Export Controls 101: What Every Tech Company Needs to Know

Imagine you are a growing tech company, developing innovative software that captures international interest. You are excited to collaborate with a foreign partner to explore new markets. Before diving in, there is a critical aspect you must consider—export controls. These regulations might determine whether you can proceed or restrict certain types of technology sharing.

Export controls are often overlooked until they cause business interruptions. They can impact various activities, including:

• Sharing technical data with foreign nationals, even if they are located within the U.S.

• Allowing foreign customers to access your cloud services.

• Shipping physical products or transferring digital technologies overseas.

• Collaborating with research teams or business partners in other countries.

In 2023, ZTE Corporation agreed to pay $892 million for violating U.S. export controls – one of the largest penalties ever imposed. Even seemingly minor violations can result in penalties exceeding $300,000 per incident. For tech companies, export control violations aren’t just abstract risks – they’re business-altering events that can halt operations overnight.

Understanding and complying with export controls can mean the difference between successful global expansion and significant regulatory trouble.

What Are Export Controls, Really?

At their core, export controls are regulations designed by the government to limit the international distribution of certain technologies, products, and services. These restrictions are in place for reasons like national security, foreign policy, or to prevent the proliferation of dual-use technologies—those that can be used for both civilian and military purposes.

The U.S. government enforces export controls primarily through three key regulatory regimes:

1. Export Administration Regulations (EAR)

• Administered by: Bureau of Industry and Security (BIS).

• Scope: Covers commercial and dual-use items.

• Relevance: Most commonly applies to tech companies, especially those involved with computing, electronics, and communications technologies.

2. International Traffic in Arms Regulations (ITAR)

• Administered by: U.S. Department of State.

• Scope: Regulates military and defense-related articles and services.

• Relevance: While ITAR is mostly focused on defense items, certain high-performance computing and advanced encryption technologies can fall under its purview.

3. Office of Foreign Assets Control (OFAC) Sanctions

• Administered by: U.S. Department of the Treasury.

• Scope: Restricts dealings with specific countries, entities, and individuals.

• Relevance: OFAC rules affect companies engaging in financial transactions or those working with sensitive regions.

Together, these regulations aim to ensure that sensitive technology does not fall into the wrong hands, thus safeguarding national security and maintaining the U.S.’s strategic advantages.

Common Misconceptions About Export Controls

Export controls often come with misconceptions that can lead to serious compliance failures. Let’s clear up a few common myths:

Misconception #1: “We don’t ship physical products, so export controls don’t apply to us.”

Reality: Export controls extend far beyond physical shipments. They include software downloads, access to cloud-based services, technical knowledge sharing, and even public speaking engagements at international conferences where controlled information is disclosed.

Misconception #2: “We’re too small for export controls to apply.”

Reality: Export controls apply to companies of all sizes. Startups and small businesses are not exempt, and violations can result in severe penalties regardless of company size—including fines, loss of export privileges, and potential criminal charges.

Misconception #3: “Our technology is publicly available, so it’s exempt.”

Reality: Even technologies that are commercially available may be subject to controls if they meet certain technical thresholds or have features that raise national security concerns. Careful classification is essential.

Key Concepts for Tech Companies

Deemed Exports

A “deemed export” occurs when controlled technology is released to a foreign national, even if this happens within the U.S. For tech companies, this means that:

• Granting an international employee access to controlled technical data could be treated as an export to that person’s home country.

• Engaging in technical discussions, training, or sharing source code with foreign nationals can constitute a deemed export.

Technology Classifications

Correctly classifying your product or service under the Commerce Control List (CCL) is a critical first step in export control compliance. Key categories relevant to tech companies include:

• Category 3: Electronics (including microprocessors and related technologies).

• Category 4: Computers (including supercomputers and related software).

• Category 5: Telecommunications and Information Security (including encryption technology).

Understanding these categories helps determine whether an export license is required.

Cloud Computing Considerations

Cloud service providers need to be especially mindful of export controls because the location of data centers, the nationality of users accessing services, and the use of encryption can all trigger compliance obligations. Points to consider include:

• Server Locations: Ensure that server locations do not inadvertently lead to unauthorized exports.

• User Access Controls: Control and document access by foreign nationals.

• Customer Screening: Properly vet all clients, including their use case for accessing your services.

Initial Steps for Compliance

Compliance might seem overwhelming, but starting with the basics is key. Here are some initial steps tech companies should take:

1. Assess Your Products and Technology

• Review technical specifications to identify any potential military or security applications.

• Determine classification under the CCL to understand control levels.

• Identify any controlled components that may impose additional obligations.

2. Know Your Customers

• Screening procedures should be implemented to verify end-users and intended end-uses.

• Due diligence should be documented to prove compliance efforts in case of an audit.

3. Establish Basic Internal Controls

• Written Policies: Develop export control policies that reflect regulatory requirements.

• Staff Training: Train relevant employees about export controls and their responsibilities.

• Record-Keeping Systems: Maintain records of exports and screenings, as required by law.

• Compliance Point of Contact: Assign a compliance officer or designate someone to handle export control inquiries.

Red Flags to Watch For

Tech companies should be vigilant for signs that could indicate a potential export control issue, such as:

• End-users reluctant to provide end-use details.

• Technical requests that do not match the stated purpose of the order.

• Pressure to circumvent normal documentation or expedite shipping to unusual locations.

These warning signs should prompt further scrutiny and possibly escalation to legal or compliance professionals.

Next Steps to Strengthen Compliance

Export controls are not a “set it and forget it” process—ongoing monitoring and adaptation are key as your company and global regulations evolve. Here’s what you should consider moving forward:

1. Consult BIS Resources: The BIS website has tools and guidance that can help.

2. Seek Professional Legal Guidance: When in doubt, consult legal experts specializing in export controls.

3. Industry Associations: Join groups that provide regular updates on compliance best practices.

4. Documentation: Keep meticulous records of your compliance efforts. Regulators often judge good-faith efforts by the strength of internal documentation.

Looking Ahead

This article is just the beginning of our exploration of export controls. In our next installment, we will delve deeper into restricted party screening—an essential element of any export control program. We will provide practical tools and strategies to help you meet these requirements efficiently while supporting your international growth ambitions.

Export controls can seem daunting, but by taking systematic steps to understand and address these regulations, your company can protect its business and pursue opportunities around the globe with confidence. Starting small, building a culture of compliance, and gradually expanding your program will not only mitigate risk but also foster sustainable growth.

This article is part of a series on export controls for the technology industry. Stay tuned for more insights in upcoming articles.

Additional Resources and References

To help you further understand export controls and ensure your business remains compliant, here are some useful resources:

1. Bureau of Industry and Security (BIS)

   • BIS Official Website

   • BIS provides resources, tools, and detailed information on the Export Administration Regulations (EAR).

2. International Traffic in Arms Regulations (ITAR)

   • Directorate of Defense Trade Controls (DDTC)

   • The DDTC site provides information on defense-related articles and the requirements under ITAR.

3. Office of Foreign Assets Control (OFAC)

   • OFAC Official Website

   • OFAC oversees sanctions programs and provides guidelines on restricted transactions.

4. Export Control Classification Number (ECCN) Search Tool

   • Commerce Control List (CCL)

   • Use this tool to determine how your product is classified under the EAR.

5. Export Compliance Training

   • Many organizations offer online and in-person training programs that cover export compliance, including organizations like Export Compliance Training Institute (ECTI).

6. Industry Associations

   • Joining associations like TechAmerica or National Defense Industrial Association (NDIA) can provide regular updates, networking opportunities, and best practice sharing.

7. BIS Online Training Room

   • BIS Training

   • BIS offers webinars and online courses to help companies understand their compliance obligations.