EXPORT COMPLIANCE IN 11 WORDS
A Series on Export Compliance Essentials
(Parts 5 & 6 of 12)
DOCUMENT & COMMUNICATE: SMALL STUFF THAT MATTERS
When it comes to export compliance, it’s often the little things that make a big difference. The reporting requirements of ITAR §122.4, for instance: has your company already missed the 5-day deadline?
In a speech called “Elephants Don’t Bite!” motivational speaker Joel Weldon reminds his audiences that in the quest for excellence, it’s almost always the small stuff, the stuff that’s easy to miss, not the big stuff, that trips us up. “Raise your hand if you have ever been bitten by a mosquito,” he says. “Has anyone here been bitten by an elephant? . . . That proves my point! It’s the little things that get you, not the big things. The little things come along and cause big problems!” Then, on a more positive note, Weldon adds, “And it’s the little things you do right that can bring you huge rewards.” The moral: pay attention to details!
Among the myriad government rules and regulations for U.S. exporters, the requirements for recordkeeping and reporting might easily be taken for trivial matters. Evidently many companies do take them that way, because changes in the firm’s registration information that have never been reported to the DDTC—as required by ITAR §122.4, “Notification of Changes in Information Furnished by Registrants”— is one of the most common problems our visiting teams discover when they arrive at a client’s headquarters for an on-site risk assessment. And you can be sure that if folks from the State Department arrive at your firm under the Company Visit Program (CVP), as part of their Outreach efforts, they will spot this right away, too, and label it (correctly) as a failure to comply with the requirements of the ITAR.
Here’s the relevant portion of this regulatory requirement in ITAR §122.4 (as amended on August 26, 2013, effective October 25, 2013):
(a) A registrant must, within five days of the event, provide to the Directorate of Defense Trade Controls a written notification, signed by a senior officer (e.g., chief executive officer, president, secretary, partner, member, treasurer, general counsel), if . . .
(2) There is a change in the following information contained in the Statement of Registration:
(i) Registrant’s name;
(ii) Registrant’s address;
(iii) Registrant’s legal organizational structure;
(iv) Ownership or control.
When this section was last revised, in 2013, the State Department also revised ITAR §129.8, which deals with the registration and licensing requirements for brokers, to include some further notification requirements. Here’s the relevant portion of that part of the regulations:
(d) A registrant must, within five days of the event, provide to the Directorate of Defense Trade Controls a written notification, signed by a senior officer (e.g., chief executive officer, president, secretary, partner, member, treasurer, general counsel), if . . .
(2) There is a change in the following information contained in the Statement of Registration (form DS–2032):
(i) Registrant’s name;
(ii) Registrant’s address;
(iii) Registrant’s legal organization structure;
(iv) Ownership or control;
(v) The establishment, acquisition or divestment of a U.S. or foreign subsidiary or other affiliate who is engaged in brokering activities or otherwise required to be listed in registrant’s Statement of Registration; or
(vi) Board of directors, senior officers, partners and owners.
And finally, here’s what the DDTC is currently saying on their web site about what the agency expects from registrants regarding notifications of changes “as part of the registration renewal process”:
[Registrants are instructed to] notify the Department of the following material changes as part of the registration renewal process: 1) consolidation of a broker registration with a manufacturer/exporter registration; 2) removal of entities not owned or otherwise controlled from registration; and 3) deletions or additions of U.S. Munitions List categories. However, if notification of change is the subject of an internal reorganization, merger, acquisition, or divestiture registrants must notify the Department of all changes in information within five days of the event, including where applicable, the three changes specified above.
The third type of change mentioned in this web notice, “deletions or additions of U.S. Munitions List categories,” is not specifically mentioned in the sections of the ITAR quoted above, but if the change your company is reporting is one involving an internal reorganization, merger, acquisition, or divestiture, you would be well advised to include any such changes in your within-five-days notification to the DDTC as well.
We trust you noted the requirement in all the above citations that these notifications need to be made to the DDTC within five days of the event. If you’re wondering whether that phrase means what it appears to mean, the answer is that it does.
If you’ve been thinking while reading the above that “within five days of the event” seems like an awfully narrow time window for notifying the DDTC of a change at your company, consider this: some required notifications must be made in advance of the event. One such prior reporting requirement—a critically important one, too, and an all-too-common source of violations, in our experience—is found in ITAR §122.4(b). This paragraph applies to any intended (that is, prospective or planned) sale, or transfer of ownership/control, of your business, or of “any entity thereof,” to a foreign party or parties. Here is the relevant passage (we’ve underlined for you a couple of crucial sentences that you might easily have missed, imagining perhaps (incorrectly) that they were “small stuff”):
(b) A registrant must notify the Directorate of Defense Trade Controls by registered mail at least 60 days in advance of any intended sale or transfer to a foreign person of ownership or control of the registrant or any entity thereof. Such notice does not relieve the registrant from obtaining the approval required under this subchapter for the export of defense articles or defense services to a foreign person, including the approval required prior to disclosing technical data. Such notice provides the Directorate of Defense Trade Controls with the information necessary to determine whether the authority of § 38(g)(6) of the Arms Export Control Act regarding licenses or other approvals for certain sales or transfers of defense articles or data on the U.S. Munitions List should be invoked (see §§ 120.10 and 126.1(e) of this subchapter).
(c) The new entity formed when a registrant merges with another company or acquires, or is acquired by, another company or a subsidiary or division of another company shall advise the Directorate of Defense Trade Controls of the following:
(1) The new firm name and all previous firm names being disclosed;
(2) The registration number that will survive and those that are to be discontinued (if any);
(3) The license numbers of all approvals on which unshipped balances will be shipped under the surviving registration number, since any license not the subject of notification will be considered invalid; and
(4) Amendments to agreements approved by the Directorate of Defense Trade Controls to change the name of a party to those agreements. The registrant must, within 60 days of this notification, provide to the Directorate of Defense Trade Controls a signed copy of an amendment to each agreement signed by the new U.S. entity, the former U.S. licensor and the foreign licensee. Any agreements not so amended will be considered invalid.
(d) Prior approval by the Directorate of Defense Trade Controls is required for any amendment making a substantive change.
We hope you noticed that, in addition to the mandatory notification that must be made to the State Department 60 days in advance (“must” and “shall” are such little words that they can easily be missed — “small stuff,” right? — but in government regulations they always translate as “mandatory” and “legally required”), there is also mention of a mandatory follow-up submission required by State no later than 60 days after the first. Any regulatory language that translates as “deadline,” whether the period specified is “before” or “after,” deserves to be underlined or highlighted; it comes under the heading of “small stuff that matters.”
“COMMUNICATE” is one of the 11 key words that we chose to summarize the essentials of export compliance in this blog series. A few synonyms for communicate are notify, report, and disclose. Notifying the State Department within 5 days of changes in your registration information is only one of the multiple notifications that are mandatory and must be made in a timely manner. Reporting semi-annually on your company’s use of the Canadian Exemption (ITAR §126.5), as specified in Supplement No. 1 to Part 126 of the ITAR, Note 14(c), is another example of a mandatory communication. (Don’t let that word “exemption” mislead you here; exemption from a license requirement doesn’t mean you are exempt from reporting and recordkeeping requirements!) Disclosing information to the DDTC or BIS about a potential or actual export control violation (see ITAR §127.12) is sometimes legally mandatory—in which case neglecting to file such a disclosure would constitute an additional violation. But even when such disclosures are not mandated by law, and when they haven’t been “directed” or ordered by a government agency, they are very strongly encouraged by all the agencies and highly advisable in most cases, since voluntary disclosures will generally be a mitigating factor in determining what administrative penalties, if any, will be imposed.
Whatever synonym is used for it, the failure to communicate critical compliance information to the DDTC, BIS, or OFAC within a specified deadline is one of the most common sources of export violations, and the penalties that can result from such violations are by no means “small stuff”!
“DOCUMENT,” another of our 11 key compliance words, is closely related to what we have been talking about here. A synonym for documenting is creating and keeping records of your exports. Some very specific kinds of recordkeeping for export transactions are mandated by the ITAR, the EAR, and the various OFAC Sanctions programs. Not only do the legally required transaction and licensing records need to be complete, accurate, and secure, they need to kept for a certain time (in most cases, five years) and maintained in a certain way.
For example, ITAR §122.5 states that the information “must be stored in such a manner that none of it may be altered once it is initially recorded without recording all changes, who made them, and when they were made.” Have you checked to see whether your company’s current order processing or ERP software supports this critical ITAR requirement? And, if the software you use does have this tracking and recording capability, have you checked to verify that the feature is appropriately configured and “turned on”?
Another detail worth checking: ITAR §122.5 also says that your export records need to be “available at all times for inspection and copying” in case of a compliance audit or other official visit or investigation. Have you checked lately to see how “available” the legally mandated records are at your company? Which employees know how to access and retrieve them for inspection, if the occasion arises?
The DDTC, BIS, and OFAC most certainly do not consider a company’s failure to keep accurate and complete records of its export transactions, as required by law, to be a trivial matter, or “small stuff.”
In our experience, many companies have not clearly understood that compliance with these recordkeeping requirements is ultimately their responsibility, as the U.S. exporter, or USPPI, and that they cannot simply hand it off to a freight forwarder or shipping agent, and then forget about it. Even if you do employ the services of a third-party freight forwarder to ship your commodities, you still need to make sure that you receive and keep on file copies of all shipping documents, AES/ACE entries, supporting documents, special certifications, and all other required documentation for every export transaction. You should also be periodically checking and comparing the freight forwarder’s records against your purchase orders, invoices, export licenses, agreements, reports of exemption use, etc., to make sure that your exports are fully compliant with U.S. export laws and regulation. In the event of an official visit or compliance audit from one of the regulatory agencies, when the agents request the records of one of your export transactions, “I’m afraid I can’t help you with that; I imagine our freight forwarders must keep that sort of information on file somewhere” will not be an acceptable answer; you might be told that it is a synonym for “export violation.”
(None of the information is intended to be authoritative official or professional legal advice. Consult your own legal counsel or compliance specialists before taking actions based upon this blog or other unofficial sources.)