The Wonder Widget Company (WW) is the largest exporter in the United States. As part of its sales promotion, WW often invites its foreign customers to visit its facility in York, Pa, to view its production process. It also likes to invite foreign university faculty and postgraduate engineering students to work at its facility temporarily, to assist in the creation of new product lines. While WW considers itself to be a responsible exporter that follows all export laws and regulations, it is not aware of the "deemed export" rule, which states that an export of technology is "deemed" to take place when it is released to a foreign national within the United States (§734.2 (b)(2)(ii) of the Export Administration Regulations (EAR)). This covers all technology produced by WW that requires an export license under the EAR and "technology" is broadly defined for these purposes. For example, certain materials, chemicals, electronics, computers, telecommunications and information security equipment, among other categories, require export licenses under the EAR.
Technology is "released" for export when it is available to foreign nationals for virtual inspection, when technology is exchanged orally, or when it is made available by practice or application under the guidance of persons with knowledge of the technology (§734.2(b)(3) of the EAR). WW may be required to obtain an export license before WW's foreign customers or foreign university faculty or research students read technical specifications, plans or blueprints, discuss the widget research or watch a demonstration of the production process. This is because technology required for the development, production or use of a controlled product remains controlled. Under the "deemed export" rule, WW has to apply for an export license if (1) it intends to transfer controlled technology to foreign nationals in the United States; or (2) there will be a transfer of the same technology to the foreign national's home country.
All foreign nationals are subject to the "deemed export" rule except a foreign national who (1) is granted permanent residence, as demonstrated by the issuance of a permanent resident visa (also known as a Green Card); or (2) is granted U.S. citizenship; or (3) is granted status as a "protected person" under 8 USC 1324b(a)(3) (which applies to political refugees and political asylum holders). Thus, if the person is a naturalized citizen or permanent resident of the United States, the "deemed export" rules do not apply. For individuals that are citizens of more than one foreign country, or have citizenship in one foreign country and permanent residence in another, as a general policy, the last permanent resident status or citizenship governs.
For example, if a Chinese national becomes a citizen of the United Kingdom, but also retains his Chinese citizenship, having dual-citizenship, the person's most recent citizenship in the U.K. governs and the release of technology would be viewed as a release to the U.K. If WW is not sure about the status of a foreign national, it can ask the Bureau of Export Administration (BXA), to determine where the stronger ties exist based on the facts of the specific case. BXA may also look at the foreign national's family, professional, financial and employment ties in making a decision.
WW may also be subject to the "deemed re-export" rule, which is a term used to indicate the transfer of controlled U.S. technology to a foreign national overseas. For example, if WW transfers its controlled proprietary technology to ABC Widgets (ABC) in the U.K., and ABC, in turn, employs a Chinese national who is not a permanent resident of the U.K., nor of the United States, and who will need the controlled proprietary technology to perform his duties, WW is responsible for obtaining any required deemed export license as if it were transferring the technology to China (§734.2(b)(4) of the EAR).
Generally, the types of technology subject to the EAR are those that are in the United States or of U.S. origin, in whole or in part. Most are proprietary. Technologies that tend to require licensing for transfer to foreign nationals are also dual-use (civil and military applications). Foreign technology that is commingled with even a de minimus amount of U.S.-origin technology is subject to the EAR. While the Bureau of Industry and Security is responsible for implementing and enforcing the EAR, regulating the export and reexport of most commercial items, other government agencies regulate more specialized exports. Defense articles are under the jurisdiction of the State Department, pursuant to the International Traffic in Arms Regulations, and technology related to the production of nuclear material is under the jurisdiction of the Energy Department. See Supplement No. 3 to Part 730 of the EAR.
The deemed export rule highlights the fact that sending technology, even a single item, out of the United States can be done in ways that most of us would not consider an "export." For example, in addition to a foreign person viewing technology, as described above, one can export technology by mail, e-mail or facsimile, carrying on an airplane, uploading or downloading on an Internet site, or even via a phone conversation. The technology does not have to be sold; it can be a gift, and it only needs to leave the U.S. temporarily.
Enforcement has increased in the past few years, and today it is not unusual for a single civil violation to result in a $250,000 civil fine or twice the amount of the transaction upon which the penalty is imposed. Criminal violations can result in a penalty up to $1,000,000 per violation and/ or up to 20 years of imprisonment. If the person making the illegal transfer is not a U.S. citizen, she or he can face removal proceedings. For example, in 2008, a manufacturing company in California paid a $31,500 fine for allowing an employee, a national of Iran, to access technology related to aircraft parts. Later that year, a retired professor from the University of Tennessee was convicted of export control violations for allowing two foreign graduate students to access information about a military defense project. In 2009, he was sentenced to four years in prison.
To protect themselves, all U.S. exporters should have an export compliance plan. The plan should be detailed, setting forth internal export procedures and designating responsible individual(s) for carrying out the procedures. While the plan will not protect a company from civil or criminal liability under the EAR, it is normally useful for obtaining mitigation of any penalty.
Cozen O'Connor's international trade attorneys work regularly with clients in drafting export compliance plans and assisting them in determining whether their products are subject to Export Administration Regulations. For more information, please contact Marcela B. Stras (Washington, D.C., 202.912.4875, mstras@cozen.com).
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