Understanding the Rules of Trade

U.S. EXPORT CONTROLS and ECONOMIC SANCTIONS – AN OVERVIEW
Cecil Hunt*
Member of the District of Columbia and California Bars

I. Introduction

Until a decade or so ago it was understandable, even if hazardous, for a company to believe that it could readily judge from the nature of its operations whether it had to be concerned with compliance with U.S. export controls and economic sanctions. Export controls were widely viewed as affecting only advanced, sensitive, or weapons-related goods and technology. A common perception was that a company that did not deal internationally in such goods or technology had little, if any, compliance exposure. As regards economic sanctions, companies generally understood that broad embargoes were in place against a few countries, such as Cuba, but if a company had no dealings, direct or indirect, with an embargoed country (and few did) it paid little attention to sanctions.

Today, U.S. export controls and economic sanctions affect a much wider range of international transactions. Moreover, these measures reach many activities that are either completely domestic or unlikely to be viewed as having an international aspect. Let’s note just a few examples of the broadened regulatory reach.

• A company the does no international business whatsoever may have to restrict the access its foreign national employees are given to certain technical data.
• A growing number of controls require an export license for even very mundane items if destined for proscribed users or uses, thereby calling for “know your customer” procedures.
• Economic sanctions are no longer aimed at only a handful of countries, but now also involve multiple lists of names of individuals and entities to be checked, sometimes irrespective of whether the transaction involves international business.

The landscape of U.S. export controls and economic sanctions is a labyrinth. Not only are several different agencies administering and enforcing controls, but also the rules are derived from different basic statutes and are affected by numerous free-standing (and sometimes uncodified) pieces of legislation. Furthermore, the transparency that is the norm in other regulatory contexts is often missing. Limitations on judicial review, plus judicial deference to the executive branch on matters related to foreign policy and national security result in there being scant judicial scrutiny of official actions in this field. Notwithstanding the complexity and occasional opacity of these regulations, firms can and do learn to cope with them and, for most, compliance expense is relatively modest.

Money-laundering laws and controls imposed specifically on financial institutions are not covered here, and this overview does not attempt to cover the full scope of export controls and economic sanctions. It is designed, rather, to be a helpful starting point for further inquiry. It can introduce the reader to some of the terminology and acronyms, which will be highlighted at first use.

II. Who controls what?

There are several agencies that handle export licensing and administer economic sanctions.

A. Most exports that are controlled are subject to the controls administered by the Bureau of Industry and Security (BIS) of the Department of Commerce

1. These controls are in the Export Administration Regulations (EAR).15 C.F.R. §§ 730-774

2. The normal statutory basis for the EAR, the Export Administration Act (50 U.S.C. app. §§ 2401-2420), is not permanent legislation, and Congress has let it expire on several occasions. Several efforts to enact a new basic law have failed. During periods of lapse, the EAR have been maintained by Presidential order under the International Emergency Economic Powers Act (IEEPA). 50 U.S.C. §§ 1701-1706; see Exec. Order No. 13222, Aug. 17, 2001, 66 Fed. Reg. 44205, Aug. 22, 2001, as most recently extended by the Notice of August 3, 2006 (71 Fed.Reg.44551, August 7, 2006).

3. The EAR are commonly referred to as applying to "dual-use" items, that is, items which are suitable for either military-related use or nonmilitary use. Some items subject to the EAR, however, have no military use.

4. The EAR include controls imposed for a variety of purposes. Some controls still reflect the Cold War focus on denying Communist countries access to technologically advanced items of strategic significance. Increasingly, the EAR implement efforts to stem the proliferation of weapons of mass destruction and to limit the ability of certain countries or actors to support international terrorism or to pursue destabilizing military efforts or terrorist activity.

B. Exports of "defense articles" and "defense services" are controlled by the Directorate of Defense Trade Controls (DDTC) of the Department of State.

1. These controls are in the International Traffic in Arms Regulations (ITAR), which include the United States Munitions List (USML). 22 C.F.R. parts 120 through 130.

2. The ITAR are promulgated under the authority of the Arms Export Control Act. 22 U.S.C. §§ 2778-2994.

3. The USML consists of items specially designed or modified for military use, but designations and determinations have extended ITAR jurisdiction to some items with non-military use .

C. The Office of Foreign Assets Control (OFAC) of the Treasury Department administers restrictions on business with countries, like Iran and Syria, that are the target of broad trade embargoes and economic sanctions that cover more than just exports.

1. The OFAC regulations applicable to these embargoes are found in successive parts of Title 31 of the Code of Federal Regulations, starting with the Foreign Assets Control Regulations, 31 C.F.R. part 500.

2. Most OFAC regulations are issued under authority delegated by the President when declaring an emergency and invoking the International Emergency Economic Powers Act. 50 U.S.C. § 1701, et seq. Embargoes imposed prior to the 1977 enactment of IEEPA are based on the Trading with the Enemy Act. 50 U.S.C. app. §§ 1-44.

D. Other agencies exercise export licensing jurisdiction over special types of exports. The EAR list such controls. See Supplement No. 3 to 15 C.F.R. part 730.

III. Commerce Department

A. The structure of the Export Administration Regulations (EAR)
1. The jurisdictional reach of the regulations is broad, but the portion of transactions requiring a license is comparatively small -- probably less than two percent by value of U.S. industrial exports.

2. The term "subject to the EAR" is key, and it has a double aspect.

a. Items (commodities, technology, and software) subject to the EAR broadly include all items "in the United States" and "U.S.origin" items outside of the United States, with three important exceptions (15 C.F.R. § 734.3):

i. Items exclusively controlled for export by another U.S. agency;

ii. “Publicly available” technology and software.

iii. Foreign-origin items with U.S.-origin content that is below a specified percentage.

b. Activities subject to the EAR

i. Exportation from the United States and reexportation. 15 C.F.R. § 734.2.

ii. Certain releases of technology or software to a foreign national. The release in the United States of software or source code to a foreign national who is not a permanent resident is a “deemed export” to the home country and is subject to any license requirement that would apply to an actual transfer to that country. Deemed reexports are also controlled. 15 C.F.R. § 734.2.

iii. The involvement of U.S. persons in supplying foreign-origin items or in otherwise supporting a transaction with knowledge of a proliferation link. 15 C.F.R. §§ 744.2- 744.4, and 744.6.

iv. Intangible exportation, including facsimile or internet transmission to an addressee abroad and placement on the World Wide Web without limitation on foreign access.

3. License requirements

a. The Commerce Control List (CCL) (15 C.F.R. part 774) has detailed entries describing items subject to list-based licensing requirements. Items that are "subject to the EAR" but not on the CCL require a license only in special situations, noted below. These are called "EAR 99" items.

b. Entries on the CCL are identified by an Export Control Classification Number (ECCN). To illustrate, ECCN 7A001 refers to certain accelerometers designed for inertial navigation or guidance systems. The "7" places it under "navigation and avionics", one of ten CCL categories. The "A” identifies it as "equipment, assemblies, or components" ("B" is test, inspection and production equipment, "C" is materials, "D" is software, and "E" is technology). The "001" places it in the national security category as to basis for control, 0-99 being national security, 100-199 missile technology, 200-299 nuclear, 300-399 CBW, and 900-999 anti-terrorism, crime control, and other bases for control. If an item is controlled on more than one basis, the lowest applicable "reason for control" group number is used in the ECCN.

c. An item may be on the CCL, but generally will require a license only if the country chart (15 C.F.R. part 738) has an "X" in one or more of the "reason for control" columns opposite the destination country. In such a case, the exportation will be termed “NLR” (no license required) to the specific destination, even though the item is not EAR99.

d. Finally, even if an item is on the CCL and there is an "X", no export license need be applied for if a license exception applies. License exceptions are set forth in Part 740 of the EAR. They cover special risk-reducing circumstances, such as low-value shipments and temporary exports that remain under the exporter's control. The availability of a particular license exception may depend upon the country of destination.

4. Part 736 of the EAR states ten General Prohibitions

a. The first three General Prohibitions are based on the control
list/country chart matrix. These "prohibitions" are better understood as being affirmatively stated requirements to seek an export or reexport license.

b. The other seven are either absolute prohibitions or, in effect, statements of additional license requirements that are not CCLbased.

i. General Prohibition Five states the so-called "catch-all" control. If the exporter "knows" of a specified link to weapons proliferation (or has been informed by BIS that a license is required due to proliferation risk), the exporter must seek a license for any item subject to the EAR, even if it is not on the CCL. "Knowledge" is defined in EAR Part 772 to include more than just positive knowledge.

ii. General Prohibition Six applies to exports to the embargoed countries covered in EAR Part 746. The scope of such embargoes extends well beyond the items listed on the CCL. The country segments of Part 746 provide guidance as to the relationship between the EAR rules and OFAC rules relating to the country. See, for example, 15 C.F.R. § 746.7 relating to Iran.

iii. The restriction of exports to named companies, institutions, and individuals is a growing part of the export control system. BIS subjects persons to enforcement related "denial orders" that, under General Prohibition 4, bar their access to items subject to the EAR. There is a “denied persons list” that is not part of the Code of Federal Regulations, but is made available for convenient reference on the BIS website and elsewhere. General Prohibition 5 bars export or reexport without a license to an end-user prohibited by Part 744. There is an "entity list", Supplement No. 4 to Part 744. This list is primarily based upon a listed entity's link to activity of proliferation concern, and listing generally means that a license must be sought even for an otherwise uncontrolled export. Part 744 also requires a license for items going to a person designated on any of several lists administered by OFAC, such as “Specially Designated Terrorists”, but defers to OFAC in order to avoid duplicative licensing review.

5. Technology and software

a. The EAR exclude much information from the scope of controls by defining "technology" as specific information "necessary for the 'development', 'production', or 'use' of a product." CCL entries further limit the scope by controlling only that technology (or software) that is related to equipment or material on the CCL. See the definition of "technology" in EAR Part 772 and the General Technology and Software Notes in Supplement 2 to Part 774 of the EAR.

b. The EAR also significantly limit the reach of controls over technology and software by excluding that which is termed "publicly available". 15 C.F.R. §§ 734.2(a)(1), and 734.7-734.11.

i. This approach reflects, in part, the concept that export controls on publicly available material would be ineffective and unnecessary -- the idea being that people are unlikely to disseminate free of charge the really significant technology.

ii. The approach also protects freedom of speech and inquiry by not controlling fundamental research, academic instruction and conferences, or material being placed in the public media.

c. Even controlled technology and software is eligible for significant license exceptions.

i. License Exception TSU allows license-free export of operation technology or software that is the minimum necessary for the installation, operation, maintenance and repair of lawfully exported products, sales technology customarily supplied when seeking business, software "bug fixes", and mass-market software. 15 C.F.R. § 740.13.

ii. License Exception TSR permits technology or software to go to many countries if the customer agrees in writing not to make a prohibited retransfer. 15 C.F.R. § 740.3(d).

d. Important and helpful guidance is to be found in Supplement No. 1 to EAR Part 734, "Questions and Answers -- Technology and Software subject to the EAR."

e. Note that some of the provisions that generally limit controls do not apply to encryption items. See, e.g., 15 C.F.R. §§ 734.2(b)(9), 734.3(b)(3), 734.4(b)(2), 734.8(a), and 734.9.

B. Enforcement of the Export Administration Regulations

1. Violations of the EAR are subject to severe criminal and administrative penalties. Criminal cases are investigated by special agents from BIS and/or Immigration and Customs Enforcement, a Department of Homeland Security element, and are prosecuted by U.S. Attorneys' offices. BIS, though charges filed with an Administrative Law Judge by BIS counsel, may impose civil fines or administrative sanctions. A 2006 amendment greatly increased the maximum civil and criminal penalties under IEEPA. Criminal violations of IEEPA are Class C felonies, and 18 U.S.C. § 3571 allows higher fines than those specified in IEEPA.

2. Administrative sanctions include subjecting the offender and related persons to a "denial order". Such an order not only bars exports by such persons, but also bars others from supplying such persons with items that have been exported from the United States. A denial order can be imposed temporarily on an ex parte basis by the Assistant Secretary for Export Enforcement without a finding of a violation, if found necessary to prevent an imminent violation. Export privileges may also be denied on the basis of a conviction under the EAA or under other export control or national security-related laws. 15 C.F.R. §§ 764-766.

3. Goods subject to export control, whether by BIS or another agency, are subject to the detention, seizure and forfeiture authority of another Department of Homeland Security component, the Bureau of Customs and Border Protection. 19 C.F.R. part 171.

C. Getting help

1. The BIS website is http://www.bis.doc.gov/. This website contains information on training courses, where to get regulations and forms, new developments, links to web sites of other agencies, and much more. Help can also be obtained by a call to the BIS Export Counseling Division, (202) 482-4811, fax (202) 482-2927 or to the BIS Western Regional Office, (949) 660-0144, fax (949) 660-9347.

2. Guidance on a particular matter can be obtained in two ways:

a. A classification request will get advice (a “CCATS”) from BIS as to whether a described item is on the control list and, if so, the Export Control Classification Number. 15 C.F.R. § 748.3(b).

b. BIS will respond to a request for an advisory opinion by giving non-binding advice as to the likelihood of receiving a license for a particular item to a particular recipient. 15 C.F.R. § 748.3(c).

3. Telephone and fax contact numbers for many agencies are included in Supplement No. 3 to EAR Part 730.

a. The EAR are massive. Help is needed! People who work often with this material are likely to subscribe to the loose-leaf, thousand page, ring-binder version available from the Government Printing Office for $182.00 a year. This service updates the EAR with supplements several times a year and contains features not included in the Code of Federal Regulations, such as a twenty-page index and a listing of denied persons. Upto-date, searchable, EAR databases can be obtained by subscription from government sources. Details and links are on the BIS website.

b. Commercial vendors also offer a variety of software and support services to assist companies in automated screening of the several name lists and in compliance management generally.

IV. State Department

A. Scope of the International Traffic in Arms Regulations

1. The Arms Export Control Act (AECA) provides authority to designate "defense articles'' and "defense services" and subject them to control. The United States Munitions List (USML), which is part of the International Traffic in Arms Regulations (ITAR), sets forth what has been designated. 22 C.F.R. part 121. The USML is divided into 21 "Categories". These range from those unambiguously confined to military use, like Category II -- "Artillery Projectors", to some that can encompass items with civil application, like Category XII that covers some image intensification and night-vision items and Category XV – “Spacecraft Systems and Associated Equipment.”

2. For the most part, the USML does not have the detailed technical parameters that make the dual-use CCL so lengthy, but more precise. The USML runs fewer than 30 pages in the code, the CCL about 170.

3. The AECA does not contain criteria for the designation of defense articles and services, but there is a policy stated in the ITAR.

a. To be so designated, the item shall be "specifically designed, developed, configured, adapted, or modified for a military application" and

b. The item shall have neither "predominant civil applications" nor "performance equivalent (defined by form, fit and function) to that of an article or service used for civil applications", unless

c. The item has "significant military or intelligence applications such that control [under the ITAR] is necessary." 22 C.F.R. § 120.3. The record and rationale of the application of point c. to decide that a dual-use article or service is or should be on the USML is not easy to discover.

4. The ITAR state that the intended use, military or civilian, is not relevant to the applicability of the ITAR, but there are significant exceptions that exclude from ITAR requirements, for example, some image intensification tubes used in commercial devices.

5. The ITAR contain a "commodity jurisdiction" (CJ) process. 22 C.F.R. § 120.4. Business can file CJ requests with DDTC either to resolve doubt as to whether an article or service is covered by the USML or to seek removal from the list. Alternatively, the CJ process may be initiated by filing a classification request with BIS under 15 C.F.R § 748.3.

6. Immediately following the USML in the ITAR are a number of so-called "interpretations", many of which amplify the list terms. These interpretations have the same force as USML entries. 22 C.F.R. § 121.2.

B. Defense Articles and Defense Services

1. Note that ITAR terminology is different from the "commodity, technology, software" structure of the EAR.

a. The ITAR define defense article to include technical data (22 C.F.R. § 120.6), but the definition of defense service includes also the furnishing of technical data to foreign persons, in the United States or abroad. 22 C.F.R. § 120.9. The broad ITAR definition of defense service merits special attention, as the ITAR has no exception for such routine operating directions as the EAR provide in License Exception TSU.

b. Unlike the EAR that treat technology and software separately, the ITAR treat software as technical data. The definition of technical data includes software "directly related to" defense articles (22 C.F.R. § 120.10 (a)(4)), but the term "specially designed software" is used in the Missile Technology Control Regime section. 22 C.F.R. § 121.16. As for components and parts, the USML standard is to list those that are specifically designed or modified for specified defense articles. DDTC applies a “see through” policy and may assert jurisdiction over a piece of non-military equipment if it incorporates a defense article component.

C. More than "exports"

1. The ITAR require the registration of persons who engage in manufacturing, brokering, importing or exporting defense articles or furnishing defense services.

2. DDTC also licenses temporary imports of defense articles. 22 C.F.R. §§ 120.18, 123.1-123.4. Permanent imports are under the jurisdiction of Treasury's Bureau of Alcohol, Tobacco and Firearms. 27 C.F.R. parts 47, 178 and 179.

3. The ITAR extend to brokering of transactions involving defense articles or defense services, whatever the location or origin, by a person in the United States, by a U.S. person, wherever located, or by a person “subject to the jurisdiction of the United States.” DDTC has recently taken the controversial position that a foreign person outside the United States can become subject to this provision by entering into an agency agreement with a U.S. company. These provisions reach brokering activity relating to the manufacture of defense articles. Subject to stated exemptions, brokers must register with DDTC and pay fees. Additionally, some brokering, activity may require prior approval from or notification to DDTC. 22 C.F.R. part 129.

4. Like the EAR, the ITAR define "export" to include oral or visual disclosure of technical data to foreign persons in the United States or abroad. The definition also includes "performing a defense service" for the benefit of a foreign person.

D. Registration and licensing process

1. The Registration Statement (DSP-9) must be signed by an authorized senior officer and must contain disclosures as to corporate officials and foreign ownership and control. Registrants must update information and must give DDTC advance notice of any intended transfer to foreign ownership or control of the registrant or of any entity thereof.

2. U.S. companies involved in international dealings with defense articles or defense services are likely to find themselves parties to numerous "MLAs" manufacturing license agreements (MLAs) and technical assistance agreements (TAAs). These agreements, concluded with the foreign party after draft approval by DDTC, serve as blanket approval for the many ITAR-controlled exports that may occur in the course of contract performance. The agreements must contain ITAR-prescribed clauses and specifically describe the assistance and technical data. Such description can be a daunting task if a complex, long-term arrangement is involved. The transmittal of a proposed MLA or TAA to DDTC must also contain extensive ITAR-prescribed content.

3. A Nontransfer and Use Certificate (Form DSP-83) must be executed by the foreign consignee, foreign end-user, and applicant and submitted to DDTC in connection with any license or MLA or TAA relating to "significant" military or classified articles or technical data, identified as such on the USML.

4. About one-third of all license applications are referred by ODTC to the Department of Defense for review, which may entail further referral to one or more of the armed services. The median processing time for these “staffed” cases not handled solely by DDTC is about 50 days. High value transactions involving major defense equipment are also subject to Congressional notification with a 15 or 30-day waiting period.

E. Licensing Policy and Exemptions

1. Part 126 of the ITAR states a policy of denial of licenses relating to specified countries. This list includes more than just the countries that have been designated for terrorism support or that are the objects of United Nations Security Council sanctions.

2. There is an important Canadian exemption in the ITAR. 22 C.F.R. § 126.5. It is not a blanket exemption from ITAR requirements, so the terms of the ITAR and other guidance as to its scope must be consulted.

F. Enforcement

1. The AECA provides for criminal and civil penalties for violations of the ITAR. The penalties are set by reference to the penalties in the Export Administration Act of 1979, as amended, except that the maximum civil penalty is $500,000 per violation, rather than $100,000. The AECA also incorporates by reference certain EAA provisions relating to investigation of possible offenses, the administrative imposition of civil penalties, and forfeiture. 22 U.S.C. § 2778 (e). In practice, DDTC relies upon Immigration and Customs Enforcement and the Defense Investigative Service to conduct investigations. The ITAR contain procedures for administrative enforcement proceedings that are patterned after those in the EAR.

2. Debarment. The AECA bars, with provision for review and exceptions, the issuance of a license to export an item on the USML to a person convicted of violating specified export control and security related statutes or debarred by another export control agency. In addition to such statutory debarment, the ITAR provide for administrative debarment based upon an administratively determined ITAR violation that DDTC believes shows lack of future compliance reliability. A threeyear debarment is the norm. Moreover, the ITAR provide for interim suspension when DDTC believes that grounds for debarment exist. Beyond proceedings for a person's general debarment, the ITAR also provide broad and varied bases for discretionary denial or revocation of a specific license, which include being the subject of an indictment under specific statutes.

G. Information

Website: http://www.pmddtc.state.gov
DDTC Response Team:
Telephone: (202) 663-1282
E-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.

V. Treasury Department

A. Organization and Authority

1. Office of Foreign Assets Control (OFAC)

a. This office reports to the Under Secretary of Treasury (Terrorism and Financial Intelligence). It administers economic sanctions programs, which can be grouped in two broad categories.

i. Financial sanctions, including investment bans and asset freezes.

ii. Export and import embargoes, some extending to other commercial activity, such as transportation.

b. There is no single, basic regulation issued by OFAC comparable to the EAR or ITAR. Instead, Title 31 of the Code of Federal Regulations contains separate parts, starting with Part 500, that contains the rules applicable to the sanctions against specific target countries or entities. 31 C.F.R. part 501 contains record keeping provisions and enforcement guidelines of general applicability.

2. Statutory authority is varied

a. The International Emergency Economic powers Act (IEEPA), 50 U.S.C. §§ 1701-1706, is the basis for many of the measures initiated since its enactment in 1977, such as those against Iraq in 1990. IEEPA supplanted the Trading with the Enemy Act (TWEA), 50 U.S.C. app. §§ 1-44, but then-existing sanctions (e.g., against North Korea and Cuba) were grandfathered, with the regulations continuing in force under the TWEA.

b. Other statutes that provide authority for one or more of the OFAC sanctions programs include the United Nations Participation Act, 22 U.S.C. § 287c, to implement measures ordered by the United Nations Security Council, and the Antiterrorism and Effective Death Penalty Act, which includes criminal penalties for engaging in financial transactions with the government of a designated terrorist supporting country or providing material support for a foreign terrorist organization. 18 U.S.C. §§ 2332d, 2339B.

c. Some legislation has an impact on sanctions initiated under other authority. For example:

i. Sanctions against Cuba were variously tightened and limited by provisions of the Cuban Democracy Act of 1992 (Pub.L. 102-484, §§ 1701-1712, 22 U.S.C. §§ 6001- 6011) and the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996, also known as the “Helms- Burton” Act (Pub.L.104-114, §§ 201-207, 22 U.S.C. §§ 6061-6067).

ii. The Trade Sanctions Reform and Export Enhancement Act of 2000, Title IX of Public Law 106-387, imposed limits on authority to restrict exports of agricultural products, medicines, and medical devices. This legislation, which was implemented in regulatory issuances by Commerce and Treasury, has left sales of these items to Cuba and to other designated terrorist supporting countries subject to special authorization procedures and limitations. Note: These selected references are far from being a comprehensive survey of the legal foundation for the programs administered OFAC. Like the rest of this overview, the object is to convey a general sense of what the agencies do.

B. Asset blocking

1. For many businesses, screening to ensure compliance with OFAC foreign asset blocking regulations will need to be integrated with internal control programs for export control compliance. Blocking requirements apply to persons in the United States and to persons elsewhere who are subject to the jurisdiction of the United States. Depending upon which part of the regulations applies, the latter can include not only branches abroad but also U.S. controlled foreign entities.

2. Most asset blocking measures are sanctions against a target, but some can be protective, such as the freezing of Kuwait’s assets at the time of the 1990 Iraqi invasion. The targets vary from program to program, and may be a country, including its nationals wherever located, a government, including its fronts ("Specially Designated Nationals"), or a nongovernmental entity sanctioned for particular activity, such as "Specially Designated Terrorists" and "Specially Designated Narcotics Traffickers".

3. Title to blocked property remains with the owner. The property must be placed in an interest bearing account. Transactions or transfers involving blocked property are barred, absent OFAC approval. The property can take any form, including financial instruments, goods, contracts, or debts. The property interest of the designated target may be present, future, or contingent.

4. Persons that acquire custody, control or possession of subject property must block it and report the blocking.

C. Exports and transaction controls

1. Different parts of the OFAC regulations affect exportation in different ways, so the terms of the specific control must be examined. For example:

a. The prohibitions subpart of the regulations applicable to Cuba does not contain a general prohibition of exports from the United States to Cuba, but it does prohibit "transactions which involve property in which a designated foreign country, or any national, thereof, has any interest". In the definitions subpart, this phrase is stated to include any export from the United States to the designated country. 31 C.F.R. § § 515.201(b) and 515.309. Other controls do refer in the prohibitions to export to the target.

b. The Iranian Transaction Regulations introduced an expanded prohibition that includes exportation or re-exportation not only from the United States or by a U.S. person to Iran, but also to a third country for use in goods to be exclusively or predominantly for Iran. 31 C.F.R. § 566.204.

c. The prohibition of “facilitation” by a U.S. person of a transaction with an embargoed country by a foreign person (such as a subsidiary) can pose challenging compliance issues. OFAC regulations that do not bar a foreign subsidiary from business with the embargoed country can, nonetheless, reach facilitation of that business by the U.S. parent. Just what parent-subsidiary activity will be deemed to be facilitation can be hard to determine. See, e.g., 31 C.F.R. §§ 560.206(b) and 560.417.

2. Exports, imports, and other transactions that are otherwise prohibited may be authorized by a general license contained in the regulations, or by a specific license issued by OFAC. Application to OFAC for a specific license is made by letter, as OFAC does not have standard forms for this purpose.

3. Many of the sanctions administered by OFAC are imposed by Presidential executive order. Except as otherwise stated in the order, the export prohibitions and other sanctions become immediately effective, and general licenses are generally not available until OFAC issues implementing regulations. There has been delay in getting the regulations issued on some occasions, necessitating efforts to obtain specific licenses. This contrasts with the controls administered by the Commerce and State Departments, which do not come into force until the effective date specified in an implementing regulation.

4. There is overlap between the Treasury and Commerce regulations restricting exports. The regulations do contain provisions designed to avoid having to apply to more than one agency for authorization. For some controls, Commerce defers to authorization by OFAC -- e.g., Iran. 15 C.F.R. § 746.7. Conversely, the OFAC regulations for Cuba and North Korea contain a general license for all transactions "ordinarily incident" to an exportation "licensed or otherwise authorized by" Commerce. 31 C.F.R. §§ 500.533 and 515.533. Note that this general license does not extend to activity that precedes the authorized exportation, so it can be necessary, for example, to seek separate authorization from OFAC for travel to Cuba to arrange for a sale of food or medicine that would be eligible for an export license from BIS.

D. Enforcement and penalties

1. OFAC's enforcement division has been enlarged, but it does not have its own criminal investigators. It refers potentially criminal cases to Immigration and Customs Enforcement or the Federal Bureau of Investigation. (BIS may investigate and take enforcement action if there is a possible violation of both BIS and OFAC regulations.) Civil penalties administratively imposed by OFAC under procedures set forth in Subpart G of the various OFAC regulations. There is pre-penalty notice and the opportunity to file a written response, but, except for Cuba cases, no hearing and no use of an administrative law judge. If a penalty is not paid, OFAC refers the matter to the Department of Justice for recovery action. In 2003, OFAC published enforcement guidelines as a new Subpart D to 31 C.F.R. part 501.

2. As noted above, different OFAC regulations are based on different statutes. The applicable penalties will depend on which statutory provision is involved. Civil penalties are provided for by IEEPA, TWEA, the Iraq Sanctions Act of 1990, and the Foreign Narcotics Kingpin Designation Act. Title VII of Pub. L. 106-120. Each of these statutes also provides for criminal penalties. IEEPA was amended in 2006 to increase fine and imprisonment limits. Sections 303 and 321 of the Antiterrorism and Effective Death Penalty Act (18 U.S.C. §§ 2332d and 2339B), contain penalties with respect to a person engaging in a transaction with the government of a designated country or providing material support to a designated foreign terrorist organization.

3. As is the case with exports subject to Commerce or State controls, Customs and Border Protection has authority to detain and seize goods believed to be being illegally exported in violation of OFAC controls. If a violation is found, administrative relief from seizure and forfeiture is obtained through a process under regulations that involves payment of a civil penalty.

C. Information

Website: http//www.treas.gov/offices/enforcement/ofac
Telephone: (202) 622-2490 (compliance), (202) 622-2480 (licensing)
Fax-on-demand: Call (202) 622-0077 for documents and brochures by fax

This material was prepared for the American Bar Association- American Law Institute Program Fundamentals of International Business Transactions, December 2006.

© Cecil Hunt 2006
*Harris, Wiltshire & Grannis LLP, Washington, D.C.