University and Industry Intersections
Academic researchers increasingly seek funding through industrial partners as government funding becomes more challenging to secure. While industry-sponsored research and industrial collaborations bring about meaningful scientific and technological advancements, they can also bring new compliance requirements for universities.
The line between “fundamental research” and “non-fundamental research” becomes increasingly blurry in practice and greater due diligence is required to ensure the delineation is clear to all involved parties. Data can quickly become comingled as university faculty, post-docs, and graduate students receive proprietary export controlled technology from their industry sponsors. The commercial viability of new technologies is also increasingly explored by faculty with entrepreneurial interests. Furthermore, universities often help support the commercialization process through small-business incubators.
The regulatory environment around export controls is also actively evolving. There is an impetus for U.S. universities to revisit their export compliance programs as changes – which encompass essential concepts including technology, fundamental research, required, and release – were recently proposed by the Department of Commerce and Department of State on June 3, 2015. These changes may affect how research institutions and their corporate partners implement controls around deemed exports.
These on-going regulatory changes make it timely to retroactively consider two contrasting enforcement cases that have occurred in recent years. What went wrong and how could the violations have been prevented? What can other universities, associated start-ups, and their industrial collaborators learn from these cases? Let’s explore how happier endings could have resulted.
Case 1: The Professor Who Went to Prison (2008)
Since his conviction in 2008, one infamous academic has become a familiar name for anyone working in the university export controls arena. So familiar that we won’t repeat the details here about the transactions, his conviction, and subsequent imprisonment. It has also been well established and discussed that willful neglect on the part of this Professor was a key element of this case. Many institutions may look at this case and think it is less relevant to them because of this fact. Let’s look at it from a new angle to highlight some practical take-aways.
There’s one aspect of this case that was somewhat less emphasized in the media and, thus, may be less engrained in the mindset of university personnel. It’s the fact that this individual was working on behalf of another organization, one that spun-off the university and had received millions of dollars in federal contracts. The Professor was charged with conspiring with this organization to conduct particular unlawful exports of defense articles.
So what might have prevented the violations from occurring? There are two alternative paths that may have led to a happier ending for the Professor.
The transfer of technology would likely have involved an Office of Technology Transfer, or an office with related responsibility. Was there proactive discussion between this office and the start-up team around export controls compliance? Would more thorough understanding of the export controls risks by company leaders have changed the ensuing events?
In this case, the technology was controlled under the ITAR, and not the EAR. However, many universities do deal with technology that is not subject to the EAR while falling under the fundamental research exclusion in their specific university setting. However, once moved into the industrial side via a technology transfer agreement, the technology is both subject to the EAR and export controlled. How can universities mitigate the risks with their associated start-ups that are moving out of the “safety” of the fundamental research exclusion? Is there a due diligence on the institution’s part to educate the faculty during the technology transfer process? Where is the division of responsibility between the university and the start up? One can argue that the ultimate responsibility lies with the new company, and not the university. That is certainly true. However, the damage to reputation in this case definitely affected the university as the institution’s good name – and not the company’s name – made it into news headlines and into the memory of readers.
Upper Leadership Support
In this case, university personnel did question the Professor and he specifically denied the occurrence of deemed exports. One has to wonder…how far did the conversations go? How deeply did university administrators probe their concerns? Were the institution’s senior leaders brought into the discussion? BIS emphasizes that upper management support is critical for the success of an effective export compliance management program. But how does that translate in practice? This is especially challenging in a typical university environment where faculty generally operate quite autonomously. Research administrators who handle day-to-day export controls issues must be backed up by university leaders who are willing to outwardly express the university’s policy and commitment to compliance. This means that the strong commitment to compliance must start at the university president’s level and flow down from there. It’s then equally important for personnel at all levels to take it seriously when a red flag has been raised.
Case 2: One University’s Restricted Party Screening Gap (2013)
The enforcement case involving this northeastern institution is vastly different than the case above. The item in question was a benign item that was classified as EAR99 under the Department of Commerce Export Administration Regulations. So what was the gap? In 2007 a shipment was made on behalf of the university to the Pakistan Space and Upper Atmosphere Research Commission (SUPARCO). It’s a group that certainly sounds legitimate and on the up and up. In reality, it was on the Department of Commerce BIS’s Entity List. The institution received a suspended civil fine of $100,000. That is, suspended if the university did not commit another violation in the following two years. What could have prevented the unlawful transaction from occurring? How could a happy ending have occurred?
Restricted Party Screening
Universities that are just starting to establish an initial export compliance program may find it a daunting task, not knowing where to begin. This case points to one of the most basic, yet critical, elements of export compliance. It’s, perhaps, a good starting point for those early-stage programs. As evidence in this case, export controls matter even if an institution doesn’t commonly handle sensitive (i.e. “controlled”) items. So even universities without an expansive research budget are wise to establish an effective and efficient approach to screening against the various government restricted party lists. The U.S. government now provides a Consolidated Screening List that brings together all the various restricted party lists from the three key departments (OFAC, DDTC, and BIS).
Perhaps a university already has restricted party screening software in place. In that case, the question bears on how it’s used. What university processes incorporate screening third parties as a matter of course (think standard operating procedure)? Are all research collaborators screened? What about all suppliers and the intended recipients of international shipments? The risk tolerance at a university may influence if students, faculty, staff, and visiting scholars are comprehensively screened as well. What is the process to ensure a match is a false positive? Robust restricted party screening can be efficiently designed into existing university operations, covering an essential element of an export compliance program.
More Happy Endings
Effective compliance doesn’t happen by accident. Export compliance requires the willing collaboration between various offices including (but not limited to) sponsored research, technology transfer, human resources, purchasing, shipping, and the research departments. A strong compliance program is only as good as the weakest department or individual. When built upon a firm foundation set by top university leadership, the various stakeholders can effectively and efficiently work together to drive lasting institutional compliance.
About the Author
Jennifer Saak is the Founder and Managing Director of Traliance,a leading provider of export controls compliance services for research organizations in higher education and industry.