Hit list

Will the myriad U.S. prohibited party lists inhibit U.S. exporters' ambitions?

By: Chris Gillis
Photo: MediaGroup_BestForYou/Shutterstock
   Just because an overseas customer places an order for a product doesn’t mean a U.S. company can automatically ship it.
   One of the most important steps to take before any shipment heads abroad is for corporate compliance officers to routinely check overseas customers and their affiliates’ customers against myriad lists which are maintained across three federal departments, each with different compliance and enforcement requirements.
   The job is tedious and challenging, but the risk of getting caught by government regulators could lead to the revocation of export privileges, hefty fines, jail time for executives, and negative press, depending on the severity of the violation.
   “It’s the highest risk area in terms of export compliance today due to the transparency of data from the government’s Automated Export System, and from a corporate compliance officer’s perspective, one of the most difficult to manage,” said Paul DiVecchio, a 35-year industry consultant who operates Boston-based DiVecchio & Associates. “But not paying proper attention to this aspect of export control could lead to disastrous results for a company.”
   Compliance with the various export control lists not only applies to U.S. companies, but to their overseas affiliates, as well.
   “Just because your product is overseas doesn’t mean that you no longer have an obligation to its compliance,” DiVecchio added. “It’s not out of sight or mind as viewed by the U.S. regulating agencies.”
   The largest government list is the Commerce Department’s Entity List. This list identifies foreign parties which are prohibited from receiving some or all items subject to the Export Administration Regulations (EAR), unless the exporter secures a license from the Bureau of Industry and Security (BIS). Reasons for an individual or company to be placed on the Entity List are based on the risk of diverting U.S. products to support weapons of mass destruction programs, terrorism or activities contrary to U.S. national security and foreign policy.
   In recent years, the Entity List has grown from about a dozen pages to 227 pages.
   “Commerce’s Entity List has become a real monster,” DiVecchio said. “It can be a major black hole for the compliance officer.”
   Many of the parties of concern on the Entity List have connections to Russian, Iranian and Chinese weapons development programs. BIS attempts to include as many aliases (“also known as,” or “a.k.a.”) and addresses for these individuals and companies as possible.
   Commerce also maintains a list for denied parties which covers overseas parties denied receipt of U.S. products, and another for parties whose bona fides it hasn’t been able to verify, known as the Unverified List.
   Other lists export compliance officers must routinely check their customers against include: the Treasury Department’s Specially Designated Nationals List; Sectoral Sanctions Identifications List, Foreign Evaders List; and Foreign Financial Sanctions List, which are enforced by the Office of Foreign Assets Control, and the State Department’s Debarred List and Non-Proliferation List.
   It’s a bear of a job at the best of times.
   “The various agency lists are not interpreted the same way, and they change all the time,” DiVecchio said.
   There are online, third-party screening companies, such as MK Technology (now part of Descartes), Visual Compliance and Amber Road, that provide exporters with comprehensive, do-it-yourself, up-to- software for electronic screening of their overseas parties against the various government lists.
   “We screen to ensure we have a clean customer and vendor master in our ERP system to make sure they’re not on any of the lists,” said Dennis Farrell, head of export compliance for Analog Devices, which uses Amber Road. “We don’t want to screen order by order. That would be incredibly redundant since most of our customers order the same thing over and over.”
   “Automated screening is best for high-volume activities,” said Brian Amero, head of global compliance and ethics at Teradyne. “However, the screening software has many settings that are adjustable.
   “If you set the screening too tight, there are too many false positives that must be reviewed. People then get complacent, like the ‘boy who cried wolf.’ If the settings are too loose, a real hit could be missed.
   “Batch screening is easier to set up, but has similar downsides to automated screening, and does not perform license determination or end-use checks,” Amero continued. “Transactional screening screens for restricted parties, end-use and license determination. This method is okay for low volumes, but depends on a human screener, which can be a weak link.”
   One of the higher risk activities for exporters are so-called off-line shipments. These are items that are not processed within a company’s enterprise systems, but take place outside those systems. For example, an engineer ships an item to a customer or supplier for evaluation of sampling. Another example would be a software company electronically sending a “bug fix” or upgrade.
   OFAC and BIS also provide exporters with access to a daily updated, online Consolidated Screening List (CSL), which compiles together the multiple screening lists of the Commerce, State and Treasury departments.    It has a special “fuzzy name” search capability, which means the exporter can search within the CSL without knowing the exact spelling of an entity’s name.
   “By setting fuzzy name to on, the CSL returns a ‘score’ for all results that exactly match, or nearly match, the name that is searched,” DiVecchio said. “This is particularly helpful when searching for names on the CSL that have been transliterated into English from non-Latin alphabet languages.”
   While IT solutions are useful to cull these lists, DiVecchio said “that’s just the first step” to ensuring one’s customers aren’t restricted entities. He recommends to also check corporate websites to better understand overseas companies’ ownership structure and scope of operations.
   Amero, who also serves on American Shipper’s Editorial Board, said Teradyne performs in-depth reviews of new distributors, which in addition to the various government lists, includes checks against the Dow Jones Risk and Compliance database for adverse press.
   “For higher risk distributors we contract to have a firm perform a public records search,” he said.

   Constant Change. U.S. export controls trace their roots to the Cold War when the United States wanted to keep its products out of the hands of the Soviet Union, but today’s controls are much more focused on entities that operate in a world that’s not so black and white.
   “The good guys and bad guys are always changing,” Analog Devices’ Farrell said. “We’re not dealing with rogue nations much anymore. It’s rogue companies.”
   It’s these entities that can also serve as supply conduits to end-users inside regimes that are national security concerns or subject to trade sanctions on cutting-edge, U.S.-made technologies and products. Many of these end-users are subject to strict U.S. export licensing requirements.
   “The export regulatory arena is not static, with changes and new regulation issuances dictated by foreign policy situations,” DiVecchio said. “The compliance officer of an exporter must be in a position to know about these regulations, interpret them as to application for the company, communicate to all pertinent departments the interpretations and ensure implementation of the procedures impacted by the regulations.”

The good guys and bad guys are always changing. We’re not dealing with rogue nations much anymore. It’s rogue companies.

   Not only does a company need to comply with U.S. export regulations, it must ensure that its affiliates overseas also comply with the re-export or transfer provisions of these rules, in addition to the regulations of the countries in which the company affiliates reside.
   “Compliance staff worldwide need to be trained to review shipments,” Amero said. “Orders shipping from Singapore can’t wait until the U.S. comes to work in the morning.”
   President Obama in 2009 issued an executive order to the Commerce, State and Defense departments to streamline and improve the way the government manages export controls.
   A hallmark of this effort, more commonly known as U.S. export reform, has been the in-depth review of the State Department’s U.S. Munitions List, which is part of the International Traffic in Arms Regulations (ITAR), and the shift of less sensitive components and technologies from this list to the Commerce Control List.
   A significant goal for the U.S. export reform initiative is to establish a single agency that will use one technology system to process all export license applications. This aspect of the reform is expected to carry over into the next administration.
   “When that is accomplished, the regulatory friction and burden caused by the need for export controls will be at their lowest possible levels,” Eric Hirschhorn, Commerce undersecretary for industry and security, said in a speech at the BIS Update in Washington, D.C. Oct. 31.
   Hirschhorn and Kevin Wolf, Commerce’s assistant secretary for export administration, are widely credited by the Obama administration, as well as the export industry, for leading the charge on export control reform within the Commerce Department the past seven years.
   However, these procedural changes have not tamed the chaotic nature in which trade sanctions are currently applied in terms of identifying individuals and corporations on the various department entities lists.

   Russian Dilemma. Until three years ago, it appeared that U.S. and Russian relations had largely thawed and trade was increasing steadily between the former Cold War enemies.
   In early 2014, however, U.S. and other Western intelligence agencies allegedly found direct Russian military assistance to Russian ethnic groups seeking to break away from Ukraine. Russia is also accused of forcibly taking over Crimea from the Ukraine months later. The United States and European Union responded to these incursions by establishing stiff sanctions against wealthy individuals and entities connected to Russia’s defense, financial and energy sectors—so-called “friends of Putin” or “FOPs.”
   In the United States, OFAC placed many of these Russian FOPs and companies that have a direct or indirect involvement with the incursion into the Ukraine on its Specially Designated Nationals list. BIS also placed many of these same companies involved with this military action on its Entity List. Both OFAC and BIS then implemented stricter controls on exports of products that could be used by Russia’s extensive oil and gas industry.
   However, the way the agencies have crafted the rules has caused confusion among exporters attempting to conduct legitimate business in Russia.
   For instance, those Russian individuals listed on OFAC’s Specially Designated List face the so-called “50 percent rule,” meaning U.S. exporters must be aware of whether these restricted individuals or companies hold an aggregate of 50 percent or greater interest in a property. And even though the asset is not a listed restricted party, it is considered prohibitive because of ownership by the restricted party.
   This issue came to light most publicly in the spring of 2014 when concert promoter Live Nation was arranging for Justin Timberlake to perform at the Hartwall Arena in Helsinki, Finland. Concerned about the ownership of the arena by Russian businessmen Boris and Arkady Rotenberg and Gennady Timchenko, all of whom are listed on the Specially Designated List, Live Nation notified OFAC to confirm whether it could conduct business with the Finnish arena. The agency determined that each Russian businessman had less than a 50 percent ownership in the arena and thus Live Nation could proceed with booking the concerts.
   However, OFAC, realizing the enforcement challenges of the rule, revised its regulation to state that if a blocked person or persons are collectively part of a property ownership arrangement that’s 50 percent or greater, then the asset is blocked.
   This action technically prevented Live Nation from working with the Hartwall Arena since the three Russian businessmen collectively owned more than 50 percent of the venue. The other minority owner in the property is Finnish firm Langvik Capital. To get around this regulatory obstacle, one of the Rotenberg brothers sold his interest in the arena to a son who is not a blocked party, bringing the collective Russian ownership in the facility below OFAC’s 50-percent threshold.
   Another wrinkle: BIS’s Entity List, which includes a number of the Russian individuals and businesses that are also listed on OFAC’s Specially Designated List, covers the Russian oil industry sanctions. For instance, the Entity List includes Russia’s United Shipbuilding Corp., which has been determined by the U.S. government to be acting contrary to national security and foreign policy interests. The U.S. sanctions further impose controls on certain items for use in Russia’s energy sector intended for energy exploration or production from deepwater, Artic offshore and shale projects.
   It’s not that U.S. exporters can’t do business with those listed on the Entity List, but a Commerce Department license must be sought and approved by BIS before any exports proceed, DiVecchio said.

Not only does a company need to comply with U.S. export regulations, it must ensure that its affiliates overseas also comply with the re-export or transfer provisions of these rules, in addition to the regulations of the countries in which the company affiliates reside.

   However, one of the stumbling points for U.S. exporters involved in Russia’s oil industry is to verify and certify from the Russian end-user that its product are not used in offshore oil exploration projects that exceed 500-foot water depths, DiVecchio said.
   These U.S. sanctions on Russia have prevented U.S. oil and gas behemoth ExxonMobil, currently under the leadership of Secretary of State-nominee Rex Tillerson, from exploring a joint venture with Russian state-controlled oil giant Rosneft, according to news reports.

   China-Iran Nexus. Equally challenging and complex for exporters is mining the various U.S. entity lists for Iranian and Chinese persons and enterprises of concern.
   The U.S. government recently eased some long-held trade sanctions against Iran after the Middle East country pledged to the United States and European Union to suspend its nuclear weapons development program.
   Under the so-called Joint Comprehensive Plan of Action, the United States maintained many economic and financial sanctions against Iran, suspending only the “secondary” restrictions against the country. Secondary sanctions, which were passed among a number of laws by Congress in 2010, are additional restrictions applied to foreign companies controlled by U.S. firms, such as overseas subsidiaries, and foreign-origin items without the benefit of the de minimis exclusion.
   For many companies with operations in both the United States and Europe, the varied approach to lifting sanctions—Europe lifted nearly all its previous sanctions against Iran, including the removal of more than 300 individuals and entities from its list of “designated persons”—leaves them struggling to know when it’s legitimate to export products and services to Iran.
   However, the United States still retains jurisdiction over the re-export of U.S. products to Iran and other U.S. sanctioned countries, and especially to those parties on the BIS Entity List or engaged in weapons of mass destruction development programs.
   China remains a U.S. regulatory concern for its frequent diversion of U.S. goods to those individuals and companies named on the various control lists.
   Citing violations of federal export control regulations, BIS in March 2016 added Chinese technology giant ZTE Corp. and three of its affiliates to the Entity List, citing that the company “planned and organized a scheme to establish, control, and use a series of ‘detached’ (i.e. shell) companies to illicitly re-export [U.S. exports] to Iran in violation of U.S. export control laws.”
   The agency added that this activity by the Shenzhen-based company was “contrary to the national security and foreign policy interests of the United States.”
   In addition to ZTE Corp., the other related companies added to the agency’s Entity List include ZTE Kangxun Telecommunications Ltd. and Beijing 8-Star in China, and ZTE Parsian in Iran.
   Based on its investigation and allegations, BIS said “no license exceptions are available for exports, reexports, or transfers (in-country) of items subject to the EAR to the entities being added to the Entity List.” (Note: ZTE Corp. is eligible on an interim basis to receive non-controlled products under a special “general license” valid through Feb. 27, 2017.)
   The move by BIS was considered extremely significant to numerous U.S. electronics component and technology exporters to China, as well as other overseas manufacturers who use American components and then export them to ZTE. ZTE is a sizable producer of Chinese smartphones.

   Political yo-yo. Those individuals and entities viewed as a threat to U.S. national security and foreign policy interests are constantly changing, especially in today’s turbulent U.S. and overseas political environment, further compounding the various export control lists.
   U.S. sanctions, which drive what entities and individuals get placed on the lists, have taken economic tolls on countries such as Russia and Iran, since it has kept important U.S.-developed technologies out of the hands of these countries’ oil and gas industries.
   It’s been widely reported that Russian President Vladimir Putin relished Donald Trump’s win of the U.S. presidential election, raising allegations that Russia tampered with the election process by routinely hacking into the Democratic National Committee computers. Putin hopes that a Russian-friendly Trump administration will help ease sanctions against Russian businesses.
   However, on Dec. 29, the White House issued an executive order to punish Russia for its alleged interference in the U.S. presidential elections. In addition to expelling 35 Russian officials from the United States and closing two U.S. diplomatic compounds, among other sanctions against Russian individuals, the administration imposed sanctions on three Russian companies it said had a hand in the hackings, namely Special Technologies Center, Zor Security (also known as Esage Lab), and Autonomous Noncommercial Organization Professional Association of Designers of Data Processing Systems.
   The incoming Trump administration has the power to undo the executive order, but at the time of publication, it’s unclear whether that step will be taken.
   On the other hand, Trump and some members in Congress have taken more deliberate shots at the easing sanctions against Iran, which has led to calls by Iranian leadership to build nuclear-powered ships.
   The incoming administration has also upset the Chinese government by recognizing Taiwan in a call to the island country’s president. Trump has also threatened tariffs on Chinese-made imports, railed against what he considers its undervalued currency, and chastised China for its projection of military power in the Pacific.
   The increasing of sanctions and restraints on trade may lead to more attempts by individuals and entities to smuggle U.S.-made technologies to Iran and China, resulting in a further expansion of the various U.S. government entity lists.

Calls to Action
  1. Screen all export transactions early. This will ensure that they have a head start in case there are restricted parties to a transaction that may require an export license application.
  2. Screen the transaction again at the time of releasing the product to the custody of a freight forwarder. The restricted party lists are constantly changing and the potential exists for a benign transaction to suddenly become negatively impacted by the addition of an overseas customer to a restricted party list.
  3. All known parties to an export transaction should be reviewed, including end-user, purchasers, intermediate consignee, forwarders and customs brokers, representatives, and banks.
  4. The U.S. government holds the exporter accountable for “all knowledge you have, both stated and implied, in the normal course of business.”
  5. In addition to the commercially available denied party list screening tools, the various U.S. government lists may be found on the regulating agencies websites. Another important set of tools are the “FAQ” sections of the Commerce Department’s Bureau of Industry and Security and the Treasury Department’s Office of Foreign Assets Control websites. Using real world examples, the agencies provide guidance to compliance officers on the interpretation of denied party lists and related regulations.
  6. When in doubt, consult a third party expert or screening services provider to ensure a shipment is not falling afoul of U.S. export regulations.
  7. Use the potential penalties involved in sanctioned list violations to underscore the importance of compliance company-wide. The C-level must be made aware of the potential for peril.