As your organization explores global opportunities and engages potential overseas partners, your company will need to assess and run through specific compliance considerations to ensure your activities are in the clear. If you will be exporting items overseas or will be sharing information with foreign entities, your stakeholders and compliance team will likely need to determine whether your company must apply for export licenses with either the Department of Commerce’s Bureau of Industry and Security (BIS) or the Department of State’s Directorate of Defense Trade Controls (DDTC). These agencies respectively administer and enforce the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) when addressing applicable export licensing requirements.
Companies that fail to acquire export licenses under either statutory regime could risk costly civil and criminal penalties. However, they also risk facing deeper, latent problems that could negatively impact their organizations over the long term. Here are some of the most commonly-overlooked costs of non-compliance with ITAR and EAR and what your company can do to address these issues.
1.) Legal and Investigatory Costs
Whether your company is facing consequences as serious as a debarment or a denial order, or just responding to records requests from DDTC or BIS, your company will inevitably require legal representation. Due to the specialized nature of export regulations, lawyers who focus on export compliance disputes are not widely accessible throughout the U.S. In fact, the coterie of outside counsel servicing this area tend to be international trade counsel affiliated with larger, multinational firms. Most of these firms, as a Major, Lindsey & Africa document points out, are based in Washington, DC. The costs of defending against even the most routine ITAR and EAR enforcement matters, therefore, can be costly for small and medium-sized businesses that cannot afford BigLaw-level bills. Additionally, stakeholders may need to also hire consulting firms to work in tandem with outside counsel during the initial stages of an agency investigation. Ultimately, legal and consulting costs can vary per case. At ECTI, we have spoken with clients who recalled paying as much as $25,000 for basic disputes to several million for more complex matters.
2.) Consent Agreement Burdens
Both DDTC and BIS are also increasingly requiring exporters to enter into consent agreements to shore up deficiencies and mitigate future violations. In addition to mandating fines and settlements ranging from $100,000 to as high as figures in the billions, these agreements also direct targeted organizations to engage in various remedial measures at their own substantial expense. For example, most consent agreements will require companies to retain third-party companies to audit their activities and provide routine reports to applicable government agencies. These agreements often also mandate affected companies to develop automated export control programs, invest in technology that mitigates unauthorized export risks, hire special compliance officers, and implement extensive training measures.
3.) Opportunity Costs From Reduced Productivity
The agency actions accompanying non-compliance sanctions can also drain productivity and devolve into distractions for your executives and personnel. Key employees, managers, and other stakeholders who drive a business’s daily activities will inevitably get pulled away to assist in-house and outside counsel with responding to agency requests on tight deadlines. Such distractions, of course, can hinder both productivity and profits. In one Udemy survey on workplace distractions, 54% of respondents indicated that distractions caused them to not perform as well as they should, while 50% reported being significantly less productive at work. Resources spent on reacting to investigations are resources unavailable to further the goals of an organization’s export compliance program.
4.) Shipping, Exporting, and License Complications
Another fact to note is that in the United States, no person or entity has a constitutional right to export goods overseas. Instead, the DDTC and BIS can restrict, or even remove, your rights to export goods internationally. Both agencies administer review processes to determine whether companies can export certain items with limited opportunity for independent judicial review. As a result, DDTC and BIS actions can unilaterally hinder or eliminate your ability to service global customers and timely deliver items. Government agencies can also detain or hold your shipments and delay the processing of essential license applications during the pendency of BIS and DDTC enforcement actions.
5.) Publication of Your Consent Agreements
Even if your organization settles with the BIS or DDTC, the federal government still has the right to publicize your ITAR or EAR offenses and consent letters online. You can find examples by plugging in site:state.gov “consent agreement” in your Google search bar or browsing through some of the BIS’s press releases on EAR-related sanctions. As these announcements are permanent, public, and searchable records, the blowback from these disclosures can be severe. The financial penalties and remedial measures these documents cover could prompt future business partners, shareholders, and other interested parties to question how specific consent agreements could impact the future business opportunities they are considering with your company.
How Companies Can Combat These Hidden Costs
These issues, coupled with ITAR and EAR’s civil and criminal penalties, can be enough to frustrate and complicate a company’s ability to conduct business abroad. Fortunately, companies can protect themselves and their interests when exporting goods by following compliance best practices and adhering to established, proven frameworks in the event of protracted disputes with the federal government.
To start, companies should compare their existing and new products and technologies to those currently listed in the U.S. Munitions List for the ITAR or, when the USML does not apply, theEAR’s Commerce Control List (CCL) and Export Control Classification Number (ECCN) system to assess the necessity of acquiring export licenses for those items. While it is best practice for companies to perform due diligence into the circumstances of their transactions and classification options for their items, exporters can always do any of the following:
- File a commodity jurisdiction (CJ) request with the State Department to confirm whether certain items or services are subject to ITAR and included in the U.S. Munitions List
- Request an EAR classification (i.e an ECCN or EAR99) for your item from BIS through the Simplified Network Application Process – Redesign (SNAP-R) portal
- In particular for items subject to the EAR, submit an export license application to BIS disclosing all the information you know about your upcoming transactions to get an official opinion regarding the necessity of acquiring a license
Even more fundamentally, companies should develop an established compliance program that mitigates latent non-compliance costs. At ECTI, in addition to following published agency guidelines, we highly recommend that exporters consider the Nunn-Wolfowitz Model. This industry-leading standard emphasizes thorough training and education of all stakeholders, thought-out and efficient application processes, robust compliance intranets, recordkeeping best practices, and detailed documentation involving instruction manuals and violation response processes.
Want to learn more about other tactics and strategies you can use to mitigate hidden non-compliance costs? Be sure to tune into our upcoming webinar, Lessons Learned From Recent ITAR Enforcements and Settlements, on March 10, 2022.
We hope this article helps you understand what the hidden costs of non-compliance with export regulations are and when they could apply to your company. As we said earlier, export compliance is a complex and detailed undertaking. Your company’s investments rely on achieving 100% compliance with all applicable export regulations and controls. That said, it is absolutely achievable—you can do it, provided you take the necessary time up front to align with an established and widely acclaimed export compliance training partner who can guide you step by step toward compliance success.
Do you have questions about the hidden costs of non-compliance with EAR and ITAR, or other export compliance challenges for your company? Visit www.davidatkinsontv.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars and live webinars, and to browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You also can call the Export Compliance Training Institute at 540-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.