Outsourcing the design and manufacture of products, components, and software to foreign contractors has become an important part of manufacturing in the United States. However, if the affected items are subject to U.S. export restrictions, outsourcing the design and/or manufacturing of such items to foreign companies may raise significant export control requirements – and a potential legal liability – for the US companies involved.

Export requirements in foreign manufacturing can arise in several ways. If the item in process or its components require an export license for export to a particular country under the Export Administration Regulations (EAR) or International Traffic in Arms Regulations (ITAR ), the transfer of technical information relating to these items to the foreign country will frequently also require an export license unless a license exception applies. Thus, if the U.S. company transfers engineering drawings, plans, or production specifications to the foreign seller for use in the foreign production of the item, the U.S. company will need to consider whether an export license is required before this transfer. Even if the foreign supplier is simply developing technology, intellectual property or software, if the US company sends specifications, product requirements or similar technical data to the foreign party, the transfer may require an export license – even if no physical product is actually produced. abroad. In some cases, the technology transfer alone may require a license even if the final product does not.

Likewise, if the U.S. company works collaboratively with the foreign company’s engineers and designers during the development process, including through phone calls and emails, conference calls, webinars, zoom calls or video conferences, the transfer of technical data controlled by US persons may require a license. Under the deemed export rule under EAR and ITAR, even transfers to foreign persons[1] in the USA. are considered an export and may require a license.

There are other ways the requirements can arise as well. If the foreign company is subject to U.S. sanctions, for example, if it is on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons List (the “SDN List”) (or if it is 50% or more owned by parties listed on the SDN List), U.S. Persons are prohibited from entering into most commercial transactions with such parties, including for the design or manufacture of items, unless a license is available. Similarly, if a party is on the Bureau of Industry and Security (BIS) Entity List, U.S. companies are prohibited from exporting EAR-subject items to those parties without a license or license exception – the items subject to the EAR include physical products, technology and software.[2]

Additionally, if the foreign manufacturer is located in a country subject to OFAC sanctions (such as Syria, Iran, Cuba, North Korea, or the Ukrainian regions of Crimea, Donetsk, and Lugansk) or subject to the requirements listed in Part 746 of the EAR, export restrictions may apply. Restrictions may also apply if the technical information transferred overseas will be used in a “prohibited end use” as set forth in Part 744 of the EAR, and/or transferred to a military or military intelligence end user or used for military or military use. the end use of the intelligence as set out in Part 744 of the EAR. Additionally, for transfers to countries such as Russia and designated regions of Ukraine, more restrictive export requirements may apply here).

The BRI recently announced a major enforcement case involving these issues. In this case, American companies were outsourcing 3D printing manufacturing for space, satellites, rockets and other controlled prototypes to companies in China. According to the BIS press release, a US intermediary company received technical data and export-controlled drawings from US companies and provided them to manufacturers in China to 3D print the items without US government permission. . Manufactured items were then imported into the United States for supply to prime customers. The BIS has issued a temporary denial order to halt further transfers and is currently conducting an enforcement investigation into the transactions in question. Assistant Secretary of Commerce for Export Enforcement, Matthew S. Axelrod, issued the following statement regarding the case:

Outsourcing 3D Printing of Space and Defense Prototypes to China Harms US National Security… By Sending Their Customers’ Engineering Drawings and Blueprints to China, These Companies May Have Saved a Few Dollars , but they did so at the collective expense of protecting the US military. Technology.

In the statement, the BIS also reminded U.S. businesses that they are prohibited from “taking any action that facilitates [the Chinese companies] taking possession or control of items subject to EAR that are intended for export. Therefore, US companies in this case could be held liable for export violations as well as for taking such actions – going through an intermediary does not automatically shield US companies from liability. Failure to obtain required export authorizations can result in significant penalties for US companies, including up to $1,000,000 in fines and 20 years imprisonment for company employees per violation. A copy of the BIS version in this case is available here.

In the face of current supply chain issues, US companies are under significant pressure to meet customer price and delivery demands. However, export control laws continue to apply even in these difficult times. Managing export control requirements for offshore outsourcing is an important checklist step in an overall export compliance effort.

[1] The term “foreign person” is defined in Part 772 of the EAR as follows: foreign person. Any natural person who is not a lawful permanent resident of the United States, a citizen of the United States, or other protected person as defined by 8 USC 1324b(a)(3). It also means any corporation, trade association, partnership, trust, corporation, or any other entity or group that is not incorporated in the United States or organized to do business in the United States, as well as international organizations, foreign governments and any agency or subdivision of a foreign government (eg, diplomatic mission). “Foreign person” is synonymous with “foreign national”, as used in the EAR, and “foreign person” as used in the International Traffic in Arms Regulations (22 CFR 120.16). This definition does not apply to Part 760 of the EAR (Restrictive Trade Practices or Boycotts).
[2] Restrictions may also apply to transfers to parties on the EAR Denied List, Military End User List, and Unverified List.

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