A Checklist of Legal Considerations for Export Operations

A Checklist of Legal Considerations for Export Operations

By Margaret McClellan Gatti, Esquire
Revised May 13, 2003
All Rights Reserved
Re-Printed Only with Permission of Margaret M. Gatti, Esquire

Introduction

After you have identified the appropriate export markets for your products and when you are ready to commence export operations, you should be sure to give consideration to a number of very important legal issues. These issues are summarized below in text format. A checklist format identifying these same issues is found in Attachment 1.

Export Contract

Your export arrangements with your foreign buyer should be summarized or documented in the form of a written export contract. This contact does not have to be a voluminous legal document, but it should in the very least give expression to the terms and conditions on which you and your foreign buyer have reached agreement. Additionally, it should bear both your signature and the signature of an authorized representative for your buyer.

Specifically, your export agreement with your foreign buyer should deal with the following issues:

Product related issues:

1. product specifics: description of product, quantity of product, quality of product;

2. purchase price: currency, amount, explanation of what is included in purchase price, validity period of purchase price;

3. packaging, marking and labeling requirements: governmental requirements, and importer specific requirements;

4. product shipment: port of shipment, timing of shipment, method of shipment, special handling requirements during shipment, insurance of product during shipment;

5. product delivery and acceptance: port of delivery, timing of delivery, process for the importer’s acceptance of the product, process for signaling non-acceptance by importer, exporter’s responsibility with regard to non-acceptance by importer, remedies available to the importer in the event of non-acceptance;

6. product warranty and servicing: warranty specifics, servicing procedures;

7. product indemnities related to buyer’s use or buyer’s resale.

Procedural matters:

1. inspection rights and inspection mechanics;

2. payment for product: method, timing, currency, and routing;

3. documentation requirements: exporter country requirements, importer country requirements and importer specific requirements;

4. responsibility for costs and expenses

Dispute resolution mechanics:

1. dispute resolution method: conciliation, mediation, arbitration or litigation;

2. dispute resolution forum;

3. law to be applied during dispute resolution;

4. language to be used during dispute resolution.

Legal issues:

1. definition of non-performance under the agreement

2. excuses for non-performance under the agreement;

3. results of non-performance; and

4. amendment of agreement.

Intellectual Property Protection Issues:

Intellectual property is afforded a wide range of protection mechanisms in the United States, including patents, trademarks and copyrights. The grant of a U.S. patent, U.S. trademark or U.S. copyright confers on its owner exclusive rights to a protected work for a certain period of time and entitles the owner to a legal right of action in the event that the owner’s intellectual property rights are infringed.

The rights which are afforded the owner of a U.S. patent, U.S. trademark or U.S. copyright, however, are territorial in nature -- that is, they are valid only in the United States and do not extend to foreign countries. This reality comes as an unfortunate surprise to many U.S. companies which venture into foreign markets.

To secure intellectual property protection outside the United States, a U.S. company must generally apply for a patent or register a trademark or copyright on a country by country basis. Granted, some countries have entered into treaties with other countries to ease the patent application process and the process for registering a trademark or copyright, but these treaties rarely provide rights that are enforceable by private parties in private litigation. As a consequence, U.S. companies seeking intellectual property protection overseas are well advised not to rely on a specific countries’ treaties for intellectual property protection without giving due consideration to treaties’ real significance.

Applying for a patent on a country by country basis or registering a trademark or copyright on a country by country basis is an expensive, time-consuming endeavor. Additionally, it is an endeavor which does not always prove worthwhile in that not all countries provide an established legal framework for enforcing intellectual property rights. Recognizing these realities, U.S. companies that venture into foreign markets should not despair as other protection mechanisms are available. These alternate protection mechanisms include entering into confidentiality agreements with foreign partners and registering with U.S. Customs to prevent the importation into the United States of goods which infringe on U.S. patents, U.S. trademarks and U.S. copyrights.

Export Behavior

U.S. law prohibits U.S. exporters (and other U.S. persons) from engaging in certain types of behavior. In exporting products from the U.S., you should be sure to refrain from such prohibited behavior which currently includes the following:

Bribing Foreign Government Officials for the Purpose of Obtaining Business: This type of behavior is prohibited in the Foreign Corrupt Practices Act (FCPA) which was enacted in 1977 and substantially revised in 1988. The provisions of the FCPA apply to all U.S. persons and make it illegal for U.S. persons to bribe a foreign government official for the purpose of obtaining or retaining business.
The wording of the FCPA is quite interesting and makes its scope rather clear. The fact that the FCPA deals only with bribes made to foreign government officials acts to exclude from the FCPA’s ambit payments to foreign persons who are not governmental officials.

Additionally, the fact that the FCPA deals only with bribes that are intended for the purpose of obtaining or retaining business acts to exclude grease or facilitating payments from the scope of the FCPA. A grease or facilitating payment is a payment made to expedite or secure the performance of a routine government action. Routine government actions include obtaining permits or licenses, processing official papers, clearing goods through Customs, loading and unloading cargo and providing police protection.

The anti-bribery provisions of the FCPA are enforced by the Department of Justice (DOJ). U.S. persons who are accused of violating the FCPA can defend their actions by showing that the payment they made is lawful in accordance with the written laws of the recipient’s country or that the payment they made is a reasonable expenditure directly related to the U.S. person’s promotional activities in the recipient’s country.

U.S. persons who are unable to defend their actions in light of the FCPA’s anti-bribery provisions face severe penalties. Penalties for violating the anti-bribery provisions of the FCPA vary based on whether the violator is a U.S. company or a U.S. individual. U.S. companies can be fined up to $2 million while U.S. individuals (including officers and directors of companies that have willfully violated the FCPA) can be fined up to $100,000 and imprisoned for up to five years, or both. In addition, civil penalties may be imposed.

Participating in Other Countries’ Boycotts of Countries which are not subject to U.S. Boycott: This type of behavior is prohibited by the Export Administration Act (EAA) and the Export Administration Regulations (EAR). U.S. firms may not participate in other countries’ boycotts that the United States does not sanction. The Anti-boycott Regulations prevent U.S. firms from being used to implement foreign policies of other nations which run counter to U.S. policy.

The Arab League boycott of Israel is the principal foreign economic boycott that U.S. companies must be concerned with today. The anti-boycott laws, however, apply to all boycotts that are unsanctioned by the United States.

When you identify any of the factors below (collectively referred to as boycott requests) in an export transaction, you may not proceed with the export in question before contacting the Office of Anti-boycott Compliance of the Bureau of Export Administration for guidance:

Agreements to refuse or actual refusals to do business with Israel or with blacklisted companies.

Agreements to discriminate or actual discrimination against other persons based on race, religion, sex, national origin or nationality.

Furnishing information about business relationships with Israel or with blacklisted companies.

Furnishing information about the race, religion, sex, or national origin of another person.

Paying, or otherwise implementing letters of credit that include requirements to take boycott related actions prohibited by the anti-boycott regulations.

The Anti-boycott Compliance Office will advise you as follows:

- to refrain from pursuing the transaction in which the boycott request was made

- to continue pursing the transaction in which the boycott request was made

- to report the boycott request

If a boycott request is reportable, the report should be made on FORM BXA-621P: Report of Restrictive Trade Practice or Boycott Request Single Transaction (revised 10-89) or FORM BXA-6051P: Report of Request for Restrictive Trade Practice or Boycott Multiple Transactions (revised 10-89). You can obtain copies of these forms from the Anti-boycott Compliance Office.

U.S. Export Controls

You also must make sure that you determine and comply with any U.S. export controls that are relevant to your export transactions. Export controls imposed on U.S. exporters by the United States government can take a variety of forms. They can take the form of prohibitions (blockades, embargoes, boycotts, sanctions) or they can take the form of limitations (licensing requirements). Likewise, export controls can be product-specific or they can be based on end-use, end user or ultimate destination.

Product-Specific Export Controls: Product-specific export controls are primarily in the domain of the U.S. Department of State and the U.S. Department of Commerce. The product-specific export controls prescribed by the U.S. Department of State are contained in the International Traffic in Arms Regulations (ITAR), whereas the product-specific export controls prescribed by the U.S. Department of Commerce are contained in the Export Administration Regulations (EAR).

In accordance with Part 734.3 of the Export Administration Regulations (EAR) and Part 120.1 of the International Traffic in Arms Regulations (ITAR), the U.S. Department of State has exclusive jurisdiction over the export of defense items, i.e. defense articles, defense services and related technical data. Articles, services and related technical data designated as defense items by the Department of State are grouped together as defense items in the Munitions List (Part 121 of the ITAR).

The State Department is guided in its designation of defense items by a policy statement outlined in Part 120.3 of the ITAR which makes it clear that it is not the intended after-export use (i.e. military or civilian) of an article, a service or technical data which is relevant for determining whether the article, service or technical data is a defense item. Instead, it is an item’s inherent capabilities and design which are considered in determining whether or not an item should be given defense item status. The policy statement further guides the State Department in defense item designation by presenting a two-part test for defense item status. According to this two-part test, articles, services and related technical data may be designated as defense items and placed on the Munitions List if they:

are specifically designed, developed, configured, adapted or modified for a military application; and
1. do not have a predominant civil application; and
2. do not have performance equivalent to that of an article or service used for civil applications; or

are specifically designed, developed, configured, adapted, or modified for a military application and have significant military or intelligence applications, such that control by the Department of State, Office of Defense Trade Controls is necessary.

Items which meet either or both of these tests are considered to have defense item status and, as result, can not be exported from the U.S. without a State Department export license, unless a license exception applies. Alternatively, items, which do not meet either of these tests are not considered to have defense items status. As a result, they are not controlled by the State Department for export purposes and default instead to the export control of the Commerce Department, unless otherwise excluded from Commerce Department control in accordance with the provisions of the EAR.

The EAR defines the scope of Commerce Department control over exports in Part 734.3 by indicating those items which are subject to Commerce Department control and those items which are excluded from Commerce Department control. A term which is often used to distinguish the types of items that are controlled by the Commerce Department from those items that are controlled by other U.S. government agencies is the term "dual use items".

In general, the term dual use items refers to items that have potential for both military and civilian \ commercial uses, i.e., items which do not meet either test for defense items status and which as a result, are not controlled for export by the State Department. The use of this term to refer to items controlled for export by the Commerce Department is not entirely appropriate, however, as the Commerce Department also controls items that have solely civil or commercial uses.

Unlike items subject to the export control of the State Department, items controlled for export purposes by the Commerce Department do not automatically require an export license. Indeed, only a very small percentage (estimated at 5% or less) of items subject to the export control of the Commerce Department are currently licensable in the case of export. These licensable items are distinguished from other items subject to Commerce Department export control in that they are assigned a specific Export Commodity Control (ECCN) by the Commerce Department and in that the export controls, to which such licensable items are subjected, are outlined in Commerce’s Commodity Control List (CCL).

The fact that an item subject to the export control of the Commerce Department has a specific ECCN and is listed in the CCL does not, however, presume the need for a Commerce Department export license, as there are many exceptions to Commerce Department licensing requirements and as Commerce Department licensing requirements are not applicable in any event to all exports to all countries. Exporters must therefore first ascertain if any license exceptions apply to their proposed export of items subject to Commerce Department control and then consult Commerce’s country chart to determine if a license is needed for a particular export.

Determining if an item is controlled for export purposes by the Department of State or by the Department of Commerce is not always easy. Likewise, it is not always easy to determine if a particular product has a specific ECCN. These problems are not insurmountable, however, in that an exporter can submit to the State Department a written Commodity Jurisdiction Request to resolve a State Department versus Commerce Department jurisdictional dilemma and in that an exporter can submit a Commodity Classification Request to the Department of Commerce to resolve an ECCN classification dilemma.

Export Controls based on End Use, End User and Ultimate Destination: In addition to the product-specific export controls described above, there are series of export controls that are based on end use, end user and ultimate destination.

End use export controls are prescribed by the Commerce Department in EAR Part 744 which clearly prohibits or otherwise restricts exports for certain end uses. Such prohibited or otherwise restricted end uses currently include nuclear end uses, missile end uses, chemical and biological weapon end uses, maritime nuclear propulsion end uses, and foreign vessel and aircraft end uses.

Unlike end use export controls which are imposed only by the Commerce Department, end user export controls and ultimate destination export controls are much broader in scope. End user export controls are prescribed by the Department of State, the Department of Commerce and the Department of Treasury. Each of these agencies produces one or more lists of restricted persons. These lists currently include the State Department’s list of "debarred persons’, the Commerce Department’s list of denied persons, the Commerce Department’s Entity List and the Treasury Department’s list of specially designated nationals. All U.S. exporters must screen the names of their buyers and the names of their end users against each of these restricted persons lists before completing a proposed export transaction for the purpose of determining if such buyers and / or end users are prohibited buyers or end users (i.e. buyers or end users to whom an export sale can not be made); or restricted buyers or end users (i.e. buyers or end users to whom an export sale can be made only under an export license).

The screening done by exporters in this regard must be done in the fullest sense, i.e. it must include a screening of all parties: (a) involved in carrying on negotiations concerning any item exported or to be exported from the U.S.; (b) involved in ordering, buying, receiving, using, selling, delivering, storing, disposing of, forwarding, transporting, financing or otherwise servicing in any way any item exported or to be exported from the U.S.; (c) benefiting in any way from any transaction involving any item exported or to be exported from the U.S..

Ultimate Destination export controls are also prescribed by the Department of State, the Department of Commerce and the Department of Treasury. Each of these agencies produces one or more lists of restricted or embargoed destinations. All exporters must screen the ultimate destination of their exports against the range of embargoed destinations prescribed by State, Commerce and Treasury for the purpose of determining if such ultimate destinations are subject to any general export prohibitions or to any general export license requirements.

Even though you have at one point determined the relevancy to a particular export of certain product-specific export controls or certain export controls based on end use, end user or ultimate destination, you should never assume that the US Export Controls found to be relevant to a particular export at any one time will remain relevant forever. U.S. Export Controls result from Congressional and governmental action related to concerns over national security, foreign policy and short supply. Consequently, as Congressional and governmental concern over these matters shifts, export controls will likely be subject to change. The frequency and unpredictability of changes to U.S. export controls make it clear that U.S. exporters can never rest assured vis a vis the U.S. export controls that they may encounter in exporting their products. Indeed, a steady review process is warranted as violations of US Export Control Laws have many serious repercussions, ranging from denial of export privileges and product seizure through monetary fines to imprisonment.

Export Procedure

In exporting a product from the U.S., you must:

apply for and obtain any required export licenses prior to exporting a product from the U.S.;
prepare a commercial invoice for each export showing the correct value amount for the export as opposed to a value amount which understates the export’s value -- See Attachment 2 for reasons why you should refuse to under-invoice;
complete a certificate of origin, if exporting to a country with which the U.S. has a trade agreement or if otherwise required by a foreign buyer;
prepare a Shippers’ Export Declaration (SED) for the shipment if the value of any Schedule B number (harmonized number) for a product included in the shipment is greater than or equal to U.S.$ 2500 -- See Attachment 3 for information on completing a SED; and
prepare any other documentation required by the foreign buyer or required under a letter of credit issued by the foreign buyer’s bank.

Export Record-Keeping

After you export a product from the U.S., you must make provisions to retain documentation for the export, as U.S. exporters are required to retain copies of their export transaction documents for a period of five (5) years from the date of export. These export records must be readily available for examination upon request by either U.S. Customs or the Office of Export Enforcement.

Attachment 1

A Checklist of Legal Considerations For Export Operations

Execute Export Contract with foreign buyer that addresses each of the following issues:
1. Product related issues
2. Procedural matters
3. Dispute resolution mechanics
4. Legal issues
5. Intellectual Property Protection Issues
Refrain from bribing foreign government officials to obtain business.
Refrain from participating in other countries’ boycotts of countries which are not subject to boycott by the U.S.
Determine and observe relevant export controls based on:
1. Product
2. End user
3. Ultimate destination
4. End use
Comply with relevant export procedures and complete required export documentation
1. Obtain required export licenses prior to exporting a product from the U.S.;
2. prepare a commercial invoice for each export showing the correct value amount for the export
3. complete a certificate of origin, if exporting to a country with which the U.S. has a trade agreement or if otherwise required by a foreign buyer;
4. prepare a Shippers’ Export Declaration (SED) for the shipment if the value of any Schedule B number (harmonized number) for a product included in the shipment is greater than or equal to U.S.$ 2500; and
5. prepare any other documentation required by the foreign buyer or required under a letter of credit issued by the foreign buyer’s bank.
Safeguard export transaction documents for five (5) years from the date of export.

Attachment 2

Reasons to Refrain from Under-invoicing an Export

Under-invoicing occurs when a foreign importer asks a U.S. exporter to enter an artificially low value on the commercial invoice and to supply a second invoice apart from the shipment for the difference between the commercial invoice value and the true transaction value. Foreign importers make under-invoicing requests for the purpose of achieving lower import duties and lower import taxes in the importing country.

Here are 5 good reasons why you should not comply with under-invoicing requests:

1) Unless you prepare your own Shippers Export Declaration (SED) and show the true transaction value on the SED for your export, your freight forwarder will automatically report the artificially low commercial value on the SED. Reporting an incorrect export value on a SED is a violation of U.S. export regulations. Such violation subjects a U.S. exporter to monetary fines and other penalties.

2) Your chances of being caught by US Customs in the act of under-invoicing have increased dramatically. U.S. Customs has intensified its export enforcement efforts by implementing the Outbound Compliance Program which entered the Enforced Compliance Phase on July 1, 1997.

3) Many importing countries have established comparable value systems for imports. If the entered value on an import is less than the comparable value for that import: (a) the entered goods may be confiscated by Customs in the importing country, which could cause you payment problems, especially if you are operating on an open account or collection basis; and/or (b) you as an exporter may be black listed by the importing country which could severely impact your future shipments to the importing country.

4) Many importing countries have Customs laws which consider under-invoicing to be a violation of the country’s import law. If you comply with an importer’s request for under- invoicing, you may be considered a co-conspirator and could be subject to penalties and/or imprisonment in the importing country, if the country can exercise jurisdiction over you.

5) Transport insurance is based on commercial invoice value. If you under-invoice and your goods are damaged or lost, your insurance claim on the value of the goods will be based on the artificially low value shown on the commercial invoice.

To avoid these problems, you are well advised to refrain from under-invoicing practices and to make your refusal to comply with under-invoicing requests clear to all your foreign buyers.

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