EAR99 Isn’t a Free Pass: Due Diligence Still Matters

We all know that having an EAR99 export classification is quite favorable for exporters.   Typically, it allows for No License Required (NLR) exports if other considerations and requirements such as end use and restricted party screening have been met.  However, let’s look at a common scenario that may not be on your radar outside of a past blog I wrote (Shipping Internationally: Do You Need an Export License?).

I only export EAR99 benign medical/automotive (insert any industry) items to distributors and they will not give me the end use or end user information so we trust that they will comply with U.S. re-export/transfer regulations.

When Distributors Won’t Share End-Use or End-User Information

This is something that comes across our desk all the time!  This scenario is not unique nor isolated to only certain industries.  The exporter of record knows that the distributor is not the end user but the distributor will not provide any additional information out of fear that the exporter of record will sell directly to their end user.  On the surface this makes sense, however, how can you comply with the export regulations without this information?  If you have knowledge that the distributor will resell the items, then part of your due diligence is to ensure that your company is not enabling the violation of the export regulations.  This includes screening of the end users, verifying that the end use is not prohibited and complying with country restrictions.

Understanding “Support” and U.S. Person Restrictions

Part § 744.6 identifies “Restrictions on specific activities of U.S. persons” by providing general prohibitions of what “U.S. persons”  cannot do without a license from BIS.  Some of these examples are straightforward and are most likely intuitive to you.  Most likely there is awareness of prohibitions linked to the maintenance/checking of nuclear explosive devices, repairing missiles, operating chemical or biological weapons and the restrictions surrounding military intelligence end-use/user in various countries including China and Venezuela.  However, the EAR uses the word ‘support’ and further explains what that means:  Performing any contract, service, or employment you know may assist or benefit any of the end uses or end users described in paragraphs (b)(1) through (5) of the EAR, including, but not limited to: Ordering, buying, removing, concealing, storing, using, selling, loaning, disposing, servicing, financing, transporting, freight forwarding, or conducting negotiations in furtherance of.

How Services Can Create Indirect Export Risk

Thinking through this example of ‘support’, what if your company performs a service?  Perhaps you are an IT company that recycles old IT equipment globally, you did not export the original IT equipment; but you are responsible for removing obsolete equipment.  You have a contract with the entity and it turns out they are in China, a high-risk country.  Perhaps they meet the definition of ‘military-intelligence end user’ as defined in § 744.22(f), or that site you are removing the equipment from are for end uses/end users described in paragraphs (b)(1) through (5) .  Ultimately your company is ‘supporting’ a restricted activity because they are benefiting from your service.

The EAR also calls out items that are not subject to the EAR located in D:5 countries (examples include Afghanistan, China, Iraq, Nicaragua etc.) it those facilities are involved in the “development” or “production” of advanced-node ICs or semiconductor manufacturing equipment.  This applies to companies that authorize shipments, conduct deliveries, perform services etc.

Due Diligence Expectations When Working With Distributors

So how do companies comply where their distributor will not provide end user information to ensure that as a U.S. Person they are not violating Part § 744.6?  The EAR points us to several due diligence requirements that includes, but is not limited to, the review of publicly available information, capability of items to be provided, proprietary market data and end-use statements as well as follow the “Know Your Customer” guidance in supplement no. 3 to part 732 of the EAR.  From a practical standpoint, relationships with distributors should be viewed as a partnership where US companies need to ensure that there is an understanding that the distributor will not put the US company at risk by violating US export regulations which can be done through contracts versus transactional one-offs.  A distributor is essentially an extension of your company; through their in-country contacts and network, can effectively distribute your items in regions where your company does not have a footprint.  Many countries require that there be a legal entity in-country to import items and unless your company has a physical presence, importing is not an option which is why distributors are essential to business growth.  Exporters and their distributors must also understand that U.S. origin items (including software and technology) do not lose their U.S. origin status when they are sold or exported.  That means that the U.S. regulations still apply when re-exporting to the end user, while also keeping in mind not only the Export Administration Regulations, but also the Office of Foreign Assets Control which has enforcement over non-US persons that cause a US person to violate US sanctions or engage in conduct that evades US sanctions.  Non-US persons also run the risk of being designated as a Specially Designated National (SDN) if they are determined to have assisted, sponsored or provided financial or other support for sanctioned persons or activities.

Key takeaway – your company may be liable for violations even if your involvement is indirect through a distributor.  Having improper due diligence is a root cause of compliance gaps that could lead to export violations.  Having an effective Export Management Compliance Program can help to mitigate these risks, especially as the U.S. is ramping up their aggressive pursuit of export violations.

If you would like assistance evaluating your export compliance program—including distributor due diligence, end-use and end-user risk, and U.S. person obligations—we invite you to schedule a no-charge consultation with one of our trade compliance experts.