On March 19, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced the entry into a $122,000 settlement with Comtech XiCom Technology, Inc. (“Comtech XiCom”), a leading supplier of high power amplifiers for satellite communications based in Santa Clara, CA, for three apparent violations of the Export Administration Regulations (“EAR”), caused by Comtech XiCom’s mistaken belief that certain exports could be made without BIS authorization.^[1]   

According to BIS, from approximately December 3, 2015 to March 30, 2017, Comtech XiCom made a series of exports of traveling wave tubes (“TWTs”), valued in total at around $153,945, to customers in Brazil, Russia, and the United Arab Emirates.  The TWTs were classified under Export Control Classification Number (“ECCN”) 3A001.b under the EAR’s Commerce Control List ("CCL") and controlled for National Security (NS) reasons, which require a BIS license to each of these destinations.  In each instance, Comtech XiCom had correctly identified the appropriate ECCN for the TWTs.  However, when Comtech XiCom staff inquired with internal compliance officials as to whether the shipment of the TWTs required a BIS license, the officials incorrectly determined that no such authorization was needed to proceed with the shipments.  This error by Comtech XiCom lead to the shipments of the TWTs being made without the required export licenses from BIS, which resulted in the apparent violations of the EAR.

Compliance Takeaways

Perhaps the most crucial element to any Export Compliance Program are the policies and procedures that are established to ensure accurate assessments regarding export authorization.  As BIS details in its Export Compliance Guidelines,^[2] there are four key steps to this element:

1. Jurisdiction: Companies should always begin with confirming which U.S. agency has jurisdiction over the intended export.
   • When classifying a product, you should always begin with the Department of State’s Order of Review, maintained under the U.S. Munitions List (“USML”) of the International Traffic in Arms Regulations (“ITAR”).
   • If you determine that the item is (i) not subject to the ITAR because it is not enumerated or otherwise described on the USML; and (ii) not subject to the exclusive jurisdiction of another U.S. agency (e.g., the U.S. Nuclear Regulatory Commission), you should then consult the CCL’s Order of Review to conduct further analysis.^[3]

    

2. Classification: Once it has been determined that an item intended for export is subject to the EAR, companies should then assess whether the item is controlled on the CCL.
   • The CCL contains several hundreds of items and consists of a series of ECCNs, each of which describes a controlled product, software, or technology and identifies the reasons for control.
   • If there is no ECCN on the CCL that corresponds to an item, it will be classified under the “catchall” category known as EAR99.
   • Classification of items on the CCL requires technical specifications of the item and comparing those to the technical descriptions included in the CCL.
   • Although BIS permits self-classification of items, you can also request BIS to issue a binding determination on classification.

    

3. License Determination: Once an item has been classified, companies must then determine whether a BIS license is needed based on the “reasons for control” and the country of ultimate destination
   • This determination is made by comparing the ECCN with the EAR’s Commerce Country Chart (“CCC”).
   • If the CCC indicates that a correlation exists between the reason or reasons for control of an item and the country of destination, a BIS license is required for export or reexport, unless a License Exception applies.

    

4. Screening: Even if a determination is made that an item may be exported to a destination without a BIS license, it is vitally important that companies screen all parties prior to export.
   • In addition to the CCL-based controls discussed above, the EAR also contain “catch-all” controls that must be considered with every export transaction, including those that do not require a BIS license for classification-based reasons.
   • These controls prohibit exports where the exporter knows or has reason to know that the item is destined for or may be diverted to a restricted end-user (i.e., a person/entity identified on a U.S. Government Restricted Party List) or end-use (e.g., proliferation of weapons of mass destruction).
   • BIS advises that such screening for end-user or end-use concerns should be performed at the initial time an order comes in, as well as subsequently prior to export.

The ultimate compliance goal for companies is to formulate comprehensive procedures, processes, workflows, and decision tables that help guide employees through each of these steps in order to accurately assess export authorization requirements.  This can include, among other components, item classification and export authorization templates, license determination matrices, and diversion risk and red flags checklists.

Failure to make correct decisions on export authorizations, such as in the case with Comtech XiCom, can result in not only substantial fines (with the maximum civil penalty of up to the greater of $311,562 per violation, or twice the value of the transaction that is the basis of the violation), but also denial of export privileges and exclusion of practice before BIS.   

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