The Department of State, Directorate of Defense Trade Controls (DDTC) has published the following notice on their website:

Industry Notice: Industry Feedback on Electronic Disclosures (DS-7787) (4.12.18) DDTC is developing an electronic version of the current DS-7787: Disclosure of Violations of the Arms Export Control Act form, also known as Disclosures. As an alternative to paper and mail, the online version will allow Industry personnel to submit Disclosures directly through DDTC’s Defense Export Compliance and Control System (DECCS). In an effort to improve this electronic form, DDTC is enabling a test version of the new online process for Industry feedback between April 16, 2018 – April 30, 2018, prior to it being publicly available online. If you are interested in participating, please visit https://pmddtcqa.service-now.com/um/ for more information on how to access and use the test version. Once you have completed testing, you can submit feedback or comments through the Provide feedback button.

As disclosures are an important part of compliance programs, this is a great opportunity to see what DDTC is developing and help make it more useful and user-friendly in the future.

EXPORT COMPLIANCE IN 11 WORDS
A Series on Export Compliance Essentials

(Part 9 of 12)

MONITOR!

Once you have an export compliance program in place, continuous monitoring is critically important to provide reasonable assurance of its effectiveness, enable you to make incremental adjustments to changing situations, and show you ways to improve the program’s efficiency. Annual compliance audits and assessments will be limited in their effectiveness and afford inadequate protection unless they are supported and complemented by the ongoing review processes that should be an integral part of compliance management.

Congratulations! It took a lot of hard work, and more time than you’d expected, but you’ve finally succeeded in getting a comprehensive export compliance program up and running at your company. You’re satisfied that it’s all there—the works, the whole enchilada, all the compliance essentials we’ve been looking at in this series:

• Risk analysis and planning
• A thorough manual with written policies and detailed procedures
• Upper management commitment and involvement
• Initial and repeated multi-level employee training
• Clear delineation of roles, responsibilities, and accountability
• Procedures for jurisdictional determination and product classification
• Obtaining approval for licenses and agreements
• Tracking the use of exemptions and exceptions
• Labeling and marking controlled items and technical data
• Real-time screening of customers, suppliers, service contractors, business partners, new hires, and other parties
• Physical security
• IT security
• Mandatory recordkeeping and records-retention practices
• Mandatory reporting to the government agencies
• Periodic internal and external reviews, with follow-up of findings

All good. Sounds fantastic. We’ve got just a few more questions for you before you take off on that well-earned vacation you’ve been looking forward to. Here’s one:

What provisions have you made for monitoring the operation of your program? In other words, how do you plan to make sure your policies and procedures continue to be adequate and continue to function properly? And how do you plan to make sure you won’t be the last to know if they aren’t working as they should?

In compliance management, as in every other part of life, no matter how carefully you’ve planned and how well you’ve done your homework, there are sure to be some unforeseen challenges. Issues will surface that were not initially identified. A procedure that looked good on paper will be put into practice and turn out to be . . . not so good. Situations and personnel will change without warning, giving rise to a whole new set of problems.

Even the best-designed compliance program is bound to require fine-tuning and frequent adjustments in response to:

• Changes in business needs
• Changes in U.S. export laws and regulations
• Changes in federal agency enforcement policies
• Changes in technology
• Changes in the national economy
• Changes in the global marketplace
• Changes in the global threat environment.

Yes, the annual risk assessments and compliance audits that you wisely included in your compliance plan are one important tool for coping with those challenges, but periodic audits cannot be the whole solution. All too often compliance audits are conducted too long after non-compliance events have already occurred to allow you to correct the issues and problems they uncover before a great deal of damage has been done.

If your company is committing an export violation today, or is about to do so, do you really want to be first apprised of the situation by the annual compliance audit report?  Don’t put off tomorrow what can be done today!

As a compliance officer, you need windows into your compliance program that allow you to view the current state of your company’s internal processes and see which areas need more attention right now. Periodic company-wide audits and assessments are most effective when they are informed and supplemented by day-to-day and week-to-week feedback from operational management, as well as frequent tests, checks, surveys, and “mini-audits” of specific processes and risk points.

Preventing the occurrence of export violations, or at least stopping them before they can multiply, is nearly always less costly and stressful than dealing with their aftermath. Successfully detecting intentional deviations from processes and procedures—such as when an employee purposely ignores or contravenes compliance safeguards for his or her own advantage or convenience—has the added benefit of reinforcing the perception that management prioritizes export compliance, is watching, and will take prompt action when problems occur.

That’s undoubtedly why the DDTC’s Compliance Program Guidelines counsel “internal monitoring” that involves “measurement of effectiveness of day-to-day operations” with “emphasis on validation of full export compliance, including adherence to license and other approval conditions.”

It’s also why the BIS’s Office of Exporter Services included “internal and external compliance monitoring,” along with periodic audits, as one of the Nine Key Elements of an Effective Compliance Program. In the agency’s 145-page handbook for U.S. exporters, Compliance Guidelines: How to Develop an Effective Export Management and Compliance Program and Manual, the BIS recommends “a transaction-level and process-level review of compliance efforts with a special emphasis placed on areas of high risk,” noting that such monitoring can “successfully focus attention at the business-unit level on risk areas at an early stage, affording the opportunity to correct deficiencies before they result in major problems.”

The DDTC and BIS guidance documents agree that internal and external monitoring are both important. Every company or organization, in addition to actively monitoring itself, needs outside assurance from an independent third party that its compliance efforts are on the right track.

The following compliance “best practices” also fall under the general rubric of export compliance monitoring:

• Self-monitoring and reporting by operations staff in all export-related departments and divisions of the company on the effectiveness of specific compliance processes and procedures is requested and implemented.

• Timely crosstalk is encouraged among employees in export-related departments, divisions, and branches within the company to ensure that practical compliance experiences and lessons learned are communicated throughout the entire organization, with a view to improving the effectiveness and efficiency of export controls and promoting consistency of procedures.

• Clear and specific internal procedures have been established and communicated to all employees, including contract employees, for the reporting of potential export compliance problems to management, including the option of reporting export violations anonymously through a mailbox, website, or helpline.

• Employees understand that management considers the reporting of suspected export violations to be the duty of each employee and know that they will be protected from retribution or retaliation of any kind if they raise questions or concerns about compliance in good faith.

• On-site end-use monitoring of personnel performing defense services is performed frequently by qualified export compliance staff to ensure that their activities remain within the scope of the relevant export authorization.

• Previously identified export compliance problems or high-risk areas are revisited to ensure that the prescribed corrective actions were implemented and that they have been effective.

Unlike banks and financial institutions, who may choose to concentrate their compliance monitoring on those transactions with the highest impact on revenue, exporters of defense articles and services, dual-use commodities, technical data, and controlled technology, when monitoring ITAR, EAR, and OFAC compliance, may sometimes need to focus on business areas that have a relatively small revenue impact but carry a large compliance risk. Manufacturing or distribution operations in a developing country, for example, or exports to new trading partners in a formerly embargoed nation whose U.S. trade sanctions were only recently lifted, might be relatively small now, when measured by current sales or profits, but multiple compliance challenges and the potential for serious penalties may call for close and continuous monitoring.

Monitoring day-to-day compliance may seem unexciting, like performing routine maintenance on your car. It undoubtedly requires a significant investment of time, effort, and money, and the benefits may not be immediately evident. But most car owners understand that failure to do so is a sure recipe for disaster.  In other words, don’t let procrastination get in the way of success and continuously monitor your compliance program!

 

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.

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.

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.”

EXPORT COMPLIANCE IN 11 WORDS (Part 4 of 12):
A Series on Export Compliance Essentials

CLASSIFY!

Sound policies and consistent procedures for classifying your products
will reduce the risk of export control violations

Export compliance managers must be thoroughly familiar with their company’s products, services, and technical data, and they must know which export control requirements apply to each category.

Determining the correct export jurisdiction for your products—State/DDTC, Commerce/BIS, or, in rare instances, another Federal agency—and classifying them accurately according to the U.S. Munitions List (USML) or Commerce Control List (CCL) is a critical element of your corporate export control process, particularly in light of the recent Export Control Reform, which has brought about the migration of many former USML items to the CCL. Solid compliance demands accurate classification.

Even a small mistake in classification can cause big problems. Multiple export control violations resulting from a misclassification may result in wasted time, unhappy customers, heavy fines and penalties, long and costly litigation, a tarnished business reputation, and a record with the regulatory agencies that will be taken into account in any future export enforcement proceedings.

How to Avoid Errors in Product Classification

1. Keep calm and follow the process.

The web-based Decision Tree Tools on the DDTC and BIS sites, especially the USML Order of Review and Specially Designed tools and the CCL Order of Review and Specially Designed tools, are invaluable resources, if used properly. Together they provide a sure roadmap that will guide you through the process of reviewing the USML and CCL in order to classify each of your items correctly, with references to the relevant sections of the ITAR and EAR for you to consult at each step along the way. When you classify your products, make it your policy to follow the statutory Order of Review consistently. Stick to the path, and resist the temptation to take shortcuts!

2. Classify your products in advance to reduce risk.

A policy of classifying your products and services transaction-by-transaction, as needed, upon receipt of an RFQ or order from a foreign customer, puts your company at high risk of double-barreled disaster. What are the risks? For one thing, informing a customer when you’re about to ship his order that you’ve just realized you’ll have to apply for an export license, so it’ll be a while before he sees his goods, is a less-than-optimal practice if repeat business and customer retention are desired. For another thing, allowing shipping deadlines to influence jurisdictional determinations and classification decisions is a tried-and-true recipe for accumulating multiple export control violations and incurring heavy fines and other penalties. “Company discovers potential compliance problem with profitable overseas order, but decides to go ahead and ship anyway because they’re so hot for the sale” is one of the most common export violation scenarios.

A much safer practice is to do your homework in advance by classifying your whole product line and compiling the classifications (USML Category and Subcategory, or ECCN, or classification as “EAR99”) into a Product (or Technology) Classification Matrix, which can then be conveniently maintained in spreadsheet format. If you do this, be sure you include a concise explanation of the rationale for each classification, referencing any associated notes or documentation.

3. Stay connected and current.

The USML Categories and ECCNs you’ve determined for your products and services may not remain valid and accurate forever. Your company’s product specifications may change over time. Changing export laws, regulations, and definitions may also require you to re-classify. Make sure you subscribe to news and updates from all the relevant U.S. Government regulatory agencies, read them carefully as they are published, and put in place timely follow-up procedures for updating your Product Classification Matrix, internal control processes, compliance manual, and employee training, as required.

4. Document everything.

Inadequate recordkeeping is a very common cause of export control violations. If you self-determine the export classifications of your products, your classification procedures and process must generate and maintain documentation to show how and why you came to your conclusions. If you submitted a Commodity Jurisdiction (CJ) Request to State/DDTC or a Commodity Classification Request (CCATS) to the Commerce Department, you need to keep copies of the official rulings they issued, along with the product descriptions and supporting documentation you submitted to them, as well as any related correspondence or notes on conversations with U.S. Government agents. Even for items that you shipped under the NLR designation, you should always keep records justifying your NLR determination, as well as the other details of the export classification, for at least five years.

5. Disabuse yourself of common myths and misconceptions.

“It’s a commercial off-the-shelf item, so it can’t be export-controlled.”  FALSE. Everything in the U.S. (except public domain information) is subject to U.S. export controls. A great many COTS items are highly controlled for export. Full-rate thermal cameras, precision gyroscopes, and CubeSat kits are just a few examples.

“If I take it with me in my carry-on luggage, I won’t have to worry about export controls.”  FALSE. Anything that leaves the U.S. is being exported. There are some exemptions and exceptions for commercial items carried out of the country temporarily for use as “tools of trade” and a few other reasons, but their use requires documentation, and by no means do these exceptions cover everything.

“I work at a university, so what I do is classified as ‘fundamental research,’ making it automatically exempt from export controls.”  FALSE. By no means is it safe to assume that all work carried on at a university is fundamental research, or that technical data and information associated with university work is not export-controlled. University research will usually not be considered “fundamental research” if the university or its researchers accept restrictions on the publication of scientific and technical information resulting from the activity, or if the research is funded by the U.S. Government and specific access and dissemination controls protect information resulting from the activity. Even when the activity itself does qualify as “fundamental research,” export control regulations may still impose restrictions on certain equipment or software used in the course of the research, and on the provision of technical data and training to foreign persons in relation to that hardware or software. Several major U.S. export enforcement actions recently have involved universities and university professors.

“One reason we ship everything through a freight forwarder is so we won’t have to worry about the export classifications of our products. Our shipping agent is responsible for classifying our exports and obtaining licenses, not us.”  FALSE. Your freight forwarder’s job is to move your freight, not to analyze and classify your products and technologies. Even if a freight forwarder or courier is involved in the export transaction, as long as you are the U.S. Principal Party in Interest (USPPI) on the AES record, the ultimate responsibility for determining the proper jurisdiction and classification, obtaining a license, and ensuring compliance with licensing requirements and provisos is still yours. If the freight forwarder makes a mistake in classifying products on your behalf, you will be liable for any export violations that may occur.

“Why, we’ve been making this product for at least 30 years, and this can’t be the first time we’ve exported it, so it must be okay. It couldn’t possibly be export-controlled.”  FALSE. It doesn’t matter how long you’ve been making it —if it needs a license and you export it without one, that’s an export violation. Even if you exported it in the past, the ITAR or EAR requirements might have changed since then. And if nobody ever thought to check on the product’s export classification until now, you may well find that you need to file a Voluntary Disclosure.

“All our company’s products are classified EAR99. In other words, they’re all NLR – No License Required. So we don’t need to worry about export licenses.”  FALSE. “EAR99” is not a synonym for “NLR.” EAR99 is a classification that applies to items that fall under the jurisdiction of the Commerce Department, but are not listed on the Commerce Control List. While it is true that such items can be exported without a license in many cases, whether or not you will need a license to export an item depends on the details of the transaction. You will need a license for an EAR99 item—or your export might even be denied authorization—if you are shipping the item to an embargoed or sanctioned destination, or to a denied party or end-user of concern, or if you have knowledge that the export is in support of a prohibited end-use designated in Part 744 of the EAR, or if any of the Ten General Prohibitions in Part 736 apply to the transaction.

Lest you think the possibility of a license requirement for an EAR99 item is merely theoretical, note that in 2009 a very small New York company agreed to pay $70,000 to settle charges that it shipped $95,335 worth of scrap metal, classified EAR99, without a license to a company in Pakistan that (unbeknownst to the exporter) was on the BIS’s Entity List. According to the BIS, a request for a license to export EAR99 scrap metal to that Pakistani customer would have been routinely approved, but since the exporter shipped without applying for one, they were guilty of an export violation.

6. Don’t try to go it alone.

Product classification is a very serious matter. Yet the U.S. export laws and regulations are fraught with complications, and it’s easy to make mistakes. Read the business section of any newspaper regularly and you’ll see that export violations occur all the time, a great many of them related to products that were classified wrongly.

If you lack the expertise to classify products, or if you are not comfortable reading and interpreting the regulations and the technical specifications of products, or if you lack the time to do those things, then find the best outside experts you can as soon as you can and seek their advice. Export compliance consultants can often help at lesser cost than lawyers. And don’t be afraid to ask the consultants tough questions; after all, that’s what experts are for.

You also need to invest internally in training one or more of your people to handle your company’s product classification process. One strategy is to identify someone already working for you who is not afraid of reading and explaining regulations, such as the quality assurance or safety control or security manager. Then send him or her to export compliance classes and seminars that include hands-on workshops and practical training scenarios in product classification. If none of your current employees looks like the right person for this responsibility, then ask your outside consultant to help you find, hire, and train a qualified new person.

Finally, when necessary, don’t hesitate to seek professional legal advice from a law firm that specializes in international trade and export controls as its primary practice area. It’s true that lawyers can be expensive and legal fees are generally not a cost that any company likes to pay. But it can be a fatal mistake to put off calling a lawyer when you find yourself facing complicated legal questions, contractual issues, potential litigation, mergers and acquisitions, or key strategic decisions, such as voluntary disclosures when dealing with a 126.1 Prohibited Destination. Classifying your products for export control purposes certainly does not normally require the services of a lawyer. In certain cases, however, experienced legal professionals, working in conjunction with technical experts, can provide indispensable assistance in reviewing complex products and radically new technologies, or sorting out ambiguous intellectual property questions, to ascertain the appropriate regulatory jurisdiction and export classification. In dealing with such thorny matters, they can help keep you out of hot water, and the earlier in the process you bring them in, the more they can help.

Product classification is a vast topic. We’ll share some further thoughts with you about how to set up effective classification processes and procedures at your company in future blog posts.

Meanwhile, in the next post of this series on export compliance essentials, “SECURE!” we’ll discuss how you can protect your company’s controlled technical data and information against access by unauthorized persons, both on the ground and in the cloud.

EXPORT COMPLIANCE IN 11 WORDS (Part 2 of 12):
A Series on Export Compliance Essentials

Analyze!

A risk analysis is the key to getting your business
ready for export compliance

As we noted in our previous post, there’s no such thing as a one-size-fits-all corporate export compliance system. Processes and procedures that are absolutely critical components of someone else’s compliance strategy might be impracticable and pointless for your company. Yet a compliance program with the wrong focus could weaken your competitive advantage by wasting time, money, and personnel on “protection” you don’t need, while leaving you exposed to being blindsided by severe penalties and crippling financial losses in areas where you actually are vulnerable.

Why Risk Analysis Is the Right Place to Start

Getting a business ready for export compliance is a challenging project. Before you can effectively address the real risks your company faces, you first need to know exactly what those risks are. You need to know how likely it is that you will be involved in a violation of the U.S. export laws, and how serious the consequences of such a violation would be. For that reason, the decision to conduct a comprehensive strategic risk analysis of your business from an export-compliance standpoint — preferably alongside an outside expert — is an indispensable prerequisite to all other compliance decision-making.

The first step in your analysis is an objective evaluation of your current information assets, systems, processes, procedures, people, and documentation. The company’s past, present, and future export customers, products, and services; the relevant U.S. laws and regulations; the likelihood of certain kinds of violation occurring; the nature and adequacy of the internal controls and personnel currently in place; the present regulatory environment and enforcement trends; the potential severity of penalties and fines, as well as other possible consequences for your business — all these issues and others need to be discussed in detail, analyzed, and evaluated before written policies and procedures can be formulated and put in place.

What’s the Difference?  “Risk Assessment” vs. “Directed Compliance Audit”

A directed export compliance audit is usually the outcome of a compliance issue that an exporter has experienced with the U.S. Government, one in which the requirement for an independent compliance audit has been levied or required as part of a settlement. The scope, focus, and completion date are mandated by the regulatory agency with which the issue is being adjudicated—either the DDTC, BIS, or OFAC. The report provided to the company by the auditor must be submitted to the agency, usually within a brief time span.

An export compliance risk assessment is a company-initiated examination of the efficiency and effectiveness of its export control process. The output from such an assessment includes a summary of the applicable U.S. export control requirements, an overall review and commentary on the existing compliance program (if any), and a detailed, process-by-process evaluation, typically presented in traffic-signal format (red, yellow, and green), with process “gaps” highlighted. The report on the findings of a risk assessment always includes recommendations for improvement and/or suggested corrective actions for potentially non-compliant activities that were found in the course of the assessment.

Following those recommendations and implementing those corrective actions is the best way to avoid a directed compliance audit.

What Do These Terms Mean? “Periodic” and “Independent”

The term “risk assessment” implies a formal, systematic process—something more than just an informal sizing-up or casual take on your compliance efforts. Industry “best practices” for ensuring corporate export compliance call for periodic independent compliance risk assessments.

“Periodic,” in this case, starts with annual assessments as a baseline.

“Independent” means that your risk level and the effectiveness of your current program need to be evaluated by a competent outside party.

“Competent” is simply common sense: the individual or team conducting the assessment needs to have the appropriate qualifications and specialized know-how, including a thorough familiarity with U.S. export controls and current risk assessment methodology. Competence may be established through relevant training and/or extensive experience. In the case of a directed compliance audit, the regulatory agency will require evidence of the qualifications of the person you have engaged to perform the audit. The U.S. Government won’t trust just anyone to assess corporate export compliance, and neither should you. So, here’s a hint: if you want to be sure you’re engaging a competent professional to conduct your risk assessment, look for someone whose résumé includes performing directed compliance audits.

“Outside” usually means that the review should be conducted by a person who is not a direct employee of your company. This is crucial, because you need an unbiased, impartial assessment of both the seriousness and likelihood of the non-compliance risks you are facing and the effectiveness of your current program and personnel. You need accurate results and recommendations you can rely on. Plainly, conflicts of interest could impair the objectivity of the findings. Common sense dictates that the more attached someone is to a situation—the more he or she has at stake—the more likely it is that the reliability of the assessment will be affected.

The Four Stages of the Risk Assessment Process

Although the details of every export compliance risk assessment are unique, the overall review process is similar in most cases, and typically involves four stages:

Stage 1:  Advance planning and preparation.

Stage 2:  An on-site visit.

Stage 3:  A report of the findings. This report should include quantitative ratings of your company’s risk of export violations in each area of your business operations. It should conclude with practical recommendations of corrective actions and procedural enhancements to address problem areas and mitigate the risks. The report’s recommendations should be summarized in a step-by-step, actionable plan that highlights the place to start in each business area.

Stage 4:  A scheduled follow-up review.

Why Assessing Compliance and Identifying Risks Is Not a Waste of Time

Perhaps you’re thinking that all this sounds like a significant investment of time, money, manpower, and energy, and wondering whether the investment is justified.  Are risk assessments really all that important? Will they truly add value to my business, or are they just a waste of time?

If you’re a U.S. exporter, periodic export compliance risk assessments, far from being a waste of time and corporate resources, are a valuable strategic tool that’s critical to your company’s continued survival in today’s global marketplace and regulatory environment. Let’s look at some of the reasons why that’s true.

Risk assessments can help you avoid severe penalties and fines. Violations of U.S. export laws can—and often do—result in stiff penalties. Criminal penalties can reach $1,000,000 and 20 years’ imprisonment per violation. Administrative penalties for civil violations are less severe, but can reach the greater of $250,000 per violation or twice the amount of the transaction—and a single non-compliant export transaction typically results in multiple violations.

In addition to fines, individuals and companies that fail to comply with export controls are subject to other administrative sanctions, including denial of their export privileges and suspension of their right to contract with the U.S. Government—penalties that would spell ruin for many U.S. companies.

Perhaps those are some of the reasons no company looks forward to being visited by officials from the BIS’s Office of Export Enforcement or the DDTC’s Office of Defense Trade Controls Compliance, or the Treasury Department’s OFAC.

“Be prepared” is not just a good motto for Boy Scouts; it’s good policy for U.S. exporters, too. The most effective measure you can take to minimize the likelihood of a visit by enforcement officials is to budget for regular export compliance risk assessments of your firm and to take the action recommendations in the assessment report very seriously. Furthermore—and equally important—if your company has been conducting its own comprehensive assessments of its compliance processes all along, and an official visit by government agents does occur, you can be sure that you and your employees will undergo a minimum of stress. You’ll be confident that you can produce any records and documents requested without delay, and you’ll be primed to answer any questions with accurate and up-to-date information. The likelihood of penalties will be small, and the cost in staff time and lost productivity will be greatly reduced.

And while you’re weighing up the negative consequences of non-compliance, here are a few more to put on the scale: avoiding hefty fines and penalties and lessening the chance of official visits and directed audits are not the only reasons you’ll be doing yourself a favor by conducting periodic independent compliance risk assessments and implementing their recommendations. A history of export violations can (1) adversely affect your company’s financial position; (2) hold up or block a sale, merger, or acquisition; (3) scare off potential foreign customers; (4) tarnish your firm’s image and business reputation; and (5) damage your business in many other ways as well.

This is definitely a case where a relatively small investment can save big over future costs and consequences.

The regulatory agencies have made it plain that they don’t consider risk assessments a waste of time. If your company should need to make a Voluntary Disclosure of an export violation you’ve discovered, one of the standard questions the DTCC and OEE will ask when reviewing your case is whether any audits or reviews of your company’s export compliance have been conducted during the past five years. Do you really want to answer “No” to that question? In most settlement agreements, the regulatory agencies require the company to have its export compliance program independently audited and send them a copy of the report within a narrow time frame. Rather than wait for that to happen, doesn’t it seem wiser to be proactive?

Risk assessments produce effective compliance programs—a valuable business asset. An export controls risk assessment by a compliance professional is bound to result in improved compliance. And a good track record and strong reputation for compliance are good for your business. Especially in the defense trade sector, a robust global trade compliance program is recognized as a competitive asset, one that some firms even list on their web sites. Recent studies of the most successful U.S. companies agree on one characteristic they have in common: compliance is part of their corporate culture.

Risk assessments can help your whole business run more efficiently. The compliance risk assessment process and your company’s follow-up on its findings and recommendations will highlight better ways to integrate export-control processes and “best practices” for export compliance into the rest of your business operations, including quality assurance SOPs and other regulatory compliance programs. The likely result will be an uptick in the overall efficiency of all your company’s operations. In particular, the implementation of Restricted Parties Screening (RPS) software and the challenge of integrating screening into your ERP software offers an opportunity to streamline your entire internal structure (including distribution process and supply chain management, inventory control, project planning, services knowledge base, and other critical business management processes). In the course of conducting an export controls risk analysis, many firms have discovered loopholes in their cybersecurity that badly needed strengthening and areas where significant improvement was possible in the networking of company resources.

Stage 1:  Getting Ready for Your Export Compliance Risk Assessment

Step back and think about your whole business.  An export compliance risk assessment should not take place in a bubble. To be fully effective, it needs to be part of a review and examination of your company’s overall business operations. What other week-to-week business processes are likely to be impacted by modifications to your export compliance system? How do you plan to integrate the findings and remediation measures that will be prescribed into your overall quality assurance and regulatory compliance system? What are your long-term corporate goals? How could improvements in your export process help you accomplish them?

Formulate some risk-mitigation proposals of your own.  Consider discussing the risk of export violations and setting down your ideas, suggestions, and tentative plans to improve your company’s export process before the risk assessment, based on your own past experiences and observations. Talk over your ideas with the reviewers before or during the on-site visit stage of the risk assessment. Later on, you can list those ideas side-by-side with the action recommendations in the assessment report, and consider how to combine the two lists into a more successful and export-compliant business.

Find out who’s who when it comes to exports.  Identify the actors within your company. Which individuals or departments are actually responsible for export compliance on a daily basis? Which employees are the points of contact within each department? Having a clear understanding of the role each person plays in export transactions is essential, because commonly, depending on the size of the company, one person may wear multiple hats with regard to export responsibilities. Being able to provide the names and contact information for key actors dealing with exports in your company will help the risk assessment run smoothly and without a hitch.

During the on-site visit phase of the risk assessment, every employee involved with exports in any way should be available and prepared to speak about his or her role, answer any questions the outside reviewer may have about the company’s internal processes, and provide examples of paperwork or electronic records related to exports upon request. Because these employees understand the specific business process and its associated flow firsthand, they can give valuable input when it comes to process improvements and risk mitigation efforts.

Seriously question your cybersecurity.  Controlled technical data stored in electronic form is always an area of potentially high risk that must be scrutinized carefully, because such data and information is easily accessed, copied, and transferred elsewhere. For that reason, some probing questions need to be asked about data storage and access control. Where is your controlled technical information and data stored? What physical and electronic security measures are in place to protect it? What company policies govern data storage? What controls exist to ensure that the granting of access to the company’s export-restricted data is consistent with U.S. regulatory requirements?

Pay attention to documentation and recordkeeping.  Review your company’s recordkeeping system and export documentation in advance of the on-site visit. Many U.S. exporters seem unaware that, according to U.S. export control regulations, recordkeeping and reporting are a very big deal, and a frequent cause of export violations. Exporters are legally required to maintain certain specific documents related to export transactions, and have them accessible for inspection, for at least five years. How and where are your records currently stored? Are they physically stored in an on-site location, or are they accessed electronically through the company servers? How conveniently and quickly can they be accessed? By whom? Each person involved in export compliance processes needs a clear understanding of the mandatory recordkeeping requirements and the company’s recordkeeping policy and practices. Make sure your export-related records will be conveniently available for review during the assessment visit, and consider how your system for saving, storing, and accessing them might be improved.

In the next post of this blog series on export compliance essentials, “EDUCATE!” we’ll discuss employee training—what it needs to cover and why it is critically important to the success of any corporate export compliance program.