Exporting Legally: Uncovering Hidden Legal Risks

 

Hello everyone. My name is Travis Epp and I'm the leader of EisnerAmper's manufacturing and distribution practice. One of the things I really enjoy about my job is the opportunity to speak with experts in their fields on various topics that are a benefit to our clients and prospects.

 

Today is no different from other discussions we've had. Joining me today is Deanna Clark, the managing attorney and founder of the Clark Act, Esposito Law Firm. Deanna has two decades of successful experience in regulatory compliance for companies involved in the sale of international goods and other highly regulated industries. Deanna is an author educator at philanthropy. Deanna, thank you for joining us today. 

 

 

My pleasure. Thanks for having me. 

 

 

As we all know, we live in an international world and a global supply chain. One of the areas that's of interest to most of our clients is the subject of exporting. In fact, in August, we reached an all time high for US exports, and today Deanna's going to share some of her expertise on the topic of exporting. So Deanna one, legal aspects of businesses, what should they be thinking about when it comes to exporting? 

 

 

Sure. Great question. So there's several things, but I'll go ahead and focus on seven key items, areas that exporters should be focused on. The first has to do with licensing and permits depending on the nature of the product. Certain merchandise can require licenses, and in particular, if they relate to military application or some other type of advanced technology. Understanding the export control requirements such as those put out by Bureau of Industry Insecurity, otherwise known as BIS. Those are essential in order to determine if your product is restricted or if it requires some type of special permit. And by the way, that can be related to when it's weaving our country or for entering the new one. The second has to do with labeling requirements. Often, there are certain labeling standards that must be met, and from basic things like language translations to country of origin markings, and then even compliance with safety and health standards. 

 

So the problem is if they're not adhered to, then it could result in shipments being denied entry into the destination country and even find your penalties. Another consideration is that companies want to look at, Hey, are there any worker permits that are required? What type of employment compliance is needed? Because visa and work permit requirements vary from country to country, and you want to be sure to have the right paperwork in place before your people ever land there from the United States. Another important area has to do with intellectual property protection. Of course, we have our whole structure here in the United States with our US patent trademark office, but businesses should also consider registering their intellectual property, whether trademark, patent, and even a copyright in the other country. And of course, IP laws vary greatly, but by putting in these protections, it can help reduce actions involving infringement or even counterfeit products. 

 

As a fifth area, you want to focus on customs and tariffs compliance in addition to wanting to understand, Hey, how much does our good cost when it actually arrives in that country? Right now, you might have heard about how there are tariffs being put into place and certainly discussed in relation to Chinese exports of electric vehicles. And so anytime there's this added tariff, the EU just put in some fairly significant ones. It adds to the cost of the good. So as a US exporter, you want to understand, Hey, how much is my product actually going to cost for that or an importer? Of course, there's the importance of export documentation. This is fundamental, and some things are standard commercial invoices, packing lists. But when it comes to exporting and export controls in particular, was that filing done in relation to this license? Did I get it before? 

 

How long is this license even good for? Is it one year? Is it five years? Ensuring accuracy and completeness of export documentation just helps facilitate the smooth clearance both on the outbound journey and then arriving into the final country. Last but not least, there's also sanctions and embargoes to be aware of. These are just restrictions with doing business in certain parts of the world. Our Office of Foreign Assets Control here in the us, they administer our US sanctions programs and violations can result in severe penalties, and they can stack up different instances of where shipments had occurred. We've had clients facing these, and then it's okay, let's take a look back because when the government does come to investigate you raising allegations of shipments going to prohibited or restrictive countries, they can go back several years essentially penalize you for all those years worth of pilot shipments. 

 

 

Deanna, during your comments there, you referred to export controls a couple of times. 

 

 

Can you 

 

 

Maybe give a little bit more information on export controls, please? 

 

 

Absolutely. So export controls are simply what is put into place at a company. In order to ensure compliance and companies want to put in robust policies and procedures, they essentially guide the nature of how export transactions are conducted. If we think of an export as a journey or products undertaking this journey, it actually will begin at the time that we have a foreign purchaser come to us and say, Hey, I'd like to put a purchase order in for such and such. Well, typically, depending on the nature of the good, but if it is in a potentially sensitive area, it's how can we vet this company in advance of accepting yes, we'll take your order. And it sounds a little backwards. It's like, of course, if somebody wants to buy your product, sell it to them, right? But when it comes to export controls, because we're looking at restrictions and prohibitions on who we're selling something to or where in the world is this thing going to? 

 

How is it going to be used? What is its ultimate end use and sometimes overlap end use in this place for that purpose? Can it be done? And so we'll oftentimes help clients with some of this pre-sale due diligence with foreign supplier vetting, involving questionnaires, who are the owners? We want to understand is this a private entity or is this some kind of public private entity, which oftentimes we'll find in China, for example. And then where is this thing going to and for what purpose? So there are a handful of things that you want to focus on in your export controls. So one just has to do with the product itself. Commodities export control. Is there some type of restriction? Is it a restricted party? Is there some kind of anti boycott restriction, et cetera? There's also, as I mentioned, the purchasing and vendor vetting that would occur. 

 

Next has to do with technical data and controlling that. Who's getting what data? And remember, exports are not only a physical goods, but if I were to email some blueprints to somebody in London, that is also considered an export, just so digital information. So how are we monitoring that? Next, of course, we have our export documentation even where a license, let's say a license is required, we turn around and it's, oh, hey, we found an exception when we'd go ahead and make our export filing. We'd still need to indicate that no license is required if none is required for that particular country. Because believe it or not, it's not just one blanket rule. It's okay if these life jackets are going to Canada, not a problem. If these life jackets are heading to Oman, gateway to the Middle East as they like to be called, then where are they ultimately going? 

 

So those things are important. Of course, there's also the record keeping requirements, and this is important because as I mentioned before, the government has an ability to take a look back several years, and so they want to make sure that your records have been maintained so that they can ensure either you have done things correctly or where they find other alleged violations. Then they can add that onto their list of, okay, here's another violation we can assess a penalty on. Separate from that, there are miscellaneous types of controls and compliance requirements. There may be certain exports which are subject to some sort of agreement. So sometimes they may have one year limitation or five year limitation. And so a reminder needs to go off, Hey, do we need to try to renew this or do we want to try and get a new license and provide for adequate time to get it? 

 

Because some can take several months to obtain. Also, we want to focus on performing internal audits. Let's say once a year, the team gets together, you take a look at these shipments. Did any go to a postal code it should not have gone to? Or, oh, is this freight forwarder somehow from a country that we have an issue of we being the us, which may be the first place that the shipment landed. What do I mean? For example, we had a case where goods landed in one of the European countries, and then a Russian freight forwarder picked up the shipment. And at the time, there had just been put into place restrictions related to the Crimea region, Ukraine. Now there's issues in general with conducting business and doing transactions with Russia, but at the time, it was limited to that in large part. And so we found ourselves, the company that we were representing had found itself taking a look back through its own shipments and had found, oh, okay. 

 

It turns out we did have these, how many others were there? And this is where we came in to make a disclosure to the government in advance of them saying, Hey, we've started an investigation in the end by coming clean, we say, and it was accidental, but by coming forward, the government says, Hey, thanks for doing that. In the end, there were no penalties assessed, and that was actually with Office of Foreign Assets Control, ofac, BIS and Commerce, which is where the export declaration is submitted. Last but not least, of course, we want to train your staff. So BIS has several online trainings. They also have several around the country throughout the year. These are the facet set of make your export compliance and controls program, 

 

 

Deanna, that certainly is a lot, and I think there's a lot of maybe complexity that I definitely didn't know about. And even if companies are well intentioned to meet all the requirements, I'm sure there's instances where there's non-compliance with these export regulations. How much trouble can companies get into if they're non-compliant? 

 

 

Well, as a starting place, a company can simply lose its privilege to export. So the government looks at, and it does this with importing also, but they view it as a privilege and not a right. So a company could be barred altogether from selling overseas. That would be a huge issue, of course, where that were to happen. That means there's been a finding of wrongdoing. And just to give you an idea in relation to BIS penalties, they have both criminal penalties and they have civil penalties. Criminal can be as high as 20 years in prison. Okay, so there's serious penalties. Yes. Also, looking at up to 1 million in fines, that's the criminal side. On the civil side, you're looking at a per violation penalty of $300,000 each or two times the value of the transaction, whichever is greater. And then to give an example of what OFAC penalties would be, they have civil penalties, either $250,000 or twice the value of each non-compliant transaction, up to a million, up to 1,000,070 $5,000 per violation. And on the criminal side, there's also ready for this 10 to 30 years in prison along with 50,000 to $10 million in fines. 

 

 

Those are definitely some staggering numbers. So if a company wants to look into these requirements and maybe isn't ready to speak with an expert like you, are there free resources out there for a new exporter or even for a more experienced exporter? Are there some refresher courses they can take? 

 

 

Absolutely. And the government actually is counting on people to go and get educated because again, it's a right. And so the idea is you figure out what needs to be done and do it the right way. We will not come and tell you how to do it. But yes, there are several resources. So starting with the US Commercial Service, they have a whole series related to getting ready to export, planning your market entry, finding foreign buyers, making the sale, and managing challenges. They also have what are known as export assistance centers, and these are scattered around the country. We have one here in lower Manhattan, in New York City, and they have counselors that you can go and meet with. They have a service called the Gold Key Service where you pay, I mean, once upon a time it was $800. It might be a little more than that now. 

 

But what they try to do is actually connect you with potential buyers along with the commercial officer in whatever country you're looking to go to, who can also help you make sense of the lay of the land. What are they seeing? What are the trends in relation to Bureau of Industry and Security? On their website, they have several just, they refer to them generally as Export 1 0 1 training videos. So they cover things like exporting commercial items, looking at export. They have these classification numbers. CCNs looking at the export administrative regulations, which is a body of law that governs the movement of cargo leaving the country. They have information related to embargoes and sanctions and that of things that fall under exceptions to licenses. There's also a training related to export licenses where you're looking to make sense of that. And within that, there's several videos dealing with classification requests and how to even figure out this ECCN really helpful things. 

 

OFAC as well, office of Foreign Assets Control. They have different episodes related to introducing the agency, who we are, what's our purpose, how to run a sanctions list search. And what that means is, as I mentioned earlier, there are restricted people restrictions and prohibitions, and that includes people, not just countries. And so they have a tool you're able to use to find if somebody could be of concern or you're just not finding them. And of course, where somebody is found to be a concern, then there's additional vetting that needs to be done with your foreign purchaser. And last but not least, on our website, we have different legal guides. We have our blog, we have our quick reference guides, and we have on our YouTube channel to law, we have over a hundred videos. Of course, they're just publicly available right there from OFAC to BIS, even customs and other business related topics. So there's lots of readily available information that's free that's out there. 

 

 

So let's say somebody has exhausted all those sort of free resources that are available, what are the unique advantages that a law firm can assist a company when they're entering new markets? 

 

 

Well, for companies entering new markets, law firms can provide an invaluable combination of legal, regulatory, and strategic insights that go beyond what a consultant or advisor could offer. Key advantages include the regulatory expertise. If you are able to work with a law firm who has deep experience in regulatory compliance, companies are able to proactively address what could otherwise be roadblocks that they just wouldn't know about. And that could be with any of the agencies I've described, whether ofac BIS. It could also be with other partner agencies like Food and Drug or Federal Maritime Commission, potentially depending on the nature of the thing being shipped. So these can be proactively addressed. There's also the benefit of risk litigation. Attorneys are able to assess potential liabilities. They can ensure compliance with trade and safety standards, and they can help develop contingency plans as well to protect the company's interests, especially in highly regulated sectors like in e-cigarettes or pharmaceuticals and alcohol even. And a third area just has to do with streamlining operations. So council will understand what you're currently doing, where you're trying to go with your future goals, and by leveraging the insight about your company along with their own experience, companies can design operations that meet both local and international laws from the start. So that can lead to facilitating smoother export and import flows, reducing clearance delays and optimizing supply chains. 

 

 

It's obvious, Deanna, that there's a lot behind just the general goal of growing sales internationally. There's a lot more for companies to think about then maybe meets the eye up front. Do you have any other closing comments you'd like to make regarding the topic of exporting? 

 

 

Yeah, a couple things. For starters, I do think planning it's key. Oftentimes it's great, somebody wants to buy this, let's ship it. And I see this with e-commerce sellers all the time. It's sure we're selling care, we're selling there. It's just another sale. They're not thinking about, oh, what does this actually look like when it lands in the other country? What items, how have we declared them? What are we saying about them? How have we prepared them? Oh, yeah, foreign language. This labeling, this has come up as issues. The other thing with exports is oftentimes in other countries, our contact, for those of us in the us, we are in contact with a distributor as opposed to selling directly to Macy's or something. How we might do in the United States, oftentimes when we're selling abroad, our point of contact is a distributor, and so fine, but who are these actually going to? 

 

Who will actually be using this? How is this actually going to be used? We recently had a case where there was a foreign company who had purchased some US goods with the intention of selling it to an Asian trading company. And our government in particular, ofac, somehow anyway, believed that that Asian company was going to turn around and sell it to an Iranian purchaser. And so for this reason, it contacted customs and said, hold on to this shipment. The shipment actually arrived in the country. It was a European country where our client was, but before our client could obtain the goods to send them onto their foreign purchaser, customs, hold the goods and returned it to the US port, you want to look ahead and make sure you're asking questions that you may not want to ask so that you can be sure to avoid penalties and avoid problems. 

 

Because it's not just about the money, it's about the investigation, the hiring, the lawyers. There could be a corrective action plan put into place after there could be periodic reporting for several years thereafter. So oftentimes, companies don't think there's a problem until they've gotten in trouble. And I would encourage companies to take a closer look in advance. Ethan, if you've already started exporting, let's go back and do one of the things I mentioned. Do that periodic or the first time even internal audit. See if you're able to identify, Hey, maybe this wasn't what it was supposed to have been. And find help, find help and get those things corrected. 

 

 

Deanna, thank you so much today for all of your comments. Your expertise and a lot of your comments will help companies with managing the risk of exporting. Thank you again. 

 

 

My pleasure. Thank you.