US Trade Controls: General Overview for Companies Operating in the United Arab Emirates, Qatar, Saudi Arabia and South Africa Introduction This memorandum provides a general overview on common compliance issues arising under US export controls and trade and economic sanctions (collectively, US trade controls). US trade controls create significant compliance challenges for non-US companies as well as US companies because of their extraterritorial reach, aggressive government enforcement and emerging theories of liability for persons and entities with only limited ties to the US. As summarised below, the scope of these US laws and their jurisdictional reach are extremely broad. In assessing how US trade controls could impact our clients’ operations in the United Arab Emirates (UAE), Qatar, Saudi Arabia and South Africa, it is important to recognise the following: • •
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Technology and products sourced from the US, or otherwise originating in the US, may, depending on their nature, be subject to export or re-export licence requirements before being transferred to any of these jurisdictions Although the current export licensing policy between the US and these four jurisdictions is generally favourable, export licences include conditions and limitations on the use of the approved items, and technology and products that are approved for export from the US continue to be subject to re-export and retransfer restrictions In certain instances, products or technology developed in these jurisdictions from US technology or products can still be subject to US re-export and retransfer restrictions US trade controls include varying levels of restrictions on transactions involving US persons, US entities or items of US origin and entities or persons in or from USsanctioned countries, including for instance Iran, Sudan, and Syria. For countries such as Zimbabwe and Iraq, there are restrictions on transactions with Specifically Designated Nationals (“SDNs”)
Given the complexity and sensitivity of these rules, it is important for particular issues and transactions to be addressed on a case-by-case basis, in careful consultation with qualified legal and compliance personnel. US Export Controls and Sanctions Laws The US government maintains and aggressively enforces laws and regulations that prohibit business activities involving certain technologies, entities, persons or countries. Because the US trade controls system involves a multiplicity of statutes, regulations and policy objectives, it can be both confusing to the outsider and frustrating to anyone trying to work within the system. The law and policy of US trade controls are driven by a combination of national security concerns, foreign policy objectives, efforts to curb international terrorism and the proliferation of weapons of mass destruction and even domestic politics. The level of control on individual transactions varies according to several factors, including the nature and
sophistication of the product or technology in question, the ultimate destination of the export, the identity of the end user and the proposed end use. Overview of Relevant Laws Most US trade controls fall under one of three legal frameworks. First, the Export Administration Regulations (EAR), which are administered by the Department of Commerce’s Bureau of Industry and Security (BIS), control exports and re-exports of a broad range of non-military (i.e., “dual-use”) goods and technology for both national security and foreign policy reasons. Second, the International Traffic in Arms Regulations (ITAR), which are administered by the Department of State’s Directorate of Defense Trade Controls (DDTC), regulate exports of goods, technical data, and services that are specifically 1 designed for military use. The ITAR is beyond the scope of this overview, though readers should note that the export of defence services, the release of ITAR-controlled technical data and the provision of defence services almost always require prior authorisation from DDTC. Third, the Treasury Department’s Office of Foreign Assets Control (OFAC) administers economic and trade sanctions against certain countries as well as a large number of SDNs. Export/Re-export Licences Exports of certain goods, software, and technology (collectively “items”) from the US, as well as re-exports of certain U.S. origin items or non-U.S. items with more than a de minimis amount of U.S. content require licences when exporting to the UAE, Qatar, Saudi Arabia and South Africa. In addition, the transfer of certain technology or know-how to foreign nationals in the US (a so-called deemed export) or the release of certain technology within a foreign country to a national of a third country (a so-called deemed re-export) may also require prior licensing from U.S. authorities. The EAR determine whether or not a licence is required according to a system of alphanumeric codes called Export Control Classification Numbers (“ECCNs”), which are then cross-referenced against a Commerce Country Chart. Factors that have weight in determining whether a licence is required include the nature of the item, its destination, the end user and the end use. Narrow licence exceptions may be available, for example for lowvalue shipments, for temporary exports, or certain additional and permitted re-exports. Freeof-charge exports/re-exports, such as gifts, remain fully subject to the EAR. Determining the correct ECCN of an item is critical, and the U.S. Commerce Department is prepared to issue official commodity classification rulings, although such rulings are not required. Latham’s export controls lawyers assist clients regularly with navigating the EAR, including understanding licence exceptions. In general terms, specific export and re-export licences issued by the Commerce Department are narrow authorisations, which are itemspecific, end user specific, limited to certain dollar-values, valid at most for a two-year period, and include a number of licence requirements and restrictions. Commonly, the holder of an export/re-export licence will flow-down the licence restrictions to the end user. Customers of technology goods and/or services will need to bear in mind that the holder of an export licence must ensure that his customers also meet certain requirements, as the activities of an exporter’s customers can determine whether the licence holder remains compliant with his own licence terms. Exporters will seek to impose these restrictions on customers, usually within the contracts governing the sale of the goods. For example, the exporter may preclude resales, retransfers, or inappropriate end uses. In most
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In addition, the Nuclear Regulatory Commission administers controls on exports and imports of certain radioactive materials, as well as nuclear production and utilisation facilities, such as major reactor components, and the Department of Energy administers controls on exports of certain nuclear-related technology and technical assistance.
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cases, the exporter will put the end user on notice that the items are subject to U.S. law, and any re-export of the item by the customer may require a “re-export” licence from the U.S. Commerce Department. Other Related Requirements Beyond US law requirements, local laws of the UAE, Qatar, Saudi Arabia and South Africa, as the case may be, will apply to the U.S.-regulated item such as customs duties, import tariffs, import licences and labelling requirements. In some areas of regulation there are panregion arrangements, such as the equalisation of customs duties within Gulf Cooperation Council member states. There are also separate regulations governing the temporary entry of goods and services, for example for promotional purposes. Readers should seek local advice on each jurisdiction’s import requirements. As an example, a 2011 guide to export compliance published by the British Exporters 2 Association reports that a recent decree in Saudi Arabia requiring strict compliance with new marking of origin regulations caused an exporter’s shipment being refused entry, notwithstanding that the goods were compliant with existing regulations on their departure from the country of origin and were in transit when the new decree had been issued. Reportedly, there was no grace period and the exporter bore the costs for goods’ return from Saudi Arabia. This type of occurrence remains an issue, and exporters to and customers within the region should be aware that they may bear the risk of changes to local regulations. Violations of U.S. Export Control Laws There are both administrative and criminal penalties for violations of US export control laws, including denial of export privileges. A criminal violation of the EAR, which requires a showing of wilfulness, can result in fines up to US$1 million per violation and up to 20 years’ imprisonment. Civil violations of the EAR, which do not require any showing of intent or knowledge, are punished by penalties of up to US$250,000 per violation or twice the value of the transaction. The US Department of Commerce encourages voluntary self disclosures, which is considered a great weight mitigating factor. In certain circumstances, disclosure is required when an item that has been exported/re-exported in violation of the EAR needs to be sold, transferred, re-exported, removed, stored, used, loaned, dispose of, transported, forwarded, or otherwise serviced. As an example, in 2005 the South African company ProChem (Proprietary) Ltd paid administrative penalties totalling US$1.54 million in 2005 to settle allegations that a predecessor company Protea Chemicals (Proprietary) Ltd. violated the EAR by reselling sensitive US-origin chemicals (cyanide and potassium cyanide) to end users in South Africa when the conditions of the US export licences did not authorise 3 resales. Given the severity of penalties for violations, and collateral consequences such as adverse publicity, parties to a contract between an exporter and customer of goods and/or services are advised to agree a detailed delineation of responsibilities for export control compliance. Risk can be allocated through indemnities and other contractual provisions that should seek to cover all eventualities, including situations caused by a third party; for example, delays within export authorities or violations of local laws by a logistics company. Targets of US Sanctions The U.S. government, through the Treasury Department’s OFAC, maintains and enforces comprehensive U.S. economic sanctions – commonly called embargoes – against Cuba, Iran, Sudan, and Syria. More limited sanctions programs are in place against certain 2
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http://www.bexa.co.uk/docs/BExA%20Guide%20to%20Export%20Compliance.pdf, page 6. [CONSIDER HYPERTEXT LINK RATHER THAN FOOTNOTE] http://efoia.bis.doc.gov/exportcontrolviolations/e924.pdf.
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countries, such as North Korea. In addition, OFAC administers a long list of SDNs who are generally off-limits to U.S. persons. For example: Iran. Complete embargo. These prohibitions apply not only to US companies, anyone in the US, US nationals and lawful permanent residents wherever located, but they have recently been extended to apply to any entity outside the US that is owned or controlled by a US person. Sudan. Complete embargo. These prohibitions generally do not apply to foreignincorporated entities, but they do reach activities of overseas branches of US entities, US persons (wherever they are located), dealings in US-origin items and all activities occurring within the US. Syria. Complete embargo. These prohibitions generally do not apply to foreign-incorporated entities, but they do reach activities of overseas branches of US entities, US persons (wherever they are located), dealings in US-origin items, and all activities occurring within the US ban on exports or re-exports of all US-origin goods, software and technology (except food items and non-sensitive medicines). Iraq. Targeted prohibitions and asset freezes relating to named individuals and entities. Zimbabwe. Targeted prohibitions and asset freezes relating to named individuals and entities. Specially Designated Nationals. A list is maintained by OFAC of several thousand “proscribed” persons (individuals, groups and entities) in various locations around the world (including non-embargoed countries), with virtually all transactions between US persons and listed parties being prohibited. Persons and Entities Subject to US Sanctions Laws For purposes of US sanctions laws, the term “US person” is defined to include the following: US citizens or permanent resident aliens of the US — even if located outside the US and/or acting on behalf of a non-US company. Foreign persons or entities acting inside US territory or causing actions in the US in breach of the rules — even if acting on behalf of a non-US company. Companies that are incorporated, organised or based in the US — including overseas branches or divisions (as opposed to overseas subsidiaries) of US companies. Violations of OFAC-administered economic sanctions programs are subject to stringent criminal and/or civil sanctions. For most sanctions programs, criminal violations, premised on a showing of wilfulness, may be punished by fines of up to US$1,000,000 per violation plus up to 20 years imprisonment. Most civil violations of the OFAC sanctions program do not require any showing of intent or knowledge, and are punished by penalties of up to US$250,000 per violation or twice the value of the transaction. Potential US Trade Control Issues for Our Clients The following is a summary of potential issues that can arise in the UAE, Qatar, Saudi Arabia and South Africa under US trade controls. Exports or re-exports of US products or technology subject to export licensing requirements. As noted above, exports and re-exports of products and technology from the
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US can, depending on the nature and export classification of the items in question, be subject to export and re-export restrictions and licensing requirements. Retransfers of US technology or products to proscribed countries, entities or persons. Whether received under a licence issued by the US government or otherwise authorised under the relevant US regulations, US-origin products and technology are subject to re-export controls that can prevent their transfer to certain destinations and parties. Even non-sensitive US-origin items can be restricted under US trade controls — and be subject to prohibitions on retransfers to countries such as Iran, Syria and Sudan. Indeed, even products developed outside the US, can, in some situations, be subject to US re-export controls — if they contain a certain percentage of US parts or materials or if they are based on US technology. Access to US technology by individual nationals of US-sanctioned or otherwise restricted countries. Individuals who live and work in the UAE, Qatar, Saudi Arabia and South Africa can be subject to US trade control restrictions, particularly if they are citizens of countries that are subject to US restrictions or sanctions. As a general rule, even low-level technology, and certainly any technology requiring a US export licence, cannot be shared with third-country nationals of Iran, Sudan or Syria, unless and until the technology in question is either exportable to their country of citizenship or specifically licensed for transfer to the particular third-country national in question. Exports from the US with knowledge or reason to know that the items are intended for retransfer or diversion to sanctioned countries. Unless specifically approved by the US government through a very restrictive licensing process, exports of products and technology from the US to the UAE are prohibited if, at the time of export from the US, there is knowledge or reason to know that the ultimate end destination for the items being shipped is Iran or any other target of US sanctions. While this does not necessarily mean that items shipped for general use or into general inventory in a third country are prohibited, the compliance risks associated with shipments of products from the US that end up in embargoed countries are significant. Foreign-incorporated companies and non-US persons shipping US-origin products or technology. Products or technology sourced from or originating in the US that were originally shipped from the US to non-sanctioned countries generally cannot be re-exported or retransferred — even by non-US persons — to US-embargoed countries (such as Iran), without specific prior approval from the US government in the form of a re-export licence. Foreign-incorporated companies and non-US persons shipping foreign-made items incorporating certain levels of US content or based on US technology. In certain circumstances, even foreign-produced products can be subject to US trade controls and restrictions on shipments to US-sanctioned countries. These re-export rules can apply to foreign-made products that contain as little as 10 percent US content (by value) relative to the value of the foreign-made end product. In other more limited circumstances, foreignmade products can be subject to US trade controls if the foreign-made end item is sensitive in nature and based on or derived from sensitive US-origin technology. US person approval or facilitation of transactions involving US-sanctioned countries. Employees of non-US companies who are citizens or residents of the US are subject to the US trade controls described above, even when acting outside the US. While overseas affiliates of US companies may lawfully engage in transactions involving Sudan in very limited circumstances, any involvement of US company personnel in those transactions must be avoided to prevent prohibited approval or facilitation. OFAC broadly construes the definition of prohibited “facilitation” by US persons. In an example of a non-US entity being prosecuted for violations of US export controls, the
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Dubai-incorporated Super Net Computers LLC was placed on the Denied Persons Register in 2007 for its role in the receipt of computer equipment from a US company and a 4 subsequent transhipment to Iran without the necessary export licence. The US exporter was also prosecuted, resulting in its export privileges being denied for five years and 5 hundreds of thousands of dollars becoming payable in both criminal and civil fines. Also in 2007 the British corporation Proclad International Pipelines Ltd admitted violations of US laws and was fined and denied export privileges for seven years following attempts to export 6 nickel alloyed pipes to Iran through the UK and the UAE. A number of non-US nationals have been jailed for violations of US export control legislation, including for example the British citizen Christopher Tappin who was sentenced to 33 months imprisonment in January 2013 after being found in violation of US export controls against Iran. How Our Clients Can Protect Themselves As explained above, US trade controls are far-reaching, complex, and aggressively enforced. The US government, often in partnership with other governments, is deploying an expanding array of criminal and civil enforcement initiatives to identify, isolate and punish companies that conduct business with countries and entities targeted by US trade controls, particularly sanctions against Iran. These and related developments are increasingly forcing both US and non-US companies that do any form of business involving US-sanctioned countries to examine carefully the increasing legal compliance, enforcement, reputational and public relations risks arising from such business. In the face of these trends, companies that conduct business with Iran or any other target of US sanctions, directly or indirectly, should carefully weigh the relevant risk factors, consider disclosure obligations as a result of new Securities and Exchange Act requirements, and take appropriate steps to manage such risks. These steps should include rigorous compliance reviews to ensure that their ongoing operations comply with any applicable US trade controls, as well as thorough internal investigations if any potential violation is suspected. Even if they are not based in the US, companies can be - and often are targeted by US government investigations and enforcement actions, under an expanding list of theories of liability that are stretching traditional notions of extraterritorial jurisdiction. As a result, virtually any company in the world that conducts business with Iran now needs to understand the many different ways in which the compliance, enforcement, and public relations risks can manifest themselves, and they need to take a global approach in their efforts to manage those risks. How Companies Operating in the UAE can Protect Themselves It is especially important for companies operating in the UAE to consider the potential application and impact of US trade controls. Based on its geographical proximity to Iran and the level of business ties between Iran and the UAE, the Emirates have been widely viewed as a point of “diversion” and transshipment of products to Iran. This has, in turn, driven the UAE government to adopt more rigorous export control laws of its own, and it is likely that we will see growing cooperation between the US and UAE governments. These trends carry with them increased risks of government investigations and enforcement actions, with potentially draconian penalties for violations, and they underscore the importance of rigorous compliance. Disclaimer: Middle East & Africa Technology, IP and Sourcing Focus is made available by Latham & Watkins for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. Your receipt of this communication alone creates no attorney client relationship between you and Latham & Watkins. Middle East & Africa Technology, IP and Sourcing Focus should not be used as a substitute for competent legal advice from a licensed professional attorney in your jurisdiction.
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CONTACT William M. McGlone +1.202.637.2202
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