Export Control Enforcement: What to Expect (and What Not to Expect) During the Obama Administration

For the government, calibrating export controls means maintaining comprehensive, strategic national security restrictions without unduly impeding innovation, international collaboration, and global competitiveness in some of the most dynamic areas of the American economy. For businesses engaged in international trade, export controls too often mean complexity and regulatory uncertainty. For them, the prospect of harsh enforcement frequently raises the stakes of their many compliance choices to levels that exceed any security justification the government could legitimately advance.

How, if at all, has the change in presidential administrations affected the way the government will strike the balance between rigorous export regulation on the one hand, and encouraging exports on the other? How will this balance affect the enforcement decisions export control agencies make? Given the ideological differences between the last administration and the current one, as well as President Obama's explicit emphasis on breaking with the past, businesses understandably want to know what to expect.

The Obama administration recently unveiled a blueprint for reforming important parts of the U.S. export control system. The blueprint calls for ambitious changes over the next 12 months to focus and streamline the rules and processes—and the agencies themselves—that govern export control. If successfully implemented, the reform plan promises major improvements in export regulation and administration, which, in turn, could affect export enforcement in a number of ways. Nevertheless, even with major systemic reform underway, businesses will likely see changes to export enforcement over the next few years that are less rapid and pronounced than might be expected in other areas of federal regulation.

A number of factors make export control policy resistant to change. Agencies tend to step carefully where national security is concerned, and they are reluctant to make untested changes that can introduce security risks or upset international expectations. In addition, civil and criminal cases can take years to build and prosecute, and the role of career employees in investigatory and charging decisions ensures the stability of offices with enforcement responsibilities. Export controls are also heavily influenced by geopolitical developments and foreign threats that exist beyond the control of regulators. The responses to these influences frequently transcend party differences. For these and other reasons, the trajectory of change in U.S. export controls historically has been gauged in years, not months.

With these considerations as a backdrop, this White Paper proceeds in four parts. Part I provides a short introduction to the several programs that constitute the bulk of the U.S. export control system, with a focus on each program's enforcement functions. In Part II, we focus on trends in export enforcement over the last few years. In Part III, we look at background forces that appear to have produced these trends. Finally, in Part IV, we consider what businesses can (and cannot) anticipate regarding the future of export control enforcement.

1. Background

   The primary responsibility for export control falls to three agencies: the Department of State, which is charged with regulating the export of defense articles and services; the Department of Commerce, which regulates commodities, software, and technology that, while generally subject to commercial use, may also have dual, military applications; and the Department of the Treasury, which administers economic and trade sanctions. Under regulations administered by the State Department and Commerce Department, an export occurs not only when covered U.S. technical information, goods, or services are transferred or accessed outside the United States, but also when technical information is accessed by or made available to foreign nationals within the United States. 22 C.F.R. §120.17; 15 C.F.R. §734.2(b)(2)(ii). The Department of Justice investigates and prosecutes criminal export violations under each of the three agencies' authority.

   1. The Directorate of Defense Trade Controls at the State Department

      The Directorate of Defense Trade Controls ("DDTC") regulates "munitions" under the International Traffic in Arms Regulations ("ITAR"). 22 C.F.R. §§120-130. ITAR is promulgated under the State Department's authority pursuant to the Arms Export Control Act ("AECA"), 22 U.S.C. §§2778-2780, and generally requires a license to export defense goods and services, which are identified in broadly defined categories on the U.S. Munitions List ("USML"). In addition, any person or company in the United States that manufactures, exports, or imports items on the USML must register with the DDTC. 22 C.F.R. §122.

      DDTC implements and enforces ITAR through three primary offices: Licensing, which reviews license applications and provides advisory opinions; Policy, which conducts training and outreach; and Compliance, which maintains company registrations and investigates ITAR violations. Each violation of ITAR is subject to civil fines of up to $500,000, and each criminal violation may be sanctioned by up to $1 million, 10 years' imprisonment, or both. 22 U.S.C. §§2780(j), (k). Moreover, in bringing administrative enforcement actions, the DDTC has available a particularly potent sanction in the form of debarment—the prohibition of a firm from participating directly or indirectly in the export of defense articles or services. 22 C.F.R. §127.7.

   2. The Bureau of Industry and Security at the Commerce Department

      The Bureau of Industry and Security ("BIS") regulates the export of dual-use items and information primarily through implementation of the Export Administration Regulations ("EAR"). 15 C.F.R. §§730-774. The authority for the EAR originally derived from the Export Administration Act of 1979 ("EAA"), Pub. L. No. 96-72. The EAA has expired and been renewed several times since its original enactment; at each lapse, the President has relied on his authority under the International Emergency Economic Powers Act ("IEEPA"), 50 U.S.C. §1701 et seq., to maintain the EAR. The EAR has operated under this substitute authority since 2001. See Executive Order No. 13222 (Aug. 17, 2001).

      The EAR contains a set of detailed lists that determine the licensing requirements for dual-use exports. Central to the EAR is the Commerce Control List ("CCL"), 15 C.F.R. §774 supp. I. The CCL covers a wide range of items ranging from "actively cooled mirrors" to "zirconium metal particulate," and denotes whether the exporter is or is not required to obtain a license prior to export. Id. The EAR also relies on a Country Chart, 15 C.F.R. §738 Supp. I, and Entity List, 15 C.F.R. §744 Supp. IV, to restrict exports to specific countries, organizations, and individuals based on the risk the exports pose to national security or other foreign policy interests. As a result, the EAR restrictions vary from country to country; for example, pursuant to the embargo of Cuba, nearly every item that is subject to the EAR requires a license for export. 15 C.F.R. §746.2.

      BIS operates through two main branches: Export Administration and Export Enforcement. Administration is responsible for processing export license applications and outreach. Enforcement investigates alleged dual-use export violations and also works with the Department of the Treasury on embargo-related issues. Consistent with its national security mission, BIS Export Enforcement gives enforcement priority to violations involving weapons of mass destruction ("WMD") proliferation, terrorism, and unauthorized military end uses. See U.S. Department of Commerce, Bureau of Industry and Security, Annual Report to Congress for Fiscal Year 2008 (2009). When BIS Enforcement discovers an EAR violation, it may work with the BIS Office of Chief Counsel to impose civil fines and denials of export privileges, or it may refer the matter to the Department of Justice ("DOJ") for criminal prosecution. EAR violations are currently subject to civil fines of up to the greater of $250,000 or twice the amount of the transaction at issue. Criminal penalties may be imposed up to $1 million per violation and imprisonment of up to 20 years. See 71 Fed. Reg. 44189.

   3. The Office of Foreign Assets Control at the Treasury Department

      The Office of Foreign Assets Control ("OFAC") administers and enforces almost 30 economic and trade sanctions programs against foreign countries and individuals, including embargoed countries and regimes, terrorists, international narcotics traffickers, and entities involved in the proliferation of WMDs. 31 C.F.R. §500 et seq. In addition to specific sanctions laws, OFAC derives its authority from the Trading With the Enemy Act ("TWEA"), 50 U.S.C. app. §5(b)(1), which authorizes the President to restrict foreign trade during wartime, and IEEPA, which allows the President to impose many of the same restrictions based on "any unusual and extraordinary threat" that creates a national emergency. 50 U.S.C. §1701.

      While individual sanctions programs administered and enforced by OFAC vary in their specifics, the regulations generally list prohibited transactions, i.e., trade or financial transactions in which U.S. persons may not engage unless authorized by OFAC or expressly exempted by statute. OFAC has the authority to grant exemptions for prohibited transactions by issuing a general license for certain categories of transactions or by granting specific licenses on a case-by-case basis. OFAC also maintains a list of restricted individuals—the Specially Designated Nationals and Blocked Persons ("SDN") list—which is in some ways similar to BIS's Entity List; however, because the SDN list is a product of various sanctions laws, it has a broader impact, barring financial dealings as well as exports.

      A relatively small agency, OFAC operates through approximately 10 main divisions, including two...