The Accidental Exporter: Five Things Businesses Need to Know About the "Deemed Export" RuleJanuary 06, 2011
Effective February 20, 2011, U.S. Citizenship and Immigration Services will require companies petitioning for certain nonimmigrant visas for foreign workers (such as the H-1B) to certify that they have -- or do not need -- an export license for their technologies. This change may create significant extra work for your company and could leave you wondering -- why is the government asking me to certify information about export licenses if none of my products ever leave the country? But that's the unpleasant surprise for many businesses -- you could face large fines and criminal liability for violating U.S. export laws even if you never send a single product outside the United States.
While this may seem strange at first, the "deemed export rule" is a logical extension of U.S. export law. Put in its simplest terms, the deemed export rule provides that making certain technology or information available to a foreign national -- even if that person is here in the United States -- is equivalent to exporting that technology or information to the foreign national's home country. An export of technology or software is "deemed" to occur when it is released to a foreign national within the United States. In the eyes of the law, giving an Iranian citizen a tour of your biotech laboratory could be equivalent to exporting biotechnology to Iran.
While the so-called "deemed export" rule has many nuances that require careful legal guidance, here are five things you should know:
1. Your instincts may not always be correct when deciding how the "deemed export" rule applies.
To many businesses, the "deemed export" rule is counterintuitive. Even to experienced practitioners, the rule requires careful analysis when deciding how it applies to a particular individual or technology. Accordingly, you should refrain from relying on a "common sense" understanding of how the rule applies in a given situation.
The first step in deciding whether the deemed export rule applies is determining whether a license would be required to export the technology directly to the foreign country in question. The application of the export licensing rules can be complex and sometimes unexpected, as both the product itself and the destination country must be considered. A widget may require a license if sent to one country, but not if sent to another country.
With regard to the product, technologies with both civil and military applications (so called "dual-use technologies") generally require licensing for transfer to foreign nationals. These technologies may also be subject to other export restrictions involving national security issues. However, there is no single "right" answer -- each technology should be reviewed on a case-by-case basis.
Because the rule is also specific to the person involved, issues of nationality and residence can quickly complicate the analysis. For instance, consider a factory tour given to a businessperson visiting from Germany. If the individual is a resident of Germany, but a citizen of Iran, or perhaps holds dual German and Iranian citizenship, the application of the rule is less straightforward. Similarly, there are complexities that may arise in operations outside the United States if, for instance, a company's German subsidiary incorporates the U.S. home office's technology into a product that is then handled at the German subsidiary by an Iranian immigrant.
2. Intangibles -- including many types of information -- are also subject to restrictions under U.S. export law.
Exporting information can be just as problematic as exporting widgets. We often think of exports as physical items, but it is also possible to export intangible "products." For instance, under U.S. export law "technology" includes information necessary for the "development," "production," or "use" of a product. If you know or intend that a technology will be transmitted abroad, releasing that technology could be considered an "export."
Quite apart from the deemed export rule, this catches many business travelers off-guard. Business people and researchers often do not consider that taking a laptop on a business trip could be considered an export of items on that laptop to their destination country.
3. You can export technology without ever sending anything out of the country.
Nothing needs to leave the United States for an "export" to occur. While we usually think of an export as sending something out of the country, the deemed export rule states that a release of technology or source code to a foreign national is an "export" to that individual's home country -- even if that individual never leaves the United States with the information.
Nor does the individual need to receive a physical copy of the information for a deemed export to occur. Technology is considered "released" for export as soon as the foreign national has seen or heard the information. For instance, if a German foreign national visits your factory for a tour, and has visual access to technology or reviews blueprints and schemes, you have effectively exported that technology to Germany for purposes of U.S. law.
4. Your own employees could be subject to the deemed export rule.
While most foreign employees will not be subject to the deemed export rule if they do not have access to sensitive information, employers should make sure to review their foreign employees and their job duties to make sure licensure is not needed. To the surprise of many businesses, even foreign nationals who are in the United States legally, often under long-term professional visas, can be subject to the deemed export rule. Thus, for instance, a company may need an export license to provide
access to technology or source code to its own employed German H1-B professional. The same applies to J-1 researchers, O-1 extraordinary ability employees, and L-1A intracompany executives -- among others.
There are exceptions -- the most notable of which is for any foreign national who has been granted a permanent resident card, commonly called a "green card." However, short-term visitors are also subject to the law, including scholars, researchers, tourists, and visiting businesspeople. The important point is that the "deemed export" issue must be analyzed separately for each and every nonimmigrant employee and technology.
5. Fines and penalties for unapproved deemed exports can be harsh, and the government is increasing enforcement.
Deemed export violations are no small matter. In the past, the government has not been particularly diligent in pursuing deemed export violations. That has been changing -- as evidenced most recently by the change in the immigration form that now requires companies petitioning for certain
nonimmigrant visas for foreign workers to certify that they have -- or do not need -- an export license for their technologies.
The potential penalties are severe. A single civil violation can result in a $250,000 civil fine or twice the amount of the transaction. A criminal violation can result in a penalty of up to $1 million per violation and imprisonment for up to 20 years.
Although complex, with experience, an informed business can navigate the deemed export rules with confidence. The key is to be aware of the issue and to avoid common mistakes that can happen simply because your employees do not know any better. As always, it makes sense to seek guidance if you are unsure. The White Collar Defense and Investigations Practice Group at Godfrey & Kahn can help your business with any international trade compliance questions you may have.