terrorism

•       CB-Chemical & Biological Weapons

•       CC- Crime Control

•       CW- Chemical Weapons Convention

•       EI- Encryption Items

•       FC- Firearms Convention

•       MT- Missile Technology

•       NS- National Security

•       NP- Nuclear Nonproliferation

•       RS- Regional Stability

•       SS- Short Supply

•       UN- United Nations Embargo

•       SI- Significant Items

•       SL- Surreptitious Listening

License Requirements

In general, license requirements depend on product classification (ECCN), destination and end user. For goods and technology listed on the CCL, a license will be required for export, unless an exclusion or exemption applies. The combination of reasons for control and the country of end user will determine whether a license or exception applies. No license is required when:

•       The item to be shipped is not on the CCL (i.e. it is EAR99).

•       The item is on the CCL but there is no “X” in the box on the country chart under the appropriate reason for control column and on the row for the country of destination.

Some Common License Exceptions

If a license is required for your transaction, a license exception may be available. License exceptions and the conditions for their use are set forth in part 740 of the EAR. Some of the common licensing exceptions are:

•       LVS – Limited Value Shipment

•       TMP – Temporary Exports

•       CIV – Civil end Users

•       RSL – Servicing and Replacement Parts

•       TSU – Technology and Software Unrestricted

•       TSR – Restricted Technology and Software

Key Points to Consider for Complying with EAR

• Know your jurisdiction – what agency controls your product?
•   Have your tools ready:  (1) the regulations and CCL (2) information about the product (3) a technical person who can help.
• Pay attention to the sub-categories in the CCL – which one covers your product?
•   Start with the highest level of control, and then use process of elimination to classify.
•   Pay attention to the notes at the beginning of a CCL listing.
•   What is the true country of end use of the export? Use that country for export control purposes.
•   Many license exceptions are available – but read the fine print.
•   If you need to apply for a license, make sure you have all the information you will need.

Penalties for Non-compliance with EAR

Penalties for non-compliance with EAR are quite severe. It can bring civil penalties of up to $250,000 per violation or twice the amount of the transaction whichever are greater and criminal penalties of up to $1 million per violation along with up to 20 years imprisonment. There are severe sanctions, in addition to the criminal and civil penalties, that may be imposed for violations, including:

•      termination of export privileges,
•        suspension and/or debarment from federal government contracting and,
•        loss of federal funds.

U.S. Export/Sanctions Laws

There are three primary set of export and sanctions rules. These are:

• ·         U.S. Export Administration Regulations (EAR)
• ·         International Traffic in Arms Regulations (ITAR)
• ·         Economic Sanctions Regulations

U.S. Export Administration Regulations

Export Administration Regulations (EAR) are found in 15 CFR Parts 730 to 744. These are administered under International Economic Emergency Powers Act by the Commerce Department’s Bureau of Industry and Security. EAR regulates exports including re-exports and deemed exports of commercial or dual-use goods, software and technology.

Penalties for non-compliance with EAR are quite severe. It can bring civil penalties of up to $250,000 per violation or twice the amount of the transaction whichever are greater and criminal penalties of up to $1 million per violation along with up to 20 years imprisonment. There are severe sanctions, in addition to the criminal and civil penalties that may be imposed for violations, including:

•       termination of export privileges

•       suspension and/or debarment from federal government contracting

•       loss of federal funds

International Traffic in Arms Regulations

International Traffic in Arms Regulations (ITAR) are administered by the U.S. Department of State Directorate of Defense Trade Controls (DDTC) under the Arms Export Control Act. It regulates exports of items and services specifically designed for military applications. It controls the permanent and temporary export and temporary import of items on the United States Munitions List (USML). The items that are controlled include defense articles, defense services and technical data. Exports under ITAR include:

•       Sending or taking a defense article out of the U.S.

•       Disclosing or transferring in the U.S. any defense article to an embassy, agency or subdivision of a foreign government.

•       Performing a defense service for a foreign person.

•       Disclosing, releasing or transferring technical data or other information to a foreign person.

U.S. Economic Sanctions

Economic sanctions are administered by the U.S. Treasury Department Office of Foreign Assets Control (OFAC). These sanctions prohibit certain transactions with countries that are subject to boycotts, trade sanctions and embargoes. The sanctions can be either comprehensive or selective. It depends on the country and the scope of sanctions. OFAC currently enforces comprehensive economic embargoes against three countries – Cuba, Iran, and Sudan. It restricts any kind of business with these three countries if you are a U.S. person or a U.S. company. There are selective sanctions against Burma, North Korea and Syria. For Burma there are restrictions on financial activity and for North Korea and Syria, there are broad export controls. Most U.S. origin items are restricted for North Korea and Syria. In addition to country-based sanctions U.S. also has sanctions against Specially Designated Nationals (SDN). 

Basel II Operational risk - best practices

What is Operational Risk ?

The Basel II accord on banking supervision defined operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Legal risk would be included in this definition according to the Basel committee, but not strategic or reputational risk

Operational Risk Failures

Internal Fraud - Losses due to acts of a type intended to defraud, misappropriate property or  circumvent regulations, the law or company policy, excluding diversity/ discrimination events,
which involves at least one internal party.

External Fraud - Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party

Employment Practices and Workplace Safety - Losses due to acts of a type intended to defraud,
misappropriate property or circumvent the law, by a third party.

Clients, Products and Business Practices - Losses arising from an unintentional or negligent failure to
meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product.

Damage to Physical Assets - Losses arising from loss or damage to physical assets from natural disaster or other events

Business Disruption and System Failures - Losses arising from disruption of business or system failures

Execution, Delivery and Process Management - Losses from failed transaction processing or process
management, from relations with trade counter parties and vendors


5 Best Practices to Follow in Operational Risk Management

1. Develop, Implement and Maintain a Framework for Operational Risk Management
2. Design the Right Operational Risk Governance Structure
3. Use Right Tools to Identify and Assess All Operational Risks
4. Implement an Approval Process for New Products and Processes that Assesses Operational Risks
5. Maintain a Robust Operational Risk Reporting Mechanism

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Complying With FLSA Requirements

The Fair Labor Standards Act (FLSA) of 1938 is key piece of compensation legislation. Although FLSA has been around for a long time, it is the most frequently violated employment law.  Employers misclassify employees as exempt or fail to calculate working time accurately. Misclassifications can result in severe back pay issues. Calculating overtime incorrectly can often result in overpayments or underpayments. Violations can not only hurt companies financially, but damage reputations as well.

FLSA cases have hit a new record high and continue to rise. A record breaking 8,126 FLSA suits were filed in federal courts in the last year. All in all, there has been an increase of over 400% since the year 2000. Employers have to be conversant with the intricacies of the law to avoid lawsuits. This white paper discusses what FLSA, its requirements and common FLSA pitfalls too avoid.

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