export compliance & foreign distribution

EXPORT COMPLIANCE &

FOREIGN DISTRIBUTION

ICPA FALL CONFERENCE

DFW AIRPORT, TEXAS

OCTOBER 28, 2013

DANIEL MARK OGDEN Attorney and Counselor at Law

Licensed Customs Broker

International Trade Consultant

Presentation Objectives

• Discuss exporters’ foreign distribution structure and how that

structure affects export compliance risks

• Provide EAR definitions of parties in the foreign distribution

structure

• Identify parties in the foreign distribution structure and the

associated compliance risks

• Provide a grid on how to approach foreign distribution export

compliance

• Provide risk management guidelines for managing foreign

distribution export compliance issues

EXPORT COMPLIANCE & FOREIGN DISTRIBUTION


Scope of Presentation

Presentation will focus on third parties in the export

distribution process and how to reduce and manage export

compliance risk due to the actions of third parties

What third parties will not be included in discussion?

Parties who assist an exporter in the export process by

providing export services but who do not play a role in

distributing the exported goods

• Freight forwarders/Customs brokers

• Banks

• Carriers


Scope of Presentation

What third parties will be included in discussion?

Intermediaries who are involved in distributing the exported

goods to the ultimate end user in a foreign country

Intermediaries Involved in Foreign Distribution

• Sales Representative

• Distributor

• Branch

• Subsidiary

Why is this important?

Exported goods may end up being re-exported without actual

knowledge but with constructive knowledge on the part of an

exporter (15 CFR § 772)

Foreign intermediaries may be a front for denied parties

and/or restricted countries

Exporter may not have effective control over the actions of a

foreign intermediary

Export compliance risks resulting from a particular foreign

distribution structure may & should factor into an exporter’s

choice of which foreign distribution structure to employ



Preliminary Foreign Distribution Issues

EAR Definitions of export, exporter, buyer, purchaser &

consignee differ from common definitions

What is an Export Under the EAR (15 CFR § 772.1)?

• “Export means an actual shipment or transmission of

items out of the United States.”

• This in effect means an export occurs when goods exit U.S.

territory from any of the 50 States or D.C.



Who is the Exporter Under the EAR (15 CFR § 772.1)?

• Exporter is “The 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.”

• Principal Party in Interest is “Those persons in a

transaction that receive the primary benefit, monetary or

otherwise, of the transaction. Generally, the principals in a

transaction are the seller and the buyer. In most cases, the

forwarding or other agent is not a principal party in

interest.”



Who is the Exporter Under the EAR (15 CFR § 772.1)?

• As a general rule, this means the exporter is usually the

last party who has contractual title to the goods prior to

the time the goods exit U.S. territory.

• INCOTERMS do not define who is the exporter of record as

well as who has export compliance obligations



Who is the Purchaser Under the EAR (15 CFR § 772.1)?

• Purchaser is “The person abroad who has entered into a

transaction to purchase an item for delivery to the

ultimate consignee. In most cases, the purchaser is not a

bank, forwarding agent, or intermediary. The purchaser and

ultimate consignee may be the same entity.”

• As a general rule, the purchaser is the party who first

obtains contractual title in the country of import




• Ultimate Consignee is “The principal party in interest

located abroad who receives the exported or reexported

items. The ultimate consignee is not a forwarding agent or

other intermediary, but may be the end-user.”

• End-user is “The person abroad that receives and

ultimately uses the exported or reexported items. The end-

user is not a forwarding agent or intermediary, but may be

the purchaser or ultimate consignee.”




• Intermediate Consignee is “The person that acts as an

agent for a principal party in interest for the purpose of

effecting delivery of items to the ultimate consignee. The

intermediate consignee may be a bank, forwarding agent,

or other person who acts as an agent for a principal party

in interest.”




• The purchaser and the ultimate consignee may be but are

not always the same party

• The purchaser and the end-user may be but are not always

the same party

• The ultimate consignee and the end-user may be but are

not always the same party



Who is a Subsidiary Under the EAR (15 CFR § 772.1)?

• Subsidiary is not defined by EAR for purposes of exports of

non–encryption items

• Subsidiary is “as applied to encryption items, means

(a) A foreign branch of a U.S. company; or

(b) A foreign subsidiary or entity of a U.S. entity in which:




1) The U.S. entity beneficially owns or controls (whether directly or

indirectly) 25 percent or more of the voting securities of the

foreign subsidiary or entity, if no other persons owns or controls

(whether directly or indirectly) an equal or larger percentage; or

2) The foreign entity is operated by the U.S. entity pursuant to the

provisions of an exclusive management contract; or

3) The foreign entity is operated by the U.S. entity pursuant to the

provisions of an exclusive management contract; or




4) A majority of the members of the board of directors of the foreign

subsidiary or entity also are members of the comparable

governing body of the U.S. entity; or

5) The U.S. entity has the authority to appoint the majority of the

members of the board of directors of the foreign subsidiary or

entity; or

6) The U.S. entity has the authority to appoint the chief operating

officer of the foreign subsidiary or entity.


Nature of Foreign Distribution Intermediaries

Independent Intermediaries

• Sales Representative

Agent of exporter

No transfer of contractual title to goods to sales representative

Sales representative is an intermediate consignee

Purchaser and ultimate consignee are generally the same

party, an end–user



Independent Intermediaries

• Distributor

Independent contractor as relates to exporter

Transfer of contractual title to goods to distributor

Distributor is purchaser and perhaps ultimate consignee

depending upon interpretation of EAR definitions of purchaser

and ultimate consignee



Controlled Intermediaries

• Branch

Direct foreign presence of exporter

No transfer of contractual title to goods

Branch will transfer contractual title to goods to local

distributors or end–users

Exporter is perhaps also ultimate consignee but not the end–

user



Controlled Intermediaries

Subsidiary

Foreign legal entity owned by exporter

Various degrees of ownership

Transfer of contractual title to goods

Subsidiary is purchaser and possibly the ultimate consignee

and end–user


Foreign Distribution Compliance Methodology

Export Compliance Control

• What is the degree of control does exporter have over the

actions of the foreign distribution intermediary?

• Degree of control can be contractually negotiated but is to

a certain extent limited by nature of foreign intermediary

• Degree of control will also relates to control over who will

be the ultimate consignees and end-users


Foreign Distribution Compliance Methodology

Export Compliance Difficulty

• What is the degree of difficulty the exporter has in

ensuring that transactions with foreign distribution

intermediary are in compliance?

• Degree of difficulty will largely be determined by nature of

the business of the foreign distribution intermediary


Export Compliance Grid

Sales Representative

• Low Compliance Control

Agent only, may be agent also of other parties

Flow of information as to ultimate consignees and end-users



Sales Representative

• Low Compliance Difficulty

Usually will know who the identity of potential ultimate

consignee or end-user

Easy to contractually require disclosure of identity of potential

ultimate consignee or end-users

Intermediate consignee



Distributor

• Low Compliance Control

Is an independent contractor

May not provide identity of potential ultimate consignee or

end-user information



Distributor

• High Compliance Difficulty

Because of nature of business, often do not know identity of

ultimate consignees or end-users

May have difficulty in contractually requiring disclosure of

potential ultimate consignee or end-users

Often unfamiliar with EAR



Branch

• High Compliance Control

Has complete control over actions

Has good information flow as to identity of potential ultimate

consignees or end-users



Branch

• Low Compliance Difficulty

Know identity of potential ultimate consignees or end-users in

most instances

Generally will sell to ultimate consignees or end-users

Key personnel will generally be familiar with EAR

Since not a local entity, may be less affected by local country

export control laws



Subsidiary


Depends upon degree of ownership

If majority or 100% owned, can control actions

Generally will have good information flow as to identity of

potential ultimate consignees or end-users



Subsidiary


If not majority or 100% owned, may not have good information

flow as to identity of potential ultimate consignees or end-

users

If not majority or 100% owned, may have conflicts with other

shareholders as to compliance requirements


INTERMEDIARIES


Subsidiary

• High Compliance Difficulty

Key personnel will not necessarily be familiar with EAR

Even if majority or 100% owned, may run afoul of local

country export control laws (Dresser France)

May reexport goods


INTERMEDIARIES

Foreign Distribution Export

Compliance Risk Management Checklist

Properly classify nature of foreign distribution

intermediary

Determine degree of compliance control and difficulty

regarding foreign distribution intermediary

Identify compliance risks associated with foreign

distribution intermediary




Identify the potential ultimate consignees or end-

users customers of the foreign distribution

intermediary

Determine if the foreign distribution intermediary

will re-export the goods

Be careful regarding requests from distributors

regarding your business relationship with Israel




Require in all distributor agreements that the

distributor has the obligation to identify potential

ultimate consignees and end-users and that the

exporter has the right to veto any sales of

distributors to ultimate consignees and end-users

based upon compliance concerns

May have to negotiate this provision as distributors

generally refrain from disclosing this information

due to competitive concerns: non-compete is one

solution




Distributor shall disclose to Exporter the identify and nationality

of any parties to which Distributor is marketing or has entered

into a contract with to purchase from Distributor any products

sold by Exporter to Distributor. Distributor shall also disclose to

Exporter the identify and nationality of any parties that have

made inquiries to purchase from Distributor any products sold by

Exporter to Distributor. Exporter shall have the right to veto any

sales of any products sold by Exporter to Distributor based upon

Exporter’s and Distributor’s legal obligations to comply with

United States export control laws and regulations, including

specifically the Export Administration Regulations.




Require that key personnel of foreign distribution

intermediaries receive training on the EAR.

Distributor/Sales Representative shall undergo training in the

application of United States export control laws and regulation,

including specifically the Export Administration Regulations. Such

training shall be required of all key personnel of Distributor/Sales

Representative that are responsible for the marketing and/or

distribution of any products sold by Exporter to Distributor or to

sold by Exporter to foreign purchasers through the efforts of Sales

Representative. Exporter shall have the right to specify the nature,

sponsorship, and frequency of such training.




Create export compliance audit programs with foreign

distribution intermediaries and require that exporter has the

right to create such an export compliance program.

Exporter shall have the right to create and administer an export

compliance audit program that will audit compliance efforts of

Distributor/Sales Representative relative to all the United States

export control laws and regulations, including specifically the

Export Administration Regulations Pursuant to such right,

Distributor/Sales Representative shall allow Exporter upon

reasonable notice to examine its accounting, business, telephonic,

email, and data records, and all marketing materials in association

with such export compliance audit.


Contact Information

DANIEL MARK OGDEN, ESQ. Attorney and Counselor at Law

Licensed Customs Broker International Trade Consultant

1000 E. Belt Line Rd., Suite 206

Carrollton, Texas 75006 972.417.1916 (voice) 972.674.8300 (fax)

www.internationaltradeattorney.com [email protected]

Twitter: tradeattorney Facebook: internationaltradeattorney

© 2013 Daniel Mark Ogden. All Rights Reserved.

export compliance & foreign distribution

Documents

export distribution

foreign intermediaries

export process

export services

foreign country intermediaries

associated compliance

ear definitions of parties

united states