Distribution Jack Up Export Rules Compliance Efforts

Photo of Mark Bollinger, Smith & Associates

Compliance with the rules governing the exportation of restricted components from the United States and the European Union to certain countries and regions have become onerous and expensive. Distributors are helping suppliers and customers navigate the tortuous terrains with a combination of internal compliance systems and external experts. 

US and European Union laws restricting the export of some electronic components and devices to certain regions of the globe leave little room for dissent or failure to achieve compliance. The cost to companies that even unwittingly violate any of the growing set of rules and regulations can be enormous, in addition to the possibility of jail terms for violators.

The US government began adding to the rules under the Trump administration. This was partly to combat what it deemed unfair trading practices by China as well as in a bid to curtail the Communist nation’s growing military presence in southeast Asia. More sanctions have been added by President Biden, this time with measures focused on the electronics industry and especially next-generation semiconductor components. To ensure the sanctions produce the desired effects, the government has expanded the American groups it partners with, drawing from the private sector in addition to traditional law enforcement groups, according to Commerce Secretary Gina Raimondo.

“We need the private sector, including business, labor, and universities, to work with us to ensure America’s long-term prosperity and security. We are pushing on all fronts, all at once. And we need to do it all together,” Raimondo said, in a statement in November while discussing actions taken by the government. “Our competition with China is global, but our economic strategy begins at home. Our economic competitiveness and national security depend on a bold domestic investment agenda in strategic and critical sectors.”

Electronics manufacturers have responded positively to the government efforts. Component suppliers, OEMs and contract manufacturers are leaning heavily on supply chain partners in the distribution segment for assistance in ensuring they do not fall afoul of the new rules. Little wonder, compliance actions have grown as a part of the supply chain services offered by electronic component distributors. All the major distributors have beefed up their compliance programs in recent years, adding personnel and updating databases of products and countries impacted by the new government rules.

In fact, all distributors have clearly stated export control policy statements on contractual agreements as well as on their websites. Here is a sample from Mouser Electronics:

Mouser will not sell or ship to embargoed countries or individuals and entities who are restricted by a) the U.S. Treasury Office of Foreign Asset Control (“OFAC”) list of Specially Designated Nationals, including entities that are owned 50% or more by such individuals or entities; b) the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) Denied Persons List, Entity List, Unverified List, and Military End User list, or for military end use in China, Russia, Venezuela, Burma and Cambodia; and c) Department of State’s AECA Debarred List, among others. Mouser will not export Products prohibited by the Export Administration Regulations (“EAR”). 

Mouser’s policy prohibits exports of any product that requires an export license pursuant to the EAR or Department of State’s International Traffic in Arms Regulations (“ITAR”). Mouser participates in BIS Export Enforcement and OFAC transaction reporting. Mouser immediately report suspicious purchases to the proper authorities for investigation.

In light of the numerous sanctions imposed upon Russia and Belarus by governments and organizations around the world, Mouser will not ship any Products to Russia, the Donetsk and Luhansk regions of Ukraine, and Belarus.

But assuring compliance with export rules is neither cheap nor easy for component distributors. Over the course of decades, the leading distributors have beefed up their compliance departments with legal experts as well as seasoned executives who closely monitor developments on export restriction and ensure the voice of the industry is reflected in proposed legislation, according to observers.

“As an American company, we always have to make sure we are in compliance with American laws,” said Mark Bollinger, chief globalization officer at Smith & Associates, during an interview at the recent Electronica Exhibition in Germany. “That is number one. And so, there are changes that are happening that we must ensure we stay on top of. We have an internal trading platform that we use to keep our people up to date. We also have internal compliance people and a well-trained operations team. In addition, we have outside advisors who help us navigate through the different regulations.”

Those regulations have mushroomed in recent years as tension grew between the United States and China on one hand and following the outbreak of war between Ukraine and Russia. Sanctions imposed by the US, the EU and allied Western nations, including Australia, Japan, South Korea, and the United Kingdom, have resulted in a further broadening of export restrictions. Manufacturers are compelled to stay on top of the evolving rules and cannot depend solely on internal teams, industry sources said.

These are frequently complimented with external experts drawn from law firms focused on export compliance, industry experts who track new regulations globally and academicians who offer consulting services and insights into new legislations. Beyond assuring internal compliance, though, some companies try to monitor and keep a database of known violators, their methodologies and track product shipment to assure they are not diverted to prohibited locations.

Demonstrating the growing role of distributors in compliance with export rules, the Department for International Trade in the United Kingdom in December published case studies demonstrating what it called “best practice and desirable approaches to license compliance,” on its website. Both case studies involved component distributors.

The case studies emphasized the need for clear messaging about what is being shipped overseas, “decisions on whether the technology requires an export license,” type of license, the details of the recipients, destination countries, licensing information and records, communication with compliance inspectors, documentation of the entire process, authorization systems and efforts to check for sensitive technology and “appropriate Ministry of Defense approvals.”

A separate publication of the UK government on “compliance code of practice for export licensing,” also published in December noted that companies should develop internal export control compliance procedures. It added that the compliance commitment should be obvious to government inspectors.

“You must demonstrate that you have adequate procedures in place to inform staff about changes to export control guidance and regulation, train personnel, create a reference list of sources of information, guidance and regulations, [and] a list of contacts for advice.”

Some of the rules can be complicated and exacting.

Last year, for example, the US Bureau of Industry and Security (BIS) within the Commerce Department imposed additional controls on the export of what it described as “certain advanced computing and semiconductor manufacturing items: supercomputer and semiconductor end use” products.

The new BIS regulation added to the list of proscribed items or products requiring pre-approval for shipment. It added to the items that required “license requirements” for export to “twenty-eight existing entities on the Entity List that are located in China,” according to a statement published on the commerce department website.

In the case of China, the task of assuring compliance has become even more complicated for the entire industry because portions of the new rules concerned “end-use” of the impacted products. Distributors and their suppliers are compelled to require extensive documentation from purchasers about the planned end-use application for the products they want to purchase ahead of shipment. However, the regulation does not absolve the seller from a diversion of the components to other applications by the buyer. This raises the risk profile of the seller, forcing many of them to completely avoid certain markets and the shipment of impacted products to countries like China and Russia.

The BIS said it seeks to “protect U.S. national security and foreign policy interests” because “the advanced computing items and ‘supercomputers’ can be used to enhance data processing and analysis capabilities, including through artificial intelligence (AI) applications.”

No deal

Some of the new rules recently added by the BIS require a “no-touch” approach. For example, the Commerce Department is restricting the involvement of Americans and permanent residents, described as “U.S. persons” in the “development or production of certain ICs in the PRC.” This imposes severe constraints on the distribution of semiconductors developed or manufactured in China.

Industry sources said many distributors have informed suppliers that they would end the distribution of components that can fall within this group.

In some ways, distributors are reinforcing compliance actions already in place at their suppliers. But they are also sending signals back to suppliers too, especially in the case of products requiring export licenses that the BIS has already indicated it would most likely deny. In such cases, efforts to secure export licenses for some of the impacted products would represent a waste of the distributor’s and the supplier’s time and resources.

Not all products fall under automatic “presumption of denial” for export licenses. The BIS published a list of items it said could qualify for “exports or reexports.” Distributors help suppliers and customers determine which products require export licenses and navigate the process of applying for the permits.