Remarks of Eric L. Hirschhorn
Under Secretary for Industry and Security
United States Department of Commerce
Legal Aspects of Trade Conference
June 13th, 2016
Hartford, Connecticut
Introduction
Thank you, Senator Blumenthal, for that gracious introduction. Thank you to the Connecticut District Export Council for the opportunity to speak at this important trade compliance conference. In particular, I would like to thank Anne Evans and her staff at the Connecticut Export Assistance Center for their hard work in organizing this event.
Overview of Commerce Export Controls
Many of you are knowledgeable about export controls but let me offer a brief overview of the U.S. export control system. I will then focus on the essential role all of you play in ensuring that this system works, as well as what’s in it for both you and the nation as a whole.
As you heard in this morning’s panels and presentations, the Bureau of Industry and Security (BIS) is part of a broader interagency export control team. BIS implements and enforces controls primarily on “dual use” items—i.e., items with recognized civilian and military applications. Examples are machine tools, advanced electronics, high performance computers, and encryption. In administering and enforcing export controls, our goal is to prevent the diversion of technology and products useful for military or proliferation applications to bad people, bad places, and bad end uses.
Export Control Reform
Export controls, in one form or another, have existed since before our declaration of independence from Great Britain. Our first export controls started when the Continental Congress prohibited the export of goods to Britain in December 1775. Since that time, export controls have continued to play an essential role in protecting U.S. national security and foreign policy interests.
One of the greatest challenges is keeping the controls and their underlying policies relevant while ensuring that they are both comprehensible and enforceable. President Obama took up this challenge when he announced the Export Control Reform (ECR) initiative in August 2009 – to update the United States’ Cold War-era export control system to one that addresses today’s national security threats and economic opportunities. The goal of ECR is to (1) improve our interoperability with close friends and allies; (2) strengthen the U.S. defense industrial base by reducing incentives to “design out” controlled U.S.-origin parts; (3) focus our limited resources on the threats that matter the most; and (4) ease the licensing burden on U.S. exporters.
The review of the State Department’s U.S. Munitions List (USML) and corresponding changes to BIS’s Commerce Control List (CCL) represent the keystone of the reform effort. We have changed the USML from a list based upon open ended, subjective, or design-intent standards to one based almost entirely on objective technical or other parameters. This means that an item will be on the revised USML only if it is determined by technical experts to provide a critical military or intelligence advantage.
If an item is not listed on the USML, it is not controlled by the State Department. The USML review has removed “catch-all” controls for many thousands of unspecified parts and components. We have transferred many militarily less sensitive items to the licensing jurisdiction of BIS. They remain controlled, but under a far more flexible and nuanced framework. The critical national security benefits include: timely exports to key defense allies; no unexpected license provisos; lower Defense Department acquisition and research costs; enhanced U.S. partner affordability throughout the product life cycle; a stronger defense industrial base; and the reduction of the licensing burden for the exporting community. BIS licensing officers reviewed over 10% more transactions in calendar year 2015 than in 2014 (45,807 up from 41,291) – and nearly double the number we saw as recently as 2012. License applications for both tangible and deemed exports, commodity jurisdictions, commodity classifications, and license determinations all showed increases from 2014, yet average processing times fell.
The success of ECR reflects a strong interagency partnership and the significant effort, commitment, and cooperation at all levels of the U.S. government.
Why Compliance is Important
An effective export control system requires a strong public-private partnership. U.S. industry’s active engagement in strategic trade is the best defense against exports that support proliferation and terrorism. We rely on all of you – from supply chain companies and OEMs, to research institutions and academia – to help safeguard U.S. national security and foreign policy interests. Your knowledge of your products, their potential end uses, your markets, and your customers makes you the front line in ensuring that commodities, software, and technologies do not end up where they should not.
Everyone in the supply chain, from a components manufacturer to the developer of an aircraft system, must do her part. This includes understanding how your products are controlled for export, ensuring that everyone in the supply chain is aware of his export compliance obligations, and, simply put, undertaking the day-to-day work required for an effective compliance program.
There is no “one-size-fits-all” when it comes to trade compliance. Elements of a well-managed compliance program include: senior level commitment; risk analysis – meaning consideration of the types of goods being exported and the destination of those goods; commitment of resources; written procedures; training of employees and suppliers as appropriate; screening of customers and transactions; recordkeeping; a system for identifying and reporting violations; auditing of transactions, evaluating findings, making improvements; and the appropriate information technology to monitor compliance throughout the organization. How these elements fit into your trade compliance program depends on many factors such the countries to which you export, the reason we control the items that you export, the types of end uses and end users, your relationships with overseas business partners, and the volume of exports.
Export Enforcement
Playing an active role in export compliance is not just good for national security; it also is good for you, your company’s reputation, and your bottom line. Criminal penalties can reach $1,000,000 and 20 years imprisonment per violation. Administrative penalties can reach the greater of $250,000 per violation or twice the amount of the transaction that is the basis of the violation. Violators may also be subject to denial of their export privileges – a penalty that prohibits a person from participating in any way in any transaction subject to the EAR, even if it involves items that ordinarily do not require licenses. Furthermore, other businesses and individuals are prohibited from participating in any way in an export transaction with a denied person.
Enforcement Guidelines
BIS published a proposed rule on December 28, 2015 that would rewrite our administrative enforcement guidelines. We expect to issue a final rule very soon. These new guidelines were proposed to make civil penalty determinations more transparent and predictable, and to align them more closely with those used by the Treasury Department’s Office of Foreign Assets Control (OFAC). The proposed guidelines provide a clearer description of how the base penalty amount is likely to be determined. The base penalty would depend on whether the violation is egregious or non-egregious and whether the case resulted from a voluntary self-disclosure (VSD). Although the proposed guidelines generally provide for significantly higher civil penalties for egregious cases, experience suggests that the majority of violations identified in OEE investigations will fall into the non-egregious category.
BIS recognizes that even companies with good intentions can make mistakes. The draft guidelines also reinforce the fact that BIS strongly encourages the submission of VSDs by parties who believe they may have violated our regulations. The vast majority of cases brought to our attention through VSDs result in the issuance of warning letters. With respect to VSDs generally, OEE will issue warning letters in cases involving inadvertent violations and cases involving minor or isolated compliance deficiencies, absent the presence of aggravating factors.
BIS’s Export Enforcement will also continue to pursue criminal and administrative penalties not only against companies that fail to comply with the EAR, but also individuals who flout the rules. Strong enforcement ensures that companies that act in good faith and invest money in their compliance programs will not be put at a competitive disadvantage with those who choose not to comply with our export control laws.
So you can expect to see a continuing robust and comprehensive enforcement program at BIS involving cases where aggravating factors are present, particularly cases involving knowledge, willful conduct, or harm to U.S. national security or foreign policy interests.
BIS Resources
This in no way means that you are out there completely on your own in trying to understand the rules of the road. BIS and the International Trade Administration’s U.S. Export Assistance Centers work hand in hand to ensure you have the information and tools you need to be successful in the international marketplace. Our robust participation in this conference is just one example and I encourage all of you to take advantage of the wide range of expertise and experience of the BIS and other U.S. Government representatives here today and tomorrow.
At BIS, we are proud of our reputation for being transparent and customer focused. Part of our job is to help you stay current and compliant, not only on ECR related changes, but also the range of issues you undertake as export control administrators and compliance specialists.
In fiscal year 2015, the BIS conducted over 50 outreach activities reaching over 5,000 people. BIS's Office of Exporter Services (OExS) counselors provided regulatory, policy, and process guidance to tens of thousands of exporters, freight forwarders, universities, and individuals, enabling them to meet their regulatory obligations under the EAR.
Beyond the “bread and butter” training and counseling work for which we are best known, OExS is actively employing a range of new outreach platforms, including the development of additional decision tree electronic tools on the BIS website, a new series of webinars on topics ranging from license exceptions and sanctions to encryption and the definition of “Specially Designed”, compliance guidelines and tools, including a consolidated screening list (on www.export.gov), audit modules and red flag guidance, an increasing number of compliance-related outreach visits to companies, and the continuation of our popular weekly teleconferences, which are usually chaired by Assistant Secretary Kevin Wolf. We offer an email list serve that sends out the latest regulatory updates. We also regularly tweet updates to our 1100+ followers.
We will continue to work hard to reach more people through greater use of electronic resources and increased partnerships with USEACs, trade associations, industry groups, and other USG agencies, and to broaden BIS’s outreach to small and medium-sized companies, including start-ups.
Setting the Tone/Raising the Bar
I would like to close by emphasizing that OEMs can set the right tone with their supplier companies when it comes to compliance obligations. You are in the best position to convey the message that export controls and compliance are in the U.S. national interest as well as in each company’s interest. I call on you to raise the bar in your own compliance efforts by reaching out to your supplier companies and increasing the level of awareness and sharing best practices through all tiers in your supply chain. It’s good for business and it’s good for national security.