U.S. Export Controls – To Self-Classify or Not?

September 15, 2015

Whether to self-classify or not is certainly a common quandary for many exporters. U.S. export control regulations generally permit exporters to self-classify their commodities or technology, and make their own determination whether an export license is required. The truth is that the vast majority of U.S. exports do not require an export license or other type of pre-approval. A decision, however, to self-classify products or to obtain a formal decision from the government should be carefully considered. Take, for instance, the following two recent examples of exporters who experienced problems because they self-classified their products.

A Colorado exporter of electronic test equipment self-classified their product as EAR99 (CCL) and proceeded to export the equipment to Hong Kong by a well-known express consignment carrier. While the shipment was in transit, an agent for Immigration and Customs Enforcement, Homeland Security Investigations (HSI) ordered the recall of the shipment and requested the exporter to provide technical information of the product. CBP then referred the classification question to BIS through the Export Enforcement Coordination Center (E2C2). Some four months later, CBP released the shipment for delivery once BIS export licensing officials confirmed that the equipment did not require a license to the Hong Kong customer.

In the second example a California software company retained a third party to classify their software, which had an encryption feature. Based on the 2010 BIS encryption controls reform, exporters were given the ability to self-classify encryption products (including software), and the third party determined that the software was excluded from controls under Category 5, Part 2, by Note IV (ancillary encryption features). A year or so later a customer who wanted to export the software questioned the determination that the software was not controlled by Category 5, Part 2. To resolve the question, the software company submitted a classification request to BIS through the SNAP-R system. Two days later BIS issued a classification decision confirming that the software is EAR 99. 

In both instances, the results were favorable to the exporters, however, the decision to rely on the self-classification process introduced uncertainty, delay and risk into the export transactions. This could have been avoided if the companies had a policy to confirm their classification determinations with BIS via the SNAP-R system. Obviously, not everything that is exported needs a formal classification determination. However, based on the individual circumstances, such as commodities, country of destination, and consignee, a formal classification determination will speed your products on their way and avoid the potential for detentions, seizures and penalties. If a government enforcement official or customer questions a shipment at the time of export, providing a formal classification decision will often resolve any issues quickly.

License Determinations (LDs) are used to support BIS enforcement actions connected with potential violations of the EAR. In FY 2013, BIS completed 436 enforcement LDs in an average of 31 days. In addition, BIS processed 1,502 LDs for the Department of Homeland Security in support of investigations of potential unlawful exports, and 284 LDs for the FBI.

Exporters often seek official classification determinations from BIS for business, recordkeeping, or other reasons unrelated to whether a classification could be self-determined. If there is a decision to seek an official classification determination, exporters should do their due diligence and use their self-classification process to make a well-considered recommendation to support the proposed classification and include details and information that sustains their determination. This will ensure that the classification determination is quickly processed with a minimum of delays in processing time.

In FY 2013, BIS processed 5,577 classification request applications, including encryption requests, in an average of 33.3 days. See the Bureau of Industry and Security’s Annual Report to the Congress for Fiscal Year 2013. The FY 2010 removal of the commodity classification determination requirements for less sensitive encryption items resulted in a significant decrease in the number of encryption commodity classification requests. The 1,550 requests processed in FY 2013 are approximately 50% less than the number processed in FY 2010. The encryption registration process, which replaced encryption reviews for many items, continued at a steady pace with 1,450 encryption registrations filed in FY 2013. Many of these registrations are by mobile app developers, both U.S. and foreign. BIS has also approved more than 1,900 licenses for encryption items in FY 2013.

If you do find that you may have an export control violation, you may wish to consider filing a Voluntary Self Disclosure (VSD). Of the 194 VSD cases closed in FY2013, 126 (65%) were closed with a warning letter, 44 (23%) were closed with a No Violation/No Action, and 1 (<1%) were closed with an administrative penalty (even then, a VSD can result in mitigation of up to 50% of the statutory penalty).

Tuttle Law Offices assists exporters and forwarders obtain Commodity Classification Decisions, prepare and file Voluntary Self Disclosures, and resolve seizure and penalty cases. If you have questions related to exports or need assistance with classification decisions or licensing, please feel free to contact George Tuttle, III, (415-986-8780, george.tuttle.iii@tuttlelaw.com).

George R. Tuttle, III, is an attorney with the Law Offices of George R. Tuttle in San Francisco.

The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.

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