Home » Blog » Uncategorized » Getting your ducks in a row – how to keep track of your dual-use demo units

Getting your ducks in a row – how to keep track of your dual-use demo units

A version of this article first appeared in the Issue no. 5 of the Export Compliance Manager


Suppose your company makes a successful product that it wants to market globally and this product is subject to dual-use export controls under the Export Administration Regulations (“EAR”).  Now suppose that it is a common industry practice to provide product demonstrations to customers who are considering buying your product.  How can a company effectively market its controlled product to customers across the world and remain in compliance with export control laws?

One possible marketing and compliance strategy is for the company to seek an export license or use a license exception for each product demonstration abroad.  In fact, the EAR contains a specific license exception – TMP for temporary imports, exports, re-exports, and transfers (in country) of commodities and software for exhibition and demonstration purposes (see section 740.9(a)(5) of the EAR).  One of the limitations of license exception TMP, however, is that the item may be exhibited at any given site for no longer than 120 days; the use of this license exception also requires accurate reporting through the Automated Export System.  Allowing your roaming salesperson to pack a controlled item in her suitcase for trips around the globe is rarely a good idea.  And for many commodities and software, licence exception TMP is simply not available.

Where license exception TMP is unavailable, your company can seek an export license for each product demo.  Once the Bureau of Industry and Security (“BIS”) licensing personnel become familiar with your company and its products, they often will be able to issue an export license within a couple of weeks of the application.  However, that is still at least a two-week delay in your company’s ability to provide a product demo to the customer, and seeking a license for each product demo imposes a hefty administrative burden.  In the context of fast-paced competitive business environments, the licensing burden creates significant risk that a roaming salesperson with a capacious suitcase will get your company into trouble.

If your company has a network of foreign subsidiaries in the countries where it wishes to market its controlled product, a good solution may be to export units of the controlled product for long-term in-country use of the subsidiary’s sales staff.  Naturally, you will need to obtain an export license if one is required for the country of destination.

An export license issued by BIS typically will be limited to the specific item included in the license, and for specific end users and destinations for which it was approved.  Consequently, your company and its foreign subsidiaries will have continuing compliance obligations with respect to products exported under a license and kept abroad for demonstration purposes.  If your company exports demo units to subsidiaries across the world, it should have robust safeguards and processes to ensure its continuing compliance with licensing requirements.  Here is an outline of measures to consider for ensuring compliance for export controlled products stored in foreign subsidiaries for demonstration purposes:

  • Maintain centralized export licensing function.  While it is important to ensure that relevant personnel in foreign subsidiaries receive training on export controls, do not count on those personnel to bear responsibility for export licensing and compliance.  Obtaining export licensing and ensuring compliance with the license conditions should be the responsibility of the corporate export controls experts.
  • Be accurate in your export license application.  The BIS export license application, Form BIS-748P, requires, among other things, the statement of the purchaser, intermediate consignee, ultimate consignee, end-user and specific end-use.  If the item is intended to serve as a demo unit for your company’s foreign subsidiaries, then that subsidiary, not potential customers, should be the ultimate consignee and end-user.  Be sure to explain in the letter of explanation that the item is being exported to a foreign subsidiary for use as a demonstration unit.
  • Provide training to foreign staff.  We, as trade compliance professionals, are well aware that export licenses come with conditions and compliance requirements.  However, such requirements are rarely intuitive to foreign sales staff and other personnel who will have access to the controlled items.  That is why it is essential to provide specific training regarding the export license and its limitations to the foreign staff who will use the demo units.  A best practice is to provide such training live via a live telephone or video conference, and of course you should retain the training records.
  • Ensure that foreign staff retain “effective control.”  Since the export license authorized the export to your foreign subsidiary, it will be an essential license compliance condition that it stays within the possession and control of the foreign sub.  That means that such demo units may not be left at a customer’s site for an extended demonstration.  If such a demonstration is required by a customer, then the customer should be stated as the ultimate consignee on the license.
  • Ensure that the item stays within the country.  Needless to say, an export license authorizes the export only to the country of the ultimate consignee.  If it is necessary to transfer the item to another country, you need to apply for a re-export license.  Again, however, these rules are not always intuitive to foreign subsidiary employees.  They may believe that since the sub owns the demo unit, it may dispose of it as needed and face business pressure to quickly provide a demo unit to colleagues in a neighboring country.  Once again, this is why training is essential.
  • Ensure accountability.  A training session alone may not be sufficient to ensure accountability for compliance with license conditions.  It is important to designate a specific foreign employee and that employee’s manager as responsible for compliance with the export license.  The employee and his manager should sign an acknowledgement of their responsibility, and that document should include a requirement that in the event of personnel changes in their functions, responsibility will be transferred to new employees and the central export controls team will be notified.
  • Maintain records.  Another best practice is for the foreign sub to maintain a log of the disposition of export-controlled demo units.  For each unit, the log should contain the name of the responsible employee, out-and-in checkout records for customer demos, and repair status of the item.  If the item is damaged beyond repair, the foreign sub can destroy it, but it should maintain records evidencing the destruction. 
  • Maintain a procedure.  In order to systematize compliance with export licensing conditions for controlled demo units, it is advisable for your company to maintain a specific procedure of mandatory nature, describing the compliance measures discussed here.  It is also a good idea for this procedure to require periodic auditing of compliance records in this area.

The compliance measures above are intended to ensure compliance with BIS licenses for tangible items controlled by the EAR.  Ensuring compliance for defense items controlled under the International Traffic in Arms (“ITAR”) regulations and for controlled technology may require a different approach and situation-specific compliance guidance.

Follow Valentin Povarchuk:
I am Valentin Povarchuk, international trade attorney and owner of Midwest Trade Law. I wanted to become a lawyer since I was 13, and I am living my dream. I prepared well for my legal career, obtaining my undergraduate degree from Cornell University with honors summa cum laude (highest honors), and serving as Editor-in-Chief of Pacific Rim Law & Policy Journal at the University of Washington School of Law.