Debarred, Denied, Restricted? Legal Responsibilities in Outsourcing
Regulatory professionals frequently work with their supply chain colleagues to ensure all relevant documentation is provided for the export of goods from the country of origin. However, there are little-known US regulatory requirements with potentially significant administrative and criminal consequences for violation, and many manufacturers may not be aware of them. The US Departments of Commerce, State and the Treasury publish lists of US and international individuals and companies that are either denied the right to export regulated goods or are subject to export restrictions. Reviewing these lists should be standard procedure for US-based manufacturers exporting product that contains components provided by third parties, and those that contract with shipping agencies or distributors to export their product.
Why are these entities restricted? The US government enacted export controls to protect national security, achieve foreign policy goals and prevent proliferation of various threats. Entities deemed to present a risk of diverting exports to weapons of mass destruction programs, terrorism groups or narcotics traffickers, or suspected of violating US sanctions, are published in the Federal Register and placed on a screening list. To avoid violating these regulations, an exporter has an explicit duty to exercise reasonable care in investigating the parties involved in, and the nature of, its export transactions.
These lists include entities based in the US and internationally, so diligence is necessary regardless of the country listed in a company's address. Companies or people of concern may be engaged in manufacturing, transportation or R&D, among other functions. Companies that manufacture medical products in the US should be alert to the status of suppliers, shippers of components or finished goods and distributors. Further, sanctions are not only limited to the entities listed, but also can extend to associated businesses, so all manufacturers need to be vigilant to ensure their supply chains are not compromised.
Recent additions to the lists include entities associated with the current tensions in Ukraine and some international air freight services and businesses associated with the export of computer technology to restricted countries. One incident involving the shipment of computer technology to a restricted country caused revocation of export privileges for not only the transportation company located within the restricted country, but also for more than a dozen associated British, Arab, Turkish and French companies as well.
Lists of Parties of Concern
There are six different lists published by the US government that identify entities of concern or those that have special requirements with respect to exporting from the US. Fortunately, there is a new Consolidated Screening List1 that combines all of these into one downloadable list, making the screening process more manageable. The following descriptions are provided on the export.gov websitehttp://export.gov/ecr/eg_main_023148.asp.
Department of Commerce--Bureau of Industry and Security (BIS)
Denied Persons List
These are individuals and entities that have been denied export privileges. Any dealings with a party on this list that would violate the terms of its denial order are prohibited.
Unverified List
This list includes end-users that BIS has been unable to verify in prior transactions. The presence of a party on this list in a transaction is a "Red Flag" that should be resolved before proceeding with the transaction.
Entity List
These are parties whose presence in a transaction can trigger a license requirement supplemental to those elsewhere in the Export Administration Regulations (EAR). The list specifies the license requirements and policy that apply to each listed party.
Department of State--Bureau of International Security and Nonproliferation
Nonproliferation Sanctions
This lists parties that have been sanctioned under various statutes. The linked webpage is updated as appropriate, but the Federal Register contains the only official and complete listing of nonproliferation sanctions determinations.
Department of State--Directorate of Defense Trade Controls
AECA Debarred List
This is a list of entities and individuals prohibited from participating directly or indirectly in the export of defense articles, including technical data and defense services. Pursuant to the Arms Export Control Act (AECA)and the International Traffic in Arms Regulations (ITAR), the AECA Debarred List includes persons convicted in court of violating or conspiring to violate AECA and subject to "statutory debarment" or persons established to have violated AECA in an administrative proceeding and subject to "administrative debarment."
Department of the Treasury--Office of Foreign Assets Control (OFAC)
Specially Designated Nationals List
These are parties that may be prohibited from export transactions based on OFAC regulations. EAR requires a license for exports or re-exports to any party in any entry on this list that contains any of the suffixes "SDGT", "SDT", "FTO", "IRAQ2" or "NPWMD."
The export.gov website provides the following guidance on using the Consolidated Screening List: "In the event that a company, entity or person on the list appears to match a party potentially involved in your export transaction, additional due diligence should be conducted before proceeding. There may be a strict export prohibition, requirement for seeking a license application, evaluation of the end-use or user to ensure it does not result in an activity prohibited by any U.S. export regulations, or other restriction."
A Call to Action
Manufacturers should be aware that orders denying export privileges are issued with an effective date and expiration date (if applicable--some do not expire), as well as the type of denial issued and the appropriate Federal Register citations, which are published in the list. The period of exclusion can vary widely, from a few months to more than 50 years or indefinitely. Doing business with an entity on any of these lists in a manner that violates an export prohibition or restriction may be a violation of US export law and could result in criminal prosecution.
The selection and/or approval of suppliers and distributors may be handled by a manufacturing company's quality assurance department or by supply chain management staff. The regulatory department should be apprised of these activities and given access to the approved suppliers list. Regardless of which department carries the responsibility, management has to ensure that screening against these lists is incorporated into the due diligence process as an essential part of selecting these external resources.
Note:
Although this article is focused solely on the US, other countries do have restrictions in place, although the author is not aware of any similarly comprehensive list as the one mentioned here.
References
- Consolidated Screening List. Export.gov website. http://export.gov/ecr/eg_main_023148.asp. Updated 5 December 2011. Accessed 25 March 2014.
About the Author
Sharon DeGrove Bishop, RAC, has more than 15 years of regulatory experience with Class I, II and III medical devices and currently oversees all aspects of user interface with the SOFIE™ Regulatory Intelligence System by Graematter. She can be reached at [email protected].
Cite as: Bishop S. "Debarred, Denied, Restricted? Legal Responsibilities in Outsourcing." Regulatory Focus. April 2014. Regulatory Affairs Professionals Society.