Export controls: Are they really a big deal for small companies?
SmallCo is a hypothetical start-up. It’s been in business for about six months but does not yet have a product to sell. It doesn’t even have a working prototype, but SmallCo has a great idea - it’s going to use nanoparticles to make the best widget possible.
SmallCo doesn’t work with any overseas companies on R&D, nor does it buy anything from foreign suppliers. It doesn’t give plant tours or use any outside contractors, not even a cleaning crew. It’s pretty safe to say that SmallCo doesn’t have any export control issues.
Yet. But even a minor change to SmallCo’s situation can have a substantial impact. Say SmallCo hires an H-1B visa holder to work in its R&D group or an S-1 visa holder on its engineering team. According to U.S. export controls, allowing a foreign national employee access to any of SmallCo’s product development or manufacturing technology, even when that person is authorized to work in the United States, is considered an export to the employee’s country of citizenship. SmallCo must now figure out what it must do to comply.
Hiring a foreign national is not the only way to trigger the applicability of export controls to your business, but for nano- and other high-tech start-ups, it is a key trigger.
An overview of U.S. export controls
American export controls regulate the worldwide transfer of U.S.-origin goods, services and technology. These controls also apply to technical assistance, technology transfers, services and other activities involving non-U.S. persons, including when technology is transferred to non-U.S. persons authorized to work in the United States.
Exports of commercial and “dual-use” items - commercial items that also have military applications - are generally subject to the Export Administration Regulations (EAR), administered by the Department of Commerce’s Bureau of Industry and Security (BIS). Exports of defense articles, including technology, are subject to the International Traffic in Arms Regulations (ITAR), administered by the Department of State’s Directorate of Defense Trade Controls (DDTC). The EAR and ITAR treat the release within the United States of technology to a foreign national who is not a permanent resident as an export.
What should SmallCo do to minimize the risk of export control violations? The first step is to review the U.S. Munitions List (USML) and the Commerce Control List (CCL) to determine whether any of its technology is controlled under the ITAR or the EAR.
Think broadly - the technology that should be classified includes technology specific to the manufacture of SmallCo’s product, and it also includes technology for the use of its equipment, technology for the use of certain materials and technology for the disposal of certain materials. In some cases technology may be controlled because it is “capable of” doing “X,” even though SmallCo is using it for “Y.” Be sure to review all categories under both the USML and the CCL carefully in order to determine what licenses are needed.
Once SmallCo has done this, it should:
- Determine which new hires are foreign nationals so licenses can be obtained as needed, based on the technology to which the individuals will need access.
- Obtain any licenses necessary. While a license request is pending, ensure that the foreign national does not have access to any technical data requiring a license.
- Ensure that all IT systems administrators are U.S. citizens or authorized to access all types of controlled technology that are maintained on the IT system. Restrict access to electronic files to only those who are authorized.
- Develop procedures to store technical and hard copy data securely and out of sight of anyone “just passing through the facility.”
- Provide periodic training to employees about export controls and how they apply to the business.
Hiring a foreign national may not be the only way nanotech startups will face export controls - but it is the most likely one. The measures identified in this article are important to ensure compliance with U.S. export controls no matter what triggered your need for compliance.
SUSAN KOVAROVICS and WILLIAM CLEMENTS are partners in Foley & Lardner’s Washington, D. C., office and members of the White Collar Defense & Corporate Compliance practice. Ms. Kovarovics designs compliance programs and provides training on export and defense trade controls, trade sanctions, and anti-boycott matters. Mr. Clements counsels foreign and domestic parties regarding international business regulatory matters, particularly export controls, economic sanctions and the Foreign Corrupt Practices Act.