Even with President Trump's "America First" policy, U.S. and multinational corporations are increasingly affected by the range of U.S. laws and regulations governing international trade. As the Trump administration continues to make its mark on export controls and sanctions policy, it is more important than ever for institutions in all sectors of the economy to stay on top of key developments. Learn about the Commerce Department's Bureau of Industry and Security (BIS), the State Department's Directorate of Defense Trade Controls (DDTC), and the Treasury Department's Office of Foreign Assets Control (OFAC) role in Export Controls and Sanctions Policy.

1. ITAR, EAR, BIS, CFIUS… OH MY!
TRADE SANCTIONS AND EXPORT CONTROLS
Recap of 2017 and A Look Forward to 2018
Edwin Broecker
December 14, 2017

2. Agenda
I. Export Administration Regulations ("EAR")
II. International Traffic in Arms Regulations ("ITAR")
III. U.S. Economic Sanctions and Embargoes ("OFAC")
IV. Import/Export Risks in M&A
V. Best Practices/Red Flags
VI. 2018 Forecast
VII.Panel Discussion
2

3. I. Export Administration Regulations
A. In the United States, the Export Administration
Regulations (EAR) broadly regulate commercial
and "dual-use" exports
B. The EAR is administered by the Department of
Commerce Bureau of Industry and Security ("BIS")
C. Lingo: items are "subject to the EAR"
D. If there is going to be an export of an item that is
subject to the EAR, then a license issued by the BIS
may be required
3

4. I. EAR-Subject to the EAR
A. What sort of items are "subject to the EAR"?
1. Commodities
2. Software and technology
3. "Dual-use" items
a. Commercial and
b. Military applications
4. Certain trade activities with "sensitive" end-users or end-uses
B. Items not subject to the EAR
1. Military items (ITAR)
2. Nuclear-related items
3. Certain non-U.S. and public domain items
4

5. I. EAR-Export
A. The EAR governs the "Export" of
items
B. Export is a very broad term
1. Physical shipment out of the U.S.
2. Cross-border electronic transmissions
of software or technology (Emails or
Downloads)
3. "Deemed Export"- disclosure of a
controlled technology item IN THE U.S.
to a foreign national

6. I. EAR-Export
D. Doesn't require sales
1. Includes intra-company transfers
2. Hand-carry on international travel
E. Temporary and Permanent
F. "Reexports"
1. Items made outside U.S. with U.S. origin
content also subject to EAR
G. Transfers
1. Transfers of regulated items between parties
outside the U.S.

7. I. EAR – License Determination
A. License requirements are dependent
upon an item’s technical
characteristics, the destination, the
end-user, and the end-use
B. Technical characteristics
1. Classification on Commerce Control List
(CCL) and what the item's Export Control
Classification Number (ECCN)
2. EAR99
3. EAR600 series
C. Destination
7

8. I. EAR-License Determination
A. After reviewing the classifications and the destinations, then there are 3 general
categories:
1. No License Required
a. Item outside scope of EAR or item to that destination or end user or end use is not required
2. Export License Required
a. Need a license prior to shipment
3. License Required but there is an exception
a. 18 itemized exceptions listed in the EAR
B. Prohibitions for all items subject to the EAR
1. U.S. embargoed countries
2. Missile proliferation and chemical, biological or nuclear weapons
3. Restricted parties list maintained by Commerce
8

9. I. EAR-Items not subject to EAR
A. EAR limited
B. Publicly available technology
and software are not subject to
the EAR if:
1. They are already published;
2. They arise out of fundamental
research;
3. They are educational; or
4. They are included in certain
patent applications
9

10. II. International Traffic in Arms Regulations
A. The International Traffic in Arms
Regulations (ITAR) regulate the export (and
temporary import) of military articles
B. ITAR is administered by the U.S.
Department of State Directorate of
Defense Trade Controls (DDTC)
1. Exports, reexports and transfers of defense
articles (including technical data) and defense
services
2. Brokering of defense articles and services
3. Manufacturing of defense articles
10

11. II. ITAR – Items on U.S. Munitions List/Export
A. U.S. Munitions List (USML) groups items into 21 categories
1. In process of being updated under Export Control Reform (ECR)
B. Focus on item, not use
1. Military use does not make a commercial item subject to ITAR
2. Dual use item under EAR
3. Issue regarding modifications specific for military
C. "Export" very broad
1. Physical transfer
2. Deemed export
3. Performing defense service for or on behalf of a foreign person in U.S. or abroad
4. Providing a defense article to foreign government in U.S. (including embassies)
5. Transferring registration or control of an ITAR-controlled item to a foreign person
11

12. II. ITAR Registration
A. Registration with DDTC required for:
1. Manufacturers of defense articles (even if just selling domestically)
2. Exporters of defense articles or services
3. Brokers
B. Annual compliance requires
1. Special notification obligations
a) 5 days after material changes in registration
1) Includes acquisitions or sales
2) Changes in officers, directors or shareholders
b) 60-days advance notice of sales to foreign buyer
1) Even if transaction occurring anywhere in ownership structure
2. Requires maintenance of ITAR compliance manual
12

13. II. ITAR-License
A. License required for virtually
all exports, re-exports or
transfers and temporary
imports of defense articles,
including technical data, and
defense services
B. Limited exemptions
13

14. III. Office of Foreign Assets Control
A. In the United States, trade sanctions
administered by the Treasury
Department's Office of Foreign Assets
Control (OFAC)
B. Sanctions regime
1. Comprehensive (5 Regions)
2. Targeted industries
3. Targeted individuals
14

15. III. OFAC Comprehensive Sanctions
A. Iran
B. Syria
C. Crimea Region
D. North Korea
E. Cuba
F. Sudan (removed in
October)
SYRIA

16. III. OFAC Limited Sanctions
A. Limited Sanctions (some dealings permitted
others restricted)
1. Russia
2. Venezuela
VENEZUELA

17. III. OFAC-List Based Sanctions
A. 13 Countries have List-Based Sanctions (specific items restricted)
1. Balkans
2. Belarus
3. Burundi
4. Central African Republic
5. DR Congo
6. Iraq-related
7. Lebanon-related
8. Libya
9. Somalia
10. South Sudan
11. Venezuela
12. Yemen
13. Zimbabwe
17

18. III. OFAC – Group Based Sanctions
A. Targeted Groups and Activities
1. Counter-Narcotics
2. Transnational Criminal Organizations
3. Counter-terrorism
4. Non-proliferation
5. Rough Cut Diamonds
6. Human Rights
7. Cyber-security
18

19. III. OFAC-Specially Designated Nationals
A. OFAC maintains list of Specially Designated Nationals and blocked
persons (SDNs)
1. Criminals, dictators, etc.
B. Sanctions cover entities in which an SDN owns, directly or indirectly,
individually or in the aggregate, 50% or more of the entity, even if the
entity is not specifically listed
1. KYC– Know your customer obligations
19

20. III. OFAC-Types of Sanctions and Applicability
A. Comprehensive Sanctions generally means no:
1. U.S. import/export from target country
2. New investment in target country
3. Export or services, technology or property in target country
B. Other sanctions are specific
1. Need to check specific rules and regulations
2. https://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx
C. Applies to U.S. Persons
1. Citizens and permanent residents
2. U.S. companies and foreign branches
3. Any person or company located in U.S.
D. Some sanctions apply to non-U.S. companies owned or controlled by U.S. persons
E. Property or activity in U.S. (dollar-based transactions)
20

21. III. OFAC-Iran
A. Comprehensive Sanctions remain
even though JCPOA lifted the nuclear
weapons-related secondary sanctions
1. No trade, investment, services
2. No transactions with the Iranian
Government, banks and no dollar
transactions
B. Subsidiary liability
1. Non-U.S. entity owned or controlled by
U.S. person prohibited from knowingly
engaging in transactions
C. State-level sanctions
21

22. III. OFAC-Iran
A. Licenses
1. General License D-1: authorizes certain transactions incident to personal
communication and internet
2. General License H: non-U.S. entities owned or controlled by U.S. persons to
transact business with Iran, subject to conditions
3. General License I: allows certain contracts relating to commercial aircraft
4. General License J-1: temporary trips of eligible U.S. controlled civilian aircraft
where non-Iranian parties continue control of aircraft
B. Humanitarian Exemption
C. Completely foreign transactions
22

23. III. OFAC-Penalties
A. Criminal penalties
1. Fines up to $1,000,000 per violation and/or 20 years
imprisonment
B. Civil
1. Greater of $284,582 or twice the value of the
transaction per violation (Cuba is $83,864)
2. Strict liability
C. Collateral designation as SDN or inclusion on
Denied Parties List
D. Debarment from government contracts/Qui tam
and False Claims Act/Whistleblowers
E. Ineligible to receive export licenses
F. Reputational risks
G. 5 year Statute of Limitations

24. III. OFAC-Penalties
A. Big Fines and Penalties
Standard
Charter Bank
$967M
2012/2014
ZTE
Corporation
$1.19B
2017
Commzerbank
AG
$1.45B
2015
HSBC Bank
$2.29B
2012
BNP Paribas S.A.
$8.96B
2014

25. IV. M&A Risks
A. Due diligence may require ITAR/EAR licenses for "deemed export" issues
B. Timing and pre-clearance issues
1. CFIUS (Committee Foreign Investment in U.S.)
a) Has authority to unwind transaction
2. ITAR
a) 60-day prior notice
b) 5-day notice
C. Representations and Warranties
25

26. IV. M&A Risks
D. Successor liability
1. Applies to both equity and asset transactions
2. Customs violations
a) U.S. v. Shields Rubber (U.S. 1989)
b) U.S. v. Ataka America (1993)
c) U.S. v. Adaptive Microsystems (2013) – bankrupt seller
d) U.S. v. CTS Holdings, Inc. (2015) – defunct seller
3. BIS/Export violations
a) Sigma-Aldrich (2002) – administrative case
1) "A company will be held accountable for violations of US export control laws committed by
companies that they acquire." BIS Press Release announcing settlement
4. ITAR
a) Pre-clearance notification requires assumption of liability
b) ITAR Section 122.4
26

27. V. Best Practices/Red Flags
A. Best Practice: Know your customer
B. BIS maintains a list of warnings that may indicate problems
1. Name similarity
2. Middleman hiding end-user
3. Routine installation and maintenance declined
4. https://www.bis.doc.gov/index.php/enforcement/oee/compliance/23-
compliance-a-training/51-red-flag-indicators
C. Train employees on risks of diversion
1. Item sold as commercial item but end user is military
2. Item sold to UAE distributor with large operation in Iran
D. Unusual transactions
1. Cash when past transactions are credit
2. Unusually large shipments
3. Multiple shipments in short period of time
E. Red Flags require resolution before a transaction may proceed
27

28. V. Best Practices-International Issue
28
Guinea and
Guinea-Bissau
Venezuela
Libya
Tunisia
Egypt
Haiti
Cuba
Cyprus
Balkans
Lebanon
Belarus
Ukraine
Crimea Region
Syria
Armenia and
Azerbaijan
IraqRussia
Iran
Afghanistan
China
North Korea
Burma
Central African
Republic
Burundi
DR Congo
Zimbabwe
Somalia
Sudan and
South Sudan
Yemen
Eritrea
U.S. only
U.S. and E.U.
E.U. only

29. VI. 2018 Forecast
A. Iran
1. Congressional determination
B. North Korea
C. Russia
D. Mid-term elections
E. Enforcement
29

30. VI. Panel Discussion
Craig Carpenter
Vice President and Associate General Counsel
Ingram Micro
Lloyd Porter
Director Global Trade Compliance
Cook Medical
Joseph Perkins
Corporate Counsel
Allison Transmission

31. © 2017 Quarles & Brady LLP -
This document provides
information of a general
nature. None of the
information contained herein
is intended as legal advice or
opinion relative to specific
matters, facts, situations or
issues. Additional facts and
information or future
developments may affect the
subjects addressed in this
document. You should consult
with a lawyer about your
particular circumstances
before acting on any of this
information because it may
not be applicable to you or
your situation.
Thank You! Questions?
31
Edwin Broecker
317.399.2828
ed.broecker@quarles.com