Integrated – June 22, 2021
Have you made the classic mistake of assuming that – because your business is a startup, has not gone global, or never intends to engage in international transactions – you are not required to comply with export controls and US sanctions? If so, this one is for you.
Export laws, foreign investment controls, and prohibitions on sanctions apply to many companies that only do business in the United States. It’s inside all The interest of US entities, especially those in the technology field, to have a basic understanding of US trade controls. Ignoring these rules can lead to a variety of problems that can arise at every stage of the process of growing a business.
So how can trade controls affect your business? Here are several examples.
1. NATIONAL SECURITY
National security concerns could bar certain funding opportunities or acquisitions, derailing huge opportunities at the last minute – and after you’ve already spent a lot of money preparing for the deal. If you are considering fundraising or hoping to be acquired, the export classification of your products or the sensitive personal data you collect may prevent certain people, entities or foreign funds from investing. If your business involves what the US government considers “critical infrastructure,” additional prohibitions could arise.
2. FOREIGN EMPLOYEES
Foreign employees on your staff may need government approval to gain access to work on your own technology, and if you’ve hired them without it, you’ve committed a costly violation. Transfers of American technology to foreign persons located in the territory of the United States are considered an export, unless the foreign person officially has permanent resident status. This is the case with many foreign people who only hold work visas and it could mean that these people are prohibited from working on your technology unless you have obtained an export license allowing the transfer of technology to the person’s country of origin.
3. RESTRICTED PARTIES
Each American entity must ensure that it does not do business with any restricted party. Restricted party lists include people, entities, and organizations with which the U.S. government has prohibited U.S. citizens from transacting, directly or indirectly. Restricted parties include persons and entities sanctioned for foreign policy and national security purposes, drug traffickers, transnational criminal organizations, terrorist organizations, foreign fraudsters and more.
Foreign countries also publish restricted party lists. Depending on where your business operates, these foreign listings may also apply. Violating these prohibitions can result in costly fines and penalties, and if done knowingly it can even land you in jail.
4. EXPORT CLASSIFICATIONS
If a customer asks you for the export classification of your product (but you don’t know it), it can sometimes take a month or more to figure it out and cost you an urgent contract. Many customers understand and are committed to complying with US trade controls. Maybe it’s because they work in high-risk industries, or maybe they’ve already suffered the consequences of a breach. Either way, savvy customers – especially those who may use your product overseas or export it – will ask you to tell them the product’s export classification.
They will want to understand the limitations and regulatory requirements that come with them and make sure those limitations work with their business plan. Depending on the complexity of analyzing your product’s export classification, you may need to submit a classification request to the U.S. government, which takes time to prepare and process. Such delays in the middle of a sale can cost you valuable customers.
5. SANCTIONED PLACES
If parties in sanctioned locations use your product or service online, you may be in violation of US sanctions whether or not you are aware of the activity or actively support it. With regard to countries under embargo, most activities, including direct and indirect exports of goods and services, are completely prohibited. This includes providing online services to anyone located in an embargoed location such as Iran, Syria, Cuba, North Korea or the Crimea region of Ukraine.
For example, if a user located in Cuba logs into your platform and uses your services, you would be responsible for a violation of US sanctions law. Likewise, an unintentional violation of penalties can also occur if a restricted party uses your product or service online, even if you did not know it, which is why it is important to conduct restricted party checks.
6. SALE TO FOREIGN ENTITIES
Is your exit strategy to sell the business to the highest bidder? If you sell your technology to a foreign party without first determining whether export controls apply or whether a CFIUS filing is warranted, you may have a CFIUS export or violation, and the U.S. government could unwind the transaction and force the foreign party to relinquish jurisdiction. It is important to proactively consider whether any export or CFIUS-related restrictions may apply to potential foreign buyers or investors so that you do not waste your time negotiating with parties who may not be legally in. able to close the deal.
7. IMPORTS SEIZED
Let’s say you import components or materials from China, and suddenly you find out that the goods have been seized at customs and could only be released if you hire a lawyer to fight the seizure. It may come as a surprise, but there are many reasons why your goods can be seized at the border, for example: non-compliance with security standards, intellectual property violations regarding trademarks or designs, incorrect import classifications, destination country missing. – original markings and more. If this happens, not only will you likely have to hire an expensive lawyer (which only increases your losses), you may find that you owe additional fees or even penalties.
Sometimes there is no option for the release of these goods, and they are destroyed by customs. It is money lost. Worse yet, as U.S. foreign policy discussions with countries like China become increasingly tense, additional restrictions may be imposed, such as bans on cotton from Xinjiang or corporate imports. technology such as Huawei and Semiconductor Manufacturing International Corporation (SMIC). For these reasons, it’s important to make sure all of your ducks are lined up before your ship arrives (literally).
As a US business, you don’t need to know everything about US trade controls. But, to avoid the glaring pitfalls, you need to understand that these rules don’t just affect those who do physical business overseas. Engage a trusted advisor with specific experience to help you identify potential issues and prepare for activities and transactions that may have a global connection, even if this is not immediately apparent.
Always know who you are dealing with and determine the associated risks and responsibilities that could arise from that connection. Finally, know the legal responsibilities that go with marketing your product or technology. So many businesses, large and small, assume that there are no rules when it comes to transferring goods and technology, especially online. But this is not the case. From the perspective of the US government, the Internet is not the Wild West. American entrepreneurs would do well to know the rules of the game so they don’t shut down before they’ve even started.
Reprinted with permission from the June 22, 2021 issue of Integrated. © 2021 Integrated. All rights reserved.