Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2013 Baker & McKenzie LLP MASSACHUSETTS EXPORT CENTER EXPORT EXPO Essentials of Export Compliance: Regulatory and Enforcement Landscape December 10, 2013 Sylwia A. Lis, Partner Baker & McKenzie LLP Washington, DC

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape –Who regulates what? –Commercial and “Dual Use” Items – Commerce Department, Bureau of Industry and Security –Trade Sanctions – Treasury Department, Office of Foreign Assets Control –Defense-related – State Department, Directorate of Defense Trade Controls –Other agencies involved: Department of Energy, Nuclear Regulatory Commission, Department of Homeland Security, U.S. Census Bureau, Defense Department, intelligence community 2

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) ‏ –Overlapping, broad, and complex Rules –Overlapping jurisdiction –Complexity of regulations, prohibitions, exceptions, license requirements, recordkeeping, and reporting requirements –Significant administrative discretion –Extraterritorial: “U.S. Person” and item-based controls –Growing complexity of Export Control Reform Initiative and final rules 3

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) ‏ –Aggressive enforcement climate –Enhanced penalties –Significantly increased levels of overseas investigative cooperation post-9/11 –Significant improvements in obtaining and analyzing evidence in electronic environment ( , documents, Automated Export System trade data)‏ –SEC inquiries –Increased use of regulatory obligation to U.S. government relating to intentions with and activities in sanctioned countries –Export enforcement actions triggered by investigations in other areas –Enforcement actions relating to violations discovered during M&A due diligence and voluntarily disclosures –Enhanced compliance expectations 4

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d)‏ –Civil penalties move from USD 50K to the greater of USD 250K per violation or twice the value of the transaction –Criminal penalties –Move from USD 50K to USD 1 million –Imprisonment up to 20 years –Negative publicity –Reputational risks 5

© 2013 Baker & McKenzie LLP 6 Examples of Enforcement Actions in 2013 –Examples of enforcement actions in 2013: CompanyFineAgencyYear 1Bank of Tokyo-Mitsubishi UFJ, Ltd.$259 millionOFAC/NYFS2013 2Weatherford International Ltd.$252 millionOFAC/BIS/DOJ2013 3Raytheon Company$8 millionDDTC2013 4Aeroflex, Inc.$8 millionDDTC2013 5American Express Travel Related Services Company, Inc. $5.226 millionOFAC2013 6United Medical Instruments, Inc.$500,000*BIS2013 7Ameron International Corporation$434,700OFAC2013 8American Optisurgical, Inc.$404,000OFAC2013 9Communications & Power Industries LLC$346,530OFAC University of Massachusetts at Lowell$100,000*BIS2013 *Penalties to be suspended for two years and thereafter waived, provided that the entity commits no EAR violations during the two-year probationary period.

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d)‏ Jurisdiction: Broad Extraterritorial Reach –Export/reexport controls: apply to any person engaged in exports/reexports of items subject to U.S. jurisdiction –Sanctions generally apply to: –“U.S. Persons”: –U.S. citizens or permanent residents (“green card” holders), wherever located or employed –Companies organized under U.S. law and their foreign branches (but not separately incorporated foreign subsidiaries)‏ –Any person located in the United States –Iran and Cuba –“U.S. Persons” as defined above –Plus entities owned or controlled by U.S. Persons (e.g., separately incorporated foreign subsidiaries) 7

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) U.S. Export Controls –Two key sets of regulations –Export Administration Regulations (EAR)‏ –International Traffic in Arms Regulations (ITAR)‏ –Administered by: –Commerce Department, Bureau of Industry and Security (BIS)‏ –State Department, Directorate of Defense Trade Controls (DDTC)‏ 8

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) Export Control Compliance: Two Critical First Steps –Determining which regulations apply: Is item to be exported subject to ITAR or EAR? –Classifying the item: Which control number (under U.S. Munitions List (USML) or Commerce Control List (CCL)) applies to the item?) –Once these questions are correctly answered, export control requirements are fairly easy to apply – based on destination, end user, and end-use 9

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) Exports: Why care whether ITAR or EAR apply? License? EAR Commerce Control List USML NONE ALWAYS 10

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) U.S. Sanctions –Targets of U.S. sanctions: –Sanctioned countries –Sanctioned country governments –Includes parties owned or controlled, or acting on behalf of governments –Sanctioned parties (located worldwide)‏ 11

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) Summary of U.S. Sanctions Comprehensive Sanctions (1)‏ –Cuba and Iran –Apply to U.S. Persons and U.S. owned/controlled entities –Full embargo Comprehensive Sanctions (2)‏ –Sudan and Syria –Apply primarily to U.S. Persons –Full embargo Limited Sanctions –North Korea (limited OFAC sanctions)‏  Nearly total export/reexport embargo under the EAR –Burma (most sanctions lifted in 2012)‏ List-Based Sanctions (SDNs)‏ –Includes parties designated under various U.S. sanctions programs, including those related to:  W. Balkans, Belarus, Cote d’Ivoire, DR Congo, Iraq, Lebanon, Liberia, Libya, Somalia, Yemen, Zimbabwe  Anti-terrorism, narcotics trafficking 12

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) U.S. Trade Sanctions: Basic Prohibitions –Target either countries or restricted persons (without reference to a country)‏ –If country-based program, restrictions apply to any dealings related to the country or to the government of the country (including any state-owned or –controlled enterprises, wherever located)‏ –“Specially Designated Nationals or Other Blocked Persons” are features of both country-based and restricted person programs –Cover a wide range of activities, not limited to export/import –Prohibit nearly all forms of U.S. Person involvement in transactions, direct or indirect –Prohibit U.S. Person “facilitation” of transactions by non-U.S. persons that are prohibited as to U.S. Persons 13

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) Ag/Med Sales –In general, favorable licensing policies and procedures –But licensing requirements and procedures vary depending on the sanctioned country and products at issue –Specific vs. general licenses –Overlapping OFAC and BIS jurisdiction 14

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) ‏ Examples of Activities That May Trigger Export Control and Trade Sanction Compliance Issues –Foreign sales –Donations to parties outside the United States –Outsourcing (e.g., manufacturing agreements)‏ –R&D, collaboration, licensing activities involving parties outside the United States –R&D activities involving foreign nationals in the United States –Submissions to foreign governments for regulatory purposes 15

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) The Export Control Reform Initiative –Initiated by Defense Secretary Robert Gates in 2010 –Key objectives of Export Control Reform  Provide greater clarity and reliability through:  A single control list administered by a single agency  Creating a positive list of controlled items, phasing out “catch all” Provisions  Eliminating conflicting or inconsistent standards and definitions between the ITAR and the EAR 16

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) The Export Control Reform Initiative –Key objectives of Export Control Reform (cont’d)  Establish a single enforcement coordination agency  Focus cnforcement resources on the most sensitive national security and foreign policy export control objectives  Provide for greater uniformity and consistency in resolution of export enforcement proceedings –First major codification of the Export Control Reform Initiative are the regulatory amendments to the EAR and the ITAR issued on April 16, 2013  EAR: 78 Federal Register  ITAR: 78 Federal Register –Amendments became effective on October 15,

© 2013 Baker & McKenzie LLP Regulatory and Enforcement Landscape (cont’d) Export Control Reform Initiative: Key Elements –Creation of the 600 Series of controlled items on the Commerce Control List (CCL)  Military Items of lesser sensitivity moved from the USML to the CCL, and thereby transferred from ITAR jurisdiction to EAR jurisdiction –Expansion and clarification of license exceptions (Part 740 of the EAR) to define the terms and conditions of exports of 600 Series items –Creation of specific definition of the concept of “Specially Designed” for export control purposes  Section of the EAR  Section of the ITAR 18

© 2013 Baker & McKenzie LLP Questions? 19 Contact Information: Sylwia Lis Partner Baker & McKenzie LLP Phone: (202) :