Monthly Archives: December 2016

2016 Year-End USML Updates

2016 Year-End USML Updates

The Directorate of Defense Trade Controls (DDTC) has revised USML Categories VIII, XII, XIV, XVIII, and XIX effective December 31, 2016.

The revisions to Categories XII (Fire Control/Sensors/Night Vision), XIV (Toxicological Agents), and XVIII (Directed Energy Weapons) under the Export Control Reform (ECR) process are found in Federal Register notices 81 FR 70340 and 81 FR 49531.

In addition to increased detail and technical performance thresholds, the revision of Category XII also includes minor revisions to related parts of Categories VIII, XI, XIII, and XV.  VIII(e) (aircraft inertial reference systems), XIII(a) (cameras), and XV(c) (GPS equipment) have been removed and reserved with their contents now covered by the revised Category XII.  Radar and sensor specifications in XI(a)(3)(ii) and (a)(10) are also revised.

Revisions to Category XIV, which was already highly detailed, include the addition of XIV(a)(5) “Chemical warfare agents not enumerated above adapted for use in war to produce casualties in humans or animals, degrade equipment, or damage crops or the environment.”  XIV(b) and (g) are revised to identify biological agents and antibodies not previously specified.  Tear gasses and riot control agents are moved to the jurisdiction of the Department of Commerce.

As revised, Category XVIII is actually shorter, with a smaller list of directed energy weapons systems.

For previously-revised Categories VIII (Aircraft and Related Articles) and XIX (Gas Turbine Engines and Associated Equipment), some articles made subject to the EAR will again be subject to the ITAR (81 FR 83126).  DDTC’s rationale is that they “constitute or are specially designed for next-generation technology.”  Unshipped balances on Commerce licenses may not be used after the effective date, requiring a State Department authorization.  Any reexport or retransfer of articles previously subject to the EAR will be subject to the ITAR.

As a result of the changes in USML categories, DDTC is also updating licensing forms and batch Common Schema.   The new versions will be 9.3 for the DSP-5, DSP-61, and DSP-73 forms, version 3.2 for the DSP-85, and version 7.6 for the Common Schema.  The new versions have been posted on the DDTC website and must be used starting January 3, 2017.  DTrade will be down for maintenance from 6pm December 30, 2016 until 7am January 3, 2017.

In related news, Section 1292 of the 2017 National Defense Authorization Act (NDAA) (S.2943), signed by the President on December 23, 2016, states that the Secretaries of Defense and State should recognize India as a “major defense partner” and improve cooperation.  However, this does not currently require any specific amendments to the AECA or ITAR.  The NDAA does direct “an assessment of the defense export control regulations and policies that need appropriate modification, in recognition of India’s capabilities and its status as a major defense partner.”

(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.)

EXPORT COMPLIANCE IN 11 WORDS (Part 8 of 12)

EXPORT COMPLIANCE IN 11 WORDS
A Series on Export Compliance Essentials

(Part 8 of 12)

SCREEN!

Failure to perform Restricted Party Screening was cited as either a root cause or a contributing cause in more than a few recent cases of export violations that resulted in severe penalties for U.S. companies. Protect your company by equipping your people with effective software tools for screening intermediaries and end-users in any potential export transaction.

In export control parlance, the process of checking and cross-referencing the entities involved in an export transaction against a variety of “black lists” prohibiting or curtailing trade with certain individuals, businesses, organizations, and nations is called Restricted Party Screening (RPS) or Denied Party Screening (DPS).

A number of such lists of “entities of concern” are maintained by the U.S. Government; similar lists are maintained by other governments (notably the UK, Canada, and Japan) and international bodies (notably the European Union and the United Nations). The “concerns” about the listed entities may be political or economic in nature (e.g., human rights violations, foreign policy and trade issues), security-related (e.g., terrorism, risk of diversion to WMD programs), or criminal law enforcement matters (e.g., narcotics trafficking, money laundering). All the lists are continually updated; names may be added or deleted at any time.

The U.S. Government takes the laws, regulations, treaties, and agreements that lie behind these sanctions lists very seriously and enforces them vigorously. Multi-million dollar fines and settlements for sanctions violations are not uncommon, and some U.S. firms have had their export privileges revoked or suspended. A breach of trade sanctions can also result in the commission of criminal offenses punishable by imprisonment.

Restricted Party Screening is a compliance control process designed to keep your company from breaking the law and prevent you from incurring penalties by inadvertently doing business with an embargoed country or restricted entity.

Screen. If you’re a frequent or regular exporter (or if you’re actively seeking to market your goods and services more widely overseas), you should be routinely screening not only your customers and potential customers, but any firms or individuals associated with your company’s export business.

Some candidates for RPS include:

  • Countries—any places where your buyers, intermediate and ultimate consignees (if different from the buyers), or end-users are based or situated.
  • Customers—not just foreign customers, but domestic customers, too, especially if they
  • Prospective customers (e.g., RFQs, RFIs).
  • Manufacturers, suppliers, and vendors of raw materials, parts, or components.
  • Contractors and subcontractors.
  • Freight forwarders and customs brokers.
  • Shipping companies.
  • Foreign banks and other financial institutions.
  • Visitors and the companies or governments they represent.
  • Brokers, sales representatives, and overseas agents.
  • Consultants, including research partners, institutions, and universities.
  • Business partners.
  • Parties to a potential acquisition or merger.
  • Employees and new hires.
  • Contract workers.
  • Service providers.
  • Proposed recipients of software source code and technical data.
  • Any “pay to” parties.
  • Any “pay from” parties.
  • Any “ship to” parties.
  • Any other parties associated with an export transaction.

Some managers are under the mistaken impression that the legal requirements for business dealings with restricted or denied parties apply only to international sales or items shipped overseas. That is simply not the case: those prohibitions can also apply to domestic or in-country transactions. If any of the parties to a domestic transaction is listed on one of the U.S. Government’s Blocked, Denied, Entity, Specially Designated Nationals, or Debarred Persons lists, the transaction should be handled with the same caution as would be used in dealing with an overseas transaction — which means you are almost certainly legally prohibited from dealing with that party. So — depending on the nature of your business and products — Restricted Party Screening may be a wise idea for domestic transactions as well as exports.

Re-screen. Because governments and international agencies are continually updating their lists, you need to be continually re-screening your parties. Your Denied Party Screening isn’t really finished until you’re really finished doing business with the party. Repeated screening of previously screened parties may seem like overkill, but it isn’t. Re-screening is imperative to ensure that their names weren’t added to one of the lists since the last time you checked.

How often should re-screening be done? Many compliance professionals would answer, “Every day!” But while daily re-screening is a good practice, an even better answer is, “Real-time!” Today’s RPS screening software, much like your other software, updates continually and automatically, and can be configured to alert you immediately if the status of any previously cleared party has changed.

Even with the necessary screening software in place and properly configured to your company’s needs, continual vigilance remains important. Although the latest trade compliance software uses advanced search methods to return accurate matches, the search results still need to be eyeballed and evaluated by a real live person who is qualified to make an informed decision. Software developers continue to make improvements, but the process of matching the parties to a transaction with an actual restricted party is still far from an exact science, and that isn’t likely to change anytime soon. Part of the problem resides in the lists themselves: the information they provide is often scanty and unreliable. Part of the problem resides in the “entities of concern”: they can be tricky people whose names and addresses are continually morphing. Software can do amazing things, and the programmers I know are all incredibly smart; but it’s hard to write code for gut instincts and horse sense. Final screening decisions are best left to human beings.

Depending on the nature of the list and transaction, a “match” could mean that you are legally forbidden to contract with, sell to, ship to, receive payments from, make payments to, convey technology to, have technical discussions with, or buy from the restricted party. Some U.S. companies simply choose not to engage in any transactions whatsoever with listed entities, even when certain kinds of transactions may not, strictly speaking, be legally prohibited, or when they could pursue and possibly obtain an authorization from the relevant government agency. They may do this as a matter of company policy or corporate values, for the sake of the company’s reputation, from the standpoint of cost-effectiveness, or for other reasons.

Actually, nowhere in the ITAR or EAR is it explicitly stated that a business must perform Restricted Party Screenings or purchase RPS software. So, a failure to screen the parties to a transaction is not in itself an export violation.  But the U.S. Government does require exporters to exercise due diligence to avoid violating U.S. laws and regulations in conducting their export transactions. That requires knowing the who, what, when, where, and how of all their business dealings. And that implies a careful and conscientious review of the denial lists. Realistically speaking, if RPS is not included in your company’s export compliance program, export violations are all but certain. In fact, you may have already committed some.

Keep records. Documenting your screening processes and decision-making, especially your responses to positive matches, is of the utmost importance. If you are asked about the export transaction at a later date, you should be able to explain the rationale behind your determinations clearly and confidently, demonstrating that the necessary level of due diligence was employed. Detailed notes regarding your incident response activities are a must so that facts are clear and your decisions are defensible in the event of a company visit or directed compliance audit.

You may know perfectly well that your company screens every single one of its export transactions thoroughly, but if problems should arise at a later date and it turns out there’s no record anywhere of your RPS activity, it might just as well never have happened. Specifics about who you screened, when you screened, which employee performed the screening, how it was done, and what the screening found must be included in your export recordkeeping.

Have a response plan in place. A compliance control process is worthless unless it includes an incident management plan. What should be done when RPS yields a match, and who should do it? What are your company’s policies and procedures for handling this situation? What’s the next step, and who is responsible to take that step? And what’s the step after that?

A positive screening match may be a cause for concern, but it shouldn’t be a cause for alarm. “False positives” are not uncommon, so you first need to ascertain whether the apparent match is genuine or not. Does the name on the sanctions list that was matched with the name of the party you are screening really refer to the same entity? Individuals and companies frequently have the same or similar names, after all. See if any further identifying details are provided in the search result, such as address, date of birth, the citation of an order in the Federal Register, or a photo. If so, you’re in luck! (Don’t get your hopes up too high, though; the information provided for some “parties of concern” is . . . well, disappointingly minimal.) Check your company’s records; they could also contain information that will help you make this determination, if you’ve had previous dealings with the party.

Sometimes identifying false positives is easy, and sometimes it isn’t. You might need to do a bit of detective work to clear up confusion caused by multiple given names, aliases, middle names, nicknames, abbreviations, alternative spellings, misspellings, different transliterations of foreign alphabets, international subsidiaries, branch offices, and divisions. You can’t skip this detective work, but don’t procrastinate or dilly-dally in getting it done either. Holding up orders and postponing shipments to perfectly legitimate customers is a good way to lose repeat business.

If you determine that a match is valid, however—and only trained and qualified employees should make such ultimate determinations—you must place the transaction on hold immediately and investigate further. That doesn’t mean you should panic. Remember that a match doesn’t equal a violation. If you haven’t exported anything yet, then plainly no export violation has occurred. But, equally plainly, the potential for an export control violation does exist, so additional due diligence is required. Proceed with caution.

The significance of a genuine match depends on the list your party’s name was found on. In some cases, exports of all kinds are strictly prohibited: some countries are subject to comprehensive trade embargoes, and some individuals are denied all trading privileges. In other cases, the restrictions are limited in scope, so you might still be able to export to, or do other business with, the sanctioned party, as long as you first apply to the listing agency and secure an export license or other permission. In still other cases, a name has been placed on a list to indicate that a “red flag” is present in the transaction—some information that couldn’t be verified and requires investigation and clarification.

Use software for screening.  If your company engages in more than a handful of export transactions in the course of a year, you should not try to conduct Restricted Party Screening by scanning each party against each of the sanctions lists, one name and one list at a time. Yes, you can do this; and the U.S. Government has even tried to help you recently by creating a Consolidated Screening List (CSL). But it is very foolish and dangerous to go this route. There are simply too many lists to scan, they are changing too frequently, the information they provide about the restricted parties is too sketchy, evaluating the search results without support is too difficult, and the stakes are much too high to risk a human error resulting in a violation. This initial screening is clearly a task for software, not human eyes and brains.

Many kinds of automated systems are available. Which type of software is best will depend on the nature and size of your export business, your budget, and your business model. Some software systems allow your employees to screen transactions individually through a simple browser-based application. Some permit batch uploading and processing of multiple names and transactions. Some can be fully integrated into your company’s existing ERP software system. Some employ extremely sophisticated search algorithms incorporating “fuzzy logic” and phonetic or “sounds-like” name matching. Some UIs are more user-friendly than others.

If you find all this confusing and aren’t sure what kind of screening system would work for your company — which of the advertised features are truly critical to your compliance and which would be a complete waste of money, given your business model — get some independent, objective, and knowledgeable advice before you make this important decision. Hint: Sales reps from software vendors may be knowledgeable – about their software, at least — but they definitely don’t qualify as “independent” or “objective.” There are experienced export compliance professionals out there. Besides giving you an independent and objective assessment of your compliance risks and vulnerabilities, they can also help you sort out the competing claims of RPS service providers and determine the safest and most economical solution for your business.

Even the simplest and most basic software system, however, will surely save you a lot of time, and will guarantee that you are screening against a database that includes all the relevant lists and is automatically updated every day. Most screening software will also allow you to configure your searches to minimize time-wasting false positives and create detailed reports of your screenings that can serve as defensible compliance audit trails.

We have no horse in this race, and we don’t see this as a compliance process where “one software solution fits all.” There are plenty of reputable vendors out there, offering screening products with a wide range of capabilities and features. There is no dearth of choices. Prices vary from downright-reasonable to guaranteed-to-induce-sticker-shock. (We’ve seen a couple of price quotes that really made us gasp — but those were outliers.)

We have only one recommendation: The worst buying decision you can possibly make is choosing not to invest in an adequate RPS software solution for your business. Take it from us – that’s a choice you can’t afford.

(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.)

EXPORT COMPLIANCE IN 11 WORDS (Part 7 of 12)

EXPORT COMPLIANCE IN 11 WORDS

A Series on Export Compliance Essentials

(Part 7 of 12)

SECURE!

 

Wherever your business interfaces with the global marketplace, your workforce should be trained to recognize export-controlled technologies and technical data, and equipped with the know-how and tools to comply with ITAR, EAR, and DoD requirements, as well as industry best practices, for safeguarding sensitive information and combating cyber threats.

Responsible information-handling practices have always been critical to export compliance. In the past few years, however, troubling reports of frequent and successful cyberattacks on U.S. Government agencies and alarming headlines about technical trade secrets stolen from private firms by hackers have moved information security to the top of the priority list for every organization—small, medium-sized, or large.

Under the terms of the ITAR and EAR, manufacturers and exporters are legally responsible to protect certain technical data related to defense articles on the USML (ITAR §120.10), as well as key technologies required for the production, development, or use of items on the CCL (EAR §772.1), against access by unauthorized persons. The disclosure or release of such information without a license, inside and outside company facilities, on the ground and in the cloud, within the U.S. and overseas, constitutes an illegal “export.”

That’s why, if any of your products is export-controlled, you had better make certain that your employees are clearly aware of the fact, that they clearly understand everything it implies, and that this matters to them.

They need to know that they’re responsible for safeguarding technical data of any kind related to the product—engineering drawings and specifications, schematics, blueprints, design analyses, photographs, formulas, performance test results, pilot production schemes, manufacturing procedures, assembly flowcharts, testing and inspection methods, or any other technical information subject to export controls.

They need to know that if they share controlled technical data without appropriate authorization, or if they carelessly allow unauthorized access to it, they’ll be violating U.S. export laws, with potentially serious consequences for the company and for themselves.

You Need to Educate—and Motivate—Your People About IT Security

In today’s business world, technical information is increasingly—in many cases, almost exclusively—digital information, consisting of text, images, numerical data, and formulas stored and distributed electronically via computer networks. That means “information security” and “cybersecurity” are increasingly synonymous, which is why most organizations have made some sort of cybersecurity training for their employees mandatory. While that’s certainly wise, it shouldn’t be grounds for complacency, because “mandatory” and “some sort” are plainly not synonyms for “adequate” and “effective.”

In addition to providing and requiring cybersecurity awareness training for all employees, truly wise managers and administrators conduct regular internal assessments of security awareness to gauge how well their employees understand the nature and seriousness of the security risks and how well prepared they are to respond to cyber threats.

You can test your employees’ understanding of cybersecurity with a survey or questionnaire. Better yet—from the standpoint of accuracy, objectivity, and credibility — get help from qualified professionals in this critical area, and ask them to evaluate the effectiveness of your current cybersecurity awareness training as part of a comprehensive cybersecurity compliance risk assessment of your entire company.

Here are some very basic questions about cybersecurity that all your employees should be able to answer:

  • Who in my company is responsible for cybersecurity?
  • What are the policies and rules that govern my use of the company’s computer system and my access to electronically stored company information? Where can I read them? How can I stay current on changes to those policies and rules?
  • If I suspect I have a cybersecurity issue (e.g., malware, spyware, a compromised password, a sensitive document sent to the wrong person, identity theft, evidence of a co-worker’s carelessness or failure to follow policies and procedures), to whom can I report it? If that person is temporarily unavailable, who is their backup? What should I do immediately to reduce potential damage?
  • Does the company have a policy on bringing personal devices to the workplace and connecting to the company’s system through them? What about accessing the company’s system remotely from home, while traveling, or through an unsecured public network (e.g., coffee shop, library, hotel, university campus?
  • In what ways could my actions (e.g., opening a malicious e-mail attachment, clicking on a link to a compromised website, installing an application that contains a Trojan) endanger the security of the company’s system and sensitive information? What are some things I can do to avoid these dangers?

Those are the easy questions—or rather, they should be. If your employees can’t answer them easily, then give that “mandatory employee awareness training” the failing grade it deserves, roll up your sleeves, and get to work on improving your company’s cybersecurity. Don’t hesitate to get outside help—qualified, professional help—if you need it.

According to a survey of hundreds of U.S. companies, conducted in 2015 by CompTIA, “human error” accounts for 52 percent of security breaches. Turns out it’s a greater cyber threat than malware, hackers, or disgruntled employees—although most managers are surprised when they hear this, and have a hard time believing it.

That recalls another category of “human error”—one that wasn’t included in CompTIA’s survey, though perhaps it should have been. It’s an extremely hazardous condition that our cybersecurity compliance risk assessment team has discovered at more than one facility they visited. If you’re a regular reader of this blog, I’m confident that this cyber hazard is not present at your company, so I offer the following on-site finding, straight from the company officer’s mouth, without further comment:

“I’m not sure our company even has a cybersecurity policy or plan or procedures yet. Do we really need anything like that? We’re not some giant corporation, you know. How would we go about creating such a policy? After all, none of us are techies!”  

You Need to Prioritize Cybersecurity Compliance in 2017

Two recent technological trends have made the job of safeguarding export-restricted information more challenging than ever before:

  • The expansion of “cloud” services from simple file storage and archiving to business software applications of all kinds, infrastructure, and platforms.
  • The proliferation of new mobile IT devices.

These advances in technology make it possible for people to access the data and resources of your organization at any time from anywhere on earth. In other words, not only is your business no longer tied to a single location, it’s not even limited to a finite number of locations. Your firm is Open for Business everywhere.

By allowing unprecedented levels of connectivity between marketing and R&D staff, contractors and subcontractors, manufacturers and suppliers, domestic and foreign offices, salespeople and customers around the globe, Cloud Computing and Mobile Technology promise to help businesses accelerate innovation cycles and reduce time-to-market. At the same time, the adoption of these technologies has created new vulnerabilities and risk areas, exposed enterprises to new legal liabilities, and raised a host of new security concerns, some of which are only beginning to emerge.

Meanwhile, in response to the overwhelming global cyber threat environment, the U.S. Government has been issuing more and more cybersecurity laws and regulations. The DoD, GSA, OMB, NASA, NARA, DHS, and the White House have published, amended, modified, and clarified so many rules, Executive Orders, definitions, standards, and guidelines recently—all of them aimed at requiring Federal contractors and subcontractors to establish more stringent controls and practices for the protection of government data—that “regulatory compliance” became the cybersecurity buzz phrase of the year during 2016, and the topic seems unlikely to leave the limelight in 2017.

The latest driver of regulatory compliance is the need for businesses to implement a somewhat bewildering array of new cybersecurity requirements that apply to most Federal contractors and consultants across a wide range of industries, including both defense and non-defense contractors. The recent surge in regulatory activity has included—

  • A new FAR final rule on “Basic Safeguarding of Contractor Information Systems”).
  • A new BIS final rule, effective September 1, 2016, allowing U.S. companies to use cloud technology and other means of electronic transmission to store and transfer EAR-controlled unclassified “dual use” technology and software without the burden of export control requirements if certain encryption requirements are met.
  • A veritable glossary of new information security terms and definitions, including Federal Contract Information (FCI), Controlled Unclassified Information (CUI), covered contractor information system, Covered Defense Information (CDI), and operationally critical support, and an array of new safeguarding requirements associated with them.
  • New mandatory contract clauses covering cybersecurity, with flowdown to subcontractors and certain other parties (FAR 52.204-21 and DFARS 252.204-7008 – 7012).
  • A new DoD final rule, effective October 21, 2016, regarding network penetration reporting (“cyber incidents”) and contracting for cloud services (DFARS Case 2013-D018).

The above are just a few of the latest regulatory changes in this area. Others appear to be on the way as we head into the new year.

Putting all these rules and definitions together and figuring out which of them applies to your company and its products is a daunting task. Complying with the new regulations—minimizing your risks and liabilities—is an even greater challenge.

Businesses need be asking and finding answers to some important questions, such as—

  • How will our firm comply with the new requirements, such as “adequate security” for CDI/CUI per NIST SP 800-171, and “incident reporting” within 72 hours of discovery through the DoD’s DIBNet portal (including compliance with all the rules for investigating, preserving, and submitting information about the data breach)?
  • Do we try to handle cybersecurity regulatory compliance ourselves, do we seek the services of an outside IT contractor, or do we need some combination of both approaches?
  • Since these new cybersecurity standards appear to be mind-bogglingly difficult to navigate and not entirely coherent, and since a failure to comply with them could have dramatic adverse consequences for our company, should we be looking at a specialized cyber insurance policy to supplement our general and professional liability policies?

The ultimate deadline for full contractor compliance with most of the new cybersecurity requirements for CDI/CUI is December 31, 2017, and that date is not likely to change. But the new cybersecurity regulations are already impacting businesses and contracts, especially those in the defense sector.

While DFARS clause 252.204-7012 allows you to notify the DoD (within 30 days) of any cybersecurity requirements that your company has yet implemented at the time of contract award, the DoD still expects you to be moving toward full compliance as rapidly as possible, and to have a remediation plan in place to achieve it by December 31, 2017.

So, if you haven’t already done the following at your company, you need to do them now:

  • Conduct a risk assessment for cybersecurity regulatory compliance.
  • Develop a cybersecurity action plan, based on the assessment findings.
  • Implement a cybersecurity framework that is appropriate for your organization.

Note: For those who don’t keep up with the latest business jargon, a “framework” includes stuff like organizational infrastructure and job responsibilities; awareness and education programs; organizational culture; and governance (security policies; work processes and procedures; monitoring effectiveness; technical controls; risk assessments and audits; breach response and risk mitigation plans). “Implementing” a framework implies investing company resources in making it happen.

Whether your company is small, mid-sized, or large, if you do business with the Federal government, or with any other companies that do business with the Federal government — have I left anyone out here? — you should prioritize both regulatory compliance and cybersecurity during 2017.

Regulatory compliance is obligatory, of course, because . . . well, it’s the law, folks! But cyber-compliance is not the same as cyber-security, and security is what you really want.

If your goal is simply to avoid fines and penalties, then as long as you’re sure you meet the minimal requirements of compliance, don’t worry.

But if you’re reading this because your goal is to see your company survive and thrive in today’s digitally interconnected business world, and you’re aware of the current security threat landscape, you shouldn’t breathe easy if you’re told that your company is 100% compliant. Breathe easy when you’re confident that your company has good cybersecurity.

(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.)