Japan-South Korea Export Control Spat
On 2 August 2019, the Japanese Ministry of Economy, Trade, and Industry (METI) announced the removal of South Korea (ROK) from its export control whitelist, which goes into effect on 28 August. The change in South Korea’s status bars it from preferential trade treatment and means transactions will receive additional licensing scrutiny. South Korea plans to respond by removing Japan from its “white list” in September. The growing export control spat adds uncertainty to an already tense East Asia region and highlights the trend of smaller nations using export control and sanctions to benefit their foreign policies at the expense of industry.
What Does This Mean for Business?
South Korea will no longer be listed in Appendix Table III of Japan’s Export Trade Control Order, which permits preferential trade treatment. It will be moved to Group B. As such, exports to South Korea will not be eligible for authorization of General Bulk Export Licenses, and exports and technology transfers to South Korea from Japan will be subject to a catch-all provision, allowing the Japanese government to suspend any export they wish for national security purposes. Furthermore, exports to South Korea of hydrogen fluoride gas, fluorinated polyimide, and photoresists will be restricted initially, and there are plans to expand restrictions to dozens of other products.
Japan produces most of the world’s supply of hydrogen fluoride gas, fluorinated polyimide, and photoresists and thus has significant leverage over South Korean companies regarding their sale and distribution. The export of these chemicals is vital to the manufacture of semiconductors and display panels, and restrictions would have a detrimental effect on firms heavily reliant on Japanese suppliers such as Samsung and LG. As Lindsay Maizland of the Council on Foreign Relations explains “experts estimate that these companies have one to three months of stockpiled materials. If the trade dispute lingers, the global tech industry could feel the sting, since South Korean companies produce more than half of the world’s semiconductors and more than 90 percent of smartphone screens.” This will have dramatic implications for global smartphone sales, memory manufacturing, and CPU fabrication.
What Caused This Spat?
Japan cites a lack of comprehensive South Korean export control policies as its justification for the removal. METI contends that this has resulted in states such as Iran, North Korea, and Syria receiving unauthorized export-controlled goods. Another source of tension is South Korea’s demand that Japanese firms pay reparations for Koreans’ inducement into forced labor and the sexual mistreatment of Korean women during World War II. Finally, the Japanese economy is performing at its weakest since 2010. The removal of South Korea could be an attempt to insulate Japanese firms from regional and global threats. In other words, the spat is a mix of unresolved historical resentments, security concerns and protectionism for Japanese electronics companies.

How Will South Korea Respond?
The South Korean government is responding in a tit-for-tat fashion by announcing on 12 August the decision to drop Japan from its own 29-country “white list” in September. However, South Korea is upping the ante, and plans to create a new downgraded trade designation specifically for Japan. As Reuters reports, Industry Minister Sung Yun-mo said the new category for Japan would reflect that it does not run its system according to “international export control principles.” South Korean exports to Japan will now face a similarly lengthy licensing process.
President Moon has warned Korean firms to prepare for a “prolonged trade dispute” and to attempt to either produce the restricted materials themselves or diversify their supply chains. This was reinforced by the South Korean Finance Minister’s comment that Seoul is “working on comprehensive plans to reduce the country’s dependence on Japan’s materials, components and equipment industries.”
How Will This Impact Companies with a Global Footprint?
For most multinational companies – except those heavily reliant on the South Korean and Japanese markets – the initial impact of this spat will be minimal. However, this case portends a growing international trend of smaller nations taking a tip from Trump’s playbook and using tit-for-tat export control and sanctions to further their foreign policy goals. While mutual pressure may push Japan and South Korea back to the negotiating table in the short term, the historical dimension underlying the spat may portend longer terms effects. Firms and their compliance staff should be following closely the escalations between the neighboring states and should be prepared to build in longer wait times for licenses and, ultimately, more diversified supply chains in case this spat turns into a larger trade war.
Regulating the Future
Concerns over Defining “Emerging Technologies”
On 19 November 2018, BIS published an Advanced Notice on Proposed Rulemaking (ANPRM) seeking public comment on criteria for identifying “emerging technologies” that are essential to U.S. national security in order to develop export controls on presently uncontrolled technologies. This process is being undertaken pursuant to Section 1758 of the Export Control Reform Act of 2018 (ECRA), which mandates the establishment of a regular multi-agency process for identifying appropriate controls on emerging and foundational technologies that are “essential to the national security of the United States” and that are currently subject to no or very limited controls under other existing U.S. export control regimes.[1] This is exercise also supports requirements in the Foreign Investment Risk Review Modernization Act (FIRRMA), which was enacted with ECRA under the National Defense Authorization Act (NDAA) of 2018.
The ANPRM included fourteen broad representative categories of technology from which BIS seeks to determine whether if and which emerging technologies are important to U.S. national security for which effective export controls should be implemented:
1. Biotechnology
2. Artificial intelligence (AI) and machine learning
3. Position, Navigation, and Timing technology
4. Microprocessor technology
5. Advanced computing technology
6. Data analytics technology
7. Quantum information and sensing technology
8. Logistics technology
9. Additive manufacturing (e.g., 3D printing)
10. Robotics
11. Brain-computer interfaces
12. Hypersonics
13. Advanced materials
14. Advanced surveillance technologies
The ANPRM also includes a list of representative examples of such technologies for each of the above categories (e.g., computer vision and national language processing within the AI and machine learning category).[2]
As an unfolding process, there is a dearth of working definitions, sufficient to inform policy in a salutary fashion, of emerging technologies – let alone how to control them. We were curious about the collective thinking on this complex topic. As such, we tried to distill the central themes and concerns across the ANPRM comments. What follows is a basic text analysis thereof.
Figure 1. Comment Contributor By Type
Contributors: The comment submission period ended in January 2019, with BIS publishing a final list of comments in early March. Overall, 232 individuals (51% or 118) and organizations (49% or 114) submitted comments (see Figure 1). Of the organizations, industry/trade associations, technology companies (e.g., semi-conductor and ICT) and universities contributed the majority of comments (~44%). Two foreign governments (France and Japan) also submitted comments.
Figure 2: Country References
Topics: Of the 232 comments submitted, the vast majority (~75%) addressed artificial intelligence (AI), followed by additive manufacturing, robotics, quantum computing, and biotechnology.
China was the only country mentioned to a statistically significant degree (China = 647 references, see Figure 2). The next most cited country was Japan (130), followed by Germany (62), Israel (56), and Russia (53).
In terms of the subject technologies listed in the ANPRM, the leading category was AI, at >45% of the references. Additive manufacturing, robotics, quantum computing, biotechnology, and data analytics represented nearly 80% of the ANPRM list technology references. One category, “Brain-Computer Interfaces” was conflated with AI and Machine Learning. On a related note, most references to “neural networks” – included as subcategories to both AI and Brain-Computer Interfaces – referred to AI as networks and not as “neural controlled.”
Beyond the technology topics, most submission focused on the following major themes:

Research (>1,250 contextual references);
Foreign availability (~305 contextual references); and
Criteria (~300 contextual references).

In both instances, sentiment analysis grouped both themes against concerns about overly restrictive (i.e., “broad” or “general”) controls. In this regard, over ~85% of the comments clustered around “showing concern” about the proposed list-building initiative. “Criteria” was heavily correlated with foreign availability and multilateral control parity. Indeed, sentiment analysis for “criteria” evinced a clear consensus on the exercise of caution in establishing control parameters given the dynamic nature of the technologies addressed.
Figure 3: ANPRM Technology Category Reference
Further text analysis highlighted a number of relationships between terms. For example, a collocation analysis revealed that ‘risk’ was highly collocated with ‘unilateral,’ ‘economic,’ and ‘research.’[3] (See Figure 4).[4] China, as country most cited, was highly collocated with ‘AI,’ ‘Japan,’ ‘Russia,’ and ‘research.’ ‘Collaboration,’ mentioned 243 times, was collocated with ‘development,’ ‘AI,’ and ‘research.’
Figure 4: Collocates of “Risk”
Conclusion: Since the inception of modern export controls, the fundamental question vexing regulators and industry concerns control criteria, as recently noted in ECRA’s admonition on stifling circumscriptions: “avoid negatively impacting U.S. leadership in the science, technology, engineering, and manufacturing sectors.” Predicated upon weapons of mass destruction (WMD) technologies and materials, the known technology universe was well understood and, as a technology class, evolved slowly. While there are civilian applications for maraging steel (e.g., exotic guitar strings), further applications will not revolutionize the economy in any way similar to AI’s impact. The emerging technology phyla, however, includes a range of exponentially developing technologies, defined in the business literature as “disruptive.” The “emerging” set is changing even as while we field comments for definitions. True to form, the dual-use aspect of any control list technology is always in its application as opposed to its constitutive nature. Unlike most of the current Commerce Control List (CCL) entries, the BIS starter kit of 14 technologies are wildly unrestrained in their applicability to current and new economic products and services, as well as to current and future weapons systems.
Apart from the above textual analysis, which merely conveys statistical portraits of clustered themes and word counts, a brute force reading of the comments does provide a more visceral listing of anxieties, complaints, and recommendations. The primary anxiety expressed in the comments concerns the negative economic and security impact of either overly restrictive, and/or futile controls. For example, overly restrictive controls could result in innovation off-shoring (or “innovation arbitrage”)[5], declining technology and ethical leadership, technology islanding or autarky, and a diminished technology reservoir from which the military could draw.
Complaints varied on a continuum regarding the USG approach to defining emerging technologies, arguing that the government should have started with very specific technologies rather than working from general categories. In other words, the onus should be on the government to establish why and how a technology is a national security threat a priori, not the other way around. One commentator succinctly captured this dilemma in the ANPRM process:
The ANPRM notes that, “Certain technologies, however, may not yet be listed on the CCL or controlled multilaterally because they are emerging technologies. As such, they have not yet been evaluated for their national security impacts.” These two sentences are at the heart of the problem of defining emerging technology within an export control framework. The uncertainties and ambiguities around emerging technology make them difficult if not impossible to govern from an export control perspective, and yet this is exactly what the process to be established through this ANPRM is tasked to do.

In terms of practical recommendations, the comments were generally of the catch-all variety, mentioning the use of the EAR’s pre-existing tool kit of non-listed and end-use and user controls: catch-all, Entity List, and 0Y521. The comments also concluded that the listing exercise would be utterly meaningless in the absence of multilateral consensus. There was almost no mention of specific control examples (e.g., “here’s how you can export control AI….”).
More so than in the recent export control past, the ANPRM has captured the fundamental anxiety of our age: technology governance. The earlier operating system of controls was constructed around a well-established threat, WMD, while emerging technology is rapidly and fundamentally rewriting our security and economic narratives in such ways that the narratives cannot practically congeal around a least common denominator that will define the constituent elements of “essential to the national security of the United States.”
[1] BIS also announced that it will issue a separate ANPRM in the future regarding the identification of “foundational technologies” that may be important to U.S. national security.
[2] Presumably, BIS developed the ANPRM representational list from Congressional testimony and other USG research. While the civilian applications for emerging technologies are relatively well established in the business literature (e.g., “disruptive technology”), there is decidedly les information about prospective “weapon” systems. For an illustrative example of the former, see McKinsey Global Institute, “Disruptive technologies: Advances that will transform life, business, and the global economy,” May 2013 < https://mck.co/2KqDe0z> and World Economic Forum Anja Kapersen, “8 emerging technologies transforming international security,” September 2015
[3] Collocation analysis examines sequences of words or terms which co-occur more often than would be expected by chance, or terms that appear more frequently in proximity to keywords across an entire corpus.
[4] Collates connected to risk are arrayed by distance, with close proximity indicating a high degree of collocation, likewise decreasing with distance.
[5] See, Adam Thierer, “Innovation Arbitrage, Technological Civil Disobedience & Spontaneous Deregulation,” 5 December 2016 < https://techliberation.com/2016/12/05/innovation-arbitrage-technological-civil-disobedience-spontaneous-deregulation/>.
Everybody Sanctions
The New Abnormal of Economic Statecraft
States now reach for economic levers to achieve foreign policy objectives.
This is a working definition of economic statecraft – that emerging global modus operandi – which may hasten what economist Paul Krugman referred to as the “great unraveling.” The latest instance of unraveling and economic statecraft is the curious case of Turkey and its otherwise stalwart treaty ally, the United States.
As a dictum of contemporary international economic practice, states would be wise, to paraphrase Joe Nye, to recognize that “manipulating the asymmetries of interdependence is an important dimension of economic power.” Companies would be wise to recognize their vulnerabilities in such a dynamic.
President Trump greets Turkish President Erdoğan during less turbulent relations.
On 20 August, the Trump Administration imposed sanctions on two Turkish government officials over the detention of an American pastor being held on espionage charges, the immediate effect of which was to further deflate the already enfeebled Lira. President Recep Tayyip Erdogan’s characterization of the sanctions is illustrative of the above-mentioned trend, describing, in a recent speech, the strong United States dollar as among “the bullets, cannonballs and missiles” foreigners are using to wage “economic war” on Turkey.

The United States is the biggest destination for Turkish steel exports, with 11 percent of the Turkish export volume. The Lira fell further after Trump’s tweet. In response to U.S. threats, Erdogan’s government announced that it would be implementing retaliatory tariffs on American cars, alcohol, tobacco, and over 100 other products. Not to be left out of the fun, on 23 August, Congress blocked the proposed sale of 100 F-35s until the Pentagon issues a report assessing the “overall strategic relationship with Turkey.”
Like much about the current Administration, the petulant and profligate use of sanctions and tariffs is unprecedented. The Turkish case is particularly unique insofar as the Administration is not only gut-punching a NATO ally (yes, he’s already threatened the Europeans with similar tariffs and with exiting NATO), but doing so to curb Ankara’s perceived wayward behavior through economic statecraft rather than the traditional diplomatic means. This, of course, has downstream consequences.
The list of aggrieving behavior includes Turkish support of jihadist groups in Syria, cultivating closer relations with Iran, and contracting to purchase S-400 surface-to-air missiles from Russia, the use of which would compromise the strategic integrity of the aforementioned F-35s. Foreign economic policy is also most likely being used for domestic political purposes: as red meat to the evangelical vote, the Administration is turning the economic screws on Ankara to free the American cleric in the lead up the November mid-term elections.
On 15 August, President Trump tweeted the following:

While not exactly correct in the broader U.S. economy sense, the President is correct with respect to government revenue, at least until 1913 with the institution of income tax (the 16th Amendment). Since the end of WW2, the U.S. has promulgated and sponsored at considerable effort a free trade agenda (i.e., tariffs ‘hugely’ bad), with sanctions serving as a non-military, discrete adjunct to foreign policy.
Now, tariffs and sanctions are indiscriminately, inconsistently applied to a range of political and economic issues. The forsaking of its custodial responsibilities over the system it helped construct sets a larger tone and creates a leadership vacuum. If the emerging tools of contemporary statecraft are tariffs and sanctions, expect more and novel engagements between allies, frenemies and adversaries.
States must become, in the words of Japanese scholar Toshifumi Kokobun, “sensitized to and creative in the use of such statecraft.” Companies should strap in for a wild ride.
When a License Denial Means Bankruptcy
The Case of CybAero
Can a denial of an export license make or break your business?
For Sweden’s largest military drone company CybAero AB and its line of dual-use helicopter drones, a license denial meant bankruptcy.
In its short history, CybAero had developed valuable collaborations with organizations such as Saab and the US Navy’s Naval Research Laboratory, and garnered widespread interest from China, Norway, Pakistan, Spain, and the United Arab Emirates. Yet the company ultimately declared bankruptcy in June 2018 after a multi-year battle to secure export licenses for an eight-figure deal.
CybAero had signed a joint venture deal with Chinese state-owned Aviation Industry Corporation of China (AVIC) group in July 2014 to supply 70 drones (worth 78-89 million USD) over 8 years. When the deal was announced, CEO Mikael Hult stated the company’s goal was to control 30% of the global drone market. That dream ended only 4 years later.
A drone manufactured by Austrian drone company Schiebel, who was the target of an Austrian parliamentary inquiry for export violations to China in 2013.
The entire AVIC deal rested on the presumption that CybAero would be granted an export license by the Inspectorate of Strategic Products (ISP) — the Swedish export control agency. The company was confident the license would be granted, and CybAero had precedence on their side. Just a few months prior their deal with Chinese Customs for the sale of three advanced drones via an intermediary had been approved.
The first trouble for the CybAero deal came when ISP denied the license for the 70 drone AVIC deal in October 2014. CybAero explained the denial as the result of applying for all 70 drones in one license, notwithstanding the fact that ISP only grants licenses for two-year periods when the AVIC deal was over eight years.
On reapplication CybAero received a positive advanced notice in November 2014 for delivery of the first 10 systems. Advanced notices are not final and require final approval once delivery is to be made. This is key, as the reason for the previous rejection was lack of clarity on the drones’ end-users.
In March 2015, CybAero received the first order from AVIC: five APID ONE Ranger drones designed for commercial purposes such as infrastructure monitoring and environmental mapping. Though CybAero lacked a license at the time, the company stated they were in constant communication with ISP and expected delivery in late 2015. In April, ISP gave CybAero a license for temporary export for demonstration purposes, and the demonstrations were conducted in multiple locations in China in August 2015.
In the less than two years between August 2015 and February 2017, CybAero had two temporary export licenses denied, and one revoked after being granted. CybAero was never able to export even the first five drones to AVIC and began suffering financial problems after years of continued losses.
In early 2018 the newspaper Svenska Dagbladet ran two articles claiming that CybAero had knowingly exported military technology to China in their Chinese Customs deal, despite the EU arms embargo on the country. This drew a response from ISP, which stated that drones can be military or dual-use technology, and that the licenses issued to CybAero were for dual-use technology.
CybAero was in financial trouble, despite multiple new investors, and their listing on the First North exchange was removed.
Following the inability to resume trading, CybAero opted to declare bankruptcy in June 2018, ending the dream of controlling 30% of the global drone market they declared just four years before. Had they fulfilled the AVIC contract, CybAero may have survived. In the end, consecutive years of losses proved too much to overcome.
This case demonstrates the importance of assembling an experienced and well-supported export compliance team that possesses a complete understanding of regulatory requirements in operational markets. It also shows the detrimental effects a license denial can have on smaller companies.
CybAero’s 2014 application for an export license for all 70 drones over 8 years shows they may have misjudged Swedish and EU regulations. It is critical to understand the differences in applying for a license for a one-time export, compared to a multi-year project. Additionally, not knowing end-user information when applying for a license would be a critical flaw in any application. Despite CybAero intentionally avoiding the risks of US components in their products, it was ultimately Swedish controls that sunk their largest deal and ultimately their company.
Countries around the world are placing increasing importance on export controls and protecting technology. Global compliance requirements should not be an afterthought.
The Bear Bites Back?
Russian Countermeasures and Criminal Penalties
For Western companies doing business in Russia, sanctions compliance may get even more complicated. The United States and Russia appear to be back to Cold War era tit-for-tat policies.
On 23 May, the Russian State Duma (lower house of parliament) passed Bill No. 441399-7 in retaliation for the 6 April United States sanctions on Russia. The Draft on Countermeasures titled “On Measures (Countermeasures) in Response to Unfriendly Actions of the USA and (or) other Foreign States” has the potential to disrupt operations by foreign-owned companies in Russia and to tighten Russian export control.
While the draft bill singles out the United States directly, it states the countermeasures may apply against foreign countries who commit “unfriendly” acts against the Russian Federation. U.S. and E.U. companies are now on notice.

The countermeasures included therein are broadly defined, though the bill gives the Russian President and Federal Government the right to determine which sectors, products, materials, individuals, and entities are impacted. Five key measures are outlined below with a sixth dependent on the will of the Russian President:
1. Termination or suspension of international cooperation between Russia/Russian legal entities with hostile foreign organizations, including those directly or indirectly controlled or affiliated with those unfriendly foreign governments
2. Prohibition or restriction on the import into Russia of products/raw materials originating in unfriendly foreign states
3. Prohibition or restriction on the export from Russia of products/raw materials by citizens of unfriendly foreign states
4. Prohibition or restriction on access to public procurement of goods, works, and services
5. Prohibition or restriction on the sale of Federal property to citizens of unfriendly foreign states
6. Other measures in accordance with the decision of the Russian President
Russian lawmakers are bolstering the countermeasures by discouraging Russian nationals’ compliance with foreign sanctions regimes. On 15 May, the Russian State Duma filed Bill No. 464757-7 which threatens up to four years of jail time and fines for individuals or representatives of Russian legal entities that restrict or deny doing business with a Russian citizen due to U.S. or other foreign sanctions. This may limit the ability of Russian national employees of foreign firms to comply with corporate internal compliance programs.
The main question now is: how far will Russia go?
Encouragingly, President Putin on 18 May indicated “any retaliation against U.S. sanctions must not hurt the Russian economy or partners that do business in Russia.” The revised version of the Draft on Countermeasures does partially echo Putin’s sentiment, having reduced the number of countermeasures from 14 to 5, including removing much of the draft bill’s threats to specific industries and sectors. While painful proposed counter sanctions on procurement of foreign technology equipment and software, rare earth metals, medicine, provision of consulting and legal service by foreign firms, and the exhaustion of IP rights among others have been diluted, the current draft is so broad that no one specific industry can be sure they can proceed unscathed. Simply put: the Draft of Countermeasures enshrines a wealth of discretionary power for counter sanctions.
As with all things Russia, the bite of these new countermeasures will be subject to Putin’s discretion. There are signs that Putin is reigning in more comprehensive measures that would isolate Russia economically. However, as evinced by recent U.S.-China trade negotiations, the immediate future of the Russian draft bill may be determined by the unpredictable relationship between Trump and Putin. Until the final text is made available, uncertainty will continue.
TradeSecure will continue to monitor developments as the Draft on Countermeasures moves through the Federation Council.
Leveraging India’s Major Defense Partner Status
The 2017 designation of India as a “Major Defense Partner” of the United States opens new doors for US companies to expand in this dynamic economy of 1.3 billion people. Commerce’s Bureau of Industry and Security (BIS) announced on January 19, 2017, a licensing policy change of general approval for exports and re-exports to India. BIS amended the end-use and end-user provisions of the Validated End-User (VEU) authorization in India to allow items to be used for either civil or military use if such items are not used for nuclear, missile, or chemical and biological weapons activities. This licensing change in addition to Prime Minister Modi’s ‘Make in India’ initiative, which relaxed foreign direct investment (FDI) laws in late June 2016, should expand US-India trade opportunities.

What This Means for the US Defense Industry
The Indian market for US military and dual-use goods became more accessible with the change in US licensing policy. Companies have two primary means to reduce compliance burdens for their exports: (1) being approved as a VEU by BIS, or (2) applying for a one-time license from Commerce.
US licensing changes coupled with Indian relaxation of FDI promises a more attractive environment for establishing overseas facilities. The Modi government is betting that with US companies allowed to retain majority ownership of their facilities and technologies, the domestic manufacturing capability of the world’s largest importer of military weapons will grow. Prime Minister Modi’s “Make in India” initiative will mutually benefit from the licensing change. To obtain a manufacturing license from India in industries requiring government approval (e.g. defense and private security) a company can apply to the Department of Industrial Policy & Promotion.
What Does India Want to Buy?
1. Single Engine Fighter Jets
India desperately needs single-engine fighter jets to supplement its aging fleet of only thirty-three planes. While Lockheed Martin presented a plan for producing an entire fleet of F-16s inside India, the government has yet to accept the terms while considering a separate Grippen production proposal from Saab. Currently Lockheed Martin has a 50/50 chance of winning the contract; aided by Senators Mark Warren and John Cornyn’s joint letter to Secretary of Defense James Mattis and Secretary of State Rex Tillerson calling for the Trump administration to encourage India to accept the deal. This could be a major step forward for US manufacturers.
2. Artificial Intelligence and UAV Technology
The Centre for Artificial Intelligence and Robotics (CAIR), an Indian laboratory under India’s Defence Research and Development Organisation (DRDO), is currently focused on the development of UAVs. Its work on configuring the complex artificial intelligence algorithms needed by new weapon systems has been facing some delays and setbacks. This is a great opportunity for US AI firms. Moreover, the recent $2 billion defense deal with Israel, which included 10 armed drones worth $400 million, clearly suggests that UAV purchases will be an important component of India’s military modernization efforts in the coming decades.
3. Ammunition
India’s Ministry of Defense plans to spend $3 billion on ammunition alone over the next decade, with ammunition procurement to be inked in long-term contracts with domestic private sector manufacturers. Private Indian companies are in initial rounds of talks with overseas suppliers for technology to fulfill such orders. US defense manufacturers should investigate such partnerships.
These examples above demonstrate the growing Indian demand for high technology and foreign investment in the defense sector. As Modi’s “Make in India” initiative expands, India’s private sector will soon be searching for industrial processing equipment, CNC machines, steel fiber, and a variety of dual-use commodities to expand their own operations. US firms should look to turn India’s “Major Defense Partner” status into a major business opportunity for establishing joint ventures or manufacturing subsidiaries or direct sales and service contracts with Indian companies.
Managing Compliance Risk in Your Freight Forwarder
Globalization—particularly changes to foreign investment, global supply chains and production sharing practices—has fundamentally reshaped the multilateral trading system. These changes are not just quantitative, with more freight in circulation, but also structural and operational. It is important to understand how your freight is moving. In this context, freight forwarders play important logistical, economic and security roles in regulating trade flows. Choosing a compliant freight forwarder can bolster your compliance efforts by adding another level of verification and security.
What is a Freight Forwarder?
In order to comply with export documentation and shipping requirements, many exporters use a freight forwarder to act as their shipping agent. An international freight forwarder is an agent for an exporter in moving cargo to an overseas destination. The term freight forwarder is often used interchangeably with ‘non-vessel operating common carrier’ (NVOCC).
Freight forwarders should be familiar with the recipient country’s import rules and regulations, the exporter’s legal requirements, the methods of shipping and the documentation required by foreign trade. Standards for and oversight of the freight forwarding community are established at international and national levels, comprising both public and private entities. In general, despite the international and national variations in licensing and standards, freight forwarders are usually legally liable for the goods and the related transaction while overseeing the transport-related transactions.

Freight forwarders help exporters to prepare price quotations by advising on freight costs, port charges, consular fees, the costs of special documentation, insurance costs and handling fees. They recommend the best packing method to protect the merchandise during transit or can arrange to have the merchandise packed at the port or containerized. After shipment, they can route the documents to the seller, the buyer or to a bank (i.e. supplying the letter of credit). Freight forwarders can also make arrangements with customs brokers overseas to ensure that the goods comply with customs export documentation regulations.
This description of freight forwarder is necessarily general as the goods transport industry, like global trade itself, is undergoing rapid change. Increasingly, the complex needs of the supply chain are being contracted out to third parties. In addition to traditional freight forwarders, exporters are faced with an array of goods transport services from customs brokers to third-party logistics providers (3PL).
Furthermore, freight forwarders are increasingly offering comprehensive supply chain services, which include documentation/licensing, insurance/financing, warehousing and carriage, and their liability exposure is similarly expanding.
What Does My Freight Forwarder Do? Is He Compliant?
The key nodes below should be formalized into the work flow of any freight forwarding operation.
Advance data collection

Prior to each transaction with the exporter, the freight forwarder must obtain complete information about the content, proposed destination and end use or end user of the shipment. For example, the UN Panel of Experts on Iran sanctions noted in its 2014 report that ‘The International Freight Forwarders Association (FIATA) has issued a notice to its members warning about the increased use of counterfeit bills of lading in connection with shipments to and from Iran’.
Vouchsafing the client and identifying restricted parties
As part of their standard due diligence processes, freight forwarders should incorporate restricted party screenings—of whether the proposed carriers participate in various certification schemes such the Authorized Economic Operator programs—and ‘red flag reviews’. It is important to note that the screening process includes both the proposed client and the shipment transaction. Consulting the relevant lists has been greatly facilitated by government and UN efforts to consolidate lists.
Identifying restricted or prohibited goods
Freight forwarders should be able to connect prohibited and restricted goods to various destinations. In some cases, however, mundane items cannot be lawfully transported to certain embargoed destinations or can be shipped only under license. In addition, many dual-use items are difficult to identify as strategic items. Freight forwarders should develop a routine protocol to consult with their clients regarding the controlled status of the shipped items and whether they have been given the appropriate licenses. This capability will become increasingly relevant as freight transport services consolidate.
Whole-of-supply-chain compliance
Contemporary supply chains are enormously complex. One transaction alone might involve multiple partners and jurisdictions. Freight forwarders can increase the signal-to-noise ratio by finding clients and partners that have compliance programs in place. For instance, BIS freight forwarder guidance notes that ‘Building compliance partnerships and sharing compliance strategies with each other and other parties to transactions as part of Standard Operating Procedures will give all involved a competitive edge’. These partnerships should also extend to the public–private realm. Freight forwarders should work proactively with governmental authorities on self-disclosure protocols in the event of inadvertent violations.
Compliance in acquisition
The freight transport industry is undergoing significant change, including the consolidation of discrete functions such as brokering and carrier services. As 3PL, if not fourth party logistics (4PL), becomes the new industry standard for transport, the new firms must include compliance parameters in their due diligence efforts. Consolidation strategies include acquiring new service providers. In the mergers and acquisition context, undiscovered export control violations can be the source of serious liabilities, which can arise years after the transaction. As such, successor liability is applicable to the transport sector as much as to regular industry.
Right-sizing compliance
Depending on the size and depth of the services offered by the freight forwarder, its compliance programs should fit seamlessly into its risk mitigation methodologies. While the basic elements of trade compliance already exist as a set of global good practices—standard operating procedures, record-keeping, audits and training—implementation at the company level is determined by its size and scope.
Significant Developments in India
Significant developments in 2016 will facilitate strategic trade and commercial cooperation with India.
An Update on India’s MTCR and NSG Progress
In July 2008, India and the United States signed the Civil Nuclear Cooperation Agreement. A few weeks later, India signed an Additional Protocol with the IAEA and obtained a “clean” waiver from the NSG (which permitted NSG member states to participate in India’s safeguarded civil nuclear complex by building power reactors, supplying fuel and pursuing other avenues of collaboration). Since then, New Delhi has upgraded its export control laws, guidelines and control lists so as to make them compliant with UN Security Council Resolution 1540 obligations, as well as consistent with the corresponding provisions of the NSG and MTCR. India will shortly complete the task of harmonizing its national list with the provisions of the Australia Group and the Wassenaar Arrangement.

These efforts are yielding tangible outcomes. In May 2015, India formally submitted its application for membership to the MTCR. Then in June 2016, India signed the Hague Code of Conduct and signed on to become the 35th member state of MTCR. (India has reportedly requested drones from the United States for technical reconnaissance missions along its border with Pakistan, and in general, will be able to upgrade its technology-embedded missile and aerospace cooperation with the major global players.)
India’s NSG membership became a matter of intense debate at the June 23-24 2016 NSG Plenary in Seoul. In the end, 38 member voiced strong support for India’s membership, including the United States, Russia, France, Britain, Canada and Mexico. China led the opposition, while the other 9 states essentially called for the setting up of clear criteria for review of non-NPT members’ cases. Following the Plenary, NSG set up a Consultative Committee of Participating States. This Committee will hold meetings with all member states and suggest specific criteria and a path forward for India’s membership.
The NSG is expected to convene a Special Session in the Fall of 2016 to formally review and decide on India’s membership. The Committee will begin its work shortly, while much diplomatic activity is expected to be carried out in the background with the aim to bring this matter to an amicable conclusion. India is building 6 additional nuclear reactors to supplement its existing pool of 21 reactors, while New Delhi has signed agreements with Russia, France and the United States to build power reactors in India, and secured long-term uranium supply agreements with Australia, Kazakhstan, Mongolia, Niger and Namibia. So while the 2008 waiver already permits India to forge these partnerships, a formal membership will enable India to join and contribute to the elite body that regulates global nuclear commerce.
Keep your eyes on newer developments that open up further strategic business opportunities in India.
Lost in the Lists?
Several US government agencies have “lists” to identify individuals or entities whose behavior conflicts with US trade and security interests. Although these lists vary by focus and government agency, they all share a common theme: conducting business with listed parties carries real risk. Navigating these extensive lists poses a difficult and time consuming task. TradeSecure can facilitate understanding and help you unlock the lists’ risk mitigation potential.

Smart Screening

Due diligence is essential to verifying compliance with all US government lists. Businesses need to determine the status of their customer or business partner with each of the government agencies involved in imposing sanctions. Actively screening these entities and individuals, using available search tools, can help avoid accidental violations and unforeseen penalties.
There are nearly 20,500 persons or entities named on these nine key lists. In order to reduce the risk of exporting to listed parties, businesses can use Commerce’s Consolidated Screening List search engine for reference and screening. In addition, OFAC’s search tool can be used to identify parties on the Specially Designated Nationals List (SDN). This tool also includes OFAC’s Non-SDN Iran Sanctions Act list (Part 541 List), which is not included in the Consolidated Screening List.
BIS has also published a list of Red Flag Indicators for new customer engagements to prevent companies from unknowingly doing business with a denied person or entity. Beyond checking the customer’s name and address against the list of Denied Persons, BIS stresses monitoring for suspicious behavior, such as: not offering end-user information, having little or no business background, paying in cash, being unfamiliar with the product, or special requests regarding delivery of the product. Businesses should be wary of companies who refuse maintenance on the item, request an abnormal shipping route or unorthodox packaging, or provide vague delivery dates. Companies should also refrain from shipping products that seem above the general technical level of the recipient country and should question shipping an item to a company with an unrelated focus. These risk management tactics can be applied to all government lists. Moreover, questions or possible violations can be directed to the US Department of Commerce.
Smart firms will use these lists to their advantage for effective risk management. Despite the overwhelming entries and numbers of the lists, it can be done. Advisory groups like TradeSecure can help companies harness such information to use in their compliance programs, to avoid penalties, and to ensure safety and security of their operations.
Update: Iran Sanctions
Trade with Iran remains a veritable minefield for US companies. Implementation of the Joint Comprehensive Plan of Action (JCPOA), or “Iran Deal,” resulted in the withdrawal of sanctions applying to non-US entities, yet left most primary sanctions affecting US business in place. According to State Dept. guidance documents, the United States has only lifted “nuclear-related secondary sanctions” on Iran. These benefit exporters outside U.S. jurisdiction, meaning foreign entities can no longer be prosecuted under U.S. law for trading with Iran. The United States also removed a number of Specially Designated Nationals (SDNs), Foreign Sanctions Evaders (FSEs), and Non-SDN sanctioned persons from their blacklists, which can be found on the Office of Foreign Assets Control (OFAC) website. Finally, the USG now permits trade in commercial airliners, rugs, and specified foodstuffs.
However, numerous U.S. sanctions on Iran remain in force. Many U.S. sanctions predate Iran’s nuclear ambitions, and the current web of sanctions reflect this history of compounding penalties to trade. Critically, while the JCPOA lifted sanctions related to the existence of Iran’s peaceful nuclear program, other unrelated U.S. nonproliferation sanctions continue to prohibit dangerous technology from being exported to Iran.

What’s Changed?
For the United States: very little, as Europe was the primary beneficiary of JCPOA-related sanctions relief. The secondary sanctions removed in accordance with the agreement affected foreign, primarily European, companies with Iranian business ties. The sanctions regime’s goal was to deprive Iran of business, both U.S. and global, and pressure them into negotiations. As secondary sanctions lifted, in combination with the removal of sanctions by the other P5+1 members, most countries can now conduct business with Iran.
However, U.S. companies still face obstacles from persistent U.S. sanctions, other than the limited carve-outs highlighted earlier (foodstuffs, rugs, and commercial airline parts). The reasons are twofold. First, US exports are still largely banned under the terrorist and human rights sanctions, preventing large-scale economic engagement between U.S. and Iranian companies. Second, and perhaps most importantly, no payments from Iran can go through the U.S. financial system without risking reprisal from the USG. This devastating financial blockade prevents any financial exchanges thereby halting all Iranian investment opportunities.
However, U.S. companies have seen some positive developments. Since secondary sanctions have been lifted, subsidiaries of U.S. companies operating outside the overseas can now do business with Iran. Subsidiaries can apply for General License H to engage in transactions. Yet as no Iranian funds can pass through U.S. banks, revenue from any financial dealings must be kept in offshore accounts.
Patience Is a Virtue for U.S. Companies
The JCPOA represents a major first step for repairing U.S.-Iran business ties. However, due to remaining non-nuclear sanctions on Iran, domestic U.S. companies have little short-term recourse regarding Iran. While overseas subsidiaries of U.S. companies can engage with Iran, considerable concerns endure for parent companies, aside from inherent legal ambiguity. First, a real stigma persists against doing business with Iran as the domestic trade embargo continues. While not illegal, parent companies may advise their subsidiaries against conducting business with Iran to avoid unwanted attention from the U.S. government. Second, the United States will closely scrutinize any Iranian trade deals with the potential of export violations. U.S. trade with Iran may be opening, but it is certainly not yet free.
U.S. trade with Iran will continue to carry caveats. In particular, companies should anticipate and prepare for high legal costs in case of U.S. government action over alleged violations. Short term, most U.S. Iran trade will likely occur through subsidiaries. Overall, while the JCPOA loosens legal restrictions for foreign companies., U.S. companies must tread lightly and be patient as avenues for Iranian business slowly open.
Note: Exporters interested in Iranian business must remain vigilant of more than just the U.S. federal sanctions regime. See TradeSecure’s upcoming Critical Data piece on state-level Iran sanctions to learn more.