On May 28, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced the entry into a $350,000 settlement with Photonics Industries International, Inc. (“Photonics”), one of the world’s largest solid state laser manufacturers based in Long Island, NY, for five apparent violations of the Export Administration Regulations (“EAR”), mainly caused by Photonics’ misclassification of laser systems exported to China.1
According to BIS, in December 2014, Photonics exported 25 picosecond laser systems, classified under Export Control Classification Number (“ECCN”) 6A005.b.6.b and controlled for National Security (“NS”) and Anti-Terrorism (“AT”) reasons, to China without obtaining the requisite BIS license. (Photonics also appears to have attempted to export an additional eight systems to China without a BIS license.) In transaction documents for these exports, Photonics mistakenly self-classified the items as EAR99 (meaning that the item is subject to the EAR, but not specifically listed on the EAR’s Commerce Control List). Photonics did not request a commodity classification from BIS on the systems.
Additionally, BIS claimed that Photonics had its freight forwarder file Electronic Export Information (“EEI”) in the U.S. Census Bureau’s Automated Export System (“AES”) for these exports that listed Hong Kong as the ultimate destination and a Hong Kong fright forwarder as the ultimate consignee, even though it knew that the ultimate destination and ultimate consignee were both located in China. Photonics apparently took this action at the direct request of its customer. (According to BIS, this type of request is a common “red flag” indicator that a potential EAR violation may occur with respect to the intended export.)2
As BIS was investigating the above transactions, Photonics was also alleged to have made an unlicensed export in May 2016 of a laser system (correctly designated as EAR99) to Sichuan University in China, which has been designated on the BIS Entity List since September 2012, thereby imposing a BIS license requirement to export any item subject to the EAR to it. According to BIS, Photonics did not maintain an export control compliance program that included screening foreign consignees or end-users against the U.S. Government Restricted Party Lists (including the BIS Entity List) and thus was unaware of the license requirement for this export.
The Photonics settlement demonstrates the importance of knowing the correct classification of products to be exported by determining whether your product has a specific ECCN on the EAR’s Commerce Control List (“CCL”).3 While BIS permits companies to self-classify their products, they should have not only a technical understanding of the item to be classified in order to do so, but also deep familiarity with the structure and format of the CCL. Divided into ten categories, each of which is further subdivided into five product groups, the CCL contains thousands of items with a litany of different parameters. Companies must carefully review all the technical specifications of a given ECCN to determine the correct classification of their product and, quite often, consult several different ECCNs before making a final selection. If, after extensive review, classification of the product cannot be determined with a high degree of confidence, companies can obtain an official commodity classification determination from BIS by submitting a CCATS request through its online SNAP-R system.
The Photonics settlement also shows that determinations as to whether BIS authorization is required to export a particular product does not end after classification. In addition to the CCL-based controls, the EAR also contain a second set of controls based on the end-user and end-use of the item to be exported. These controls are commonly referred to as “catch-all” controls because they must be considered in connection with every export transaction, including those that do not require a license for classification-based reasons.
Broadly speaking, these controls prohibit the unlicensed export of items subject to the EAR, where the exporter knows or has reason to know that the item is destined for or may be diverted to a restricted end-user or end-use. These controls prohibit unlicensed exports to a foreign person that is identified on a U.S. Government Restricted Party List, such as the BIS Entity List, or that is likely to use the item in connection with proscribed proliferation activities. Thus, companies must ensure that, in addition to classifying products, all parties to be in possession of the product are screened prior to export (including consignees), even if the product itself does not require a BIS license to be sent to its destination.
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