Export Control Laws Have Bite
You have a client in a friendly European country. You've done business with him for years and when he places another order for oil country PVF, you're only too happy to ring up what promises to be a lucrative sale. Except this time, the transaction brings visits from the U.S. Customs Service, and their investigation leads to criminal prosecution. What you're spending on attorney fees far exceeds the money made on the export deal.
True story. I'm told the company being prosecuted is a PVF distributor, and the ultimate destination of the OCG was Iran. People who know the distributor think his overseas contact deceived him. The U.S. Department of Homeland Security decided to prosecute, which means they think he knew where the materials were going or willfully avoided knowing. In any case, the distributor is caught up in a costly mess, which can only get a lot worse if he's convicted.
Could it happen to you? A lot of people in the PVF Roundtable are shuddering with the thought, “There but for the grace of ….”
The Houston-based PVF Roundtable is an energetic organization of manufacturers, distributors, master distributors and other businesses attached to the industrial PVF marketplace (www.pvf.org). They inhabit a close-knit community where friendships and business relationships are virtually indistinguishable. When a trusted client tells them something, they are inclined to believe it. Also, they are a patriotic bunch from the state that gave us two conservative U.S. presidents named Bush. PVF Roundtable members aren't the kind of folks who would knowingly lend a helping hand to medieval mullahs who call us devils.
Yet, it's easy to get tripped up by export control laws. That was the message hammered home by attorney J. Triplett (“Trip”) Mackintosh, a partner in the Denver office of Holland & Hart (www.hollandhart.com) with 20 years of experience in export control law. The PVF Roundtable recruited him to share his knowledge with members in a seminar held last Feb. 22.
Expensive MistakesThe attorney grabbed the crowd's attention early on by noting that to retain a firm like his to defend against export violation charges will typically run around $4,500 a day, plus expenses - usually adding up to between $50,000-100,000. “I've never had a case where my fees didn't surpass the deal margin within a week,” he said. That's just for mounting a defense. If found in violation, penalties can climb into seven figures. Government crackdowns are becoming increasingly severe in phase with threats from terrorism and nuclear proliferation. It is a lot cheaper to hire his firm ahead of time to devise compliance strategies, Mackintosh let it be known.
“You cannot rely on gut instincts with export laws,” he noted. The attorney related examples of seemingly reasonable actions deemed to be violations, while seemingly complicit behavior falls through legal loopholes. For example, it's not necessarily illegal for a foreign subsidiary of a U.S. firm to sell to clients who may be off limits to the U.S. parent.
During the Cold War, export controls were relatively simple. There were the Soviet bloc nations with which trade was forbidden or severely restricted. Almost everywhere else was wide open.
Now, trade restrictions are defined not only by national boundaries, but also by prohibition against dealing with a long list of unsavory characters and organizations. They include people associated with terrorism, drug trafficking, weapons trafficking, nuclear proliferation, bribery, smuggling and other illicit activities. PVF firms that deal in specialty metals are particularly vulnerable, and Iran is a focal point of enforcement at present.
The Commerce Department keeps a long list of individuals who are subject to export controls. The list is constantly changing, so a person you may have dealt with legally in the past may now be “hot.” Of course, once they know they've been targeted, unapproved buyers will likely take steps to hide their identity from suppliers or operate through intermediaries. Customs officials expect suppliers to make a reasonable effort to find out who their ultimate customers might be and whether it is legal to sell to them. According to Mackintosh, suppliers aren't expected to become James Bond in probing customer backgrounds, but willful blindness can get them in trouble.
Trouble sometimes arises from the fact that a distributor's direct contact with an export buyer may be a commissioned sales rep or someone else whose primary incentive is to overcome sales obstacles rather than raise them. Mackintosh said that from a law enforcement standpoint, an employee's violation is presumed to be done with the knowledge of the owner. He added that many investigations get triggered by disgruntled employees.
Complicating things still more is a bewildering array of federal agency jurisdiction over exports. State, Commerce, Treasury, Defense and Homeland Security are among the Cabinet-level agencies regulating exports, and communication between them is not always smooth. Most PVF transactions fall under Dept. of Commerce jurisdiction, though there could be exceptions, Some guidance is available via the U.S. Custom & Border Protection Web site, www.cbp.gov. Click on Export to start the process.
Anatomy Of An Export ViolationMackintosh presented an example of how a distributor can unwittingly get trapped into a serious violation. Let's say Distributor X exports high nickel content PVF around the world. The company is aware of export regulations and has taken steps to comply. This includes classifying all of its products according to the Commerce Control List. Most of this distributor's products are categorized by the Export Administration Regulations (EAR) as EAR99, which do not require an export license, but a few SKUs fall under the 2B350 regulation, which requires a license to export to certain countries.
A company in one of those countries places an order for a bunch of EAR99 products. The order gets processed and passes through internal administrative controls to assure compliance with export regulations, but a couple of days before the order gets shipped, the purchaser adds a 2B350 product to the order. Warehouse personnel treat it as a routine add-on and nobody thinks to subject it to the same administrative controls as the original order, so the goods get shipped with paperwork stating that all products are EAR99. If U.S. Customs agents are diligent, the distributor could be subject to both civil and criminal penalties for that simple little oversight.
This is why one of the elements of a compliance program is to train warehouse, shipping and other line employees on how to spot violations and report them. The attorney also drew attention to a variety of red flags about foreign buyers. For instance, it should raise suspicion if a customer is willing to pay cash, has little or no business background, is unfamiliar with the product's performance characteristics, or declines routine engineering or maintenance support. Also beware of vague delivery dates, out-of-the-way destinations or shipping routes, or if a freight forwarding firm is listed as the product's final destination. “More and more burden is being placed on the exporter to know the customer,” Mackintosh said.
As lawyers are wont to do when trolling for business, his presentation focused on worst case scenarios. The attorney painted U.S. Customs officials as hostile folks motivated to stick it to businesses in order to gain promotions. This raised the hackles of a U.S. Customs Service official I spoke with. “We're passionate about our jobs, but dispassionate when searching for evidence,” said the official.
The customs agent also indicated that from his agency's perspective, ignorance of the law IS a legitimate defense. “We're not out to get people who aren't criminally culpable or willfully negligent about export regulations. There are far too many legitimate targets to worry about for us to deal with stuff like that. We try to help people build their export control knowledge,” the agent said.
At a subsequent reception I asked several PVF Roundtable members how familiar they had been with the content presented in the seminar, and they responded by saying how frightening it was to learn how little they knew. The PVF Roundtable rendered a valuable service in shedding light on this subject. <<