Regulatory: Know your customer when doing business overseas

Trading goods with restricted countries can lead to costly sanctions

In our last column, we emphasized how a company wishing to do business in overseas markets must first lay a solid foundation through the proper classification of its products. Once goods have been classified correctly, there is another critical step that must precede every international transaction: checking to make sure that you can legally do business with the potential trade partner in the first place.

The U.S. government restricts trade with certain entities and individuals because of national security or other foreign policy concerns. Several different agencies maintain lists of these restricted parties. Although checking these lists is a very simple task, and the potential penalties for doing business with a restricted party are quite severe, an alarming number of U.S. companies are not even aware that the lists exist.

The consequences of accidentally doing business with a restricted party can be significant. For example, earlier this year, FedEx agreed to pay a $370,000 penalty for six violations, three of which related to shipments of goods to restricted parties on the Entity List. The government does not only target the big fish for enforcement, either. For example, a small company in Madison, Wis. agreed to pay $7,500 for only one shipment of an X-ray instrument to a Pakistani university on the Entity List.

Some companies assume that if the goods they export do not need an export license, they do not need to worry about where they send them. That is not the case, as shipments to restricted parties often are prohibited even if the shipment would not require an export license if sent to anybody else. For example, in the enforcement action involving FedEx earlier this year, each of the shipments to the restricted party involved goods that were “EAR 99,” meaning that ordinarily a license would not have been necessary to ship them. In another enforcement action that BIS filed just this month, a New Jersey company was fined $50,000 for shipping scrap steel to a mill in Pakistan. If the mill had not been on the Entity List, the company likely would not have needed a license to ship the scrap steel to Pakistan.

Contributing Author

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Eric Wilson

Eric J. Wilson is a shareholder in Godfrey & Kahn's Litigation Department and a member of the White Collar Defense and Investigations Practice Group. He...

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Contributing Author

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Wendy Arends

Wendy Arends is an associate in the Godfrey & Kahn's Madison office, where she advises businesses, organizations and trade associations regarding their interactions with local,...

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