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Trade and Investment
Two external factors that will predictably shape international trade and regulatory issues in 2004 are the continuing “war on terrorism” and the fact that 2004 is a presidential election year. The ongoing war on terrorism will continue to emphasize border security, limiting the proliferation of weapons of mass destruction, and pressuring foreign governments to take aggressive parallel actions. This will manifest itself in changes in export policies as, perhaps, in a loosening of economic sanctions against Libya and Iran, a tightening of sanctions against Syria, and a combination of positive and negative steps with respect to North Korea and other South Asian regimes and in restrictions affecting imports and travel, including increased scrutiny of the movement of persons and goods into the United States. The objectives of the war on terror will even affect trade policies, with the promise of expanded benefits under Free Trade Agreements being used as another lever in U.S. foreign policy that may overshadow the traditional Republican commitment to “free trade.”
The politics of an election year will also shape the application of U.S. trade laws and the direction of policies. The election campaigns will not only revive old debates about the broad value of freer trade and investment compared to the focused pain of trade dislocations and adjustments. This election year will also likely see renewed debate on the value of expanding free trade agreements versus securing greater protections for American workers and the environment; the benefits of a strong WTO in opening foreign markets versus decisions adverse to the United States; and the value of decisive unilateral U.S. action versus building multilateral consensus on issues ranging from environmental and worker protections to intellectual property protection. Even anti-corruption issues, already on the ascendancy, may become a campaign issue. It is instructive to recall that it was past presidential campaigns that led to U.S. anti-boycott laws, the Foreign Corrupt Practices Act, various economic embargoes, and numerous trade policy initiatives. All signs point to trade and trade regulatory issues being more prominent election issues than ever before.
Expect Further Breakthroughs in Trade Negotiations in 2004
Following the collapse of WTO negotiations in Cancun, Mexico in September 2003, the Bush Administration has continued to aggressively pursue free trade agreements (“FTAs”) on a bilateral basis. FTAs with both Chile and Singapore were completed in 2003 and took effect on January 1, 2004. Also in 2003, the United States completed negotiation of the U.S.-Central America Free Trade Agreement (“CAFTA”) with four countries: El Salvador, Guatemala, Honduras, and Nicaragua. The text of the CAFTA, which includes provisions addressing agriculture and textiles, is expected to be delivered to Congress for approval in early 2004. Negotiations with both Costa Rica and the Dominican Republic to join the CAFTA in 2004 are ongoing.
2004 should see the continuation of present FTA negotiations and the consummation of new agreements. U.S. trade officials have indicated that FTAs with both Australia and Morocco, for which negotiations began in 2003, will likely be completed in 2004. Negotiations for a Free Trade Area of the Americas, covering thirty-four nations of the Western Hemisphere, continue despite difficult negotiations in 2003. FTA negotiations with the five members of the South African Customs Union (“SACU”) Botswana, Lesotho, Namibia, South Africa, and Swaziland also began in 2003 and are scheduled to be completed in 2004, although U.S. trade officials have suggested that they might not meet this deadline.
USTR has announced its intention to pursue FTAs separately with Bahrain, Panama, Thailand, and four Andean nations: Bolivia, Colombia, Ecuador, and Peru. The Administration has also suggested that a Middle East FTA will be a priority in 2004. In addition, a number of countries, including New Zealand and Taiwan, have proposed FTAs with the United States. The momentum of U.S. FTA negotiations seems likely to continue throughout 2004 and be the subject of heated debate as the November elections approach.
Broadening Horizons For Section 337
Section 337 of the Tariff Act of 1930 allows holders of U.S. intellectual property rights to quickly obtain an exclusion order barring imports of infringing goods. These orders are issued by the U.S. International Trade Commission (“ITC”), generally within 12 to 15 months after a complaint is filed, and are enforced by the Bureau of Customs and Border Protection (“Customs”). While the typical case involves patent infringement, Section 337 applies to a wide range of unfair import conduct, including trade in gray market goods, registered and unregistered trademark violations, copyright infringement, and even antitrust violations. Several recent ITC decisions illustrate the statute’s breadth. One case involved gray market goods authentic goods imported without the U.S. trademark holder’s consent. An ITC judge held that the gray market goods infringed a U.S. trademark because of differences in aftermarket services, even though there were no physical differences between the authorized and gray market goods. If upheld on review by the ITC, this case will represent an expansive approach to gray market protection.
In another recent case, a U.S. company successfully protected its unregistered trade dress rights against knockoff Chinese tractors. The company obtained relief from the ITC less than five months after the ITC instituted its investigation. Such a quick remedy was possible because the U.S. company invoked the ITC’s procedure for a temporary exclusion order (“TEO”), allowing a company to obtain relief on an emergency basis where the unfair acts threaten a domestic industry with irreparable harm. In such cases, the statute directs that a TEO be issued within 90 to 150 days. Although the tractor maker’s TEO motion was the first filed with the ITC in several years, it apparently signaled new life for the TEO remedy, as it was the first of three TEO motions filed in 2003. More are expected in 2004.
Another recent trend that will likely continue in 2004 is towards general exclusion orders (“GEOs”), which bar all imports of infringing goods, regardless of their point of origin, and regardless of whether they were produced, imported, exported or distributed by a party named in the ITC action. GEOs can be obtained to prevent circumvention of a more narrow order, or to halt a widespread pattern of violation. Previously a rare phenomenon, GEOs were sought in roughly half of the Section 337 investigations commenced in 2003. A number of these complaints targeted imports from China.
With mounting pressures from cheap infringing imports, there is reason to suspect that GEOs will grow increasingly popular. Similarly, in light of district court congestion, requests for TEOs are likely to become more frequent. Given the expansive range of conduct to which Section 337 can be applied, there is little doubt that IP owners will continue to push the boundaries of an understandably popular remedy.
Cross-Border Services in the Patent Law Crosshairs
Section 271(g) of the U.S. patent law allows a patent owner to sue for patent infringement anyone who imports a “product” made outside the United States using a patented process or method. The Federal Circuit (the appeals court that hears patent infringement appeals) recently limited the scope of Section 271(g), ruling that a medical diagnostic laboratory outside of the United States that uses a process patented in the United States does not infringe the patent when the test results are subsequently “imported” back into the United States. The court held that the term “product,” as used in Section 271(g), means only physical goods.
The court’s holding is important for any entity involved with medical diagnostic testing. It is
also potentially important for entities with a process or method patent that relates to intangible products, including testing, software products, and data.
The Federal Circuit’s decision might not be the last word on the subject, however, as it explicitly invited Congress to address this issue. There is enough money involved in the medical diagnostic industry to make Congressional action plausible. In addition, companies for which the courts are now foreclosed might wish to investigate whether such imports may be brought before the U.S. International Trade Commission (“ITC”) as “unfair methods of competition” under Section 337 of the U.S. trade laws. (See the previous section).
Application of Section 337 to diagnostic test results or similar services would be unprecedented, and might be further than the ITC is prepared to go. However, in several cases the ITC has issued orders to halt the transmission of digital information and software into the United States in conjunction with orders barring continued importation of infringing physical goods. Companies concerned with medical diagnostics or similar services might wish to consider the possibility that the ITC will take a similarly broad view of its authority in such cases.
Promoting Chinese Compliance With Trade Laws
In acceding to the WTO, China promised to take specific steps to establish a rule-based market economy. According to a Fall 2003 report released by the U.S. Chamber of Commerce, China’s compliance with its WTO obligations in its first two years of WTO membership has been “uneven and incomplete.”
As U.S.-China trade further expands in the wake of China’s accession to the WTO and normalization of U.S.-China economic relations, the Department of Commerce (“Commerce”) is planning a 2004 reorganization designed to promote Chinese compliance with laws prohibiting unfair trade practices. The restructuring is part of the Bush Administration’s “Pro-Growth Manufacturing Initiative” and the broader U.S. effort to improve the U.S. trade deficit with China.
As currently planned, Commerce’s Import Administration will establish an Office of China Compliance (“OCC”) and an Unfair Trade Practices Team to investigate potential unfair trade practices of enterprises importing into the U.S. market. The OCC will specialize in dumping, and is also expected to be involved in countervailing duty and China-specific “safeguard” investigations. On the export side, Commerce will move trade promotion into the field and heighten its vigilance of China’s compliance with WTO obligations.
China has recently become the second-largest source of U.S. imports and has also been the subject of more U.S. antidumping investigations and orders during the past three years than any other country. The increase in China investigations comes at a time when the WTO reports a general decrease in antidumping investigations worldwide. (This decrease is likely in part due to the steel safeguards, which displaced many steel dumping cases but which were lifted in late 2003). The variety of industries affected by China investigations is also expanding, beyond historical disputes relating to textiles; Chinese products subject to U.S. antidumping orders in 2003 included chemical compounds, refined metal products, and food products.
Commerce’s restructuring will also redouble U.S. efforts to promote exports, including heightened attention to WTO compliance by China. Trade promotion activities will now specifically address this issue. As the USTR highlights areas of Chinese noncompliance in the annual reviews under the WTO Transitional Review Mechanism, Commerce will conduct more on on-the-ground monitoring of Chinese compliance. The existing Trade Development unit will be scrapped, and trade promotion will be carried out by the Foreign Commercial Service under the supervision of a new Assistant Secretary for Trade Promotion and a new Assistant Secretary for Manufacturing Services.
More Interesting Times Ahead for the Softwood Lumber Trade Dispute
What might be the biggest single trade dispute of all time involving both dumping and countervailing duties imposed on softwood lumber from Canada continued to prove interesting in 2003. (In the interest of full disclosure, we should warn the reader that we represent Weyerhaeuser, the largest producer of softwood lumber in the world.) Events of 2003 included three NAFTA panel decisions, one of which held that the International Trade Commission (“ITC”) did not support its threat of injury finding with substantial evidence and remanded for further consideration. If the panel ultimately finds that the ITC did not have substantial evidence, the case will end.
The case is also in front of four WTO panels, as well as the Department of Commerce. Events of 2004 will include further NAFTA panel decisions, some important WTO decisions, possibly including the first definitive ruling on the U.S. practice of zeroing, and the first Department of Commerce administrative review. Or perhaps the parties will finally reach a settlement. Stay tuned.
New Free Trade Agreements Provide Limited Recourse to Arbitration
The FTAs with Chile and Singapore, which became effective on January 1, 2004, provide new dispute settlement opportunities for U.S. investors adversely affected by government action in those countries. Like the NAFTA, both the Chile and Singapore FTAs contain investor-state dispute settlement mechanisms allowing investors to bring claims in arbitration for damages for illegal actions by government authorities in the signatory countries. Specifically, U.S. investors may bring claims (on their own behalf or on behalf of their investments in the signatory countries) for enumerated illegal actions such as expropriation, denials of national and most-favored nation treatment, or failure to meet minimum standards of treatment. Conversely, investors from Chile and Singapore may also bring such claims against the United States.
The investor-state dispute settlement provisions in the Chile and Singapore FTAs are narrower, however, than analogous provisions in the NAFTA text. In particular, the Chile and Singapore FTAs contain revised provisions regarding “Minimum Standard of Treatment” and Annexes dealing with expropriation that limit the scope of investor rights. For example, the Annex on expropriation provides that public health, safety or environmental regulations do not constitute indirect expropriations absent extraordinary circumstances. The “Minimum Standard of Treatment” provision specifies that such protection is limited to rights recognized under customary international law, thus adopting the conclusions of the NAFTA Free Trade Commission, which has attempted to limit the scope of an analogous NAFTA provision.
Some of the changes are intended to codify how the NAFTA has been interpreted, even though it is written more broadly. Others, particularly the expropriation revisions, limit investors’ rights over what is provided in the NAFTA, particularly with respect to so-called regulatory takings. It remains to be seen whether these limitations, which many believe the U.S. government has supported out of concern for its own potential liability and which will serve as the model for other FTAs under negotiation, will adequately protect foreign investors against inappropriate behavior by host governments.
NAFTA Investor-State Dispute Settlement Continues Apace
In 2003, there were several significant developments in investor-state arbitrations brought against the U.S., Canadian and Mexican governments under Chapter 11 of the NAFTA. In addition to several new claims brought against the Governments of Mexico and the United States, awards were issued in several pending arbitrations. Among the new claims filed in 2003, Glamis Gold, Ltd., a Canadian mining company, brought claims against the United States for Chapter 11 breaches based on allegedly discriminatory environmental measures designed to block Glamis’ development of a mining concession in California. Corn Products International, a U.S. investor that owns a large high fructose corn syrup (HFCS) production facility in Mexico, brought claims against Mexico for Chapter 11 violations related to Mexico’s imposition of a tax on soft drinks containing HFCS.
In addition to the filing of new claims, 2003 saw the issuance of a number of awards in pending cases. During the summer, a tribunal issued a final award dismissing all claims in the long-running arbitration between the Loewen Group International and the United States. Loewen, a Canadian investor in funeral homes, claimed that the United States breached its Chapter 11 obligations as a result of discriminatory treatment suffered by Loewen in Mississippi court proceedings. The tribunal held that Loewen’s assignment of its rights in the arbitration to a Canadian shell company owned and controlled by a U.S. corporation effectively divested the tribunal of jurisdiction over the dispute because Chapter 11 arbitrations are available only in disputes between a NAFTA country and an investor of another NAFTA country.
A tribunal also issued a final award dismissing all claims in the arbitration between the ADF Group and the United States. ADF, a Canadian steel producer, alleged violations of NAFTA Chapter 11 as a result of “Buy America” provisions requiring states to procure U.S.-manufactured steel as a precondition of receiving federal highway funds. The tribunal first held that ADF failed to prove de jure discrimination because both U.S. and foreign steel manufacturers are faced with “Buy America” constraints. It then held that ADF failed to prove de facto discrimination because it failed to provide economic data to demonstrate whether the “Buy America” provisions actually discriminated against foreign-produced steel.
Finally, an Ontario Court rejected a Mexican challenge to the arbitral award in a dispute between Mexico and Marvin Roy Feldman Karpa, a U.S. investor operating a trading company in Mexico. Mexico argued that the Canadian court should overturn an award in which the tribunal found a national treatment violation. The violation was based on an adverse inference the tribunal had drawn against Mexico for failing to respond to the claimant’s prima facie showing that the Mexican Government had denied the claimant certain benefits that it granted to the claimant’s Mexican competitors. In rejecting these arguments, the court noted that Canadian law requires a high level of deference to arbitral awards and their factual findings, that Mexico was given adequate notice of the tribunal’s expectation that it respond, and that none of the tribunal’s actions offended fundamental principles of justice or fairness.
These cases show that the Chapter 11 process, despite efforts to use it aggressively and creatively, is producing more mainstream outcomes than some have predicted would occur. 2004 will further test the system in the area of asserted regulatory takings, and with respect to the Chapter 11 process itself.
Mexico Beefs Up Audits of NAFTA Eligibility Claims
U.S. producers and exporters should be aware of increased risks of audits by the Servicio de Administración Tributaria (“SAT”), the Mexican taxation authority responsible for reviewing importer claims for NAFTA benefits. In a recent meeting with Miller & Chevalier, Mr. Gabriel Oliver, the head of the international tax unit responsible for NAFTA Customs audits, revealed that Mexico intends to aggressively scrutinize parties claiming NAFTA benefits for imports entering Mexico. We have since confirmed that the number of NAFTA audits planned or scheduled for this year will dramatically outpace the number of audits SAT performed in 2003 and that Mr. Oliver has recently hired and trained significant numbers of audit personnel to perform these audits.
Also noteworthy is Mr. Oliver’s pronouncement that his office has adopted a new “hard-line” approach to NAFTA eligibility claims through investigations and use of judicial actions. Prior disclosures generally serve as a means of settling a case only prior to initiation of an investigation. Thus, producers and others providing certificates of origin for products exported into Mexico are well-advised to review their trade compliance programs to ensure that they are applying the correct methodology to eligibility determinations, and to ensure that their record retention practices would be adequate to respond to audit inquiries by the Mexican tax authorities.
Compliance Standards Continue to Rise: Death to the Paper Program
Thanks in part to statutory and regulatory changes affecting corporate governance, the compliance landscape continues to change and can be expected to do so in 2004. Once preventive measures for which corporations received affirmative benefits, formal compliance programs are now expected by enforcement officials and are likely to be scrutinized to determine whether they meet the standard of an “effective” program. Heightened scrutiny is increasingly likely, both from Audit Committees and enforcement officials, as a result of the increase in internal investigations, voluntary disclosures, and enforcement actions.
Several official and unofficial statements in 2003 show that the compliance bar is rising, and that what was “state of the art” is becoming the standard. If there had been any doubt before, it is now clear that the “paper program” is dead. The updated Justice Department’s “Principles of Federal Prosecution of Business Organizations” (January 23, 2003), followed by the so-called “Breeden Report” on Corporate Governance for MCI (August 2003), criticize the checklist approach to determining “best practices” and emphasize the importance of building truly effective compliance and governance safeguards.
The year ended with the publication of the U.S. Sentencing Commission’s proposed changes to the Sentencing Guidelines, which reflect the recommendations of the Ad Hoc Advisory Group to the Commission. The Group’s October 2003 report had recommended a separate guideline on compliance that would flesh out the criteria for evaluating an “effective” program. The recommended changes emphasize the importance of compliance-oriented “culture,” and stress defined standards and procedures, accountability, training, continual program evaluation, and ongoing risk assessment.
The changes would effectively codify those program elements that in our view represent the best compliance program practices, but have not yet been universally adopted as standard program elements. Perennial questions of effective training and preserving a compliance culture remain an important focus. In addition, companies will face challenges to improve cross-disciplinary coordination among various functions, including legal, compliance, human resources, internal audit, and audit committees.
Due Diligence in M&A Context Grows in Importance
The Sigma Aldrich case in which an administrative law judge upheld the Commerce Department’s position that acquiring companies could be held liable for pre-sale export control violations of the acquired company, even if the acquisition was structured as an asset sale caused us to recommend last year that companies include export control due diligence in their overall acquisition due diligence. Subsequently, customs, sanctions, FCPA, and export controls enforcement officials have echoed the theme of successor liability in enforcement actions and other forums (e.g., Department of Justice FCPA Review Release 2003-01). Although it is unclear whether a court would reach the same conclusion, the enforcement community appears joined in the view that a buyer has an obligation to conduct pre-sale compliance due diligence in these areas, and strongly urges targets to do the same.
The risks of failing to conduct compliance due diligence are clear. Violations that are discovered late in the M&A process, or after the deal has closed, typically take longer to resolve, steal momentum from and add costs and delay to the management transition, and typically are not as susceptible to favorable resolution with enforcement agencies.
Conversely, a buyer that finds problems early can tailor indemnities, adjust the transaction price and structure, get a head start on compliance transition planning, and move forward with a clean slate. A seller that knows its weaknesses can address them, keeping them off the negotiating table, and reduce liability risks by voluntarily disclosing violations. Together with aggressive enforcement, these factors might explain the up tick in companies taking a closer look at compliance systems and violations before closing a deal.
Further Customs Security Measures Likely in 2004
2003 was a year of possibly unprecedented attention by Customs to security measures. It included the implementation of advance manifesting requirements for imports made by truck, rail, sea- and air-carriers and the announcement of Food and Drug Administration (“FDA”) “prior notice” rules for foodstuff imports.
There were also major developments in the Customs-Trade Partnership Against Terrorism (“C-TPAT”) program, as Customs began carrying out verifications of individual participants’ compliance with their commitments under the voluntary security program, and as Customs extended C-TPAT eligibility to foreign manufacturers. C-TPAT is a program under which companies commit to enhancing their security programs in exchange for expedited processing at the border.
Customs activity in the security arena will continue into 2004. For example, Customs and the FDA have clarified that the “prior notice” rules for food shipments, which became effective in December 2003, will likely be phased in over four separate stages lasting through August 2004. Non-compliant importers will face detention and seizure of their merchandise. Similarly, the advance manifesting requirements announced in late 2003 will become effective during 2004.
An area of concern is the extent to which U.S. trading partners might enact their own security measures, perhaps based on a perception that the U.S. measures constitute non-tariff barriers. Because a worldwide proliferation of security measures could result in increased barriers to trade, members of the trade should consider participating in the formulation of model security standards and measures by U.S. and foreign Customs authorities, as well as international bodies.
Free Trade Agreements Create Compliance Challenges and Opportunities
Following the entry into force on January 1 of the new FTAs with Chile and Singapore, importers and exporters have the opportunity to benefit from reduced duty rates. To take advantage of these duty preferences, parties will have to understand the applicable rules of origin that determine whether a particular good “originates” within the territory of the FTA in question and thus qualifies for the duty preference.
Additionally, importers wishing to claim benefits under the new FTAs must comply with documentation requirements imposed by the agreements. For example, although the Singapore FTA simply requires a “statement” supporting eligibility to be filed at the time of importation, importers must maintain detailed records substantiating the claimed eligibility for five years. Preparation of such records should be performed at the time of the transaction, even though all records need not be submitted to Customs.
Compliance with these requirements is crucial not only for importers in the United States, but also for importers including subsidiaries of U.S. companies operating in Chile and Singapore. Following a careful review of relevant eligibility criteria and documentation requirements, any company seeking to claim benefits under the new FTAs should develop an effective approach to record retention as preparation for possible future audits by U.S. or foreign Customs authorities.
Importers Face Choice Between Two Customs Audit Programs
In 2004, many importers will continue to ponder whether it is better to take the risks that accompany a Focused Assessment (“FA”) or to eliminate those risks by enrolling in the Importer Self-Assessment Program (“ISA”) (which Customs initiated in 2002 and which gained momentum in 2003). These programs are designed to ensure that importers accurately enter their imports. The FA and the ISA each has its own advantages and disadvantages, and importers need to consider carefully which program best meets their needs.
The FA is a mandatory Customs audit. Customs reviews an importer’s procedures and controls to determine the degree of risk of non-compliance with Customs’ regulations in areas such as valuation, classification, country of origin marking, quantity, tariff preference and other duty reduction programs, and antidumping and countervailing duty orders. If Customs identifies an unacceptable risk, then it may test numerous specific transactions in order to quantify any noncompliance and any loss of revenue by Customs.
The ISA Program, on the other hand, is strictly voluntary, and it enables importers to avoid many of the unpleasant surprises often discovered during an FA. Participation in ISA automatically removes a company from Customs’ audit pool. The ISA Program requires an importer to participate in the Customs-Trade Partnership against Terrorism (C-TPAT) and make a substantial investment in documenting processes and controls and identifying and remedying deficiencies, to ensure compliance with all applicable customs rules and regulations. Thereafter, an ISA participant must conduct annual self-testing based on a plan approved by Customs, and make the results of self-testing available to Customs for review, including notifying Customs of any material errors that are discovered.
In other words, an importer is entering into a continuing relationship with Customs. Of course, this investment provides several benefits, such as lower penalties and the opportunity to save money by streamlining a supply chain, to learn about new preference programs, etc. Moreover, the costs of enrolling in the ISA Program can be lessened if they leverage the Sarbanes-Oxley compliance efforts that many corporations are already undertaking.
So, the question of FA or ISA comes down to the choice of being proactive and making the investment now and in the future, but at one’s own pace, or postponing that investment until one’s company is selected for an FA, and then scrambling to meet Customs’ time requirements. In 2004, it is expected that increasing numbers of importers will begin to recognize the benefits of the ISA and will apply for the program. At the same time, many smaller importers will continue to play the odds, betting that they will not be selected for an FA.
Export Controls: Aggressive Enforcement Continues, Reach of ITAR Expands
The global war on terrorism has made its mark on virtually every area of international trade and business. Heightened border security and anti-terrorism initiatives have resulted in increased government scrutiny of export and import transactions. Not surprisingly, the increased scrutiny has resulted in a record-breaking number of export enforcement actions and multi-million dollar export enforcement settlements.
In the past year, U.S. companies agreed to pay the largest civil fines ever assessed for export violations under the State Department’s International Traffic in Arms Regulations (“ITAR”) and the Commerce Department’s Export Administration Regulations (“EAR”). On the criminal side, senior Justice Department officials have indicated that they are conducting more export control investigations and bringing more criminal enforcement actions for alleged export control violations than ever before. This trend towards more aggressive export enforcement is expected to continue well into 2004.
Antiterrorism concerns have also led to an increasingly aggressive regulatory climate, particularly under the ITAR regime. The State Department’s newly-structured Directorate of Defense Trade Controls (“DDTC”), which administers and enforces the ITAR, has grown dramatically in size and importance. DDTC has added additional internal resources dedicated to enforcement and compliance, taken an expansive view of its regulatory jurisdiction, and begun to pursue potential violations more aggressively. One trend we have seen is for DDTC to impose more burdensome compliance and reporting requirements on companies that make voluntary disclosures. There are also indications that DDTC is increasingly willing to bring civil penalty actions in greater numbers, including in voluntary disclosure situations.
One other sign of the growing importance of the ITAR regime is the applicability of the ITAR to a growing universe of products that might not be inherently military. In the pre-9/11 world, domestic and foreign military end-users were moving towards using commercial off-the-shelf (“COTS”) product solutions. While COTS solutions are still sought in many environments, we have observed an increased number of requests to “customize” COTS products. Such customization requests often subject the item in question to ITAR control, or at a minimum require a company to carefully analyze the jurisdictional issue and perhaps submit a commodity jurisdiction (“CJ”) request to DDTC. The State Department has been quite aggressive in reviewing those CJ requests, subjecting many items to ITAR control that would appear to fall outside of that regime.
In short, the war on terrorism has forced U.S. companies to invest millions of dollars in implementing export compliance programs and adopting corporate procedures to carefully analyze their export transactions. Employing good compliance procedures and personnel is the best preventive measure to ensure that export violations do not occur and the best mitigation if those procedures fail to catch a violation.
Evolving Geopolitical Landscape Reshaping U.S. Sanctions
The ephemeral nature of U.S. trade and economic sanctions has never been in greater evidence. Over the past two years, the U.S. Government has lifted embargoes against Afghanistan and Iraq, imposed more restrictive controls with respect to Burma, enacted new sanctions legislation targeting Syria, and adopted more restrictive interpretations and licensing policies with respect to certain transactions involving Cuba and Iran. As always, these changes have been driven by a combination of foreign policy, national security, and domestic policy issues. Of course, in the case of Afghanistan and Iraq, sanctions were lifted as a result of the overthrow of the targeted governments. In the coming weeks and months, we expect to see major questions about the future of U.S. sanctions with respect to Libya, Iran, and Syria. In the case of Syria, the “Syria Accountability and Lebanese Sovereignty Act of 2003,” which was signed into law in December 2003, will likely result in a number of new trade and diplomatic sanctions, but their exact nature and scope remain unclear.
Based on dramatic recent steps by the Libyan Government to redress issues relating to the Lockerbie bombing and Libya’s weapons of mass destruction programs, there will be growing pressure on the Bush Administration to ease or perhaps even lift the embargo that has been in place since 1986. And, in the case of Iran, recent progress on nuclear proliferation issues and overtures from the Bush Administration suggest that we could see some thawing of the diplomatic and perhaps business relationship in 2004. Finally, if the trend towards less chilly relations with Iran and Libya continues, it is fair to assume that the Bush Administration will continue the practice of avoiding the imposition of sanctions against foreign energy companies under the Iran and Libya Sanctions Act of 1996 (“ILSA”).