United States: Failure To Follow License Provisos Leads To $1.9 Million Penalty

Congratulations, you have finally received an export license, and you are now authorized to ship your products overseas. However, although you have made it over most of the hurdles, you are not finished yet. One last hurdle remains. Before you ship your products, you must understand and comply with your license provisos. As this recent enforcement action indicates, those paragraphs at the end of your license are not just fluff. Failure to follow the provisos contained in your license agreement can lead to problems and substantial penalties. Simply stated, if you ignore this last hurdle, you could take a fall and lose your export privileges.

The first step in conducting an export is to ascertain the export requirements and obtain proper authorizations. Once a company obtains a license approval, it must understand the scope of the authorization so that it can properly administer the export. Licenses are often subject to limitations, which are appended to the license approval. Examples of such limitations include:

• Restrictions on the period during which an export may occur

• Restrictions on who may receive the product or technology

• Restrictions on how the product or technology may be used

• Requirements that non-disclosure agreements or end-user certifications be obtained prior to export

Export authorizations are strictly interpreted, leaving no room for inferences regarding the scope of an authorization. For example, a license authorization to ship controlled hard drives to an address in Paris, France, cannot be interpreted as authorization to ship the same hard drives to other destinations in France. Similarly, the license cannot be interpreted to permit the export of either the computers which house the hard drives, or the technical data related to the hard drives. Each license authorization is strictly limited to the specified item to the specified address.

In 2000, Western Geophysical Company of America ("Western") of Houston, Texas, was alleged to have committed 156 violations of the Export Administration Regulations ("EAR") because of its failure to comply with several license limitations. Western received three export licenses from the Department of Commerce’s Bureau of Industry and Security ("BIS") to export underwater geophysical mapping equipment to the People’s Republic of China ("PRC"). The equipment was subject to the EAR and was controlled for national security reasons.

Under the terms of the licenses, Western was to lease the equipment to the Geophysical Company of Bohai Oil Corporation in the PRC. Several conditions were imposed on the licenses to ensure that the controlled equipment was constantly under the supervision or oversight of a Western monitor or an otherwise authorized representative. One of these conditions stated that 24 hours per day, seven days per week, a monitor from a former Coordinating Committee for Multilateral Export Controls ("CoCom") member country had to supervise the equipment when it was not actually being used at sea, and that only authorized personnel were to have access to the equipment. Later, this limitation was modified. Under

the terms of the modification, Western was required to store the controlled equipment in a locked container, and a national of a former CoCom country was required to enter the container and inspect the controlled equipment weekly.

BIS alleges that during a 26-week period in 2000, Western maintained the controlled equipment in storage in the PRC, but failed to monitor the equipment in accordance with the license conditions. In response, BIS charged Western with 78 violations of a license condition (one violation per week for each of the three licenses.) In addition, BIS alleges that Western stored the equipment subject to the license limitations with knowledge that violations of an export license occurred or were about to occur in connection with the items. Thus, BIS charged Western with 78 additional counts of acting with knowledge of a violation.

Western agreed to enter into an agreement with BIS to settle the charges. In August 2006, BIS assessed a civil penalty against Western for the 156 alleged violations in the amount of $1,965,600.

In order to avoid similar violations, companies involved with exports must ensure that each of their employee’s actions fall within the scope of the export authorization. First, to the extent there are any provisos that conflict with the terms and conditions of the license or license application, companies should immediately resolve those conflicts with the agency. Often companies will receive a license that contains provisos that make no sense (e.g., a license to export technical data with a proviso that no technical data may be exported), and the only way to resolve that conflict is through discussions with the agency. In addition, in order to ensure the proper use of export licenses, companies should create some kind of a license administration plan, which is a written memorandum that describes the following:

• The scope of an authorization, including any restrictions

• Reporting requirements

• Which personnel are responsible for administering different aspects of the export

• Sensitive risks associated with the export

Such plans not only help companies keep track of export license limitations, but they also assist them in properly executing export licenses so that they can avoid any license violations.

When you have your export license in hand, be sure to take the final steps to ensure that all activities are conducted in accordance with that license. Identify your provisos and put a plan in place to ensure that you adhere to each restriction and limitation. Once you have executed your proviso plan, you will have cleared the final hurdle, and can make your way to the finish line and begin exporting your products.

This article is presented for informational purposes only and is not intended to constitute legal advice.