Updated Export Guidance (and Enforcement Warning) for Freight Forwarders

International Alert
01.29.10

On January 8, 2010, the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") posted updated guidance for freight forwarders on its website. Building on previous guidance, the updated guidance amplifies many existing requirements for forwarders that facilitate export of items controlled under the Export Administration Regulations ("EAR"). The guidance also gives insight into BIS's policy for enforcing those requirements.

Although the updated guidance simply reinforces many existing requirements for forwarders, it comes at the heels of BIS's $9.44 million settlement with DHL for allegedly violating some of the very same requirements identified in the updated guidance. Thus, issuance of updated guidance in the wake of that settlement should be considered a warning that BIS will continue to monitor and enforce compliance of those requirements vigorously.

And although the guidance is intended for the freight forwarding community, many aspects equally apply to all exporters.

In an ongoing effort to inform our clients, we highlight and discuss crucial aspects of the guidance below and provide additional information relevant to the guidance.

Routed Export Transactions

A routed export transaction is a transaction whereby the foreign principal party in interest ("PPI"), usually the foreign buyer, expressly assumes certain obligations from the U.S. PPI, usually the U.S. seller. In doing so, the foreign PPI enlists the help of a U.S. agent, usually a forwarder, to act as the "exporter" of the item under the EAR and ultimately undertake the export control obligations. These obligations include determining licensing requirements and obtaining necessary export authorizations.

The guidance reiterates many important principles about routed export transactions. In particular, BIS reaffirms the requirement that a U.S. PPI must obtain a writing from a foreign PPI that expressly assumes the U.S. PPI's export control obligations. As stated in the guidance, "if the U.S. PPI does not obtain from the foreign PPI the writing described above, then the U.S. PPI is the ‘exporter' and must determine licensing authority and obtain the appropriate license or other authorization. This is true even if the transaction is considered a routed export transaction."

Thus, in a routed export transaction, a U.S. PPI should always ensure that it receives such a document before it transfers an item to a foreign PPI's forwarder. Absent the document, the U.S. PPI remains liable for transaction's export obligations. Even worse, the U.S. PPI may also become liable for any acts that the forwarder performs in the transaction. The U.S. PPI should also obtain a copy of the power of attorney or other written authorization that the foreign PPI gives to the forwarder.

A forwarder acting on behalf of a foreign PPI should also ensure that the U.S. PPI receives the document to ensure that the forwarder is fulfilling the export control obligations of its client rather than those of the U.S. PPI. The forwarder should also obtain its own copy of the document.

A forwarder acting on behalf of a foreign PPI must also obtain a power of attorney or other written authorization to act on behalf of the foreign PPI in a routed export transaction.

In a routed export transaction, the U.S. PPI must also provide the foreign PPI and its forwarder certain information about the export to assist them in fulfilling their export control obligations. As discussed below, forwarders are liable for the correctness of the information. Thus, to the extent possible, forwarders should ensure the accuracy of the information and, if necessary, confirm that the information was actually derived from the U.S. PPI or that the foreign PPI can support the information's validity.

Non-Routed Export Transactions

Even in non-routed export transactions, where the U.S. PPI exports the item and authorizes a forwarder to act on its behalf, the U.S. PPI must provide the forwarder a power of attorney or other written authorization and certain information about the export.

Recordkeeping

The guidance also reminds forwarders that, upon request, they must provide PPIs a copy of information about an export they submit through the Automated Export System. This requirement applies to both routed and non-routed export transactions and regardless of whether the forwarder is acting on behalf of the U.S. PPI or foreign PPI.

The requirement, which is also contained in the Foreign Trade Regulations ("FTR"), clarifies a common point of contention between U.S. PPIs and forwarders, further confirming that U.S. PPIs have a right to a copy of the information. However, the extent of information provided U.S. PPIs vary depending on whether the export is a routed or non-routed transaction. In a non-routed transaction, the forwarder must provide the U.S. PPI any information in a mutually agreed format. In a routed transaction, on the other hand, the amount of information owed to the U.S. PPI is limited to information about the U.S. PPI, the exported item(s), and licensing information. Thus, even in routed export transactions where the forwarder is acting on behalf of a foreign PPI, it still has an obligation to a U.S. PPI under U.S. law.

The same principle applies to powers of attorney and other written authorizations that foreign PPIs supply to forwarders in routed export transactions; under the FTR, forwarders must provide U.S. PPIs a copy of such authorizations.

Conversely, the above requirement reminds U.S. PPIs that they should request a copy of the information from their forwarders to ensure that the forwarders properly filed the correct information and, if not, enable a correction to be made in a timely manner.

Last but not least, the U.S. PPI must maintain documentation to support the information that it provides to a forwarder and, if applicable, the foreign PPI.

Liability

The guidance is also a reminder that forwarders and exporters share compliance risks. As the guidance states, "[b]oth the [forwarder] and the PPI who has authorized the [forwarder] are responsible for the correctness of each entry made on an AES submission." As the old export compliance adage goes, exporters can outsource their export responsibilities, but not their liability. In the same vein, forwarders can fulfill those responsibilities, but accept a certain amount of liability in doing so. Even "in a non-routed transaction…some compliance responsibility rests with the freight forwarder."

The guidance goes on to state that:

Good faith reliance on information obtained from the PPI can help protect [a forwarder], but the careless use of ‘No License Required,' or unsupported entries, can get [forwarders] into trouble… When presented with Red Flags, forwarders have an obligation to inquire about the facts o the transaction, evaluate all of the information about inquiry and refrain from engaging in the transaction if the Red Flags cannot be resolved.

Thus, not only will reckless attempts at compliance render a forwarder liable, but the failure to follow-up with the PPI will also render the forwarder liable when it had reason to know that the submitted information was wrong or unsupported. To avoid such a situation, the guidance recommends that forwarders obtain classification information and supporting documents from PPIs.

Conversely, both U.S. and foreign PPIs should maintain a copy of all information provided to forwarders to protect themselves from liability for errors attributable to a forwarder.

Enforcement

The guidance also solidifies BIS's current enforcement policy related to forwarders. Unlike the previous guidance, the updated guidance noticeably adds that "forwarders may be subject to criminal prosecution and/or administrative penalties for violations of the EAR. BIS has not hesitated to hold forwarders liable for participating in illegal transactions." Coupled with the DHL settlement, that statement should be considered a stark warning that BIS will continue to pursue charges against forwarders for failing to abide by the requirements in the guidance.

Compliance Programs

In a sign of the increasingly important role of forwarders in the export process, the guidance recommends that forwarders implement a compliance program to mitigate the risks inherent in that process. As the guidance states, the program should comport with the nine key elements of BIS's Export Management and Compliance Program (EMCP), especially the element related to screening. While accounting for the risks posed by the items being exported, the program should also be tailored to the forwarder's business operations and meet the needs of the forwarder's clients. Moreover, the program should include processes and procedures to ensure compliance with the requirements in the guidance, such as processes and procedures for recordkeeping and for obtaining necessary documentation in routed export transactions.

Conclusion

Given a forwarder's unique role in export transactions as the gatekeeper to the global marketplace, it is often the last line of defense for export controls. The updated guidance represents BIS's renewed emphasis on that principle. It also implicitly reminds exporters that it still has compliance obligations even when forwarders are used. Forwarders and exporters should heed the guidance and closely work with each other to ensure compliance with the requirements identified in the guidance.

For more information, please contact:

Larry Christensen, lchristensen@milchev.com, 202-626-1469

Claire Palmer, cpalmer@milchev.com, 202-626-1575

David Hardin

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