By Melissa Miller Proctor
See Ms. Miller’s contact information below for any follow up questions or further advise.
There is a very common misconception held by many U.S. textile/apparel and footwear companies that the mysterious world of export controls is the exclusive domain of high technology companies and defense contractors. Although there has been a marked increase in export compliance awareness in the apparel and footwear industry over the past few years, many companies continue to ask: “Should we really be concerned with U.S. export controls?” The answer is an unequivocal “yes.”
With certain exceptions, the vast majority of apparel and footwear rarely requires export licenses. However, apparel and footwear companies routinely engage in regulated export activities such as:
- Exporting raw materials or components from the United States to other countries for cutting, assembly or other operations;
- Exporting finished products from U.S. distribution centers to customers in other countries;
- Engaging forwarding agents (or working with customers’ forwarders) in transporting raw materials, components, or finished products from the United States to other countries;
- Engaging in online retail; and/or,
- Maintaining relationships with business partners in countries that support boycotts not sanctioned by the United States.
There are many U.S. Government agencies that are responsible for administering U.S. export controls, such as: the Commerce Department’s Bureau of Industry and Security (BIS); the Treasury Department’s Office of Foreign Assets Control (OFAC); the State Department’s Directorate of Defense Trade Controls (DDTC); the Census Bureau; U.S. Customs and Border Protection (CBP); and a host of other agencies. The majority of textile/apparel products that are exported from the United States are subject to the jurisdiction of the BIS. However, OFAC requirements also apply whenever an embargoed or sanctioned country (i.e., Cuba, Iran, North Korea, Syria, Sudan, etc.) or entity designated on the Specially Designated Nationals Lists is involved. The Census Bureau is responsible for ensuring that exporters transmit accurate Electronic Export Information (EEI) filings via the Automated Export System (AES), and CBP, with whom textile apparel importers are most familiar, enforces the export laws of all of the U.S. Government agencies.
Why Control Exports?
The United States restricts the export and reexport of items to certain countries and end users, as well as those intended for certain prohibited end uses, in order to further U.S. national security and foreign policy objectives, safeguard scarce natural resources and fulfill its international obligations. There is nothing new about export controls — they have been in existence since the days of ancient Rome. In fact, export controls were implemented in the United States before independence was won from Great Britain — the first U.S. export law was enacted by the Continental Congress in 1775 to restrict trade with England.
U.S. export requirements are also imposed to assist the government in the collection of foreign trade statistics. Exporters are required to submit EEI filings via the AES for, inter alia, exports of commodities valued at more than $2,500 per Schedule B Code, goods subject to export licenses, and military items controlled under the International Traffic in Arms Regulations (ITAR). Exporters must ensure that all required data elements (e.g., product description, export classification, licensing authority, quantity, value, destination, intermediate consignee, ultimate consignee, etc.) are accurate and complete.
Who Must Comply with U.S. Export Controls?
All “U.S. persons” are subject to the export laws and regulations, which includes U.S. citizens, U.S. permanent residents, foreign persons in the United States, and individuals protected under the U.S. immigration laws. The term U.S. person also includes U.S. companies incorporated to do business in the United States and their foreign branches, as well as foreign companies that are incorporated in the United States. (As a side note, with respect to the U.S. embargo on Cuba, foreign companies owned or controlled by U.S. persons are also considered to be U.S. persons even if they do not conduct business in the United States.)
All U.S. persons must comply with the U.S. export laws and regulations. The consequences of noncompliance, even inadvertent errors, can be quite severe. The BIS and OFAC may impose maximum civil penalties of the greater of $250,000 or twice the value of the underlying transaction per violation. Criminal penalties for willful violations may extend into the millions of dollars with the potential for imprisonment of up to 20 years. Further, given that exporting is a privilege and not an inherent right, the U.S. Government may suspend a company’s ability to engage in export transactions for a number of years.
Taking Export Compliance to Heart
Companies that are new to U.S. export controls often, at first glance, become overwhelmed by the apparent complexity of the regulations. However, to implement an effective compliance program, companies should first focus on knowing: (1) their customers and business partners; (2) their products; (3) their product destinations; and, (4) how to identify “red flags.” Only then can they begin to build a stalwart compliance infrastructure. For example:
- Companies should know the export classifications of their products (i.e., Schedule B Codes and the Commerce Control List classifications). Classification is a required EEI data element; however, with very few exceptions, HTSUS classifications may be used in lieu of the Schedule B Codes.
- Companies should screen their business partners, customers and transactions against the restricted parties lists published by the various U.S. Government agencies to ensure that they are not inadvertently dealing with prohibited end users. Restricted parties list screening (as well as IP Address screening) is especially important for online retailers, where there generally is no established relationship with customers who are located around the world. In addition, companies should also confirm that their products are not destined for embargoed or sanctioned countries.
- Companies should look for “red flags” or suspicious signs in proposed transactions or communications with customers indicating that their goods may be unlawfully diverted to unauthorized destinations or end users.
- Companies should closely review their communications with companies located in countries supporting foreign boycotts that are not sanctioned by the United States (i.e., countries in the Middle East that support the Arab League’s boycott of Israel), and timely report the receipt of boycott-related requests, when warranted, to the U.S. Government.
- Companies should closely monitor the activities of their forwarding agents because the exporter will be held responsible for any acts or omissions committed by its agents.
- Companies should establish a formal export record retention policy and procedure.
Further, in creating and documenting the necessary export oversight infrastructure, textile/ apparel companies ensure that compliance personnel have sufficient resources to manage day-to-day export activities, and that company personnel whose activities touch on export activities are trained on U.S. export requirements. Internal audits should be performed regularly, and issue escalation measures established to enable senior management to take swift corrective action when errors occur.
In view of the U.S. Government’s commitment to increase export enforcement initiatives, and as apparel and footwear companies drive their operations further into the global marketplace, acquiring the requisite knowledge of U.S. export requirements and implementing effective compliance programs are the tools required for ensuring continued profitability and longevity in these challenging economic times.
Melissa Miller Proctor is a Member of Sandler, Travis and Rosenberg, P.A. and the firm’s Export Practice Leader, resident in the Scottsdale, Ariz., office. With significant experience in export controls, customs laws and regulations, and international trade, Ms. Proctor works closely with clients to expand their markets while ensuring their regulatory compliance. She may be reached at (480) 305-2110 or via e-mail at firstname.lastname@example.org.