Export control requirements, economic sanctions, foreign ownership rules, import restrictions — cross-border trade continues to get more complex.

Do you know there are trade laws that restrict who you can do business with and who can have access to your technology – even if it is in the United States? That’s why every startup needs a basic understanding of U.S. trade controls. Ignoring these rules can limit investment and restrict growth, and in the worst case, require foreign investors to divest. So here are the top-four trade compliance issues.

Foreign Ownership

Many startups have it. Many domestic investment funds and companies have it. Why does it matter if an investor or potential investor is ultimately foreign-owned? Suppose a potential investor or acquiring company has either direct or indirect foreign ownership. In that case, it can affect the company’s ability to execute its planned exit strategy, raise additional funding, or even merge with another organization based on national security restrictions.

Before you say, “my business doesn’t involve national security,” note that the Committee on Foreign Investment in the U.S., which reviews foreign investment, has an expansive definition of national security. National security includes everything from food products and health care companies to electronics and logistics software. Not planning for a required foreign investment review can cause delays and legal fees and ultimately derail a deal if a mitigation plan can’t be reached.

Sometimes a foreign investment filing is required if a business works with export-controlled goods or technology (see next section) that would require an export license to send it to a proposed investor’s home country. In addition, sometimes, a filing is necessary simply because the business collects certain kinds of sensitive data, operates in a sensitive industry, or invests in a sensitive location. The good news is that imposing simple rules regarding investor involvement and access to data and technology for most transactions avoids these issues. The key is to have the initial review and document the determination to protect the company if CFIUS reaches out to investigate the transaction or investment.

Export Control Requirements

The company’s relationships with foreign entities, owners, or employees are crucial to another trade compliance issue – export controls. A company may have export-controlled items, like software, technology, or technical data, but may not know it. Whether the company is physically exporting goods, there may be limits on what it can share with foreign investors or foreign employees working in the United States — unless an export license is obtained. Sometimes a business needs an export license for foreign employees to have access to its product or technology.

Even if you have no foreign investors or employees, knowing your product’s export classification is extremely important: 1) Your customers or the government may ask you for this information. 2) Knowledge of the classification lets you advise customers/distributors/agents about export licensing requirements because your company will continue to be liable for export violations, even after you’ve sold the items. 3)  If you plan to sell the company or take investors, part of the due diligence is determining whether the company complied with U.S. export control regulations and whether the company carries potential liability. Potential investors and buyers want to make money, not purchase an existing liability for such violations. In negotiations, a lack of understanding may raise a red flag to the other side, and the company may not be able to execute its exit strategy as planned (or at all).

Economic Sanctions

All U.S. companies and U.S. persons, wherever located, must comply with U.S. economic sanctions laws. A company cannot do business with or indirectly support or sell to a restricted party or a sanctioned place. If parties in sanctioned locations use your online product or service, you could violate U.S sanctions, regardless of whether you knew of the activity or actively supported it.

When it comes to embargoed countries, most activity – including direct and indirect exports of goods and services – is completely banned. This ban includes providing online services to any person located in an embargoed location such as Iran, Syria, Cuba, North Korea, or the Crimea region of Ukraine.

For example, if a user in Cuba logs on to your service, you would be liable for violating U.S. sanctions law. An unintended sanctions violation can also occur if a restricted party, a party appearing on a U.S. restricted party list such as the Specially Designated Nationals and Blocked Person’s List, uses the online product or service. That applies to everything from iPhone apps to cryptocurrency exchanges. That’s why it’s essential to complete restricted party screenings before engaging in direct or indirect business with any foreign parties.

Import Restrictions

If a business accidentally imports goods with fake or “infringing” trademarks, the goods can be seized and destroyed with no compensation.  U.S. Customs and Border Protection (CBP) handles almost all U.S. border regulations. That includes intellectual property protections, safety regulations, and consumer protection regulations. CBP also collects and enforces import tariffs or duties – essentially, taxes on foreign goods brought into the country.

In some circumstances, such as when the U.S imposes high taxes on foreign goods to protect a domestic industry or drive foreign policy goals, the tariffs can be a financial blow. For example, the “china tariffs” imposed on billions of dollars worth of goods coming from China in the last few years have taken a toll on importers who had trouble passing on the costs to customers or supply chain partners. An even more significant potential financial blow is the fines a company could receive for improperly imported goods.

Many businesses believe that the customs broker is responsible for their decisions. However, a customs broker is the business’s agent and is not liable for any mistakes regarding your imports. The company must ensure it has proper Harmonized Tariff Schedule of the United States numbers, proper countries of origin, and proper duty rates, licenses, and labels.

The complexities of engaging in cross-border trade continue to expand. For example, growing new government requirements prohibit doing business with a Chinese entity that uses forced labor or with a company using restricted semiconductor chips or magnets. Government enforcement of online sanctions violations has also increased. In this environment, startups have little choice but to pay more attention to trade compliance.

Reprinted with permission from the October 21, 2021, issue of CFO. © 2021 CFO. All Rights Reserved. 

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