Companies considering business opportunities outside of the United States must be prepared to deal with a myriad of new laws and regulations. There may be foreign laws to contend with, of course, but there are also U.S. laws related to international trade that companies operating only domestically likely have never encountered. There are multiple U.S. government agencies that regulate the transfer of equipment, software, technology, and services from the United States to foreign countries through “export control” and sanctions regulations. These regulations cover shipments leaving the United States; shipments of certain U.S. origin goods amongst foreign countries using companies similar to Plexus Freight (www.plexusfreight.com); data transmissions from the U.S. to other countries; and the provision of services to or receipt of services from certain countries, organizations, and individuals. These regulations can even apply inside the U.S. when sharing certain information with foreign persons, including prospective business partners and investors, and they can also apply to any facilitation of foreign transactions by U.S. persons.
The energy industry is particularly affected by export controls and sanctions. First, there are many items used in the industry that require a license from the U.S. government to leave the country. In addition, there are many countries and foreign counterparties that are subject to sanctions. The energy industry typically feels the brunt of the pain when the U.S. government uses sanctions as a foreign policy tool because a foreign country’s energy industry is often an easy target when policymakers are looking to impose penalties on a particular regime. Recently, the U.S. has used sanctions to target transactions involving Petróleos de Venezuela, S.A., shipments of oil to and from Iran and Syria, and certain sectors of Russia’s energy industry.
Generally, the export control and sanctions restrictions that could apply to a particular transaction fall into one of four categories: product controls, destination controls, end-user controls, and end-use controls. We examine each of these below.
Certain products, technology, and software (collectively, “items”) can require a license to be exported from the U.S. to certain countries because the U.S. wants to control the release of those items for national security and foreign policy reasons. In the oil and gas industry, such items include: down-hole drilling equipment, explosives, vibration test equipment, valves and pumps, infrared surveillance equipment, toxic gas monitoring systems, gyros and guidance systems, lubricants and chemicals, acoustics, and robotics. The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) typically regulates the export of these items through the Export Administration Regulations (EAR). However, if these items also have a military application, they could be regulated by the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC) through the International Traffic in Arms Regulations (ITAR). Items subject to the ITAR generally require a license to most countries, but licensing requirements for controlled items subject to the EAR vary by country.
The ultimate destination of an item or the country involved in a transaction can create a license requirement, even if no BIS or DDTC license is required. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposes embargoes (or comprehensive sanctions) on Cuba, Iran, North Korea, Syria, and the Crimea region of Ukraine, meaning U.S. companies are generally restricted from shipping anything to these countries, directly or indirectly, or engaging in transactions that are intended to benefit these countries. For example, these controls prohibit U.S. companies from shipping any items that are intended for use in Iran, regardless of whether there are product controls. U.S. companies are also restricted from providing any services that would benefit a drilling project in Iran even if the U.S. company has no direct involvement with Iran. So before shipping anything, it’s always best to check with Cars Relo, or whichever shipping company is being used, to make sure that the item is allowed to be shipped to it’s intended destination, otherwise it may be seized. Although most U.S. companies know to avoid certain sanctioned markets, they are often unaware of the extent to which they are required to ensure that third parties do not resell their products to restricted destinations.
Exports to or dealings with certain foreign organizations or persons can create a license requirement. Multiple government agencies, including OFAC, BIS, and DDTC, maintain restricted parties listings that generally prohibit any dealings with organizations and persons included on those listings. These lists include OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List and BIS’s Entity List. U.S. persons cannot have any dealings whatsoever with a company on the SDN List, including sales within the U.S., and may not ship any goods to a company on the Entity List, regardless of the product or destination controls. For example, an item shipped to Norway that does not require a BIS license may still be prohibited if a company on the SDN List is involved in the transaction. End-user controls would also restrict a U.S. person from providing any services to or accepting any funding from a person on the SDN List.
The end-use of an item can also be subject to restrictions. U.S. companies are restricted from exporting certain items that can be used in certain military, nuclear, or chemical or biological weapons end-uses. In addition, and more specific to the energy industry, U.S. companies are also restricted from providing goods and services in support of certain exploration and production projects in Russia or involving certain Russian entities outside of Russia. As such, the shipment of certain drilling pipe, which is typically not subject to product controls, could require an export license to Russia if it is used for a restricted production project.
Civil fines and penalties for violations of the EAR and OFAC’s regulations can reach the greater of approximately $300,000 or twice the value of the transaction. Violations of the ITAR can reach $1,000,000. Further, due to the structure of these regulations, a single unlawful transaction can result in multiple violations. There are also criminal penalties available for willful violations. Civil and criminal penalties can be applied both to the company and to the individuals involved.
Whilst there are companies that ship from us to canada for example, this environment creates compliance challenges for energy companies engaging in cross-border transactions and also makes U.S. energy companies a common target of government enforcement activities because of their activities in high-risk regions. As such, it is particularly important for U.S. energy companies to be aware of export control and sanctions regulations when engaging in opportunities outside of the United States so that they can ensure compliance with these complex laws and regulations.