The Department of Commerce’s Bureau of Industry and Security (BIS) recently posted new export control guidance for freight forwarders on its website. BIS enforces the Export Administration Regulations, which regulate the conduct of both shippers and trade intermediaries and, among other things, prohibits the unlicensed export of controlled items to certain destinations. BIS has brought administrative enforcement actions against large and small forwarders over the years, while at the same time declining to specify exactly what forwarders’ compliance obligations are. A link to BIS’s new guidance is below.
BIS’s new posting presumably attempts to clarify forwarders’ responsibilities. It states that “primary responsibility” for compliance with the EAR falls upon the principal parties in interest to a transaction. The Census regulations provide that principal parties in interest are “[t]hose persons in a transaction that receive the primary benefit, monetary or otherwise . . .. Generally, the principal parties in interest in a transaction are the seller and buyer. In most cases, the forwarding or other agent is not a principal party in interest.”
However, as the BIS posting discusses, when a U.S. seller sells goods ex works and obtains from the foreign buyer a writing wherein the buyer assumes responsibility for complying with export control regulations, it is no longer the “exporter” as defined by the EAR. In that case, the foreign principal party in interest – the foreign buyer – undertakes to export the goods itself, typically through its own forwarder. The foreign principal party in interest provides a power of attorney to its forwarder to file EEI (SED) information on its behalf. In that instance, the forwarder, as agent for the foreign principal party in interest, becomes the “exporter” under the EAR with primary compliance responsibility because the EAR states that the “exporter” is “[t]he person in the United States who has the authority of a principal party in interest to determine and control the sending of items out of the United States.”
A forwarder filing EEI on behalf of a foreign principal party in interest in a routed export transaction must be diligent in determining the correct export control classification for the goods at issue and obtaining a license if necessary. It stands in the shoes of the foreign principal party in interest, which has expressly promised to the USPPI that it will comply with the EAR and make necessary license determinations. It helps to think of the situation from a practical standpoint: in a routed export transaction scenario, it would be exceedingly difficult for BIS to hold the foreign party directly responsible for compliance errors because the foreign party does not have a U.S. presence, making the issue jurisdiction problematic. Furthermore, it would turn logic on its ear to have a foreign party – whose sole interest is obtaining U.S. goods – to ascertain licensing requirements under U.S. law. On the other hand, a U.S. agent of a foreign buyer is clearly subject to BIS jurisdiction and is easily prosecuted for wrongdoing. Thus, in a routed transaction, the enforcement axe will fall on the forwarder acting as the U.S. agent of a foreign principal party in interest if controlled goods are exported without a license.
BIS’s new posting clarifies that, in a routed transaction, the forwarder must (i) prepare the SED based on information received from the U.S. PPI; (ii) maintain documentation to support the information reported on the export declaration; and (iii) upon request, providing the U.S. PPI with a copy of the SED filed by the agent. It also must correctly determine licensing requirements. To that end, the regulations provide that the U.S. principal party in interest must provide to the forwarder the goods’ correct Export Control Classification Number (ECCN) or sufficient technical information to determine the ECCN, along with any information that it knows will affect the determination of license authority. BIS’s posting warns that “[a]n agent should avoid making commodity classifications for which it lacks technical expertise, and should obtain support documentation for ECCNs and other material.” Thus, forwarders should not attempt to determine from looking at an item whether it is controlled, which is sound advice insofar as the Commerce Control List frequently controls items based upon performance specifications that would be unknown to a forwarder.
The posting advises that a forwarder should seek backup documentation from the USPPI to support the USPPI’s classification of its goods. This is interesting insofar as the USPPI is already obliged to provide the correct ECCN; BIS apparently wants forwarders to go one step forwarder and obtain secondary evidence that the USPPI’s classification is correct. Presumably a forwarder would not be warranted in overruling or changing the USPPI’s classification given BIS’s warning that forwarders should avoid making classifications, so the practical usefulness of this step is open to question.
BIS’s new forwarder guidance does not discuss other forwarder best practices such as denied party screening. Numerous BIS enforcement actions against forwarders have alleged that the forwarder made improper shipments to denied parties, so this is a curious omission.
Other enforcement actions have indicated that a forwarder should have known that the goods it shipped were controlled even in the absence of positive classification information from the USPPI, and this runs counter to BIS’s guidance that forwarders should not make unilateral classification determinations. We believe that forwarders should, at the very least, be on guard against exporting items such as stun guns, detonators and nuclear materials regardless of the USPPI’s assertions as to their classification because they frequently require licenses, and if documents indicate that these types of goods are being shipped, it is a red flag that should prompt further investigation.
Forwarders should adopt export control compliance programs to reduce the risk of violating the export administration regulations. A compliance program is also a mitigating factor that BIS considers should a forwarder ever be accused of wrongdoing. While BIS’s guidance is helpful, it is only a good start, and forwarders should go the extra mile to implement best practices to avoid export control violations and the stiff penalties that go with them.