Have you made the classic mistake of assuming that — because your company is a startup, hasn’t gone global or never plans to engage in international transactions — you aren't required to comply with export controls and U.S. sanctions? If so, this one’s for you.
What Are Trade Controls?
Export laws, foreign investment controls, and sanctions prohibitions apply to many companies that only do business within the United States. It is in every U.S. entity’s interest, especially those in the technology field, to have a basic understanding of U.S. trade controls. Ignoring these rules can lead to a variety of issues that can crop up at each stage of a company’s growth process.
Trade Controls Can Include:
- Controls on the transfer of software, goods, services and technology (even within the United States) based on export classifications
- Import requirements and prohibitions
- Economic sanctions, prohibitions and restrictions handed down by theU.S. Department of the Treasury Office of Foreign Assets Control (OFAC).
- And the Committee on Foreign Investment of the United States’ (CFIUS) controls over foreign investment in the U.S.
So how can trade controls affect your company? Here are several examples.
1. National Security
National security issues could prohibit certain funding opportunities or acquisitions, derailing huge opportunities at the last minute — and after you’ve already spent a lot of money preparing the transaction. If you’re considering a funding round or hoping to be acquired, the export classification of your products or sensitive personal data that you collect might preclude certain foreign persons, entities or funds from investing. If your business involves what the U.S. government considers “critical infrastructure,” additional prohibitions could arise.
2. Foreign Employees
Foreign employees on your staff may need government approval to have access to work on your own tech, and if you hired them without it, you’ve committed a costly violation. Transfers of U.S. technology to foreign persons located domestically within the territory of the United States is considered an export unless the foreign person has official permanent resident status. This is the case with many foreign persons only holding work visas and could mean that allowing those persons to work on your technology is prohibited unless you have obtained an export license authorizing technology transfer to the person’s home country.
3. Restricted Parties
Every U.S. entity must ensure it does not do business with any restricted party. Restricted-party lists include persons, entities and organizations with whom the U.S. government has prohibited U.S. citizens from transacting — either directly or indirectly. Restricted parties include people and entities sanctioned for foreign policy and national security purposes, narcotics traffickers, transnational criminal organizations, terrorist organizations, foreign sanction evaders and more.
Foreign countries also publish restricted parties lists. Depending on where your company does business, these foreign lists may also apply. Violating these prohibitions can result in costly fines and penalties, and if it’s done knowingly, it can even land you in jail.
4. Export Classifications
If a customer asks you for the export classification of your product (but you don’t know it), it can sometimes take a month or more to figure it out and cost you a time-sensitive contract. Many customers understand and are committed to complying with U.S. trade controls. Perhaps this is because they work in high-risk industries, or maybe they have previously suffered the consequences of a violation. In any case, knowledgeable customers — especially those who may use your product abroad or export it — will require you to tell them the export classification of the product.
They will want to understand the accompanying regulatory limitations and requirements and ensure that these limitations work with their business plan. Depending on the complexity of your product’s export classification analysis, you may have to submit a classification request to the U.S. government, which takes time to prepare and process. Such delays in the middle of a sale can cost you valuable customers.
5. Sanctioned Locations
If parties in sanctioned locations are utilizing your online product or service, you could be in violation of U.S sanctions, regardless of whether or not you knew of the activity or actively supported it. When it comes to embargoed countries, most activity — including direct and indirect exports of goods and services — is completely banned. This includes providing online services to any person located in an embargoed location such as Iran, Syria, Cuba, North Korea or the Crimea region of Ukraine.
For example, if a user located in Cuba logs on to your platform and utilizes your services, you would be liable for a violation of U.S. sanctions law. Similarly, an unintended sanctions violation can also occur if a restricted party uses your online product or service, even if you didn’t know it happened, which is why it is important to complete restricted party screenings.
6. Selling to Foreign Entities
Is your exit strategy to sell the company to the highest bidder? If you sell your technology to a foreign party without first determining whether any export controls apply or a CFIUS filing is warranted, you may have an export or CFIUS violation, and the U.S. government could unwind the transaction and force the foreign party to divest. It is important to preemptively consider whether any export or CFIUS-related restrictions may apply to potential foreign buyers or investors so that you don’t waste your time negotiating with parties that may not legally be able to close the deal.
7. Seized Imports
Let’s say you’re importing components or materials from China, and suddenly you find out that the goods were seized at Customs and might only be released if you engage a lawyer to fight the seizure. This may come as a surprise, but there are a lot of reasons that your goods can be seized at the border — for example: non-compliance with safety standards, intellectual property violations regarding marks or designs, incorrect import classifications, missing country-of-origin markings and more. If this happens, not only will you likely have to engage an expensive lawyer (only adding to your losses), and you might find out that you owe additional duties or even penalties.
Sometimes, there is no option for the release of these goods, and they are destroyed by Customs. That’s money down the drain. Even worse, as U.S. foreign policy discussions with places like China become more and more tense, additional restrictions may be imposed like prohibitions on cotton from Xinjiang or imports from leading technology companies like Huawei and the Semiconductor Manufacturing International Corporation (SMIC). For these reasons, it’s important to ensure you have all your ducks in a row before your ship (literally) comes in.
As a U.S. operation, you don’t need to know everything about U.S. trade controls. But, to avoid the glaring pitfalls, you do need to understand that these rules don’t just affect those doing brick-and-mortar business abroad. Retain a trusted advisor with the specific experience to help you identify potential issues and prepare for activities and transactions that may have a global nexus — even if it might not be immediately apparent.
Always know who you’re doing business with, and determine the associated risks and liabilities that might come with that connection. Finally, know the legal responsibilities that come along with dealing in your product or technology. So many companies — both big and small — assume that there are no rules when it comes to transferring goods and technology, especially online. But, this is not the case. From the U.S. government’s perspective, the internet is not the Wild West. U.S. entrepreneurs would do well to know the rules of the game so they don’t get shut down before they even start up.