This memorandum summarizes the regulatory concerns applicable to the export of specialty steel and specialty metals products, as well their ancillary melting and processing technologies. The memorandum is intended to assist company representatives identify issues that could give rise to export licensing consequences.
The number of different U.S. government agencies involved in developing export control lists, denied persons lists, and in enforcing the various export control statutes presents one of the biggest challenges to tracking developments in the export control area.
The principal agency, the Department of Commerce’s Bureau of Industry and Security (BIS), is responsible for administering and enforcing the “dual use” export controls. These controls apply to products with applications for both commercial and military uses. BIS administers three principal types of controls. The first set applies to particular materials, finished products, software, and technologies.
Many specialty steel and specialty metals producers are concerned with materials and materials processing controls that are found in Categories 0, 1 (materials), and 2 (materials processing) of BIS’s Commerce Control List (CCL), which is part of the Export Administration Regulations (EAR). These categories identify products that are controlled for export, specify which controls apply, and help determine which shipments will require an export license.
Certain nickel powder or porous nickel metal, other than nickel powder or porous nickel metal specially prepared for the manufacture of gaseous diffusion barriers subject to the export licensing authority of the Nuclear Regulatory Commission, are controlled for export by ECCN 1C240.
In CCL Category 1, certain equipment for producing metal alloys, metal alloy powder, or alloyed materials is controlled for export to many destinations under ECCN 1B002. Tools, dies, molds, or fixtures for “superplastic forming” or “diffusion bonding” titanium, aluminum or their alloys for the manufacture of airframe or aerospace structures, aircraft or aerospace engines, or components of such engines are controlled for export by ECCN 1B003. Other metal powder production equipment is controlled for export by ECCN 1B102.
Many other products that could potentially be used to produce propellants, particularly for missiles, are controlled under other sections of ECCN category 1B.
A number of metal alloys, metal alloy powders and alloyed materials are controlled by ECCN 1C002. Controlled materials include over 40 different subcategories of aluminides, nickel alloys, niobium alloys, titanium alloys, and aluminum alloys. Other metal alloy powders or particulate material for use in turbine engine parts, alloys made using vacuum atomization, gas atomization, rotary atomization, splat quenching, melt spinning and comminution, melt extraction and comminution, or mechanical alloying, and certain alloyed materials in flake or thin rod form are also controlled by this category.
Other titanium and aluminum alloys of specified characteristics that are not controlled by 1C002 are controlled by 1C202.
Certain magnetic metals are controlled by 1C003. Certain uranium titanium alloys or tungsten alloys with a matrix based on iron, nickel, or copper are controlled by 1C004, while certain “superconductive” “composite” conductors materials are controlled by 1C005.
Metals in particle sizes of less than 60µm (in most shapes) made from 99% or more zirconium, magnesium, and alloys of these metals, whether or not encapsulated, are controlled by 1C011, along with certain boron and boron carbide, guanidine nitrate, or nitroguanidine.
Maraging steels are controlled by 1C116 or 1C216.
Tungsten, molybdenum, and alloys in particle form, as well as tungsten in solid form, that can be used for certain rocket or missile components are controlled by 1C117.
Certain titanium stabilized duplex stainless steel is controlled by 1C118.
Enriched boron is controlled by 1C225, and tungsten, tungsten carbide and other alloys of tungsten are controlled by 1C226. Many other metals are controlled in the 1C category, including certain magnesium, bismuth, beryllium, hafnium, zirconium, and others.
Certain other production equipment is also controlled under Category 2, such as crucibles resistant to liquid actinide metals (2A225), pumps that can move molten metal by electromagnetic forces (2A993), a number of types of machine tools (2B, among other categories), isostatic presses (2B), certain spray deposition products (2B), robots, flow forming machines (2B109), certain furnaces (2B), and many other types of material processing equipment.
Moreover, more and more products are being manufactured from high nickel content alloys. Products like pumps, valves, storage tanks, heat exchangers, agitators, and other types of liquid, gas, and chemical processing equipment made from those products are controlled for export under 2A226, 2B350, and 2B999. Controls on these product categories, including equipment for chemical processing, were expanded significantly in recent years. Commerce now controls exports for the ECCN categories listed in this paragraph to approximately 160 countries, over 400% of the number controlled a decade ago.
Software and technology (the “know-how” required to develop, produce, or use materials or equipment listed in the CCL) is also controlled for export to many destinations. Such exports could include written “recipes” for manufacturing certain controlled powders, alloys, or metals, for example, or technical manuals and other materials related to manufacturing equipment. These technology controls apply to transfers in the United States to nationals of countries that would require an export license if the technology were to be shipped to that destination (known as a “deemed export”). For example, if a license were required to export a certain nickel powder to India and China, a license would be required to share technology for producing that product with an Indian or Chinese engineer in the United States, whether they are an employee or a visitor to your facility. These “deemed export” controls do not apply to persons who hold green cards.
Many of the products listed above are controlled for export for, among other reasons, National Security (NS), meaning that licenses are generally required to export them to most destinations.
Please note that this listing of materials is not intended to be comprehensive regarding the product controls in the Commerce ECCN listings. The control categories referred to briefly above are included for illustrative purposes. To ensure compliance with product export controls, each company must evaluate its own products against the ECCN listings and classification criteria to determine if they manufacture products that may require a license for export.
In addition to these product and technology controls, Commerce also enforces a second type of control on exports for certain prohibited end uses, including missile production and development in most parts of the world, chemical and biological weapons development, and for nuclear weapons development. These controls now apply virtually worldwide. Commerce has also emphasized that exporters are responsible to be alert for “red flags” indicating that an export may be destined for a prohibited end use, user, or destination.
Finally, in a third set of controls, Commerce, along with the other export enforcement agencies described below, administers lists of “denied parties.” In general, U.S. companies are not permitted to export to, import from, or conduct financial transactions with companies or individuals on these lists. There are a few exceptions to this practice, but every export should be screened against all the applicable denied party lists to ensure compliance.
Separate from the Commerce Department controls on dual use equipment, the Department of State’s Directorate of Defense Trade Controls (DDTC) controls exports of “defense articles.” Defense articles are items that are either listed on the United States Munitions List (USML) or provide performances equivalent to USML items. The export controls on defense articles are called the International Trafficking in Arms Regulations (ITAR). These controls do not apply exclusively to weapons or weapons systems. For example, articles on the USML include items in a partially completed state (such as forgings, castings, extrusions, and machined bodies) which have reached a stage in manufacture where they are clearly identifiable as defense articles.
The USML includes metal products that may go into certain propellants for use in missiles and other propulsion purposes. Because certain powders are also controlled by BIS, it is important to ensure that your product is subject to the proper agency’s jurisdiction. Other ITAR controlled products include certain zirconium, magnesium, and alloys of these metals in particle sizes of less than 60 micrometers are covered, as is certain aluminum powder. Explosives and fuels containing certain alloys (whether encapsulated or not), and metal fuels in particle form, whether spherical, atomized, spheroidal, flaked or ground, consisting of 99 percent or more of any of the following: zirconium, beryllium, boron, boron carbide, iron powder, magnesium, and alloys of these are also controlled by the ITAR. The regulations also cover metal embrittling agents.
As with the Commerce product controls mentioned above, this list is only illustrative, not comprehensive. Moreover, software and technical data associated with defense articles may also be controlled for export.
The U.S. Department of State also administers anti-proliferation sanctions on specified parties, similar to the Commerce Department’s denied party lists.
Products used in overseas nuclear power facilities are generally controlled for export by the Nuclear Regulatory Commission, though there is some overlap with the Department of Commerce. Nuclear technology, or information, is controlled for export by the Department of Energy.
The Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers the assorted U.S. sanctions programs. These change regularly with U.S. foreign policy positions and priorities. As of this writing, broad sanctions apply to dealings with Cuba, Iran, North Korea, Russia, Syria, and the Crimea region of Ukraine. Exports of many items to Sudan remain subject to substantial restrictions, although the embargo on Sudan administered by OFAC has been lifted. OFAC also administers a list of Specially Designated Nationals (SDNs), with whom U.S. persons are generally prohibited from dealing.
The list of countries and territories subject to economic sanctions, and the exact rules applicable to each sanctions program, can and do change, sometimes frequently, in response to U.S. foreign policy concerns. In addition, the scope and restrictions for each set of sanctions vary by program, making compliance with the various requirements particularly challenging. Any potential sanction issues should be reviewed by legal counsel.
The following sections detail the current sanctions imposed by the United States:
The United States has a complex entanglement of executive orders, agency regulations, and statutes that comprise the sanctions against Russia. There are three key categories of sanction issues that pertain to U.S. and non-U.S. companies. First, there are primary blocking sanctions against individuals and entities designated as a sanctioned party by OFAC or owned, 50 percent or more, directly or indirectly by sanctioned parties. “Designation” occurs when OFAC adds a party to one of its sanctions lists, including the SDN List. Second, there are “sectoral sanctions” that prohibit U.S. persons from dealing with entities operating in certain sectors of the Russian economy. Finally, there are secondary sanctions that subject non-U.S. persons to potential sanctions for engaging in specific activities where no U.S.-jurisdictional nexus exists. Notably, on April 6, 2018, the Treasury Department released a list of sanctioned Russian oligarchs, officials, and entities that it determined to have participated in worldwide malign activity. These sanctions were intended to have a significant commercial impact, as they target individuals and companies with global profiles across a range of key sectors. Non-U.S. persons that engage in “significant transactions” with the sanctioned parties on the list could be subject to secondary sanctions.
Russia (specific to the metals and mining sectors):
Section 223(a) of the Countering America's Adversaries Through Sanctions Act (CAATSA) states that the “Secretary of the Treasury may determine that a person meets one or more of the criteria in section 1(a) of Executive Order No. 13662 if that person is a state-owned entity operating in the . . . metals and mining sector of the economy of the Russian Federation.” In practice, this means OFAC may impose blocking sanctions or sectoral sanctions, as described above. To date, OFAC has not issued a directive placing sectoral sanctions on U.S. persons dealings with individuals and entities operating in one or both of these sectors. However, on April 6, 2018, OFAC exercised its power to use blocking sanctions by designating one of Russia’s largest aluminum producers, Rusal, as an SDN for being owned or controlled by, directly or indirectly, EN+ Group and Oleg Deripaska. This designation was a result of Rusal’s affiliation with a sanctioned individual and entity. While Rusal was not necessarily sanctioned for its role in the metals and mining sectors, OFAC nonetheless demonstrated it is willing to target entities operating in these sectors. U.S. persons dealing with parties in these sectors need to be aware of evolving changes in Russian sanctions and must be prudent about determining whether the parties are on a sanctions list or owned, 50 percent or more, directly or indirectly by sanctioned parties.
Despite some easing of restrictions during the Obama Administration, the United States still maintains a comprehensive embargo on trade and other transactions involving Cuba. As a result, most transactions involving persons subject to U.S. jurisdiction related to Cuba continue to be prohibited absent authorization from OFAC in the form of a general or specific license. Exports and reexports of U.S.-origin goods, technology, and software are also generally prohibited absent exceptions to the relevant regulations.
U.S. economic sanctions in Iran are highly restrictive. U.S. persons and U.S. companies are generally prohibited from conducting any transaction or dealing related to Iran. Non-U.S. companies can be subject to U.S. secondary sanctions if they conduct significant transactions involving Iranian SDNs. Exports from the United States to Iran are prohibited, and many reexports of U.S.-origin items are similarly prohibited.
On May 8, 2018, President Trump announced that the United States is exiting from the multilateral Iran nuclear deal and fully re-imposing sanctions on Iran. Most relevant to this posting is the re-imposition of sanctions for the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel. Additionally, General License H has been revoked, meaning foreign subsidiaries of U.S. companies are no longer authorized to conduct most commercial business involving Iran without the threat of U.S. secondary sanctions penalties. Companies currently performing activities under General License H must wind down remaining business related to Iran by November 4, 2018.
The U.S. currently maintains a comprehensive embargo on North Korea, along with a substantial secondary sanctions program. Among other things, Executive Order (E.O.) 13722 blocks the property and interests in property of the Government of North Korea, blocks the Workers’ Party of Korea, and blocks the exportation and reexportation of goods, services (including financial services), and technology to North Korea. North Korea is also subject to an import ban under E.O. 13570.
Persons subject to U.S. jurisdiction are generally prohibited from conducting any transaction or dealing related to Syria unless otherwise authorized by the U.S. government. U.S. sanctions against Syria also prohibit nearly all exports to or imports from Syria, among other measures.
The United States maintains a comprehensive embargo on the Crimea region of Ukraine pursuant to E.O. 13685, which prohibits the importation or exportation of goods, services, or technology to or from the Crimea region of Ukraine, as well as new investment in the Crimea region of Ukraine by a U.S. person. Unlike other sanctions programs, the embargo on Crimea is targeted at a subnational region, not an entire country. The subnational nature of the embargo can make compliance a challenge. To ensure U.S. persons do not inadvertently provide or receive goods or services from Crimea, companies should screen Russia- and Ukraine-related transactions for the involvement of known locations in Crimea.
Penalties for violating U.S. export controls can be significant, including fines of up to $250,000 per violation, forfeited export privileges, and jail time for willful offenders. Representative enforcement cases include the following:
- Titanium Rods Without Licenses – Service Steel Aerospace Corp. of Tacoma, Washington (SSA) agreed to pay a civil penalty of $12,000 to settle changes that it committed three violations of the EAR on or between January 7, 2005, and December 29, 2005, by exporting titanium rods – items subject to the EAR and controlled for nuclear nonproliferation reasons – from the United States to Israel and Mexico without the necessary Department of Commerce licenses.
- Nickel Alloy Pipe to Iran – On December 16, 2005, PA Inc. of Houston, Texas, was sentenced to three years of probation and a $50,000 criminal fine following a guilty plea to a charge of attempting to export specialty nickel alloyed piping to Iran. On August 19, 2005, BIS assessed a $50,000 administrative penalty and a five year suspended denial of export privileges as part of an agreement with PA Inc. to settle administrative charges related to these transactions.
- Nickel Powder to Taiwan – On June 21, 2007, Theresa Chang pled guilty to one count of making false statements related to the export of nickel powder controlled for nuclear proliferation reasons to Taiwan without an export license. She was sentenced to three years of probation and to pay a $5,000 criminal fine.
- Nickel Alloyed Pipes to Iran – On November 30, 2007, Proclad International Pipelines, Ltd., a British corporation, pled guilty in United States District Court to one count of violating the International Emergency Economic Powers Act for conspiring to export nickel alloyed pipes to Iran. As part of a global settlement, Proclad agreed to pay $100,000 in civil penalties and to be subject to a suspended order denying its export privileges for a period of seven years.
- Nickel Powder Without Licenses – On October 1, 2009, Novamet Specialty Products Corporation agreed to pay $700,000 to BIS for 15 unlicensed shipments of controlled nickel powder worth about $80,000.
- Titanium Alloy Billets to China – Firth Rixson Monroe, a specialty metals forger, agreed to pay $85,000 to BIS to settle charges that the company exported 1,055 pounds of 6-2-4-2 titanium alloy billets worth about $35,000 to China. The company voluntarily disclosed the exports to BIS.
- Minxia Non-Ferrous Metals, Inc. paid $1,198,000.00 to settle allegations of dealing in Cuban metals between 2003 and 2006.
- Metallic Powder to Iran – On June 14, 2016, Erdal Kuyumcu, the CEO of Global Metallurgy, LLC pleaded guilty to one count of conspiring to violate the International Emergency Economic Powers Act, in connection with the export of a metallic powder composed of cobalt and nickel from the United States to Iran without a license. Kuyumcu was sentenced to 57 months in prison.
- Aluminum Tubes to Iran – On March 4, 2015, Nicholas Kaiga of Brussels and London, was sentenced to 27 months imprisonment, two years supervised release, and $100 special assessment after a plea of guilty to one count of attempting to violate the export control regulations. Kaiga attempted to export aluminum tubing with a high-tensile strength (7075 Aluminum Tubing) that is controlled for nuclear non-proliferation purposes.
- Specialized Metals For Iranian Missile Program – On February 1, 2011, Milad Jafari, an Iranian citizen and resident, was charged with illegally exporting and attempting to export specialized metals, including steel and aluminum alloys, from the United States through companies in Turkey to several entities in Iran. Jafari was added to the Specially Designated Nationals, freezing his assets under U.S. jurisdiction and prohibiting transactions with U.S. parties.
- Metallurgical Goods to Iran – On April 29, 2014, Li Fangwei was charged with violating the International Emergency Economic Powers Act for, among other things, selling to Iranian entities various metallurgical goods and related components that are banned for transfer to Iran. Fangwei has yet to be sentenced, and The United States Department of State’s Transnational Organized Crime Rewards Program is offering a reward of up to $5 million for information leading to his arrest and/or conviction.
With these in mind, it is imperative that companies take their export compliance responsibilities seriously. Doing so is not only critical for the companies themselves, but for the safety and security of the Unites States and its allies.
Below is a list of industry best practices governing the export, deemed export, and re-export of items related to the development, production, and use of specialty metals. While no solution is right for every company, this guidance establishes a good starting point to which specialty metals producers should aim when developing or evaluating their export compliance programs and procedures.
- Brief and train personnel, including new employees involved in international trade, regarding international trade regulation compliance;
- Implement broad policies and narrow procedures pertaining to export compliance;
- Conduct internal audits and reviews of the Company’s compliance procedures as appropriate;
- Assign at least one person at the corporate level and at each affected facility to the role of Export Compliance Coordinator;
- Note any “Red Flag” issues and determine if the transaction may continue, in conjunction with legal counsel as necessary;
- Ensure Denied Party screening is conducted in accordance with Company policies;
- Monitor changes in regulations that affect international operations;
- Establish a principal contact point for export license applications and with counsel regarding export issues;
- Work with employees to determine the proper ECCN classifications on the Commerce Control List (15 C.F.R. § 774, Supplement 1) for the Company’s products – especially new products;
- Develop and update the product ECCN classification matrix as needed;
- Keep a record of all conversations and correspondence that occurs between any company personnel and enforcement officials;
- Maintain contact with the enforcement officials, preferably through counsel; and
- Press for a completion of any audit, inquiry, or investigation through prompt and complete responses and continuous contact with the proper officials.
This brief outline of recent events is in no way intended to be a substitute for tailored advice and a proper export compliance system. For the sake of brevity and broad applicability, its scope is necessarily narrow and shallow. For advice specific to your business, please contact Kelley Drye & Warren’s Larry Lasoff (202) 342-8530 (firstname.lastname@example.org).
This memorandum does not contain legal advice. Rather, it provides a summary of some, but not all, key aspects of the regulations relating to special metals product controls. Every company should consult experienced export counsel regarding rules applicable to its products and technologies. Kelley Drye & Warren LLP, would be pleased to provide initial or detailed advice regarding any export control matter.