‹ Back

What Rules Apply to Me?
A Primer on Biotech Export Regulations

 

In April 2023, the Department of Commerce imposed a record-breaking fine of $300M on US company Seagate Technology for its exports to a Chinese telecom firm–the largest standalone administrative penalty in the agency’s history. Though most technology companies understand the existence of export restrictions and the heavy penalties if these rules are not followed, these regulations are particularly nuanced when it comes to the biotechnology industry. Therefore, a basic understanding of these rules within the biotechnology sector can enable a more effective due diligence program, protecting your company and making it easier for authorities to hold the proper parties–the illicit procurement agents–accountable.

 

Export control regulations are the US Government’s means of preventing export of goods posing a risk to US national security and foreign policy interests, as well as upholding agreements the US Government has made to the international community. Initially the US Government will enter into international agreements with other countries, such as legally binding treaties like the Chemical Weapons Convention, or voluntary international arms control regimes, like the Australia Group, intended to promote global stability and prevent truly horrible forms of war. These agreements are then codified into law by the US Congress and implemented by Executive Branch agencies through a series of regulations.

 

The three primary sets of regulations include the International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and sanctions programs:

 

The International Trafficking in Arms Regulations (ITAR) derives from the Arms Export Control Act, implemented by the Department of State’s Directorate of Defense Trade Controls (DDTC). This governs the manufacture, import, and export of defense-related items on the US Munitions List–primarily things like firearms and fighter jets–as well as provision of defense-related services. Very few items in the biotechnology sector fall under these regulations, however, the regulations do extend to specific chemicals, microorganisms, toxins, and associated genetic elements associated with chemical and biological warfare and specified in international treaties. The regulations also include items funded or used by the Department of Defense to identify and protect against chemical and biological warfare agents. Finally–and perhaps most importantly–these regulations apply to items used in the development and testing of chemical warfare agents, capturing items which may not be otherwise controlled. 

 

The second set of regulations, the Export Administration Regulations, are administered by the Department of Commerce’s Bureau of Industry and Security (BIS), and cover significantly more items commonly used in the biotechnology sector. Under this set of regulations, items are categorized in the Commerce Control List (CCL) and assigned an Export Control Classification Number (ECCN) which describes the item and licensing requirements. Items are “controlled"–meaning they require a license from the Department of Commerce to export based on a combination of the reason for control and the country to which it is being exported. For example, items like gravity meters (ECCN 6A007) or underwater sonar navigation systems (ECCN 7A008) going to Cyprus are controlled for national security reasons, but are not controlled when going to the Czechia. This is one reason illicit procurement agents utilize front companies in certain locations. Additionally, many items widely used in the biotechnology industry are classified as “EAR99,” which means no license is required to export it, though these items may be controlled under ITAR if intended for certain end uses, such as development of chemical weapons. 

 

The final set of regulations is the Department of the Treasury’s sanctions programs, which are administered by the Office of Foreign Assets Control (OFAC) and are intended to accomplish certain foreign policy and national security goals. These sanctions are codified in Treasury’s Specially Designated Nationals (SDN) list, which identifies individuals or companies controlled by or acting on behalf of certain foreign countries, or transnational groups such as terrorists and narcotics trafficker, whose assets are blocked and with whom US entities are prohibited from interacting. Sanctioned entities most likely to interact with the US technology sector include procurement agents supporting foreign weapons programs, who may seek to obtain technology through an unwitting US supplier. Additionally, foreign companies owned by individuals--such as Russian oligarchs—may pose a risk to US technology companies through inadvertent joint business ventures. 

 

Despite all these regulations, illicit procurement agents still manage to divert US technology–usually by deceiving the exporting company, not only causing a risk to US national security, but also placing exporting companies at risk for regulatory action and significant financial loss. They evade ITAR restrictions by establishing front companies in the United States, leading the manufacturer to believe the item was a domestic sale, and then exporting the items using aliases and false addresses, or hiding the controlled items in other shipments. They evade EAR licensing requirements by establishing front companies in countries more favorable to US exports, obscuring the end user or use of the technology, and miscategorizing it on export documentation. Finally, they hide affiliations with Treasury-sanctioned individuals using offshore firms in countries which do not require declaring a company’s true owner.

 

US companies can protect themselves by paying particular attention to red flags–described in more depth by the Department of Commerce--such as mismatch between the purchase and the company’s declared business, or a general lack of familiarity with the item. Exporters can conduct additional research on the purchaser and purported end user, including obtaining names and addresses which can be searched online or passed to due diligence professionals for more specialized and thorough scrutiny. Exporters can also insist upon a detailed, written description of end user and end use, and be diligent about properly characterizing the export in their own paperwork, ensuring the proper party is held responsible for any violations.

 

See OFAC’s “Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base” for additional information and recommendations.