United States: Exporting Without Importing a Headache: An Application of the U.S. Export Regulations to The Financial Services Industry

Just as it is essential for financial services institutions and other business entities to have internal systems in place to meet their employment law and tax obligations, they also must implement comprehensive programs to ensure compliance with United States export, anti-boycott, anti-money laundering, and sanctions laws. These complex international regulatory schemes demand that companies have a thorough understanding of these requirements so that no transaction is conducted contrary to these controls. In recent years, the U.S. government has increasingly focused on the compliance-related issues, and many companies are now charged with creating, implementing, and maintaining diligent compliance programs for their international operations. Reflecting this concern, legislation continues to expand and reinforce compliance demands upon corporations, and penalties for violations have become more severe. This article broadly discusses the requirements imposed by the U.S. government agencies primarily responsible for export, anti-boycott, anti-money laundering, and sanctions controls, and how those controls impact the financial services industry.

The Department of Commerce, Bureau of Industry and Security ("BIS"), administers controls imposed on the export of commercial and "dual-use" goods and technology through the Export Administration Regulations ("EAR"). Dual-use items include those commodities or technology with both commercial and military applications, or those with strictly commercial uses (e.g., encryption technology, software, and high speed computer equipment).

Companies must obtain licenses before engaging in any export activity involving controlled U.S.-origin goods or technologies. An "export" is an actual shipment or transmission of items subject to the EAR out of the United States. The export control regulations also apply to what are called "deemed exports," which occur any time a U.S. entity allows foreign nationals, whether located in the United States or abroad, to access or view export-controlled software or data. A "deemed export" can occur, for example, when foreign nationals are allowed access to a company’s U.S.-based intranet. In that situation, the export status of all software and data located on the intranet would need to be evaluated for export compliance.

The Department of Commerce, through the Office of Anti-Boycott Compliance, also enforces the U.S. anti-boycott regulations. Under these requirements, U.S. persons are prohibited from participating, or agreeing to participate, in certain activities, including:

• Conducting business with or in a boycotted country, or with blacklisted companies.

• Employing or otherwise discriminating against any U.S. persons on the basis of race, religion, sex or national origin.

• Furnishing or knowingly agreeing to furnish information about U.S. persons regarding race, religion, sex, or national origin to a boycotting country.

• Furnishing or knowingly agreeing to furnish information concerning charitable or fraternal organizations which support a boycotted country.

• Furnishing or knowingly agreeing to furnish information concerning business relationships, whether past, present or proposed, with boycotted countries or blacklisted persons to a boycotting country.

• Clearing a letter of credit that contains any of the above-prohibited conditions or requirements.

• Taking any other action with the intent to evade the anti-boycott regulations.

The anti-boycott regulations have a number of reporting requirements to both the Department of Commerce and the Internal Revenue Service. 

Failure to comply with these laws and regulations can lead to serious criminal and administrative penalties. To avoid these criminal and civil penalties, the best practice is to implement a comprehensive anti-boycott compliance program in conjunction with your company’s overall compliance program.

The U.S. Department of State, Directorate of Defense Trade Controls ("DDTC"), regulates the export and temporary import of defense articles from the United States to any foreign destination or to any foreign person, whether located in the United States or abroad. DDTC administers these requirements through the International Traffic in Arms Regulations ("ITAR").

"Defense articles" are those items designated on the United States Munitions List ("USML"), and include the commodities, related technical data, and services controlled by DDTC for export purposes. A number of products that one may not typically consider to be "defense articles" per se are, in fact, controlled by DDTC. The ITAR controls, for example, certain encryption products, protective personnel equipment, and several types of electronics systems.

The ITAR requires companies to comply with registration, licensing, recordkeeping and reporting provisions. DDTC is vested with broad discretion to determine, under subjective standards, whether ITAR compliance requirements are satisfied. Any company subject to the ITAR must register and obtain license approval for the export of items or technology controlled on the USML prior to shipment or transfer. Registration and licensing requirements also apply to brokering/ marketing services for defense articles and services.

Although not typically a concern for transactions conducted directly by most financial services companies, it is important to be aware that the ITAR can nevertheless impact mergers and acquisitions, and financing arrangements that involve companies that are subject to DDTC’s jurisdiction. It is, therefore, essential to include as part of any due diligence review, a thorough analysis of the companies’ international sales and export transactions to ensure compliance with ITAR’s requirements.

The Department of Treasury, Office of Foreign Assets Control ("OFAC"), regulates economic trade with foreign countries. The Foreign Assets Control Regulations administer the statutory and economic trade sanctions imposed against several foreign countries. U.S. economic trade sanctions prohibit transactions with designated foreign countries, entities or individuals. Sanctions apply to all persons subject to U.S. jurisdiction, including foreign branches of U.S. companies and foreign-organized subsidiaries of U.S. corporations. Sanctions prohibit most transactions with the designated countries, entities, or individuals, including financing and dealing in securities or merchandise, without an OFAC license.

The Treasury Department’s Financial Crimes Enforcement Network ("Fin- CEN") is the primary U.S. government agency charged with implementing the expanded anti-money laundering regulations under the USA PATRIOT Act. While most banks already have anti-money laundering compliance programs in place, FinCEN steadily has extended this requirement to other financial institutions, including broker/ dealers, mutual funds, and operators of credit card systems. Among their new responsibilities, financial services companies in the above businesses are required to establish strict identification procedures, report suspicious transactions to FinCEN, and verify that transactions do not involve any prohibited persons included on OFAC’s Specially Designated Nationals list. Since the Treasury Department has become increasingly active in its enforcement of anti-money laundering and sanctions regulations, financial services companies must establish comprehensive compliance programs in both areas.

Any financial services company that has foreign offices, conducts business with foreign entities, maintains correspondent accounts, or offshores certain aspects of its operations—such as its call center, data entry, or web development operations—must have export, anti-boycott, sanctions, and anti-money laundering compliance programs in place. First, the U.S. export control and sanctions regulations have jurisdiction over all goods, no matter how mundane, which are produced in the United States, present in the United States, or are based on U.S. goods or technology.

In addition, the U.S. export control regulations put the burden of demonstrating export compliance on the exporter. A financial services company is required to document its export compliance, even if the goods being exported may be shipped without an export license. In other words, even if most of the items used in foreign offices or offshore operations can be exported without an export license, because the regulatory baseline is that all items are controlled, a company must be able to demonstrate that the export is not controlled in order to justify the shipment of the goods without first obtaining an export license.

Finally, U.S. government officials have indicated that they will be stepping up their enforcement of export control, anti-money laundering, and sanctions regulations. Companies and individuals can be assessed large civil and criminal fines for violating these regulations, and may even be denied export privileges for a period of time. These penalties can be significantly mitigated if caught and addressed by companies before they receive enforcement attention. For this reason, we also recommend that any company with a foreign office or offshoring operations undergo a compliance review of all exports or other international transactions, in order to determine whether any corrective or mitigating actions need to be taken.

In conclusion, an understanding of the different regulatory requirements imposed on financial services companies by the Department of State, the Department of Commerce, and the Department of Treasury, is crucial for ongoing business success in the financial services industry. Financial services companies must incorporate these requirements both into their own operations, as well as into those of their customers and clients. Without compliance programs in place to deal with these evolving regulatory requirements, financial services companies will expose themselves to unnecessary liability, will not be able to properly and accurately assess risk in their business transactions, and will jeopardize the growth of their own organizations in the burgeoning international economy. 

This article is presented for informational purposes only and is not intended to constitute legal advice.