National Council on International Trade and Development, NCITD Meeting on March 9, 2011

National Council on International Trade and Development, NCITD Meeting on March 9, 2011 The meeting began with a presentation by the Acting Associate Director for Enforcement, Office of Foreign Assets Control ( OFAC ), U.S. Department of Treasury, Thomas P. Freddo Mr. Freddo s presentation focused on the changes in the in the Enforcement Office this past summer as part of the re-organization of all OFAC enforcement operations, with the objective of strengthening the enforcement function. As a metric for measuring the effect of the re-organization, he noted that in Calendar Year 2010, there were 27 cases with a finding of a violation, settlement or penalty, with over $2 million collected for the year. He noted that six of these cases were carried out jointly with the Commerce and the Justice Departments. Freddo expressed confidence that officials from these and other agencies would invariably involve his office in any cases involving IEEPA. In the future, he expects to see more insurance and freight forwarder cases as well as those involving the Securities and Exchange Commission and Bureau of Industry and Security. There is an average of 1200 cases opened every year. So far, in 2011 there are 10 cases involving penalties and one finding of violation. In the question and answer period he spoke about the Office s back log of pending cases. Last year it opened 500 cases while closing 600 in the same period, with current cases stretching up to some 20 months in length. In terms of the country focus of their work, there were many Iran-related cases and Sudanese cases, surprisingly outnumbered those from Cuba. In his view, one of his Office s most important enforcement tools is the ability to change the duration and provisos in any given OFAC license. Great weight is accorded to voluntary self disclosures and any related mitigation efforts. In concluding, he pointed to their work on an improved data management system with metrics similar to those in place at the BIS. Asked about the extent of his 1

Office s outreach efforts, he mentioned that the Office headed up by Dennis Woods is responsible for the training and outreach function. Richard Sawaya Director USA*Engage (a private sector organization) Mr. Sawaya reviewed the history of sanctions-related legislation,starting with the Iran-Libya Sanctions Act of 1996 through the more recent efforts to sanction Libya, Sudan, as well as Iran. The Iran-Libya bill s enactment led in part to the creation of his organization USA*Engage. In regard to Libya, he noted the overwhelming concern of companies and governments was to evacuate safely their personnel and citizens from the country, and he observed that the United States and Canada were the only countries that have put in place comprehensive financial sanctions targeting the top leadership of that country. Last year, that country exported about 2 million barrels a day, almost all of it to Europe. But now that flow of oil has been cut to less than one million barrels a day, with energy markets reacting strongly to developments in the Middle East as well as in North Africa. In regard to the recent referendum and declaration of independence in the south of Sudan, there was a much anticipated policy of providing sanctions relief to the new state; however, it is unlikely to materialize so long as the administration is unable to certify that the government in Khartoum is no longer engaged in training, supporting or otherwise aiding the Lord s Resistance Army. In this regard, he mentioned H.R. 895, sponsored by Reps. Royce and McGovern. He went on to describe the evolution of sanctions on Iran from the Iran-Libya Sanctions Act ( ILSA ) through the Comprehensive Iran Sanctions and Divestment Act of 2009( known as CICADA ) targeting a wide range of investments into that country. And no sooner was the ink dry on this legislation Congress began demanding evidence of immediate implementation from the Obama Administration. And the most recent iteration, the Iran Transparency and Accountability Act, sponsored by Rep. Dan Burton, requires much more reporting and SEC disclosures, extending the reach of CICADA to even more companies exporting to Iran. With the Venezuealan oil company, Pedevesa, accused of selling gasoline to Iran, the legislative focus is shifting to Latin America and to Asia where China s relationship with Tehran is under increasing scrutiny. When asked whether Pedevesa was the next target, Assistant Secretary of State Valenzuela said, We are looking into it. 2

Finally, he notes that individual American states are getting into the act, putting sanctions laws on the books that are in some cases inconsistent with Federal statutes. Sawaya summed up the numerous sanctions-related bills as a large nuisance in the foreign policy- making process, contending that unilateral sanctions rarely attain their objectives. He went on to stress that extending sanctions to all companies that lift Iranian crude is likely to counterproductive in so far as it will drive up the price at the pump for many Americans. Asking rhetorically who has been sanctioned thus far, he responded to his own question by citing a Swissbased oil trading company. The final speaker was the Assistant Secretary of Commerce for Export Administration Kevin J. Wolf Bureau of Industry and Security U.S. Department of Commerce Mr. Wolf talked about the big picture. There are certain deadlines that have not been met, but everyone in the Administration is working very hard to accomplish export control reform. He summarized the ongoing export control reform efforts, stressing the fact that its overall objective was focused on promoting U.S. national security including promoting greater cooperation and inter-operability, while ensuring that the U.S. Government will no longer have to adopt policies leading to the design out of U.S. parts, components, equipment, or technology because of the Export Administration Regulations ( EAR ) or the International Traffic in Arms Regulation ( ITAR ). He thanked the members of the exporting community for their numerous and thoughtful comments on the department s regulation on category 7 of the U.S. Munitions List as well as the Strategic Trade Authorization ( STA ), providing license free treatment for exporters involving some 127 countries. Of these, 120 had received almost no dual-use exports in recent years. Acknowledging that the identification of subsequent buyers under the draft STA regulation was controversial, he was determined to ensure foreign consignees were notified of the coming changes. He expected 3,000 fewer licenses when the final regulation is adopted. Wolf cited a speech that he recently gave in Germany, which can be found at this address: http:/www.nctid.org/documents/kwolfspeech.pdf. Mr. Wolf stated that the general consensus of the written comments was that no one liked having to identify subsequent buyers of exported products. Re-exports were also a big concern, and also the definition of what constitutes membership in a control regime differs from country to country. But the goal of the STA is to 3

put foreign consignees on notice of coming changes, and to expedite the signing of a document of understanding. Cautioning that the list review efforts and the removal of items from the USML, with DTSA as the lead agency, will not amount to a decontrol policy, because many of the items will remain controlled by the Commerce Control List through a three-level tiering process, according the highest priority to items deemed of greatest significance to U.S. national security. He was also quick to note that the CCL allowed for the de minimis treatment of items while the ITAR did not. All told, he expects about 30,000 ITAR licenses to shift over to Commerce or be otherwise modified when the reform effort is completed. He expects that a place will have to be created in the CCL for transferred USML items and that new definitions will have to be completed within the USML. The Defense Department is taking the lead on this exercise. He expects to complete the Category 7 (of the ITAR) exercise and the STA license exception effort to be completed by the end of April, and three or four more USML categories, most likely 1,2, 5, and 15 to be finished by the end of June. He is working to harmonize the definitions across agencies including the term specially designed. He also expects to have a working draft of a common definition of that term by the end of April. Another key priority is the creation of a single licensing form which he expects to provide in draft form to the department s technical advisory committees. BIS will need $2 million to complete work on the full implementation of a fully electronic licensing system. Encryption issues are also under review and additional regulations are likely this year. 4

Regulations and Procedures Technical Advisory Council, RPTAC Meeting of March 15, 2011 In room 4830 of the Commerce Department Kevin Wolf Assistant Secretary of Commerce for Export Administration Assistant Secretary Wolf began the meeting by noting that the comments submitted regarding the proposed Strategic Trade Alternative ( STA ) license exception had solicited the second greatest response from the exporting community in the history of regulations, almost 100 separate comments had been submitted, and changes were already underway. There is less likely to be as many product categories included in the final version of the regulations, nor will there be there quite as many countries eligible to file for the exception. There were thousands of pages of comments filed, and the Bureau of Industry and Security ( BIS ) is still going through all the comments. Wolf noted that companies will have, as he put it, two bites of the apple. They have already commented, but they will be able to comment once again when the final version of the regulation is issued in proposed form. Wolf was interested in industry comments, because companies are more likely to know what the effect of the regulation will be when it is put into effect. BIS is a regulator, not an actor, and it needs a second perspective. Companies are also more likely to have real life examples of foreign availability of their products, but they need to be detailed and specific when they report to the Government about that foreign availability. Generalities are not helpful. Wolf promised to keep information entirely secret if companies need to have their identities concealed to avoid the potential for retaliation. Wolf also noted that the inter-agency group had not yet agreed on a new tiering strategy, and this is very important, because an item s chances of being approved increase dramatically if it is one of the bottom two tiers of control. Almost every company that submitted comments has argued that its products do not deserve to fall into the top control tier, because they know that this top tier will greatly diminish their chances of getting license approval when the time comes to apply for a license. Wolf went on to say that he would agree that encryption needs a positive list the way that the International Traffic in Arms Regulations regulators are trying to devise a positive list for the products that they control. But, in both cases, it is not as easy as it seems. Wolf noted that the three main export control agencies: Commerce, State, Defense, and Treasury (through the Office of Foreign Asset Control OFAC) are 5

moving closer to a common data base and a common list of who the bad guys are. Soon data will move smoothly among the various export control agencies. Kevin Wolf concluded by promising that the proposed STA regulation will be issued in proposed form in early April, so progress is really being made. John Priecko, President and Managing Partner of Trade Compliance Solutions, John Pisa-Relli, Trade Compliance Legal Director for Thales USA, and Ben Lindorf, Associate Counsel and Export Compliance Manager, the Institute for Defense Analysis Presented a study regarding best practices for export compliance John Priecko pointed out that the Commerce Department has 162 pages of guidance on creating a compliance system, while the State Department has only four pages on the same subject. This group s objective is to get rid of the differences and inconsistencies among the control agencies and clarify the issue for the practitioners. It also wants to share best practices among its members and among the general exporting community. Mr. Priecko and his colleagues raised a number of interesting questions about what constitutes a good compliance system. The following questions give a flavor of the problems and questions that export compliance people have: What is the standard for screening? How many times should an item be screened? Are there gaps and inconsistencies between the State and Commerce Departments advice on screening. Should companies be told the exact manner in which to screen? Of course the answer is no. Screening is risk-based. This group s idea is to provide practical guidance -- not hard and fast rules. What is an export? How do you organize authority over exports within your organization? The Nunn-Wolfowitz study of ten years ago is still the best source for 90 percent of the questions. But there are gaps. No one size fits all. The study that was presented is not meant to be proprietary. It is meant to be a dialog and a debate among the exporting community, and that is what John Priecko and his colleagues tried to achieve in this presentation. Hillary Hess Director of Regulatory Affairs, Bureau of Industry and Security, 6

U.S. Department of Commerce Ms. Hess emphasized that it has been a busy year, with many new regulations being issued. In January alone, there were final rules on encryption and on the Chinese Verified End Users ( VEU ). January also saw new regulations taking certain Indian companies off the BIS watch list as potential proliferators. A large number of companies came off that list, pursuant to the new United States-India technology arrangement. March also saw a new arrangement for gaining so-call SNAP-R authority to submit licenses electronically to BIS. The process was simplified and put on-line, removing much of the previous paperwork involved in the process. Hess noted that BIS is still working on the STA license exception, but it is ready to be released in early April. The remaining questions regard how many CCLs are covered and how many countries are eligible. The STA regulation is in its fourth version now, and Hess predicted that it is likely to be further revised. BIS is also still looking for more detailed foreign availability information and more specificity about the technology of various products, so that it will be easier to place them on the proposed three tiers for control purposes. Hess assured the attendees that 2011 promises to be a busy year. 7

March 15, 2011 Seeking clarity, consistency and specificity Coalition for Excellence in Export Compliance (CEEC) A Presentation for the Regulations and Procedures Technical Advisory Committee by: John Priecko, President and Managing Partner, Trade Compliance Solutions John Pisa-Relli, Trade Compliance Legal Director, Thales USA Inc. Ben Lindorf, Associate Counsel & Export Compliance Manager, Institute for Defense Analyses 1 Coalition for Excellence in Export Compliance PURPOSE OF OUR MEETING TODAY Inform the Regulations and Procedures Technical Advisory Committee (RPTAC) who the CEEC is and what we are doing regarding best practices and trade compliance standards including a brief overview of our history, mission, priorities, working group initiatives, timelines and other considerations Learn more about what the RPTAC is doing in the same or related areas and what the mutual goals, objectives and synergies are Discuss the benefits of working together to better articulate and harmonize best practices and therefore enhance compliance Determine Action Items and a way ahead that benefits our collective interests and better and more thoroughly articulates agreed on trade compliance best practices 2

Coalition for Excellence in Export Compliance MISSION Identify and recommend export compliance ce best practices ces that provide practical guidance to better detect and prevent violations of law 3 Coalition for Excellence in Export Compliance ORGANIZATION INDUSTRY PARTNERS CORE GROUP ADVISORY COMMITTEE WORKING GROUP Best Practices Matrix Analysis WORKING GROUP Nunn-Wolfowitz (N-W) Task Force Report: Industry Best Practices Regarding Export Compliance Programs SUPPORTING MEMBERS 4

US - Commerce US - State US - Sentencing US - Nunn Compliance Guideline Element Japan UK Department Department Commission Wolfowitz Senior Corporate Commitment Responsible Individuals Training/Communications Recordkeeping & documentation Audits Compliance Standards & Processes* Government Notification Integrate w/quality Management Knowledgeable Management History of Management Incentives/Discipline Corrective Actions Process to Disclose Violations Coalition for Excellence in Export Compliance ACTION ITEMS/PRIORITIES Best Practices Matrix Analysis Working Group 1. US SIDE-BY-SIDE COMPARISON: Update and synthesize existing industry and government export compliance best practices and other related guidance [i.e. US Sentencing Guidelines, Commerce, Homeland Security/Customs and Border Protection, State, Foreign Trade Regulations, N-W ] 2. STATE DEPARTMENT SETTLEMENT SIDE-BY-SIDE COMPARISON: Mandated compliance measures over the last 5 years 3. INTERNATIONAL SIDE-BY-SIDE COMPARISON: Update and synthesize country-by-country industry and government export compliance best practices 5 6 Nunn-Wolfowitz Task Force Report- Export Compliance Best Practices Management Commitment Compliance Council Export Compliance Personnel Export Compliance Instruction Manuals Export Compliance Intranet Site Training and Education License Application Process Implementing License Authorizations Foreign Nationals Recordkeeping Audits Handling Suspected Violations Trade Compliance Core Best Practices - Top Ten Essentials AGENCY & INDUSTRY BEST PRACTICE GUIDANCE (Side-by-Side Comparison Example] (As of 3/12/2008) Department of State / Directorate of Defense Trade Controls Organizational Structure Corporate Commitment and Policy Identification, Receipt and Tracking of International Traffic in Arms Regulations (ITAR) Controlled Items/Technical Data Re-Exports/Retransfers Restricted/Prohibited Exports and Transfers Recordkeeping Internal Monitoring Training Violations and Penalties Department of Commerce / Bureau of Industry and Security Export Management System: - Management Policy - Responsible Officials - Recordkeeping - Training - Internal Reviews - Notification - Order Processing System - Screening Technology Control Plan: -Corporate Commitment - Physical Security Plan - Information Security Plan - Personnel Screening Procedures - Training and Awareness Program Department of Homeland Security / Customs and Border Protection Have Management s Commitment to Compliance State Compliance and Cost Goals Develop Formal Policies Establish Training Programs Conduct Internal Control Reviews Create Compliance Group Access Executives for Needed Resources Develop Compliance Requirements for Suppliers Establish a Recordkeeping Program Partner with CBP U.S. Sentencing Commission / U.S. Sentencing Guidelines Establish Standards and Procedures to Prevent and Detect Criminal Conduct High Level Oversight and Responsibility for Compliance and Ethics Program Exclude from Program, Persons Known to Have Committed Violations o Monitoring/Auditing of Program to Ensure it is Followed and Effective Procedure for Employees to Seek Advice and Report Problems Incentives to Follow Program and Discipline for Those Who Do Not Appropriate Response When Violations Are Detected, to Prevent Recurrence. Include Program Modifications as Warranted [SOURCE: John Priecko and Mike Turner matrix analysis of best practices and related guidance ; From the PowerPoint presentation Trade Compliance Core Best Practices Top Ten Essentials, to the International Compliance Professionals Association, San Antonio TX, March 12, 2008 ]

Coalition for Excellence in Export Compliance ACTION ITEMS/PRIORITIES N-W Task Force Report: Industry Best Practices Regarding Export Compliance Programs Working Group 1. Reevaluate the existing N-W Report & identify specific, inconsistencies, gaps and determine what needs to be done to redefine a baseline for the 21 st century with greater granularity/specificity as appropriate 2. Take a deeper dive approach into US best practices including: automation, education and training, deemed exports/foreign nationals, digital and electronic communications, export jurisdiction/ classification, screening, recordkeeping, regular internal and external audits, internal and external investigations and disclosures 7 Coalition for Excellence in Export Compliance N-W 12 KEY AREAS (July 25 th, 2000) 1. Management Commitment 2. Compliance Council 3. Export Compliance Personnel 4. Export Compliance Instruction Manuals 5. Export Compliance Intranet Site 6. Training and Education 7. License Application Process 8. Implementing License Authorizations 9. Handling Foreign National Issues 10. Recordkeeping 11. Audits 12. Handling Suspected Violations 8

Coalition for Excellence in Export Compliance ACTION ITEMS/PRIORITIES Certification (This Item was deferred as a potential longer-term initiative) Discuss and assess positives, negatives, standards, methodology and associated considerations for certifying i individuals id or an organization s export compliance program as meeting well-defined best practices through credible, recognized, independent, unbiased, third-party oversight and validation 9 IN CONCLUSION Other Considerations, Questions, Comments Synergy? Value-Added? The Way Ahead? Action Items? Closing Remarks 10

SUPPLEMENTAL MATERIAL In conjunction with the Coalition for Excellence in Export Compliance (CEEC) presentation before the US Department of Commerce, Bureau of Industry and Security, Regulations and Procedures Technical Advisory Committee, March 15, 2011 Trade Compliance Core Best Practices Top Ten Essentials 1. Commitment Globally, Horizontally and Vertically 2. Written & Followed Standardized Policies, Processes and Procedures 3. Initial & Recurring Education & Training 4. Effective Organization & Staffing 5. Timely & Accurate Jurisdiction & Classification 6. Cradle to Grave License Management 7. Thorough Due Diligence 8. Complete Documentation / Recordkeeping 9. Periodic External & Internal Assessments / Audits 10. Dealing with Violations / Non-Compliance Trade Compliance Solutions Without these you don t have an effective and comprehensive World Class program. Trade Compliance Core Best Practices Top Ten Essentials Independent Accurate Layered Proactive Dealing with Violations / Non-Compliance Periodic External & Internal Assessments/Audits Prevention Complete Documentation / Recordkeeping Thorough Due Diligence Objective Disciplined Security Automated Consistent Quality Multi-Media Cradle to Grave License Management Timely & Accurate Jurisdiction & Classification Effective Organization & Staffing Initial & Recurring Education & Training Integrated Checklists Communication Varied Validated Active Written & Followed Standardized Policies, Procedures and Processes Commitment Globally, Horizontally and Vertically Current Involved Trade Compliance Solutions SOLID FOUNDATION SOURCE: John Priecko and Mike Turner analysis of best practices and related guidance published in the Nunn-Wolfowitz Task Force Report: Industry Best Practices Regarding Export Compliance Programs and online at the US Department s of Commerce, Homeland Security and State websites along with Chapter 8 of the US Sentencing Commission, US Sentencing Guidelines. From the PowerPoint presentation Trade Compliance Core Best Practices Top Ten Essentials, to the International Compliance Professionals Association, San Antonio, Texas, March 12, 2008