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Originally Published IVD Technology September 2005
Regulations & Standards
Export administration regulations: Issues germane to IVDs
Philipp Novales-Li
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| Philipp Novales-Li, DMedSc, PhD, DPhil, is director of scientific and regulatory affairs at BioGenex Laboratories Inc. (San Ramon, CA) and can be reached at philippn@biogenex.com. |
Market analysts have predicted that the global demand for diagnostic tests will increase at a rate of about 7% per year through 2008. This growth rate could rise even higher as more molecular markers and advanced detection and automation technologies are introduced. The United States is still the leading manufacturer of IVDs, accounting for $10.4 billion of the total worldwide market of $26 billion in 2003.1 Approximately 40% of U.S.-made IVDs are exported abroad, with Japan, Canada, and the European Union (mainly Germany, France, the UK, Spain, and Italy) as the largest foreign markets.
As the market opportunity for IVD exports increases and IVDs become more complex in their technological specifications, a number of IVD manufacturers have been coming under scrutiny by the Bureau of Industry and Security (BIS). BIS is a branch of the Department of Commerce that implements and enforces the export administration regulations (EAR). Although these regulations had never been actively imposed on IVD manufacturers, this situation has changed during the past two years, as evidenced by empirical incidents of administrative subpoenas issued to manufacturers. Even if the majority of IVDs are exempt from licensing requirements under EAR, IVD manufacturers should be aware of these regulations and at the very least comply with their essential requirements.
Export Administration Regulations
The primary legislation that governs the statutes on exporting commercial products from the United States is the Export Administration Act (EAA) of 1979, which was subsequently amended in 1991, 1998, and 2000. Under the authority of this act, the EAR were designed to implement the essential requirements of this legislation. However, the EAA was not permanent; it remained in effect until August 20, 2001. After this act lapsed, President George W. Bush extended the EAR with successive presidential notices (the latest was on August 6, 2004) and under the International Emergency Economic Powers Act, which essentially continued the implementation of the act via the EAR.
Besides BIS, other agencies have jurisdiction over narrower classes of exports. For example, FDA and the Drug Enforcement Agency administer their own types of controls over exports. As such, the items that BIS regulates are termed dual use, since they can potentially have military, police, and strategic uses (e.g., nuclear), as well as civilian commercial applications (e.g., diagnostic).
Export Controls under the EAR
The EAR’s export control requirements are intended to prevent U.S. exports from being used in activities that are related to chemical and biological warfare, terrorism, nuclear proliferation, and other threats to national security. Such was the original intent of these regulations when they were first enforced.
However, after 9/11, coupled with the administration’s counterterrorism agenda, the regulation now includes many other products that broadly fall within the various categories in the EAR. Such other products have been included even though by virtue of their intended use they are not used for military purposes, nuclear and missile technology, or chemical and biological warfare.
In essence, the EAR’s control provisions are applied to restrict access to exported dual-use products, especially if their use may be inimical to U.S. interests. In addition, U.S. policy decisions, such as economic sanctions, may extend export restrictions beyond dual-use products for certain countries (e.g., Iran).
Because of this dual-use provision, IVDs are subject to the EAR, regardless of whether or not their intended use has been established or approved for a clinical diagnostic purpose. The argument for including IVDs is cogent, especially since diagnostic products are a motley assembly of devices ranging from simple tests to highly complex diagnostic systems with multifaceted technology platforms. For example, a state-of-the-art digital image-analysis system that is intended for analyzing biological specimens may contain high-resolution digital cameras and a powerful computer. Such components could be used for non-diagnostic applications, such as in weapons manufacture for detecting flaws in physical components.
Another point is that under the EAR, the term export has a broader meaning, beyond the traditional definition of shipping U.S.-made goods to overseas countries. Under the EAR, it does not matter how a product is transported outside the United States. Certain actions that are not regarded as being export-related in one context may be deemed an export activity under the EAR.
For example, a small vial containing an IVD reagent that is mailed or hand-carried on an airplane is considered an export for export control purposes. Similarly, sending a package insert containing technical specifications by fax or e-mail to an overseas customer, or downloading the insert by the customer from a U.S. manufacturer’s Web site, is regarded as an export activity.
Export controls also apply to products that are sent to a U.S. manufacturer’s foreign subsidiary to be evaluated or presented at a trade show. Even a foreign-made product that is shipped to the United States and then returned to the country of origin is deemed an export. Moreover, disclosing technology or source codes to a foreign national in the United States through an oral briefing or a product demonstration is considered an export to the foreigner’s country of origin.2
Commerce Export License
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Table I. Codes for export product categories according to the Bureau of Industry and Security’s |
Since IVDs fall within the scope of the EAR, they may require a commerce export license in order to export or re-export them to other countries. However, only a small percentage of total U.S. exports and re-exports are required to have a commerce export license from BIS because several license exceptions exist. Nonetheless, U.S. IVD manufacturers should still determine whether or not their products require a license. By doing so, IVD manufacturers can provide documentation to support the due diligence performed in complying with the EAR, thus mitigating any sanctions for noncompliance such as monetary fines, criminal prosecution, and loss of export privileges for a period of time.
IVD manufacturers must address the following four key questions to determine whether a commerce export license is needed: What is being exported? Where will it be exported? Who is the end-user? What will the item be used for?
BIS maintains a commerce control list (CCL) that categorizes many products and can assist IVD manufacturers in defining what is being exported. The CCL broadly categorizes products into codes (see Table I). Under each CCL category, a product may be assigned a specific export control classification number (ECCN). Items that are not described in the CCL fall under the umbrella ECCN code EAR99, which is the case for most IVDs.
Even though a majority of IVDs do not have a unique ECCN code and fall under the EAR99 code, before this assumption can be made, IVD manufacturers must also address where the product will be exported. U.S. restrictions resulting from sanctions and embargoes may restrict or even deny the export of IVDs to certain countries (e.g., Cuba, Iran, Libya, North Korea, Sudan, and Syria). Since this list may change regularly (e.g., Iraq), manufacturers should refer to the BIS Web site for the most current information. Either a license or approval to export under a special government program may be required when restrictions are in place. In such cases, IVD manufacturers should have discussions with the Commerce Department, legal counsel, and a consultant as part of their due diligence.
Even if an IVD is classified under EAR99 and is not being shipped to an embargoed or sanctioned country, it may still require a license. Certain end-users are prohibited from receiving U.S. exports and re-exports, while others may only receive exports and re-exports under a license. Consequently, IVD manufacturers must determine who is the end-user of their products. The following lists are revised and updated on a periodic basis, and manufacturers should consult them as part of their EAR due diligence.
The entity list in the EAR contains the names of organizations that engage in activities related to the proliferation of weapons of mass destruction and are therefore subject to license requirements.3 This entity list includes organizations in China, India, Israel, Pakistan, and Russia. The U.S. Treasury Department’s specially designated nationals and blocked persons list in the EAR contains names of individuals and organizations that are known to be involved in terrorism or narcotics trafficking.4
The unverified list contains the names of firms that have not undergone an end-use check by BIS. Such firms are still suspect, thereby necessitating additional inquiries by IVD manufacturers. In this case, manufacturers should carry out some due diligence on the importing firm’s commercial practices, standard operations, and business models. The denied persons list contains the names of individuals and firms whose export privileges have been denied by BIS. Both the unverified list and the denied persons list are available on the BIS Web site.
In addition, a license may be required for exporting a product, depending on what it will be used for. For example, if a product could be used in activities that are germane to the proliferation of weapons of mass destruction, then a license is required, no matter what the product is. Part 744 in the EAR gives more information on prohibited end uses of exported products.
Recommended Compliance Approaches
IVD manufacturers should take the following three immediate actions to establish compliance with the EAR.
Product Classification. IVD manufacturers should use the CCL to properly classify their products. While manufacturers may classify their products on their own, they should get a formal classification from BIS. The latter approach will necessitate allowing additional time since follow-up questions and requests for other materials from a BIS specialist may arise. IVD companies should use the multipurpose form (BIS-748P) that can be requested from BIS. Alternatively, IVD manufacturers can do their product classification online via the simplified network application process at www.bis.doc.gov/ snap/index.htm. To ensure an efficient response, manufacturers should enclose a copy of the technical specifications or package inserts of the products to be classified. IVD companies should expect a phone call from a BIS specialist, especially if additional information is needed to process the request. Once the products are classified, companies will receive an official notice from BIS, indicating the ECCN code for each product.
Destination Control Statement. At a minimum, IVD manufacturers should include the following statement on the invoice, airway bill, or other export control document that is attached to the shipment: “These commodities, technology, or software were exported from the United States in accordance with the export administration regulations. Diversion contrary to U.S. law is prohibited.”
End-User Statement. IVD manufacturers should use form BIS-711 or the statement by the ultimate consignee and purchaser, and have their foreign distributors or overseas customers fill out and execute the document. The purpose of this form is to document in writing the disposition or use of the exported product by the ultimate consignee.
These items are only the first steps in establishing a comprehensive export compliance program. Such a program should address the export implications of designing, manufacturing, and distributing an IVD product. IVD companies that routinely export their products to multiple countries may want to consider purchasing or leasing export compliance tools to automate searches of the constantly changing government databases.
Conclusion
The above compliance schemes are not all-encompassing, and IVD manufacturers must carry out their own due diligence to determine the best compliance approach for their respective situations. And even after the compliance schemes have been met, IVD manufacturers should constantly monitor any suspicious activities regarding the export of their products. Such activities may indicate unlawful diversion or use of their products. Some red-flag indicators include the following: the product’s intended use does not fit the buyer’s line of business; customers are willing to pay cash for a very expensive item even when other payment terms are available; routine installation, training, or maintenance services are declined by the customer; the purchaser location is different from the delivery location; and the product ordered is incompatible with the technical capabilities or facilities of the country where the product is being exported.
References
1. E Sholk, “IVD Market Continues an Upward Climb,” Advance for Administrators of the Laboratory 13, no. 2 (2004): 10–14.
2. “Export Administration Regulations,” U.S. Government Printing Office Web site (Washington, DC: GPO, 2005 [cited 4 August 2005]); available from Internet: www.access.gpo.gov/bis/ ear/pdf/730.pdf.
3. “Part 744 – Control Policy: End-User and End-Use Based,” U.S. Government Printing Office Web site (Washington, DC: GPO, 2005 [cited 4 August 2005]); available from Internet: www.access.gpo.gov/bis/ear/pdf/744.pdf.
4. Office of Foreign Assets Control, “Specially Designated Nationals and Blocked Persons,” the U.S. Department of the Treasury Web site (Washington, DC: 2005); available from Internet: www.treas.gov/offices/enforcement/ ofac/sdu/t11sdn.pdf.
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