The outsourcing of the production of sensitive items to foreign companies poses a challenge for export controls | Williams Mullen

Outsourcing the design and manufacture of products, components, and software to foreign contractors has become a significant part of US manufacturing. However, if the items in question are subject to US export restrictions, outsourcing the design and/or manufacture of these items to foreign companies can subject the US companies involved to significant export control requirements – and potential legal liability.

Export requirements in foreign manufacturing can arise in various ways. When the manufactured item or its components require an export license for export to a particular country under the Export Administration Regulations (EAR) or the International Traffic In Arms Regulations (ITAR), the transmission of technical information on such items abroad is common required also require an export license unless a license exception applies. Thus, if the US company transfers engineering drawings, blueprints, or production specifications to the foreign seller for use in manufacturing the item overseas, the US company must determine whether an export license is required prior to such transfer. Even if the foreign vendor is merely developing technology, intellectual property, or software, if the US company sends specifications, product requirements, or similar technical data to the foreign party, the transfer may require an export license—even if no physical products are actually manufactured abroad . In certain cases, the technology transfer alone may require approval, even if the end product does not.

Likewise, if the US company collaborates with the foreign company’s engineers and designers during the development process, including telephone calls and emails, conference calls, webinars, zoom calls, or video conferences, the transmission of controlled technical data by the US persons may be subject to a license to be required. Also transfers to foreign persons as part of the fictitious export regulation according to EAR and ITAR[1] in the USA. are considered exports and may require approval.

Requirements can also arise in other ways. If the foreign company is subject to US sanctions, e.g. B. is listed (or is 50% or more owned by the listed parties) on the Office of Foreign Assets Control (OFAC) list of Specially Designated Nationals and Blocked Persons (the “SDN List”) ) U.S. citizens are prohibited from engaging in most business transactions, including to design or manufacture any item, with such parties unless a license is available. Similarly, if a party is on the Bureau of Industry and Security (BIS) list of companies, U.S. companies are prohibited from exporting items subject to the EAR to such parties without a license or license exemption – items subject to the EAR are subject to include physical products, technology and software.[2]

Even if the foreign manufacturer is located in a country that is subject to OFAC sanctions (e.g. Syria, Iran, Cuba, North Korea or the Ukrainian regions of Crimea, Donetsk and Luhansk) or is subject to the requirements listed under EAR Part 746, export restrictions can apply. Restrictions may also apply if the technical information transferred abroad is used for a “prohibited end use” under EAR Part 744 and/or transferred to a military or military-intelligence end user or used for military or military-intelligence purposes. intelligence end use per EAR Part 744. In addition, more restrictive export requirements may apply to transfers to countries such as Russia and certain regions of Ukraine (see “US Imposes Sweeping New Export Controls and Economic Sanctions Against the Russian Federation” available). here).

BIS recently announced a significant enforcement case on these issues. In this case, US companies outsourced 3D printing manufacturing for space, satellites, rockets and other controlled prototypes to companies in China. According to the BIS press release, a US intermediary received export-controlled engineering data and drawings from the US companies and provided those manufacturers in China to 3D print the items without US government approval. The manufactured items were then imported into the United States to be made available to the ordering customers. BIS has issued a preliminary injunction to stop further transfers and is conducting an enforcement investigation into the transactions concerned. Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod issued the following statement on the case:

Outsourcing 3D printing of space and defense prototypes to China harms US national security… By sending their customers’ engineering drawings and blueprints to China, these companies may have saved a few dollars – but they did so at the expense of the US military protection technology.

In the press release, BIS also reminded US companies that they are prohibited from “taking any action that will facilitate this.” [the Chinese companies] Possession or control of EAR items intended for export.” Consequently, in this case, US companies could also be held liable for export violations if they take such action – going through an intermediary does not automatically protect US companies of liability. Failure to obtain necessary export permits can result in significant penalties for US companies – including fines of up to $1,000,000 and 20 years in prison for company employees per violation. A copy of the BIS publication in this case is available here.

In navigating today’s supply chain challenges, US firms face significant pressure to meet customers’ pricing and delivery requirements. However, export control laws continue to apply even in these challenging times. Dealing with export control requirements when outsourcing abroad is a key step on the checklist of a comprehensive export compliance effort.

[1] The term “foreign person” is defined in Part 772 of the EAR as follows: Foreign person. Any individual who is not a lawful permanent resident of the United States, a citizen of the United States, or another protected person as defined in 8 USC 1324b(a)(3). It also means any corporation, association of companies, partnership, trust, corporation, or other entity or group not incorporated or organized in the United States to conduct business in the United States, as well as international organizations, foreign governments, and any agency or Subdivision of a foreign government (e.g. diplomatic mission). “Foreigner” is synonymous with “foreign national” as used in the EAR and “foreign person” as used in the International Traffic in Arms Regulations (22 CFR 120.16). This definition does not apply to Part 760 of the EAR (Restrictive Trade Practices or Boycotts).
[2] Restrictions may also apply to transfers to parties on the Denied Persons List, the Military End User List and the Unverified List.

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