|In April 2005, the Department of Commerce significantly expanded the export licensing requirements for chemical processing equipment. In the past, export licenses were required to export controlled equipment and technology to 37 countries that were of particular concern for chemical weapons proliferation (plus embargoed countries). Commerce changed its approach in April 2005 by stating that only members of the Australia Group of allied countries concerned about proliferation could receive unlicensed exports. Under the new rules, licenses (or license exceptions) are required for exports of 2B350 products (and other chemical processing equipment) to over 150 countries. See 15 C.F.R. 738, Supplement 1 (and 70 Federal Register 19,688). This rule applies to shipments after April 29, 2005. Moreover, exports of controlled technology in the United States to personnel from newly-listed countries will require “deemed export” licenses from Commerce before August 13, 2005.
Australia Group Members for Which an Export License Is Not Required for 2B350 Products :
Terrorism experts have identified chemical weapons as one of the leading threats to international security. Hazardous chemicals transported in rail and truck tankers, on ships, and stored at chemical production plants have been identified as potential terrorist “targets of opportunity.” As a result, these targets have been the subject of increased security efforts by private industry and the U.S. government.
But security diligence in the post-9/11 world does not end there when it comes to the chemical process. Rather, it extends beyond the chemicals themselves to touch certain types of equipment as well. Under current export laws, pumps, storage tanks, and valves are just a few of the product types common to the fluid handling industry that may be subject to certain restrictions.
A relatively complicated set of regulations is used to control U.S. exports of certain chemicals and many types of chemical processing equipment. Export controls on chemicals and chemical mixtures are fairly well understood, but the level of control over equipment is less clear.
A steadily increasing percentage of fluid handling products are manufactured with chemically resistant materials. Many of these products cannot be exported from the United States to a long list of countries without first obtaining a U.S. government-issued export license. This list of controlled destinations for chemical processing equipment was expanded dramatically in April 2005. Therefore, companies must be very careful about what they do with equipment they are replacing, selling off, or moving to facilities in international locations. Exporting chemical processing products without first checking to see whether an export license is needed is an extremely ill-advised practice. Certain types of chemical processing equipment can be used to assist weapons production, and failing to obtain the proper licenses for such equipment can lead to harsh legal consequences for all involved parties.
Penalties for violating export rules related to fluid handling equipment include substantial fines, jail time, and (in some circumstances) even the loss of a company’s privilege of exporting products from the United States. In the past year alone, export violations involving fluid handling products have resulted in fines levied by the enforcement arm of the Department of Commerce’s Bureau of Industry and Security in excess of $700,000. Similar penalties have been doled out in prior years.
The following list includes export control hotbuttons for fluid handling equipment manufacturers and users. This list is intended to provide a general overview of export control as it relates to fluid handling equipment. However, it is not a comprehensive discussion of export controls that apply to the industry, nor does it constitute legal advice or address the legal requirements applicable in any specific situation. For advice on a given scenario, please consult an attorney with experience in export control.
10 Export Issues to Consider
1. ECCN 1C350 & 2B350
The U.S. Export Administration Regulations control the export of various categories of products and technology. Controlled products require an export license from the Department of Commerce (or the use of a license exception) before they may be exported to certain countries.
Export Analysis Action Items
The following are recommended action items based in part on the items discussed in this article:
• Engineers and product designers should take export control issues into consideration in developing products. Watch for “ingredient creep” in chemical products and fluid handling items directed to countries where 1C350 and 2B350 items are controlled for export.
• If compatible with the proposed end use, design chemical handling products with at least one wetted surface that is not made from a controlled material. But watch for replacement part evasion, as described in item nine.
• Engineers and others should be extremely careful about unlicensed exports of the technological know-how needed to manufacture controlled products.
• Every exporter should have a matrix with accurate ECCN classifications for every product they export, no matter whether the products appear to be controlled or not. Don’t assume products are not covered by export regulations.
• Every company that manufactures chemicals and fluid handling products that may be controlled for export should conduct an export control review. An attorney experienced in the export control area can offer complete data confidentiality and attorney-client privilege protection in the event potential violations are discovered.
• Conduct export control due diligence before acquiring any company involved in fluid handling. Such a purchase brings with it the acquired company’s past export control violations. Many recent export enforcement cases demonstrate that a company can be penalized for those past violations following the acquisition.
Be sure to review current regulations to determine whether the chemical products and mixtures your company exports are controlled for export under Export Control Classification Number (ECCN) 1C350 of the Export Administration Regulations. Many companies are surprised that triethanolamine (C.A.S. #102-71-6), triethanolamine hydrochloride (C.A.S. #637-39-8), and many other listed chemicals (and mixtures containing listed chemicals) actually require an export license for certain destinations. All exporting companies should have a product matrix that classifies each product exported according to ECCN number.
The principal category covering fluid handling products is ECCN 2B350, which identifies selected chemical processing equipment. The products in 2B350 are designed to handle chemicals controlled for export by ECCN 1C350. (Other ECCN categories cover specialized types of valves, pipes, and other fluid processing equipment.)
ECCN 2B350 covers the following types of equipment:
• Reaction Vessels and Reactors
• Agitators, Impellers, Blades, and Shafts
• Storage Tanks and Containers
• Heat Exchangers and Condensers
• Distillation and Absorption Columns
• Remote Filling Equipment
• Valves and Valve Casing Liners
• Multi-Walled Piping With a Leak Detection Port
• And Certain Parts of These Products
Not every product that fits in these general categories is controlled for export. In some cases, liquid flow capacity, operating temperature, and other parameters limit the category’s coverage. Material of construction is also a critical variable, as described below.
The key to knowing whether your company’s products require export licenses for shipment to the designated countries is to conduct an explicit analysis of the export laws pertaining to specific product types. Regulations put the burden on manufacturers to determine if their products are subject to control. For users selling off existing equipment or moving equipment to an international facility, export licenses are also an issue. Enforcement agents do monitor export documentation to identify violations, and enforcement budgets and total penalties are increasing at a rapid pace.
2. The Wetted Path
Intro to Export Controls
The Bureau of Industry and Security (BIS) provides several resources on its Web site for companies looking to educate themselves on the Export Administration Regulations (EAR). One of the common misconceptions about BIS’s regulatory efforts is that it regulates only “dual-use” items (i.e., items that support both commercial and military applications). But the agency warns that commercial items without an obvious military use are also subject to the EAR. So any company exporting goods and services would be wise to review this Web site.
In order to be controlled for export, the wetted surface of a chemical processing product generally must be made from (or coated with) one or more of these chemically resistant materials:
• Fluoropolymers (see additional details below)
• Glass or Glass Linings
• Graphite and Carbon Graphite
• High Nickel-Content Metals and Alloys (e.g., Hastelloy)
• Silicon Carbide
• Tantalum (and alloys)
• Titanium (and alloys)
• Zirconium (and alloys)
If the wetted path of a product is made from one or more of the above materials, companies should perform an intensive review of the specific 2B350 classification criteria to determine if export controls apply to the product. Note that a few of the materials listed here may be used in some of the products in list item one without creating an export control requirement.
3. Fluoropolymer Designations
Fluoropolymers are the most complex and controversial wetted-path material. The generic term fluoropolymer covers a great many products that are increasingly used in fluid processing equipment, including PTFE (polytetrafluoroethylene), which is the most common fluoropolymer used in manufacturing.
The following products do not necessarily create export control concerns, but many are referred to in industry literature as fluoropolymers: PVDF, FEP, E-CTFE, E-TDE, PFA, CTFE-VDF, PCTFE, THV, and PVD, as well as brand names such as Teflon, Kynar, Fluon, Halar, and Tefzel. The presence of fluoropolymers in the wetted path of a product mentioned in list item one should trigger a very careful analysis to determine whether the product is controlled for export.
4. More & More Control
Know Your End-User
Supplement No. 4 to part 744 of the Export Administration Regulations highlights international end-user organizations that are subject to export concerns. Donned the “Entity List,” these organizations are end-users known to participate in weapons proliferation activities. The list is based on an initiative called the Enhanced Proliferation Control Initiative (EPCI), which is part of the Export Administration Regulations framework. The list is designed to inform the public of export license requirements related to certain international entities. However, it should be noted, the list is not comprehensive and does not absolve exporters of the responsibility to determine the nature and activities of their potential customers.
An increasingly large percentage of fluid processing products are controlled for export by the U.S. government. That is partly because the regulations were recently amended to cover certain parts. And, more importantly, equipment is being made with relatively sophisticated resistant materials that push the products into categories that are covered by existing export regulations.
5. Regulated Export Destinations
Products controlled for export by ECCN category 2B350 are not controlled for export to all destinations, but they require an export license before shipment to listed countries. Some of those destinations are popular export nations, including: China, Egypt, India, Israel, Pakistan, Russia, Saudi Arabia, Taiwan, and the United Arab Emirates.
6. Material Selection & Design
The materials used in the design and manufacture of products and parts can create export licensing obligations that can complicate, slow, and limit sales. For manufacturers, this means efforts to achieve certain performance characteristics must be balanced with the difficulty certain designs may present in overseas sales potential.
When it comes to chemical processing exports, it is important not to let “ingredient creep” force a product over the line into controlled export territory. Periodic reviews of new products and mixtures can help prevent such a situation.
7. Exporting Controlled Knowledge
Exports of controlled products are not the only concern. Exporting the technological know-how required to make a controlled chemical or fluid handling product is also considered a controlled export and requires a license.
In this day of global sourcing, companies are having chemicals, parts of fluid handling products, and entire products manufactured overseas (particularly in Mexico, India, and China). This often occurs under license or in a company’s new foreign facility. U.S. companies import those products and sell them in the U.S. and overseas. These business approaches raise serious export control concerns.
U.S. regulations prohibit the export of certain technology necessary to make controlled chemicals and fluid handling products. When referring to the export of technology, the regulations mean exporting the knowledge necessary to manufacture a controlled product at an international location. Thus, it may well be illegal to export the directions for manufacturing certain chemical compounds controlled by 1C350, or engineering drawings and other know-how required to make an agitator, pump, heat exchanger, or other item controlled by category 2B350 without an export license. Such illegal exports of technology could occur by fax, e-mail, or even on a phone call. Before assisting with an overseas production process involving a controlled product or part, ensure the proper export control analysis has occurred for the product and related technology.
8. Re-Export Controls
Re-exports are tricky. Just because a product is manufactured in China, India, or one of the other controlled destinations, does not mean it can be imported into the U.S. and then re-exported from the U.S. without regard to U.S. export rules. If a product falls into the 2B350 category, it is almost certainly controlled for export from the United States, and it will require a license to re-export the product to one of the controlled destinations (even if it was just imported from one of those countries).
Moreover, U.S. export controls follow the product overseas after it leaves the United States. If a company exports a 2B350-controlled valve, for example, to a foreign distributor, the company’s export control responsibilities may effectively have ended for that shipment. But the foreign distributor may well be required under U.S. law to obtain a U.S. re-export license to re-export that product to a controlled destination. If the distributor doesn’t apply for (and obtain) a re-export license from the United States, it might be subject to fines or placed on a “denied party” list. Placement on a denied party list could make it difficult for virtually any U.S. company to do business with the distributor in the future. Many foreign distributors depend on their U.S. suppliers to help them decipher the applicable regulations, and companies should implement processes to protect international distributor relationships from infringing upon export laws.
9. Evasion Tactics
One of the most common ways for foreign users to evade export regulations is to order complete products along with replacement parts that will permit them to assemble a controlled product. For example, an order from Pakistan might come in for a product with polypropylene parts as part of the wetted path. Such a product would not be controlled for export under 2B350. But the order might also request replacement parts of Teflon, which is a fluoropolymer. In some situations, the customer could easily swap out the polypropylene parts and insert the Teflon parts, creating a product that would have been 2B350-controlled if exported in that configuration. Such “red flag” situations can create export license requirements. Moreover, indications that a product may be used to develop or manufacture chemical weapons also create export license requirements, regardless of whether or not one exists in connection with the particular equipment ordered.
Also, if a company cannot make a requested export because of export control rules, it is an evasion violation for personnel to refer the purchaser to a foreign affiliate or distributor.
10. To Voluntarily Disclose or Not
Companies used to receive slaps on the wrist when they voluntarily disclosed export control violations to the government. Those days are gone. Today, it is not unusual to see voluntary disclosures settled with the government for multiple hundreds of thousands of dollars in penalties. Voluntary disclosures of potential violations are not mandatory under the law, although enforcement agencies have the option of reducing penalties for companies making such disclosures. All disclosures of potential violations should be carefully considered by senior company personnel in consultation with an export control attorney.
About the Author
Eric McClafferty is a partner in the international trade and customs practice of the Washington DC law firm Collier Shannon Scott, PLLC. He earned bachelor’s and master’s degrees from the University of Michigan and a law degree from the University of Virginia. Mr. McClafferty has more than nine years of experience with fluid processing industry export issues, and he works on a number of other industrial and technology import and export trade concerns. He has spoken and written widely on export control and import issues. He can be reached at firstname.lastname@example.org or 202 342-8841.